Disclosure Document and Notice of Meeting

Challenger Financial Services Group Challenger Financial Services Group Limited

ACN 106 842 371 This document is important and requires your immediate attention. It should be read in its entirety. If you have any queries about any part this development to impervant and requires your announce accounting should be read in the change of you have any quere
of this document you should obtain the advice of your stockbroker, accountant or other financial or pro

Important notice

This Disclosure Document is an important document and should be read in its entirety. This document does not take into account the investment objectives, financial situation and particular needs of any Unitholder or any other person. You should not rely on this document as the sole basis for any investment decision in relation to Units, Challenger Shares or any other securities. You should seek independent financial and taxation advice before making any investment decision in relation to Challenger Group Units, Challenger Shares or any other securities.

This Disclosure Document is a prospectus for the purposes of Part 6D of the Corporations Act. However, no application form accompanies this Disclosure Document and the issue of Challenger Shares will occur without Unitholders submitting or signing any application form. If Unitholders approve the Restructure, a holding statement will be sent within five Business Days following the Record Date, which sets out the shareholding of that member in Challenger.

The Corporations Act imposes an "exposure period" on disclosure documents for non-quoted securities, which prevents the processing of applications for a period of seven days following the lodgement of the Disclosure Document with ASIC. This period may be extended by ASIC for a further seven days. The purpose of the exposure period is to allow the document to be examined by investors and market participants. Although this Disclosure Document does not include an application form and has not been produced for the purposes of fundraising, it will be generally available for review from the date of lodgement with ASIC until the date of the meeting of Unitholders, in compliance with the Corporations Act. No Challenger Shares will be issued on the basis of this Disclosure Document except for those issued pursuant to the Restructure of Challenger Group. The document can be viewed and downloaded on the Challenger website www.challenger.com.au throughout that period.

The Disclosure Document is dated 10 November 2003 and was lodged with ASIC on that date. ASIC takes no responsibility for the contents of this Disclosure Document. No securities will be issued on the basis of this Disclosure Document after the Expiry Date. ASX takes no responsibility for the contents of this Disclosure Document. The fact that ASX may admit Challenger to the official list and quote the Challenger Shares is not to be taken in any way as an indication of the merits of Challenger.

Forward looking statements

Partidos (

Certain statements in this Disclosure Document relate to the future, including forward looking statements relating to Challenger Group's and Challenger's financial position and

Neither Challenger Group, CPH Management, Challenger or any other person gives any representation, assurance or guarantee that the results, performance or achievements expressed in or implied by the forward looking statements in this document will actually occur. Unitholders are cautioned not to place undue reliance on the forward looking statements.

Jurisdiction

This Disclosure Document may be viewed and downloaded from www.challenger.com.au. Persons who access the online version of this Disclosure Document should ensure that they download and read the entire document. This Disclosure Document does not in any way constitute an offer of securities in any place in which, or to any person who, it would not be lawful to make such an offer. In particular, this Disclosure Document will not be lodged or registered under the Securities Act 1933 (US) and the Financial Services and Markets Act 2000 (UK). This Disclosure Document is being provided to New Zealand resident Unitholders pursuant to Securities Act (Australian Issuers) Exemption Notice 2002 (NZ). An "Investment Statement" prepared for the purposes of New Zealand securities laws will accompany this Disclosure Document when provided to New Zealand Unitholders. No action has been taken or will be taken to register the Challenger Shares or otherwise permit Challenger Shares to be issued to investors in any jurisdiction other than Australia and New Zealand.

Glossary

A number of defined terms are used in this Disclosure Document. These terms are explained in the glossary in section 14.

Currency

The information contained in this Disclosure Document is current as at 10 November 2003.

Time

References to time are to time in Sydney, Australia.

Table of Contents

	Letter from the Independent Directors	3
		4
	Frequently asked questions	9
	Summary of Grant Samuel's Independent Expert Report	14
Section 1.	Overview	21
Section 2.	Recommendation	26
Section 3.	Benefits, disadvantages and risks of the Restructure
Section 4.	The Restructure	31 45
Section 5.	Challenger	59
Section 6.	Pro Forma Financials and Accountant's Report
Section 7.	Challenger and Challenger Group business risks	69 77
Section 8.	Taxation Report	85
Section 9.	Long Term Incentive Plan	93
Section 10.	Independent Expert Report	139
Section 11.	Additional information	157
Section 12.	Implementation Deed	177
Section 13.	Notice of Meeting
Section 14.	Glossary	181
	Corporate Directory	ibc

Timetable

The dates for implementation of the Restructure are dependent on satisfaction of the Conditions (which include the Third Party Conditions) of the Restructure.

If all the Third Party Conditions are satisfied by 16 December 2003:

• Units will be suspended from trading on ASX after $\bullet$ trading closes on 16 December 2003;
• if Unitholders approve the Restructure Resolutions $\bullet$ at the Unitholders' Meeting on 22 December 2003 then this date will be both the Effective Date of the Restructure and the Record Date for determining entitlements to the Challenger Shares to be issued under the Restructure; and
• trading in entitlements to Challenger Shares, initially on a deferred settlement basis, will commence on 23 December 2003.

If all the Third Party Conditions are not satisfied by 16 December 2003 then:

• the Unitholders' Meeting will be held on 22 December 2003;
• Units will be suspended from trading on ASX with effect from the date that CPH Management notifies ASX that the last of the Conditions of the Restructure has been satisfied (Notification Date);
• the Record Date for determining entitlements to Challenger Shares, to be issued under the Restructure, will be set for four Business Days after the Notification Date; and
• trading in Challenger Shares, initially on a deferred $\bullet$ settlement basis, will commence on the Business Day immediately following the Record Date.

These dates are indicative only and are subject to ASX approval.

Actions required of Unitholders

Step 1: Read this Notice of Meeting and Disclosure Document

This Notice of Meeting and Disclosure Document contains details of the Restructure and the Long Term Incentive Plan (LTIP) and sets out the reasons to vote for the Restructure and the LTIP as well as reasons why Unitholders may consider voting against the Restructure and the LTIP. It also contains the Independent Expert Report which has been prepared by Grant Samuel and the Taxation Report which has been prepared by Ernst & Young.

This information is important. You should read this document carefully and, if necessary, seek your own independent advice on any aspects about which you are not certain.

If you have any questions about your holding in Challenger Group or any matter contained in this Notice of Meeting and Disclosure Document, please contact the Challenger Information Line on 1300 733 343 (toll free within Australia) or +61 2 9240 7450 (from outside Australia).

Step 2: Vote on the Resolutions

It is very important that you vote on the Resolutions. If you are unable to attend the Meeting in person you are encouraged to complete and return the Proxy Form which accompanies this Disclosure Document.

To appoint a proxy to vote on your behalf, complete the enclosed Proxy Form and return it in the enclosed reply-paid envelope or to the following address or facsimile number so as to be received before 11.00am on 20 December 2003:

Computershare Investor Services Pty Limited Level 3, 60 Carrington Street Sydney NSW 2000 Facsimile: +61 2 8235 8220

You may nominate one or two persons to vote on your behalf at the meeting and may indicate on the Proxy Form how you wish that person or those persons to vote. A proxy need not be a Unitholder.

For details on how to complete and lodge the Proxy Form please refer to the instructions on the enclosed Proxy Form or on the Notice of Meeting.

The Independent Expert, Grant Samuel, has considered the Restructure and concluded that the Restructure is fair and reasonable to Unitholders not associated with CPH and is also in the best interests of Unitholders. In Grant Samuel's opinion, non associated Unitholders are likely to be better off if the Restructure is implemented than if it is not.

The Independent Directors consider the Restructure is in the best interests of Unitholders and recommend that you vote in favour of ALL the Restructure Resolutions (resolutions 1 to 6).

All of the Directors consider the LTIP is in the best interests of Unitholders and recommend that you vote in favour of ALL the LTIP Resolutions (resolutions 7 and 8).

Unitholders' meeting

Unitholders are invited to attend a Unitholders' Meeting which has been convened to be held at 11.00am on Monday, 22 December 2003 at The Hotel Westin Sydney, 1 Martin Place, Sydney. At the meeting, Unitholders will be asked to approve each of the Resolutions set out in the Notice of Meeting.

The Meeting will consider resolutions which relate to a Restructure of Challenger Group involving, among other things:

• (i) all Units in Challenger Group, except five Units which will be held by Challenger, being redeemed for the issue of Challenger Shares; and
• (ii) the Units of the Ineligible Overseas Holders being transferred to the IOH Transferee before the redemption of Units referred to in paragraph (i) occurs, for cash consideration which is described in section 5.1(d).

Although voting at the Unitholders' Meeting is not compulsory, your vote is important. If you believe that the Restructure should proceed, but you do not vote, it is possible that the Restructure may not be approved and will not take effect.

If you want the Restructure to proceed, you should vote in favour of each of Resolutions 1 to 6 in the Notice of Meeting.

If you want to approve the LTIP, you should vote in favour of each of the LTIP Resolutions, being Resolutions 7 and 8 in the Notice of Meeting.

If you do not want the Restructure to proceed you should vote against the Restructure Resolutions, being Resolutions 1 to 6 in the Notice of Meeting. If you do not want the LTIP to proceed you should vote against the LTIP Resolutions, being Resolutions 7 and 8 in the Notice of Meeting.

All Unitholders who are registered as holders of Units in the Unit Register at 11.00am on 20 December 2003 are entitled to attend and vote either in person or by proxy at the Unitholders' Meeting.

A summary of each Resolution in the Notice of Meeting is included in section 4.4.

Each Resolution in the Notice of Meeting, other than resolutions 2 and 8, must be passed as an ordinary resolution, that is, by at least 50% of votes cast (whether in person or by proxy) by Unitholders entitled to vote on those Resolutions at the Meeting.

Resolutions 2 and 8 must each be passed as a special resolution, that is, by at least 75% of the votes cast (whether in person or by proxy) by Unitholders entitled to vote on the Resolution at the Meeting.

Letter from the Independent Directors

10 November 2003

Sydney

Level 41, Aurora Place 88 Phillip Street Sydney NSW 2000 Australia www.challenger.com.au

telephone 02 9994 7000 facsimile 02 9994 7777

On 9 September 2003, Challenger announced it was working on a proposal to corporatise Challenger Financial Services Group (Challenger Group), a listed trust, through internalising the Responsible Entity function provided by CPH Management Limited, and eliminating the requirement to pay management and performance fees to CPH Management Limited.

This document contains for your consideration the proposal to corporatise. The steps to effect the corporatisation are complex and you should read this Disclosure Document in full. In summary, Unitholders are being asked to agree to the complex and you should read this pisciosure pocument in num, in summary, primioners are being asked to agree to the
redemption of their Units in Challenger Group in consideration for being issued the same number of shares Company, Chancinger Emancial Services Group Limited (Chancinger, Chanciagement has agreed to retire as hesperator
Entity of Challenger Group, and will be compensated for so doing. The proposed transactions between Challeng and CPH are:

• Challenger Group will pay CPH \$96 million for CPH Management agreeing to retire as Responsible Entity and terminating the Investment Management Agreement;
• CPH will pay Challenger \$36 million to acquire Challenger Group's interest in Jurlique, a Challenger private equity investment, which is a manufacturer and retailer of natural skin and body products; and
• CPH will pay Challenger \$60 million to acquire 300 million non-transferable call options over Challenger Shares with an exercise price of \$0.65 and a 10 year term.

In addition, Challenger will employ and assume responsibility for the remuneration of the Chief Executive Officer of Challenger – this is also subject to Unitholder approval as part of the Restructure.

For the Restructure to proceed, the approval of Challenger Group Unitholders is required under the ASX Listing Rules and the Corporations Act. All elements of the Restructure are interdependent, which means that if any element of the Restructure is not approved by Unitholders, the Restructure will not proceed.

The Independent Directors of CPH Management believe the Restructure to be in the best interests of Challenger Group The independent Directors of Criminal agency deneve the resultation of the Desk interests of Chancriger Group
and its Unitholders for the reasons set out in this Disclosure Document. We unanimously support the Restructure recommend and omnioners you in tayour or the restructure resonances. The Unitholder Meeting will be held
the Resolutions and other information which will enable you to assess the Restructure. The Unitholder Meeting will be the nesolutions and other information willcrivent enable you to assess the restructure. The onlindider wieeling will be held
at 11:00am on 22 December 2003 at the Hotel Westin Sydney, 1 Martin Place, Sydney. If you are una Disclosure Document.

The Independent Directors of CPH Management have also appointed an independent expert, Grant Samuel & Associates, The interpendent Directors of Christmanagement have also appointed an interpendent expert, Grant Barnles & Associates,
to review the proposed Restructure. The Independent Expert has concluded that the Restructure is fair a associated Unitholders are likely to be better off if the Restructure is implemented than if it is not. The Independent Expert Report is contained in full in section 10, and you should read it in its entirety.

In addition to being asked to approve Resolutions relating to the Restructure, Unitholders are being asked to approve the establishment of a Long Term Incentive Plan (LTIP) for senior executives, which is recommended by all Directors. Full details

of the LTIP Proposal are set out in section 9. This Disclosure Document contains important information about the Restructure, the LTIP proposal and Challenger Group and Line Discount December Corrent and inportant information about the restructure, the Life proposariand Chancement Chancement and Line on
and Lencourage you to read it carefully. If you have any queries, please contact t should exercise your vote, you should consult your investment or other professional adviser.

Yours sincerely

Jeul Filly

Michael Tilley On behalf of the Independent Directors of CPH Management Limited

Melbourne

Level 41, 101 Collins Street Melbourne VIC 3000 telephone 03 8616 1000 facsimile 03 8616 1111

Brisbane Level 34, Central Plaza One 345 Queen Street Brisbane QLD 4000 telephone 07 3218 8000 facsimile 07 3220 3132

Perth

Level 2, 141 St Georges Terrace Perth WA 3149 telephone 08 9480 2800 facsimile 08 9322 9289

Adelaide

Level 9, T & G Building 82 King William Street Adelaide SA 5000 telephone 07 8211 7777 facsimile 07 8212 7777

Challenger Financial Services Group Limited ABN 50 002 993 302 Challenger Managed Investments Limited ABN 94 002 835 592
Challenger Securities Limited ABN 28 009 568 496 Challenger Superannuation Pty Limited ABN 52 006 475

Frequently asked questions

Why is Challenger Group undertaking the Restructure?

The operations of Challenger Group were fundamentally altered by the Merger in July 2003. Since that time, feedback has been received from a number of Unitholders who have expressed a desire to see a more conventional, simpler corporate structure.

The Restructure will address these Unitholder concerns and will result in a corporate structure in line with other groups operating in the Australian financial services sector. The Independent Directors believe that the primary advantage of the Restructure will be the removal of the ongoing liability to pay management and performance fees to an external responsible entity. In addition, the Restructure is expected to help maintain widespread investor interest in Challenger Group, facilitate more transparent reporting to investors and better position the business for future growth.

For full details of the recommendation of the Independent Directors, see section 2. For a discussion of the benefits, disadvantages and risks of the Restructure, see section 3.

What are the likely management fees?

The management fee is currently approximately \$7.3 million per annum.

Should the volume weighted average price for Units as traded on ASX over 10 consecutive Business Days exceed 60 cents (the 60 Cent Threshold established at the time of the Merger), Challenger Group will be obliged to pay CPH Management a management fee in relation to the investment in Challenger made under the Merger, resulting in an additional management fee of \$9.2 million per annum, taking the total annual fee to \$16.5 million.

In June 2005, CPH Management is required to value the Challenger Group assets (Five Year Value) to determine if a Five Year Performance Fee is payable. Even if no Five Year Performance Fee is payable, from that date the Five Year Value will be the main basis of calculating the management fee. This means that even if the performance of Challenger Group in a five year period has not been sufficient to require a performance fee to be paid to CPH Management, any growth in the value of Challenger Group will result in an increase in the management fee.

What financial benefits will be provided to CPH as part of the Restructure?

The proposed transactions between Challenger Group and CPH are:

• Challenger Group will pay CPH \$96 million for CPH Management agreeing to retire as Responsible Entity and terminating the Investment Management Agreement;
• CPH will pay Challenger \$36 million to acquire Challenger Group's interest in Jurlique, a Challenger private equity investment, which is a manufacturer and retailer of natural skin and body products; and
• CPH will pay Challenger \$60 million to acquire 300 million non transferable call options over Challenger Shares with an exercise price of \$0.65 and a 10 year term.

More information regarding the financial benefits is contained in section 4.3.

What will be the impact of the Restructure on my Unitholding?

On the Effective Date, all of your Units will be redeemed by Challenger Group. In consideration for this, you will be issued one Challenger Share for each Unit redeemed, except if you are an Ineligible Overseas Holder, in which case you will receive a cash amount referable to the market value of Challenger Shares for each of your Units.

After the Restructure, you will own the same number of Challenger Shares as you owned Units on the Record Date. It should be noted that, as part of the Restructure, options to acquire Challenger Shares will be granted to CPH which, if later exercised, would reduce the overall percentage of Challenger Shares that you own. In addition, Challenger Shares will be issued to the CEO and, subject to Resolution 7 being passed, Challenger Shares will be issued under the LTIP.

The Independent Expert has stated that Unitholders are likely to be better off if the Restructure is implemented than if it is not.

Will there be any direct cost to me for the exchange of Units into Shares?

No brokerage or other fees will be payable by Unitholders as a result of the Restructure.

Challenger Group's taxation advisers have also confirmed that CGT rollover relief should be available to Unitholders in relation to the Restructure. A Taxation Report is included in section 8.

Is the Restructure in the best interests of Unitholders?

Challenger Group has appointed Grant Samuel as independent expert to review the Restructure.

Grant Samuel has concluded that the Restructure is in the best interests of Unitholders.

The Independent Expert Report is included in section 10.

The Independent Directors have also recommended that Unitholders vote in favour of the Restructure Resolutions. Their recommendation, and the reasons for it, is set out in section 2.

What will happen if the Restructure is not approved?

If the Restructure is not approved (or if any conditions of the Restructure are not satisfied) then the status quo will be maintained, with Challenger Group continuing to be a listed managed investment scheme. CPH Management will remain as Responsible Entity and will continue to be entitled to fees under the Challenger Group Constitution. The CEO will remain an employee of CPH Management.

The LTIP for senior executives, other than the CEO, may be approved and implemented in Challenger Group even if the Restructure is not approved.

Are there any conditions to the Restructure taking place?

There are a number of conditions, in addition to Unitholder approvals, that must be satisfied before the Restructure can occur. They include:

• the Restructure being approved by the Treasurer of the Commonwealth of Australia under the Financial Sector (Shareholdings) Act:
• ASX agreeing to admit Challenger to the official list and quoting Challenger Shares;
• the CGHL Options being dealt with in the manner referred to in this Disclosure Document.

Section 4 refers to the other conditions of the Restructure.

How will my unitholding be treated if my Units are registered under an address outside of Australia and New Zealand?

Challenger Group does not intend to register this Disclosure Document outside of Australia and New Zealand. As a result, Unitholders who have a registered address outside of these jurisdictions will not be eligible to receive Challenger Shares as part of the Restructure. Instead, Ineligible Overseas Holders will have their Units transferred to the IOH Transferee on the Record Date before the Restructure is implemented. In consideration, they will receive a cash amount based on the average of the daily VWAP for Challenger Shares over the 10 trading days immediately following the commencement of trading of Challenger Shares on ASX. The payment is expected to be mailed to Ineligible Overseas Holders within 25 Business Days following the Record Date.

Is voting compulsory?

Voting at the Meeting is not compulsory. However, your vote is important. If you believe that the Restructure should be implemented, but do not vote, it is possible that Unitholder approval may not be received and the Restructure will not proceed. If you do not want the Restructure to proceed, you should vote against the Restructure Resolutions.

If you believe that the LTIP should be approved, but do not vote, it is possible that Unitholder approval may not be received and the LTIP will not be implemented. If you do not want the LTIP to proceed, you should vote against the LTIP Resolutions.

Who is entitled to attend and vote at the Meeting?

All Challenger Unitholders who are registered as holders of Challenger Units on the Unit Register at 11.00am on 20 December 2003 are entitled to attend and vote either in person or by proxy at the Meeting. However, the Corporations Act and the ASX Listing Rules require certain Unitholders not to vote on a number of the Resolutions. These restrictions are referred to in the Notice of Meeting.

What happens if I cannot attend the Meeting?

If you are unable to attend the Meeting, you are encouraged to appoint a proxy to attend and vote for you. Instructions relating to the appointment of proxies are contained on the Proxy Form and in the Notice of Meeting.

What happens if I do not vote or vote against the Restructure Resolutions but they are still passed?

If the Restructure Resolutions are passed, the Restructure will take place as described in this Disclosure Document and your Units will be redeemed in exchange for Challenger Shares. You will be bound by the decision of the Meeting even if you did not vote or voted against the Restructure Resolutions.

Should Challenger employ and remunerate the CEO?

Under the structure put in place at the time of the Merger, the CEO was directly employed by CPH Management, with the intention that he be remunerated by CPH Management out of the management and performance fees received from Challenger Group. As CPH Management will no longer receive fees after the Restructure and as it will no longer be the Responsible Entity, it is inappropriate for the CEO to be employed by CPH Management and the Independent Directors believe that it is in the best interests of Challenger to employ its chief executive officer. The cost to Challenger of assuming responsibility for the CEO's remuneration has been factored in to the value of the financial benefits to be provided to CPH in connection with the Restructure as described in this Disclosure Document. The Independent Directors believe that an important advantage of the Restructure is that the CEO will be directly committed to Challenger through his employment agreement and directly incentivised by Challenger.

When will the Restructure become effective?

Assuming that Unitholders approve the Restructure Resolutions, the Restructure will become effective on the Effective Date, which will also be the Record Date for determining entitlements to Challenger Shares. The determination of the actual Record Date is not possible at the date of this Disclosure Document because it is not certain when the Third Party Conditions will be satisfied.

If all the Third Party Conditions are satisfied by 16 December 2003:

• Units will be suspended from trading on ASX after trading closes on 16 December 2003;
• the Record Date for determining entitlements to the Challenger Shares to be issued under the Restructure will be set for 22 December 2003, after the Unitholder Meeting; and
• trading in entitlements to Challenger Shares, initially on a deferred settlement basis, will commence on 23 December 2003,

subject to ASX approval.

If all the Third Party Conditions are not satisfied by 16 December 2003 then:

• Units will be suspended from trading on ASX with effect from the date that CPH Management notifies ASX that the last of the Conditions of the Restructure has been satisfied (Notification Date);
• the Record Date for determining entitlements to Challenger Shares, to be issued under the Restructure, will be set for four Business Days after the Notification Date; and
• trading in Challenger Shares, initially on a deferred settlement basis, will commence on the Business Day immediately following the Record Date,

subject to ASX approval.

Why will Challenger Group Units be suspended from trading on ASX₂

Challenger Group Units will be suspended from trading for four Business Days either from close of trading on 16 December 2003 (if all the Third Party Conditions to the Restructure have been satisfied by that date) or from the Notification Date (being the date CPH Management notifies ASX that the last of the Conditions of the Restructure has been satisfied).

The suspension of trading in Units is required to enable all ineligible Overseas Holders to be identified and to avoid the need to comply with multi-jurisdictional legal and disclosure requirements if the Ineligible Overseas Holders were to participate in the issue of Challenger Shares under the Restructure.

What is the difference between owning a share in a company and a unit in a managed investment scheme?

The differences between owning a Challenger Group Unit and owning a Challenger Share are summarised in section 11.9 of this Disclosure Document.

Will CPH remain involved in Challenger?

Despite CPH Management retiring as Responsible Entity of Challenger Group, if the Restructure takes effect:

• CPH will continue to hold a 25% shareholding interest in Challenger and the 300 million Challenger Options; and
• CPH will have two nominees on the Board of Challenger, Mr Packer and Mr Jacob. It is also intended that Mr Graham Cubbin, who is a CPH executive, will be invited to join the Challenger Board.

Summary of Grant Samuel's Independent Expert Report - see section 10 for the full Independent Expert Report

					GRANT SAMUEL
--	--	--	--	--	--------------	--	--	--	--	--

■

GRANT SAMUEL & ASSOCIATES

LEVEL 19 GOVERNOR MACQUARIE TOWER 1 FARRER PLACE SYDNEY NSW 2000 GPO BOX 4301 SYDNEY NSW 2001 T: +61 2 9324 4211 / F: +61 2 9324 4301 www.grantsamuel.com.au

10 November 2003

The Independent Directors CPH Management Limited Level 3 54 Park Street SYDNEY NSW 2000

Dear Sirs

$\mathbf{1}$ Introduction

On 10 November 2003, the directors of CPH Management Limited ("CPH Management"), the responsible entity for Challenger Financial Services Group ("Challenger Group"), announced the details of a proposal to restructure Challenger Group (the "Restructure"). If approved, the Restructure will result $in:$

• the internalisation of the management agreement for Challenger Group. CPH Management will retire and be replaced as responsible entity by a wholly owned subsidiary of Challenger Group; and
• the corporatisation of Challenger with unitholders exchanging their units in Challenger Group (a unit trust) for shares in a new holding company, Challenger Financial Services Group Limited ("Challenger"), on a one-for-one basis.

As compensation for CPH Management retiring as responsible entity and forgoing associated fees, the ultimate holding company of CPH Management, Consolidated Press Holdings Limited ("CPH"), will receive \$96 million. However, as part of the Restructure, a subsidiary of CPH will, for a total consideration of \$96 million, acquire:

• Challenger Group's interest in Jurlique International Pty Limited ("Jurlique"), a South Australian based manufacturer and distributor of natural skin, hair and body products, for \$36 million. Challenger Group holds a 25% interest in Jurlique together with the associated call options and rights under the Jurlique shareholders agreement (the "Jurlique Interest"); and
• 300 million options over Challenger shares ("Options") for \$60 million. The options will have an exercise price of 65 cents, a 10 year term and will not be transferable.

As a consequence of the Restructure, Challenger will assume the responsibility for employing its Chief Executive Officer ("CEO"), currently Mr Chris Cuffe. Challenger will also become responsible for the payment of costs associated with operating a board of directors. All existing directors of CPH Management will become directors of the new holding company, Challenger. Mr Graham Cubbin, a director of CPH, will also be invited to join the board.

The Restructure involves a number of related party transactions. It will also result in a potential increase in CPH's relevant interest in Challenger Group from 25% to up to 33%, although CPH's ultimate interest in Challenger will depend upon whether it exercises its Options. Accordingly, unitholder approval is being sought for the Restructure. Unitholders are also being asked to approve the adoption of a Long Term Incentive Plan for senior management, although approvals of the plan and the Restructure are not interdependent.

The directors of CPH Management not associated with CPH ("the independent directors") have engaged Grant Samuel & Associates Pty Limited ("Grant Samuel") to prepare an independent expert's report for the purposes of Sections 611 and 208 of the Corporations Act and ASX Listing Rule 10.1 stating whether, in Grant Samuel's opinion, the Restructure is fair and reasonable to the unitholders of Challenger Group not associated with CPH (the "non associated unitholders"). The independent directors have also asked Grant Samuel to opine on whether the Restructure is in the best interests of unitholders.

Summary of Opinion $\overline{2}$

In Grant Samuel's opinion, the Restructure is fair and reasonable to the non associated unitholders and is also in the best interests of unitholders.

The fundamental question for unitholders is whether the value of the savings associated with the internalisation of management more than offsets the value of the Jurlique Interest sold to CPH and the Options which will be granted to CPH. In Grant Samuel's opinion, the financial benefits of the Restructure should outweigh the value transfer to CPH and, accordingly, non associated unitholders are likely to be better off if the Restructure is implemented than if it is not.

The impact of the Restructure on control of Challenger Group is not material, notwithstanding that CPH's interest in Challenger could increase from 25% to 33%. CPH will arguably be able to exercise less control over Challenger as CPH Management, a wholly owned subsidiary of CPH, will no longer be responsible for managing Challenger Group. There are other potential benefits and disadvantages. These are not considered to be material in the context of the potential financial benefits from the Restructure.

3 Key Conclusions

The financial impact of the Restructure has been analysed using two approaches

An assessment of the financial impact on unitholders involves a comparison of the value of the potential savings from internalisation of management with the value of the Jurlique Interest and the Options to be acquired by CPH. Grant Samuel has undertaken this analysis using two approaches. The first approach calculates the estimated net present value ("NPV") of management fees saved (less costs associated with employing a CEO and board of directors) for a variety of different return/capital growth scenarios for Challenger Group. These NPVs are then compared to the value of the Jurlique Interest plus the value that would be ultimately realised from the Options when exercised (discounted back to determine an estimated NPV) under the same scenarios. This calculation assesses the options on a "look back" basis to determine, with the benefit of hindsight, the eventual cost to unitholders of issuing the Options.

This approach reflects the fact that the value of the management fee savings and the ultimate value of the Options are heavily dependent on the capital growth rate of Challenger Group over time. This capital growth rate is the key driver of "gross asset value" (the base upon which management fees are calculated) and the unit price. The capital growth rate is, in turn, a function of total return on investment achieved by Challenger Group and the extent to which that return is retained or distributed to unitholders. Moreover, the NPV is very sensitive to the capital growth rate. Grant Samuel does not believe it is possible to estimate that growth rate with sufficient precision to determine a reliable point estimate, or even a usefully narrow range, of value. Rather, it believes it is more meaningful and helpful to unitholders to undertake the analysis across a spectrum of potential scenarios and to consider in what circumstances unitholders may be better or worse off.

At the same time, this analysis has limitations. For example, even if Challenger Group produced zero capital growth over the next 10 years and the Options ultimately proved to have no value, the Options clearly have a significant value today based on current market values and present expectations as to future performance.

Accordingly, Grant Samuel has also undertaken the analysis using a second approach of attributing a "current" value to the Options (rather than a "look back" value). This approach is referred to in this report as the "forward looking" approach. The value of the Options under this approach was calculated using a modified Black and Scholes methodology (the most widely accepted option valuation methodology). However, it must be recognised that this methodology also has significant limitations. For example, the Options are not freely transferable, the impact of which is not capable of being captured in a valuation based on option pricing models.

A conservative set of assumptions has been adopted for the analysis

Where possible, Grant Samuel has adopted a conservative approach (at least from the perspective of non associated unitholders) in selecting its base assumptions for its analysis. In particular:

• Grant Samuel has adopted a discount rate of 12% to assess both the value of the internalisation savings and the Options (on a "look back basis"). A lower discount rate is arguably more appropriate for assessing the value of the savings from the internalisation of management to reflect the fact that the cash flow stream (at least the base management fee component) has a lower risk than the overall income stream of Challenger Group;
• Challenger Group is assumed to pay 50% of its total returns to investors by way of dividends or distributions from year four. While the payment of dividends impacts both the value of the internalisation savings (by reducing the gross asset value of Challenger Group) and the Options, in relative terms the impact of higher payout ratios on the value of the internalisation savings is greater than the impact on the value of the Options (on a "look back" basis);
• a value of \$50 million has been assumed for the Jurlique Interest. The likely realisable value for the Jurlique Interest today is \$32-41 million. Accordingly, the assumed value of \$50 million provides a significant margin over the top end of that value range; and
• Grant Samuel's assumptions for assessing the Options using a modified Black and Scholes methodology are conservative (from the perspective of non associated unitholders). For instance, an option volatility of 35% has been adopted and dividends have been assumed to be three cents per unit, a level more consistent with low expectations for average returns to unitholders.

The financial impact of the Restructure should be favourable to unitholders

Grant Samuel has assessed the financial impact of the Restructure for a range of scenarios for the rates of return achieved by Challenger Group. Under scenarios of constant rates of return for Challenger Group, unitholders could expect to be better off with the Restructure than without it:

	Financial Impact on Unitholders – Constant Growth Scenarios
Scenario	After Tax Annual Rate of Return on Assets $(Years 1-20)$	Terminal Growth Rate in Management Fee	Net NPV Benefit/Cost (\$ millions)
Low Return
Forward Looking	8%	1%	31.5
Look Back	8%	$1\%$	57.2
Medium Return
Forward Looking	12%	2%	124.9
Look Back	12%	2%	122.6
High Return
Forward Looking	16%	3%	267.8
Look Back	16%	3%	230.0

Note: (1) After payment of base management fees

Only where the average rate of return achieved by Challenger Group is less than 5.4% would unitholders be worse off (assessed on a "forward looking" basis). The growth rate below which unitholders would be worse off if assessed using a "look back" approach is materially lower at 2.4%. In Grant Samuel's opinion, assuming total returns to unitholders as low as these would be extremely pessimistic and would imply that Challenger Group is unable to meet, or even come close to meeting, its cost of capital over the long term. Grant Samuel does not believe this to be commercially realistic.

Grant Samuel has also conducted the analysis adopting a range of non constant rates of return for Challenger Group. The analysis indicates that changes in rates of return over time do not materially impact (at least on the downside) the position of unitholders. The analysis is also sensitive to a

range of other assumptions including the volatility assumed in the modified Black and Scholes pricing model, the discount rate and the proportion of total returns paid out to unitholders. However, only in very limited circumstances (for instance only where low capital growth and a high discount rate is assumed) is it possible to identify circumstances where unitholders could be worse off.

The current level of management fees may not be sustainable in the long term

Grant Samuel's analysis assumes that the current base management fee of 1.5% per annum is maintained into perpetuity. This is CPH Management's existing legal entitlement. However, it should be recognised that the fee is substantial and has a significant profit component for CPH Management. Management fees across the entire funds management industry are under constant downwards pressure. There have been several instances of managers voluntarily reducing their fees.

Accordingly, it is conceivable that, at some future time, CPH Management may well reduce the base management fee as a matter of commercial reality. Pressure from unitholders is almost certain if Challenger Group continues to grow in size, particularly as CPH Management is contributing only the CEO rather than the whole management team. (ie it bears no extra costs as the business becomes larger and more complex).

A reduction in the base management fee impacts the value of the savings from internalisation of management materially. However, Grant Samuel's analysis indicates that even where the base management fee is assumed to be reduced to 0.75% per annum (ie half the current rate) from 1 January 2004, the Restructure remains positive in NPV terms for unitholders so long as rates or return over the long term remain close to, or greater than, levels consistent with the cost of equity.

There are a number of other benefits and advantages for unitholders

There are a number of other benefits and advantages for Challenger Group unitholders from the Restructure:

• the Restructure should result in improved corporate governance arrangements. For instance:
• shareholders in Challenger will be able to directly elect directors;
• annual general meetings will be a statutory obligation;
• the potential for conflicts of interest between CPH, as owner of CPH Management, and other unitholders will be reduced; and
• the remuneration arrangements for the CEO will be fully disclosed in accordance with Corporations Act requirements;
• the Restructure eliminates:
• incentives for CPH Management to pursue highly geared investments (as it currently receives fees on the gross asset value except in relation to the former Challenger International Limited business); and
• impediments to future mergers and acquisitions which exist because CPH Management will be entitled to a portion of earnings from any new business or asset (through its management fees);
• Challenger may be more attractive to the investment community. Challenger Group's peers are structured as companies, making valuation benchmarking between Challenger and its peers more difficult under the existing structure. Moreover, Challenger Group's current corporate governance regime may act as a disincentive to some investors. For instance, the inability to elect directors may cause some reluctance on the part of investors to invest. The Restructure should remove these impediments to investment; and

the regulatory regime applicable to Challenger as an ASX listed company may be more favourable than as a trust. In particular, the fundraising provisions applicable to companies will provide more flexibility.

The Restructure has no practical effect on control

If the Restructure is implemented, CPH has the potential (upon exercise of the Options) to increase its interest in Challenger from 25% to up to 33% (depending on any share issues in the interim). Arguably, this increase could give CPH greater control over Challenger. However:

• CPH will only increase its voting power in Challenger if it chooses to exercise the Options. There is no certainty they will be exercised;
• if CPH ultimately exercises the Options, CPH's stake in Challenger would be significantly less than 50%. While the stake would confer significant influence on CPH, it does not confer full control; and
• CPH already exercises significant influence, if not control, over Challenger Group through CPH Management's role as responsible entity. While CPH Management can be removed as manager of Challenger Group, CPH's 25% interest in Challenger Group makes doing so difficult.

Accordingly, it is Grant Samuel's view that there is no material change in the level of practical control exercised by CPH as a result of the Restructure.

Other disadvantages of the Restructure are not material

There are a number of other potential disadvantages, none of which are considered material in the context of the Restructure. These include:

• loss of guaranteed access to investment opportunities that become available to CPH. However, given Challenger Group's focus on financial services operating businesses this is unlikely to have any material negative impact;
• exposure to unexpected changes in the cost of CEO and director remuneration; and $\bullet$
• one-off transaction costs of about \$5 million will be incurred if the Restructure is implemented.

Other Matters $\Delta$

Approval or rejection of the Restructure is a matter for individual unitholders based on their own circumstances including their expectations of returns for Challenger Group, risk profile, liquidity preference, investment strategy, portfolio structure and tax position. Those unitholders who are in doubt as to the action they should take in relation to the Restructure should consult their own professional adviser.

Grant Samuel has not been asked by the independent directors to provide, and does not provide in this report, an opinion on the merits or otherwise of the Long Term Incentive Plan or the reasonableness of the CEO's remuneration.

The opinion is made as at the date of this letter and reflects circumstances and conditions as at that date. This letter is a summary of Grant Samuel's opinion. The full report from which this summary has been extracted is attached and should be read in conjunction with, and is an integral part of, this letter.

Yours faithfully GRANT SAMUEL & ASSOCIATES PTY LIMITED

Great Samel & Associates

Section 1. Overview

1.1 The Restructure

On 9 September 2003, CPH Management announced to ASX that it was working on a proposal to corporatise Challenger Group, which would result in the Responsible Entity function being internalised and eliminate the requirement to pay management and performance fees to CPH Management.

The proposal to corporatise has been further developed and Unitholders are now being asked to consider and vote on whether the proposal should be implemented. This Disclosure Document contains the details of the Resolutions and information to enable Unitholders to assess the proposal. The Unitholders' Meeting will be held at 11.00am on 22 December 2003 at the Hotel Westin Sydney, 1 Martin Place, Sydney.

The steps to effect the corporatisation are complex and Unitholders should read this Disclosure Document in full. The broad elements of the proposed corporatisation are:

• Unitholders will become shareholders in a new ASX listed company, Challenger Financial Services Group Limited (Challenger);
• CPH Management will retire as Responsible Entity and the Investment Management Agreement (which includes CPH's obligation to offer Challenger Group the opportunity to co-invest in future investments) and any related agreements will be terminated;
• the following transactions will take place between Challenger Group and CPH:
• Challenger Group will pay CPH \$96 million for CPH Management agreeing to retire as Responsible Entity and terminating the Investment Management Agreement;
• CPH will pay Challenger \$36 million to acquire Challenger Group's interest in Jurlique, a Challenger private equity investment, which is a manufacturer and retailer of natural skin and body products; and
• CPH will pay Challenger \$60 million to acquire 300 million non-transferable call options over Challenger Shares with an exercise price of \$0.65 and a 10 year term.

From the Effective Date, Challenger will assume ongoing liability for the costs which are currently borne as private costs by CPH Management. These are the remuneration costs of Challenger's CEO and the directors' fees payable to the Independent Directors.

In this Disclosure Document, the totality of these steps is described as the "Restructure".

Various Unitholder approvals are required to effect the Restructure, and these are described more fully in section 4.4. In summary, for the Restructure to proceed resolutions must be approved:

• to amend the Challenger Group Constitution to authorise implementation of the Restructure, including the acquisition by Unitholders of Challenger Shares in consideration for the redemption of Units;
• under ASX Listing Rules 10.1 and 10.11 and Chapter 2E of the Corporations Act, to authorise the giving of the financial benefits described in this Disclosure Document to CPH;
• under section 611 (item 7) of the Corporations Act, to approve the acquisition by Challenger of five Units and the future exercise of Challenger Options by CPH Investments; and
• under ASX Listing Rule 10.11 and Chapter 2E of the Corporations Act, to approve the CEO's employment contract with Challenger, including the issue of 40 million Challenger Shares to the CEO on the terms set out in this Disclosure Document (including vesting terms).

The Unitholder Resolutions to effect the Restructure, referred to in this Disclosure Document as the "Restructure Resolutions", are interdependent, which means that if any one of the Restructure Resolutions is not passed by Unitholders, the Restructure will not proceed.

As set out in section 2, the Independent Directors unanimously recommend the Restructure and recommend that Unitholders vote in favour of the Restructure Resolutions. The benefits, disadvantages and risks of the Restructure are set out in section 3.

The Independent Expert, Grant Samuel, has concluded that the Restructure is fair and reasonable to Unitholders not associated with CPH and is also in the best interests of Unitholders. In Grant Samuel's opinion, non associated Unitholders are likely to be better off if the Restructure is implemented than if it is not.

The Restructure involves interdependent steps. These are described in detail in section 4. In summary the steps are:

Changing the Responsible Entity and associated matters

Under this step, Unitholders will be asked to approve a change in the Responsible Entity of Challenger Group including a number of connected steps. If approval is given CPH Management will retire from the position of Responsible Entity and Challenger Managed Investments Limited will become Responsible Entity of Challenger Group' in its place; the obligation for Challenger Group to pay management fees and performance fees to the Responsible Entity from the Effective Date of the Restructure will be revoked although CPH Management will receive the management fee up to the date it retires as Responsible Entity; a number of agreements to which CPH Management (as responsible entity for Challenger Group) is a party will be terminated; the CPH Transactions will be effected; and Challenger will assume responsibility for the CEO remuneration and Directors' fees.

Unitholders accepting Challenger Shares for their Units

Under this step, Unitholders will be asked to approve the issue of Challenger Shares to them on a one for one basis in exchange for their Units being redeemed, except if they are Ineligible Overseas Holders, in which case they will receive a cash amount for their Units which will be transferred to the IOH Transferee. Challenger will become the new holding company of Challenger Group and it will be listed on ASX.

Both steps are described in further detail below. Unitholders should be aware that there are a number of connected matters which they must also approve if the Restructure is to proceed. Further details of these approvals are set out in this Disclosure Document in section 4.

Set out overleaf are simplified corporate charts which show the structure and ownership of Challenger Group both before and after the Restructure is approved.

1 As soon as practicable after Challenger Group is de-registered as a managed investment scheme, it is intended that the unit trust structure will be removed, subject to complying with necessary laws.

After

1. Before the exercise of the Challenger Options and, subject to its approval, the LTIP.
   2. As soon as practicable after the Challenger Group is deregistered it is intended to remove
   the trust structure, subject to complyi

1.2 Long term incentive plan for executives (LTIP)

At the Meeting, Unitholders will also be asked to approve a long term, equity based, incentive plan in which senior executives of Challenger Group may participate. Section 9 contains the details of this plan, which is referred to as the LTIP in this Disclosure Document.

Resolutions 7 and 8 authorise the implementation of the LTIP in Challenger Group. However, if the Restructure takes effect the LTIP will be implemented in Challenger, not in Challenger Group, provided Resolution 7 is also approved.

1.3 Suspension of trading in Units

The suspension of trading in Units is required to enable all Ineligible Overseas Holders to be identified and to avoid the need to comply with multi-jurisdictional legal and disclosure requirements which would apply if the Ineligible Overseas Holders were to participate in the issue of Challenger Shares under the Restructure. CPH Management has decided that it is unreasonable for Ineligible Overseas Holders to participate due to the small number and value of the Challenger Group Units held by Ineligible Overseas Holders and the cost of complying with offshore securities law requirements.

Accordingly, based on the indicative timetable which is included in this Disclosure Document, Units will be suspended from trading on ASX from the close of trading on 16 December 2003 and ending on 22 December 2003, being the date of the Unitholders' Meeting. However, the suspension of trading on these dates is dependent on all Third Party Conditions of the Restructure being satisfied.

It is possible that the FSSA Approval will not be granted by 16 December 2003. In this event, Units will continue to trade on ASX after the Unitholders' Meeting, even if the Unitholders approve the Restructure Resolutions, until all Conditions, including the Third Party Conditions, have been satisfied. In this event, once all Conditions have been satisfied CPH Management will give a notice to ASX of the Record Date for the Restructure which will be four Business Days after the notice is given. On the date of that notice, Units will be suspended from trading on ASX. Challenger Shares will commence trading, initially on a deferred settlement basis, on the day after the Record Date set out in the notice given by CPH Management to ASX.

CPH Management will make appropriate announcements to ASX and will take appropriate steps to inform Unitholders of any information which is relevant to the matters outlined above, including by posting the announcement on the Challenger Group website (www.challenger.com.au) and placing advertisements in national newspapers.

1.4 Record Date/Effective Date and trading in Challenger Shares

The Record Date and the Effective Date of the Restructure will be the same date. On that date, which is referred to as "Record Date" in this section 1.4, the Unit Register will close at the record time, being some time after 5:00pm on the Record Date, for the purpose of determining entitlements to participate in the Restructure; including for the purposes of determining whose Units are to be redeemed and to whom Challenger Shares are to be issued. Also, on the Record Date, Supplementary Deed Number 6, which amends the Constitution as referred to in this Disclosure Document, will be lodged with ASIC.

The earliest possible Record Date is the date of the Unitholders' Meeting.

The determination of the actual Record Date is not possible at the date of this Disclosure Document because it is not certain when certain Third Party Conditions of the Restructure will be satisfied.

Because of the uncertainties which exist at the date of this Disclosure Document, there are two possible timing scenarios that could result for the implementation of the Restructure. The scenarios, and their implications for setting the Record Date and trading in Challenger Shares, are:

Scenario 1

Under this scenario, it is assumed that all Third Party Conditions of the Restructure are satisfied by 16 December 2003. On this basis:

• Units will be suspended from trading on ASX from the close of trading on 16 December 2003;
• the Record Date for determining entitlements to the Challenger Shares to be issued under the Restructure will be set for 22 December 2003; and
• trading in Challenger Shares, initially on a deferred settlement basis, will commence on 23 December 2003, subject to the agreement of ASX.

Scenario 2

Under this scenario, it is assumed that a Third Party Condition of the Restructure is not satisfied on or before 16 December 2003.

On this basis:

• Units will be suspended from trading on ASX with effect from the date that CPH Management notifies ASX that the last of the Conditions of the Restructure to be satisfied, has been satisfied (Notification Date):
• the Record Date for determining entitlements to Challenger Shares, to be issued under the Restructure, will be set for four Business Days after the Notification Date; and
• trading in Challenger Shares, initially on a deferred settlement basis, will commence on the business day immediately following the Record Date, subject to the agreement of ASX.

Under the Implementation Deed there is a sunset date - 30 June 2004 - for the satisfaction of the Conditions of the Restructure. If all the Conditions of the Restructure are not satisfied by that date, the Implementation Deed can be terminated by any party, in which event the Restructure will not take place.

1.5 CPH Transactions

As a result of the Restructure taking effect:

• Challenger Group will pay CPH \$96 million for CPH Management agreeing to retire as Responsible Entity and terminating the Investment Management Agreement;
• CPH will pay Challenger \$36 million to acquire Challenger Group's interest in Jurlique, a Challenger private equity investment, which is a manufacturer and retailer of natural skin and body products; and
• CPH will pay Challenger \$60 million to acquire 300 million non-transferable call options over Challenger Shares with an exercise price of \$0.65 and a 10 year term.

A reference to "CPH Transactions" in this Disclosure Document is a reference to these three transactions.

In addition, the existing employment contact between CPH Management and the CEO will be terminated with effect from the day when the Restructure is to be implemented and the CEO will enter into a new employment contract with Challenger. As a result, Challenger will be responsible for the remuneration of the CEO from the Effective Date of the Restructure.

CPH Management will no longer bear the cost of Board fees which are paid to the Independent Directors of CPH Management. Challenger will be responsible for Directors' fees.

1.6 Recommendations, benefits, disadvantages and risks

Section 2 contains the recommendation of the Independent Directors in relation to the Restructure. When considering the recommendation, Unitholders should also give consideration to the benefits, disadvantages and risks associated with implementing the Restructure which have been identified by Challenger Group and which are summarised in section 3.

Additionally, section 7 contains a summary of the ongoing business risk factors relating to the operations of Challenger as it will be conducted following implementation of the Restructure.

1.7 Independent Expert Report

The Independent Directors engaged Grant Samuel to prepare an Independent Expert Report in relation to the Restructure.

A complete copy of the Independent Expert Report is set out in section 10.

In summary, Grant Samuel have concluded:

In Grant Samuel's opinion, the Restructure is fair and reasonable to the non associated Unitholders and is also in the best interests of Unitholders.

The fundamental question for Unitholders is whether the value of the savings associated with the internalisation of management more than offsets the value of the Jurlique Investment sold to CPH and the Challenger Options which will be granted to CPH. In Grant Samuel's opinion, the financial benefits of the Restructure should outweigh the value transfer to CPH and, accordingly, non associated Unitholders are likely to be better off if the Restructure is implemented than if it is not.

The impact of the Restructure on control of Challenger Group is not material, notwithstanding that CPH's interest in Challenger could increase from 25% to 33%. CPH will arguably be able to exercise less control over Challenger as CPH Management, a wholly owned subsidiary of CPH, will no longer be responsible for managing Challenger Group. There are other potential benefits and disadvantages. These are not considered to be material in the context of the potential financial benefits from the Restructure.

Section 2. Recommendation

The Directors of CPH Management at the date of this Disclosure Document are James Douglas Packer (Chairman), Christopher Edgar Cuffe (CEO), Ashok Peter Jacob, James Glen Service, Brenda Mary Shanahan, Russell Richard Roberts Hooper, Peter Leith Polson and Michael Tilley.

Each of the Directors, other than Mr Packer and Mr Jacob, considers himself or herself justified in making a recommendation concerning the Restructure or the Restructure Resolutions. Mr Packer and Mr Jacob do not consider themselves justified in making a recommendation in relation to the Restructure given their close association with CPH, as both are directors and executives of CPH, and the fact that CPH is to be provided financial benefits as part of the Restructure. Neither CPH nor its associates will vote on the Restructure Resolutions

However, Mr Packer and Mr Jacob do consider themselves justified in making a recommendation in relation to the LTIP Resolutions. The LTIP Resolutions are not conditional on the Restructure being approved. Mr Packer and Mr Jacob agree with the recommendation of the other Directors in relation to the LTIP Resolutions.

One of the Restructure Resolutions (Resolution 6) seeks Unitholders' approval of the terms of the CEO's proposed employment contract with Challenger and the issue to the CEO of 40 million Challenger Shares. The Restructure cannot proceed unless that Resolution is passed. Mr Cuffe has an interest in Resolution 6 and therefore gives no recommendation in relation to Resolution 6.

Despite Mr Cuffe's interest in Resolution 6, he considers himself justified in making a recommendation in relation to the Restructure given that all material details concerning his proposed employment contract with Challenger are disclosed in this Disclosure Document

In relation to all aspects of the Restructure (other than those matters which are the subject of Resolution 6), Mr Cuffe makes the same recommendation as the other Independent Directors in relation to the Restructure for the reasons set out in this Disclosure Document.

The Independent Directors (that is, all the Directors of CPH Management other than Mr Packer, Mr Jacob and Mr Cuffe) unanimously recommend that Unitholders vote in favour of the Restructure Resolutions at the meeting which has been convened to be held on 22 December 2003.

In making this recommendation, the Independent Directors have considered:

• the benefits, disadvantages and risks of the Restructure, as summarised in section 4;
• the risks associated with the business of the Challenger Group, as summarised in section 8; and
• the findings of the Independent Expert, as contained in section 10.

In summary, the Independent Directors consider that the benefits of the Restructure outweigh the disadvantages and risks of the Restructure and they have formed this view after taking into account the fact that financial benefits are provided to CPH and CPH Management as an integral part of the Restructure. The major factors influencing the Independent Directors' recommendation are as follows:

Restructure of Challenger Group

A number of the Restructure Resolutions relate to the corporatisation of Challenger Group, including the required amendments to the Constitution of Challenger Group to authorise the Restructure and its implementation. The Restructure will result in Challenger Group no longer being required to pay management and performance fees to CPH Management or another responsible entity. The Independent Directors believe that corporatising the Challenger Group ownership structure is an important element in maintaining widespread investment and institutional interest in Challenger Group; it will facilitate better investor understanding of Challenger Group; under the corporate structure there will be more transparent reporting to investors; and it will facilitate improved access to capital. In addition, Challenger Shares will likely be regarded as more acceptable transaction consideration in future acquisitions, particularly given that Challenger Group will no longer be required to pay sizeable management and performance fees to external parties from the time the Restructure is implemented.

Financial benefits to CPH

An integral and interdependent part of the Restructure is the requirement to enter into the CPH Transactions. In addition:

• the existing employment contract between CPH Management and the CEO will be terminated, although CPH Management will make a separation payment to the CEO as described in section 4.3; and
• CPH Management will cease to have an obligation to pay remuneration to external board members, which is currently approximately \$500,000 per annum in aggregate plus out-of-pocket expenses.

Challenger, from the date that the Restructure is implemented, will assume the obligations to the CEO under the proposed CEO employment contract and will be responsible for Board remuneration of up to \$950,000 per annum, which can only be increased if approved by Challenger shareholders. It should be noted, however, that the increase in the permitted level of Board fees does not mean that the Challenger Directors intend to increase their existing directors' remuneration. It is their intention that, for the current financial year, Board fees will remain the same. Board fees will be reviewed annually with a view to aligning them to the amounts paid by comparable listed public companies. In addition, in the future the size of the Challenger Board may be expanded and, if it is, there will be capacity within the \$950,000 limit on Board remuneration to pay new appointees.

However, if the Restructure is approved, Challenger Group will have no obligation to pay ongoing management and performance fees to a Responsible Entity from the Effective Date and Challenger will be managed by its own executives under the direction and control of the Challenger Board, rather than by CPH Management.

If the Restructure is implemented CPH Management will be entitled to management fees up to the Effective Date of the Restructure.

The Independent Directors believe that the quantum of management and performance fees which will be payable if the existing structure is retained will be significant on an ongoing basis. The Independent Directors believe the cost of providing the financial benefits to CPH in accordance with the Restructure is reasonable having regard to the quantum of fees, which are:

• The management fee is currently approximately \$7.3 million per annum.
• Should Challenger Group Units trade above the 60 Cent Threshold established at the time of the Merger for more than 10 consecutive trading days, Challenger Group will be obliged to pay CPH Management a management fee in relation to the investment in Challenger made under the Merger, resulting in an additional management fee of \$9.2 million per annum, taking the total fee to \$16.5 million per annum.
• . In June 2005 CPH Management is required to value the Challenger Group assets (Five Year Value) to determine if a Five Year Performance Fee is payable. Even if no Five Year Performance Fee is payable. from that date, the Five Year Value will be the main basis of calculating the management fee. This means that even if the performance of Challenger Group in the five year period has not been sufficient to require a performance fee to be paid to CPH Management, any growth in the value of Challenger Group will result in an increase in the management fee.

Jurlique Investment

In the opinion of the Independent Directors, the Jurlique Investment is not material to the ongoing business or consistent with the strategic focus of Challenger Group or Challenger.

Jurlique International Pty Limited (Jurlique) is a South Australian based manufacturer, distributor and retailer of natural skin, hair and body care products and aromatherapy essential oils. Jurlique products are currently sold in more than 20 countries, including the United States, United Kingdom, Japan, Korea, Taiwan and Hong Kong. There is potential for the brand to use its current platform to expand into a number of markets that remain largely untapped, including the United States, Europe and Asia.

Jurlique distributes its products through various channels, including concept stores, franchise stores, department stores, pharmacies, health stores, beauty clinics and aromatherapists. Jurlique has in excess of 30 specialty concept and day spa stores, both company-owned and franchised, in Australia, the United States and Asia. A number of the concept stores have day spas and wellness sanctuaries with specialist therapists providing a wide range of facials, massages, body treatments and hydrotherapy services. Jurlique is also a supplier of products to other spa operators in the United States.

Challenger Group acquired 25% of the shares in Jurlique for \$25 million in September 2002. This investment was based on a 2002 earnings multiple of approximately 6.5 times. In addition, Challenger Group has options to increase its investment to 75% over time.

Further details concerning Jurlique are set out in section 4 of the Independent Expert Report.

The Independent Expert has analysed the disposal of the Jurlique Investment in the context of the Restructure. This analysis is included in section 5 of the Independent Expert Report. The Jurlique Investment will cease to be an asset of Challenger Group if the Restructure is approved.

Challenger Options

CPH will be granted 300 million Challenger Options as part of the CPH Transactions.

The Independent Expert has analysed the Challenger Options to be issued in the context of the Restructure. Their analysis is included in section 5 of the Independent Expert Report.

The Independent Directors also note that if all the Challenger Options are exercised, CPH will pay Challenger \$195 million, being the aggregate exercise price, to acquire 300 million Challenger Shares. This compares to the current cost of acquiring 300 million Units (namely \$149 million, based on the closing market price of Units on ASX on the trading day before the date of this Disclosure Document).

CEO's employment contract and Board costs

CPH Management currently meets certain costs of operating Challenger Group as private costs, that is, they are not funded out of trust property. These costs are the ongoing cost of the CEO remuneration, and part of the directors' fees and committee fees payable to the Independent Directors (Mr Packer and Mr Jacob do not receive fees for acting as directors) which currently amount to approximately \$500,000 per annum in aggregate plus out-of-pocket expenses.

The assumption by Challenger of the obligation to pay the directors' fees will occur as a result of the change to a corporate structure. The assumption by Challenger of the CEO's employment contract requires Unitholder approval, as an integral and interdependent part of the Restructure. Further details of the CEO's proposed employment contract with Challenger are contained in section 4.3.

The financial benefits being provided to CPH, as described in this Disclosure Document, take into account the reduction in cost to CPH from Challenger assuming the obligations under the CEO's service agreement and the directors' fees. Even with these additional costs, the Independent Directors believe that the advantages to Unitholders of the Restructure more than outweigh the value of the CPH Transactions and other financial benefits being provided to CPH.

It is important for Unitholders to note that the decision to proceed with the Restructure is subject to each of the Restructure Resolutions being passed. If any of those Resolutions is not passed, the Restructure will not proceed.

So as to satisfy all necessary legal requirements, the Independent Directors engaged the Independent Expert to provide Unitholders with the Independent Expert Report.

In summary, the Independent Expert has concluded that, in its opinion:

• the Restructure is in the best interests of Unitholders;
• the CPH Transactions are fair and reasonable to Unitholders other than CPH and its associates; and
• the impact of the Restructure on control of Challenger Group is not material, notwithstanding that CPH's interest in Challenger could increase from 25% to 33%. CPH will arguably be able to exercise less control over Challenger as CPH Management, a wholly owned subsidiary of CPH, will no longer be responsible for managing Challenger Group. There are other potential benefits and disadvantages. These are not considered to be material in the context of the potential financial benefits from the Restructure.

A complete copy of the Independent Expert Report is set out in section 10 and Unitholders are urged to read the Independent Expert Report in its entirety.

The Independent Directors note that the opinions of the Independent Expert are consistent with their recommendation to Unitholders as set out above.

If any of the Restructure Resolutions is not approved, or if any Condition of the Restructure is not satisfied then:

• Challenger Group will remain listed on ASX as a registered managed investment scheme;
• the proposed transfer of Units to Challenger and the issue of Challenger Shares will not take place;

• CPH Management will remain as the Responsible Entity of Challenger Group;

• the amendments to the Challenger Group Constitution will not become effective, with the consequence that CPH Management will remain entitled to be paid both management fees and performance fees in accordance with the current Challenger Group Constitution;

• the Investment Management Agreement will not be terminated; and
• the CEO will remain employed by CPH Management, not in its capacity as Responsible Entity of Challenger Group, but as a wholly owned subsidiary of CPH.

LTIP recommendation

The recommendation of the Directors in relation to the LTIP and the LTIP Resolutions is set out in section 9.

Section 3. Benefits, disadvantages and risks
of the Restructure

3.1 Reasons why you may decide to vote in favour of the Restructure Resolutions

The Independent Directors believe that the main benefits of the Restructure are:

3.1.1 Removal of ongoing liability for fee payments to the Responsible Entity

The Challenger Group Constitution currently provides that the Responsible Entity from time to time is entitled to be paid fees by the Challenger Group. These fees comprise management and performance fees.

A central element of the Restructure is that CPH Management, being the entity currently entitled to receive these fees, will retire as the Responsible Entity and the Challenger Group's Constitution will be amended to remove the requirement for management and performance fees to be paid to any Responsible Entity from the Effective Date of the Restructure.

If the Restructure is approved, the ongoing liability to pay management and performance fees will therefore be removed. This will result in those amounts being retained by the Group either for reinvestment in the business or returned to Challenger Shareholders as part of any future distributions to Challenger Shareholders.

The Independent Directors believe the benefit to Challenger of removing the ongoing liability for fees outweighs the cost of the financial benefits being provided to CPH. In addition, there is no net cash outflow from Challenger as a result of the CPH Transactions.

The Independent Expert has also stated that in its opinion, the financial benefits to Unitholders of the Restructure should outweigh the value transfer to CPH.

3.1.2 Benefits of corporate structure

When CPH Investment Corp (the previous name for Challenger Group) was established in 1997 its primary activity was the holding of interests in various listed and non-listed investments. The Merger with Challenger International Limited in July 2003 transformed the renamed entity into a provider of diversified financial services. While the managed investment scheme structure is suited to entities which purely derive investment income (such as investment trusts or property trusts), there are a variety of legal and operational advantages that will flow to the Challenger Group as a result of operating under a corporate structure.

Managed investment scheme aspects

There are several differences in the regulations governing ASX-listed managed investment schemes and ASX-listed companies. The differences include:

• · different provisions for fundraisings which are more restrictive for listed managed investment schemes than for listed companies; and
• the fact that not all of the provisions of the Corporations Act which apply to listed companies apply to listed managed investment schemes; for example, notice requirements for meetings of members, the requirement to disclose executive remuneration and the requirement to hold an annual general meeting.

More comparable and better understood structure

Challenger Group's peers within the financial services sector operate under corporate structures. Through the Restructure, Challenger Group will bring itself into line with its peers which will assist in making the business more comparable for investors in the financial services sector. This may attract increased investor interest in the new company as investors may previously have been reluctant to invest due to the comparatively unusual corporate structure currently in place. A corporate structure should generally be better understood by the business and investing communities and, while managed investment schemes are certainly not unusual in Australia, the majority of listed operating businesses are companies. This should assist in promoting confidence in the business by investors, business partners and customers.

3.1.3 Corporate governance and control

Removal of potential conflict at Responsible Entity level

At present, the power to direct the operations of Challenger Group is vested in the Responsible Entity, being CPH Management. CPH Management is a wholly owned subsidiary of CPH which is also the largest Unitholder in Challenger Group through the holdings of its wholly owned subsidiaries. Although, in the great majority of situations, the interests of CPH and the other Unitholders will be closely aligned, it is possible that situations could arise where there is a perceived conflict of interest between CPH and other owners of Units

The implementation of the Restructure will remove this potential for conflict and will vest control of Challenger Group in the shareholders and Board of Challenger.

Ability to elect directors

Following implementation of the Restructure, Challenger Shareholders will have the ability to elect directors to the Board of Challenger at annual elections of directors. The requirement for an annual election of directors should ensure that the Board is directly accountable to shareholders for the performance of the businesses.

Requirement to hold an annual general meeting

Under the Corporations Act there is no statutory requirement that the Responsible Entity of a managed investment scheme hold an annual meeting attended by Unitholders. While CPH Management in its capacity as Responsible Entity of Challenger Group has made it clear that appropriate disclosure and communication with Unitholders is a priority, the requirement for annual general meetings to be held will be a statutory requirement of Challenger if the Restructure is approved.

Restructure of CEO employment and remuneration

At present, the CEO of Challenger Group, Mr Chris Cuffe, is an employee of CPH Management and does not have a direct contractual relationship with Challenger Group. The Independent Directors believe the CEO's role in the ongoing development of the Challenger Group business is important to its success, given his depth of experience in financial services and track record in building a business in the sector.

One aspect of the Restructure provides that the CEO will cease to be an employee of CPH Management and will enter into a new employment contract with Challenger. Under the terms of the employment contract to be entered into, the CEO will be contracted to April 2008.

The restructure of the employment arrangements with the CEO will ensure the CEO's interests are directly aligned with the interests of Challenger shareholders.

Further details of the CEO's proposed employment contract with Challenger can be found in section 4.3.

3.2 Reasons why you may decide to vote against the Restructure Resolutions

The Independent Directors believe that the main disadvantages of the Restructure are:

3.2.1 Additional costs imposed on Challenger

Under the Restructure, Challenger will assume the liability for certain costs of managing Challenger Group which are currently borne by CPH Management. These costs are:

• remuneration of the CEO of Challenger; and
• Board fees.

However, the Independent Directors have factored in the amount of these additional costs in determining that the benefit to Challenger of removing the ongoing liability to pay the management and performance fees to CPH Management outweighs the value of the financial benefits being provided to CPH under the Restructure.

3.2.2 Potential dilution of Unitholders

The Restructure requires CPH to be granted 300 million Challenger Options and Challenger to issue 40 million Challenger Shares to the CEO. The Challenger Options are only likely to be exercised into Challenger Shares if the price of Challenger Shares reaches the Challenger Option exercise price of \$0.65.

3.2.3 Tax liabilities

The sale of the Jurlique Investment to the CPH Group will give rise to an assessable capital gain for Challenger or its subsidiaries to the extent that the sale price exceeds the tax cost base in the investment. The amount paid for the investment was approximately \$25 million. Whether the cost base is impacted by the formation of a tax consolidated group has not, at this stage, been determined. However, it is unlikely that the cost base will be materially impacted by the formation of a tax consolidated group.

Tax losses may be available to shelter the capital gain. The extent to which tax losses will be available substantially depends on the Proposed Tax Law Amendments.

Any Goods and Services Tax payable in respect of the CPH Transactions may not be fully creditable. However any portion not creditable is not expected to be material.

A tax liability should not be triggered for Challenger by the receipt of the subscription consideration for the Challenger Options or by any subsequent exercise of those options. If the Challenger Options lapse without being exercised at expiration of the 10 year term, a capital gain would arise for Challenger at that time equal to the subscription consideration less any costs of granting the options.

The taxation implications of the Restructure for Unitholders are set out in the Taxation Report in section 8.

3.2.4 Timing of payments to CPH

Although there is no net cash outflow to CPH from Challenger Group resulting from the CPH Transactions, the Restructure requires CPH and CPH Management to be paid compensation now for the extinguishment of future rights.

3.2.5 Loss of access to CPH investment opportunities

As part of the Restructure, the Investment Management Agreement will be terminated. This means Challenger Group will no longer have a contractual right to access investment opportunities that become available to CPH.

3.2.6 Alternate mechanism for removal of CPH Management is available

Under the Corporations Act, Unitholders could act to remove CPH Management as Responsible Entity, in which case the CPH Transactions would not need to be implemented. However, this removal would require the approval of Unitholders to an ordinary Resolution. Given CPH's position as the largest single Unitholder on the Challenger Group register, such an attempt to remove CPH Management might not be successful. It should be noted that even if this mechanism for removal of CPH Management was achieved, Challenger Group could remain liable to pay CPH Management substantial ongoing fees in accordance with the Investment Management Agreement.

3.3 Risks of the Restructure

In considering whether to vote for the Resolutions, Unitholders should take into account various risk factors associated with the Restructure and its implementation. These risks which relate specifically to the Restructure process are described in this section.

A more detailed discussion of the ongoing business risks which relate to the operations of the Challenger Group now, and which will relate to the operations of Challenger after the Restructure is implemented, is contained in section 7.

3.3.1 Restructure Proposal risks

Jurlique

As part of the Restructure, Challenger Group is selling the Jurlique Investment to CPH. The sale of Jurlique is consistent with Challenger's objective of reducing its exposure to private equity investments over time.

Nevertheless, there is a risk that Challenger Group may have sold the Jurlique Investment too early or at a discount to its likely value in future years, as, at this time, the full potential value of Jurlique may not yet be fully apparent. Challenger's investment in Jurlique was made in September 2002. Jurlique is still in an expansionary phase of its operations and its expansion and profitability in future years may be higher or lower than currently anticipated.

CPH relationship

As part of the Restructure, CPH Management will retire as Responsible Entity of Challenger Group. CPH will be represented on the Challenger Board if the Restructure is approved by Unitholders, but will not have an ongoing active role in the management of Challenger. CPH is a successful company which has many talented and experienced managers who, other than Mr Cuffe, will no longer have responsibility for, or be able to participate in the day-to-day management decisions of, Challenger.

Section 4. the Restructure

4.1 Features of the Restructure

This section provides further details of the steps involved in the Restructure.

(a) Replacement of Responsible Entity

If the Restructure is approved and takes effect then CPH Management will retire as Responsible Entity of Challenger Group and, pending deregistration by ASIC of Challenger Group as a registered managed investment scheme, Challenger Managed Investments will become the Responsible Entity of Challenger Group. Challenger Managed Investments is wholly owned by Challenger Group.

As a result of the amendments to the Constitution proposed by Resolution 2, it will no longer be necessary for management and performance fees to be paid to the Responsible Entity of Challenger Group after the Effective Date. CPH Management will be entitled to the management fee up to the date of its retirement as the Responsible Entity. Certain of the amendments to the Constitution, which are proposed by Resolution 2, clarify this entitlement. If the Effective Date of the Restructure and the date of CPH Management's retirement as Responsible Entity is 22 December 2003, the likely management fee payment for the period 1 July 2003 to 22 December 2003 will be approximately \$3.5 million.

The likely management fees which will be payable to CPH Management if the Restructure is not approved are set out in section 3. In summary, for the current year to 30 June 2004 the management fee would be \$7.3 million if the 60 Cent Threshold is not satisfied or \$16.5 million if the 60 Cent Threshold is satisfied.

Further, the Responsible Entity of Challenger Group is entitled to a performance fee in respect of the five year period ending 30 June 2005 and then every five years thereafter

The five year performance fee is based on the realised and unrealised performance of Challenger Group by reference to a formula which is contained in the Constitution which, in summary, amounts to 20% of out-performance against benchmark growth of 10% per annum compounded.

In addition to the five year performance fee, the Responsible Entity of Challenger Group is entitled to realisation fees upon the realisation of individual investments of Challenger Group, assuming they have achieved the compounded annual 10% return on the equity investment. Both the five year fee and the realisation fee are only payable if any prior shortfall in performance is first made up. At the date of this Disclosure Document the carry forward shortfall in fees which needs to be made up before a performance fee or realisation fee would become payable is approximately \$28 million.

A detailed summary of the entitlement of the Responsible Entity to be paid management and performance fees in accordance with the Constitution is set out in the Scheme of Arrangement Booklet (dated 9 May 2003) which was issued in connection with the Merger together with the letter lodged by Challenger International Limited with ASX on 20 June 2003 (Fee Information). A copy of the Fee Information is available on the Challenger Group website (www.challenger.com.au) or will be provided free of charge to any Unitholder who requests a copy from the Challenger Information Line on 1300 733 343 (toll free within Australia) or +61 2 9240 7450 (from outside Australia).

If the Restructure is implemented, Challenger will seek to have Challenger Group deregistered as a managed investment scheme. This process must be undertaken in accordance with the requirements of the Corporations Act and may take some months following implementation of the Restructure to be finalised. As soon as practicable after the Challenger Group is deregistered it is intended to remove the trust structure, subject to complying with all necessary legal requirements.

(b) Amendments to the Constitution

As part of the Restructure the Constitution will be amended in a manner that will enable the Restructure to be put into effect if the Restructure Resolutions are approved by Unitholders. See section 4.4 for further details.

(c) Termination of Investment Management Agreement

It is a requirement of the Implementation Deed that, upon the Conditions being satisfied, the Investment Management Agreement and other related agreements between CPH and Challenger Group will be terminated. It is proposed that a Deed of Termination will be executed on or prior to the Effective Date so as to give effect to the obligation to terminate the Investment Management Agreement. The principle terms of the Deed of Termination are also summarised in section 11.

(d) Ineligible Overseas Holders

For the reasons outlined earlier in this Disclosure Document, Challenger Shares will not be issued to any Unitholder who at 4.00pm on the Record Date has a registered address which is outside Australia and its external territories or New Zealand, unless either CPH Management and Challenger is satisfied that Challenger is not prevented from lawfully issuing Challenger Shares to such a Unitholder, either unconditionally, or after compliance with conditions as CPH Management and Challenger regard as reasonable and acceptable.

Under the Restructure, the Units of Ineligible Overseas Holders will be transferred at 4.00pm on the Record Date to the IOH Transferee, being an entity that holds a dealer's licence or Australian financial services licence issued by ASIC. As a result of that transfer, the IOH Transferee will become the registered holder and owner of those Units shortly after 4.00pm on that date.

Ineligible Overseas Holders will receive consideration for such transfer an amount, for each Unit transferred to the IOH Transferee, which is equivalent to the average of the daily VWAP for Challenger Shares over the first 10 days of trading of Challenger Shares on ASX.

The IOH Transferee will pay this consideration to the Challenger Registry within 20 Business Days of the Record Date. The Registry will then make payment of the consideration due to Ineligible Overseas Holders within five Business Days of it receiving these funds from IOH Transferee, or sooner if reasonably practicable. The payments to be made by the Registry will be despatched by mail to the Ineligible Overseas Holders' registered address as shown in the Challenger Group Register by cheque in Australian currency,

drawn on an Australian bank. In the case of joint holders, the cheque will be made payable and forwarded to the holder whose name first appears in the Challenger Group Register at the Record Date.

The obligation of the IOH Transferee to make the payment described above to the Registry will be quaranteed by the IOH Guarantor, which will be a related entity of IOH Transferee that has been assigned a credit rating of not less than A by Standard & Poor's.

CPH Management is currently in final negotiations with two subsidiaries of UBS, an international investment bank, and CPH Management expects that it will enter into an agreement under which the UBS subsidiaries will agree to perform the functions of IOH Transferee and IOH Guarantor. CPH Management is not aware of any reason why the two abovementioned UBS entities will not agree to perform the function of IOH Transferee and IOH Guarantor on terms no less favourable than those set out in this Disclosure Document. If an appropriate agreement is not concluded with the UBS entities, CPH Management will ensure that no later than 10 Business Days prior to the Unitholders' Meeting agreements are entered into with an investment bank to perform the functions of IOH Transferee and IOH Guarantor, in the manner and on the terms referred to in this Disclosure Document.

CPH Management considers that it is in the best interests of Unitholders, and not unfair to Ineligible Overseas Holders, that the Units of Ineligible Overseas Holders are transferred to the IOH Transferee in the manner and for the consideration described above.

Challenger Group will make an announcement to ASX when CPH Management enters into an agreement with IOH Transferee and IOH Guarantor. At this time, summaries of the agreement with IOH Transferee and IOH Guarantor will be made available to Unitholders on a request being made to the Challenger Information Line on 1300 733 343 (toll free within Australia) and +61 2 9240 7450 (from outside Australia).

4.2 Approvals, consents and conditions

There are a number of approvals and consents which are required from Unitholders for the Restructure to proceed. These approvals will be sought at the Unitholders' Meeting to be held on 22 December 2003.

Further details concerning these approvals are set out in the Notice of Meeting for the Unitholders' Meeting. The Restructure can only proceed if each of the Restructure Resolutions is passed at the Unitholders' Meeting.

The other conditions of the Restructure are set out in the Implementation Deed, a copy of which is reproduced in section 12. They include:

• the FSSA Approval is granted so as to permit Challenger to acquire Challenger Group in accordance with the Restructure:
• ASX agrees to admit Challenger to the Official List of ASX and to quote Challenger Shares on conditions which are acceptable to CPH Management and Challenger;
• all necessary consents and approvals are given for the proposed transfer of the Jurlique Investment to CPH; and
• the scheme of arrangement which is to be proposed in relation to the CGHL Options is approved by the holders of CGHL Options or ASIC provides any necessary modification to the Corporations Act to permit Challenger to compulsorily acquire the CGHL Options if the Restructure is approved. For further details of the CGHL Options, refer to section 11.1.

An application for the listing of Challenger on ASX has been prepared and will be lodged with ASX within 10 Business Days of the date of this Disclosure Document. CPH Management is not aware of any reason why ASX will not admit Challenger to the ASX Official List or quote Challenger Shares.

ASX has, in connection with the Restructure and the possible listing of Challenger on ASX, advised Challenger that it would be likely to grant the waivers from compliance with certain ASX Listing Rules, as summarised in section 11.13.

Challenger has lodged with APRA an application in draft for the FSSA Approval. Neither Challenger nor CPH Management is aware of any reason why the FSSA Approval will not be granted. It may be, however, that FSSA Approval is not granted by the date of the Unitholders' Meeting. Sections 1.3 and 1.4 deal with the consequences of FSSA Approval not being given by the date of the Unitholders' Meeting.

CPH Management is not aware of any reason why the necessary consents and approvals which are required for the transfer of the Jurlique Investments will not be aiven.

If the Restructure does not proceed

The consequences of the Restructure not being approved, or a condition of the Restructure not being satisfied, are summarised in section 2.

If the Restructure Resolutions (or any of them) are not approved, but the LTIP Resolutions are approved, then the LTIP will be implemented in Challenger Group.

4.3 Financial benefits to CPH

If the Restructure is approved and takes effect, then:

• CPH Management will retire as Responsible Entity of Challenger Group and will not be entitled to be paid management fees and performance fees for the period after the Effective Date of the Restructure.
• The Constitution will be amended to delete the requirement for management and performance fees to be paid from the Effective Date of the Restructure and to provide for CPH Management to be paid a pro rata fee for the period to the date when it retires as Responsible Entity of Challenger Group. Pending deregistration of Challenger Group as a managed investment scheme under Part 5C of the Corporations Act, a wholly owned subsidiary of Challenger, namely Challenger Managed Investments, will be appointed Responsible Entity of Challenger Group.
• The Investment Management Agreement will be terminated.

As a consequence, CPH Management (which is a wholly owned subsidiary of CPH) will have foregone the opportunity to continue to be paid management fees and performance fees.

As compensation, the CPH Transactions will be entered into as part of the Restructure. These transactions involve:

• (1) Challenger Group will pay CPH \$96 million for CPH Management agreeing to retire as Responsible Entity and terminating the Investment Management Agreement and related agreements;
• (2) CPH will pay \$36 million to Challenger Group to acquire Challenger Group's interest in Jurlique, a Challenger private equity investment, which is a manufacturer and retailer of natural skin and body products.

Challenger Group has a 25% interest in Jurlique and has options to increase its interest to 75% over time. A description of the Jurlique Investment is contained in section 2. The Jurlique Investment has a value in the financial statements of Challenger Group as at 30 June 2003 of \$28.1 million.

The Independent Expert has analysed the disposal of the Jurlique Investment in the context of the Restructure (see section 5 of the Independent Expert Report); and

(3) CPH will pay Challenger \$60 million to acquire 300 million non-transferable call options over Challenger Shares with an exercise price of \$0.65 and a 10 year term.

The terms and conditions of the Challenger Options are set out in Schedule 2 to the Implementation Deed, a copy of which is contained in section 12. In summary, the Challenger Options:

• have an exercise price of \$0.65;
• have a 10 year term;
• are not transferable or assignable;
• may each be exercised into one Challenger Share; and
• may be exercised at any time within 10 years of the Effective Date of the Restructure.

The Independent Expert has analysed the Challenger Options to be issued in the context of the Restructure. Their analysis is included in section 5 of the Independent Expert Report.

By exercising all the Challenger Options, and assuming the issue of Challenger Shares to the CEO, it is possible that CPH's shareholding interest in Challenger could increase from approximately 25% to approximately 32.7%.

The Independent Expert, Grant Samuel, has stated that in its opinion, the financial benefits of the Restructure should outweigh the value transfer to CPH and, accordingly, non associated Unitholders are likely to be better off if the Restructure is implemented than if it is not. A complete copy of the Independent Expert Report is set out in section 10.

CEO employment contract

The CEO's existing service agreement with CPH Management will be terminated and he will become a full time executive of Challenger when the Restructure becomes effective.

CPH has agreed to pay the CEO a separation payment of \$1.85 million as compensation for the change in the terms of the CEO's proposed employment contract with Challenger compared to the CEO's existing employment contract with CPH Management.

The material terms of the CEO's proposed employment contract with Challenger are set out below.

The term of the employment contract will be until 9 April 2008 with the CEO being appointed to the role of chief executive officer of Challenger from the Effective Date of the Restructure.

The CEO's salary package will be \$675,000 per annum, including base salary and superannuation entitlements. The contract of employment will provide that the salary package is to be reviewed at the commencement of each financial year.

In addition, the CEO will be entitled to participate in an annual short term incentive scheme under which the CEO may receive up to 150% of his salary package in cash. This maximum percentage is only attainable on the achievement of superior performance as determined by the Board of Challenger on both qualitative and quantitative measurements.

The CEO will also be entitled to participate in a long term equity based incentive scheme (CEO Plan) which will be on the same terms (including in relation to the non recourse loan) as the LTIP outlined in section 9 except for as follows:

• . the CEO will be allocated 40 million Challenger Shares;
• the issue price of the 40 million Challenger Shares will be \$0.53:
• the release dates will be calculated from a starting date of 10 April 2003, meaning the first release date will be 9 April 2005 (when 20% of the shares allocated will be released);
• the second release date will be 9 April 2006 (when a further 20% of the shares allocated will be eligible for release);
• the third release date will be 9 April 2007 (when a further 20% of the shares allocated will be eligible for release);
• the final release date will be 9 April 2008 (when the remaining 40% of the shares allocated will be eligible for release);
• no performance hurdle will apply in respect of the first release of shares on 9 April 2005 (20% of the shares allocated);
• a performance hurdle of 15% per annum compound (total return to shareholders, including distributions) will apply in respect of further releases of shares (80% of the shares allocated) on 9 April 2006, 2007 and 2008;
• the reference price for the purposes of calculating the performance hurdle in respect of the shares to be released on 9 April 2006, 2007 and 2008 will be \$0.53;

• the performance hurdle in respect of the shares to be released on 9 April 2006, 2007 and 2008 will be calculated from 10 April 2005;

• if the CEO fully completes his term of employment the non recourse loan will not be repayable until the earliest of 9 April 2009 and the date of sale of all released shares, unless the CEO commences any legal action against Challenger or any of its controlled entities or breaches the terms of his employment contract in which case the loan will be repayable within 30 days of that event; and

• if the CEO's employment is terminated by Challenger other than for cause or poor performance, he will continue to participate in the CEO Plan as though he was a continuing employee until 9 April 2009, and the non recourse loan will not be repayable until the earliest of 9 April 2009 and the date of sale of released shares in respect of which there is a loan outstanding, unless the CEO commences any legal action against Challenger or any of its controlled entities or breaches the terms of his employment contract in which case the loan will be repayable within 30 days of that event.

The CEO's employment contract will be terminable by Challenger in the following circumstances:

• (a) for any reason other than reasons specified below, in which circumstances the CEO will be entitled to receive all accrued statutory entitlements, ongoing benefits under the CEO Plan as though the CEO remained employed for the full term of the employment contract, plus a payment of \$1,500,000. No payment will be made under the short term incentive scheme in these circumstances.
• (b) for cause, in which event the CEO will be entitled to receive all accrued statutory entitlements and vested benefits under the CEO Plan at the date of termination. No payment will be made in these circumstances under the short term incentive scheme.
• (c) for poor performance (after appropriate warnings), in which circumstances the CEO will be entitled to receive all accrued statutory entitlements and any benefits due under the CEO Plan as at the date of termination. No payment will be made under the short term incentive scheme in such circumstances.

(d) for incapacity for six consecutive months, six months in any 12 month period or total and permanent disability, in which circumstances the CEO will be entitled to receive all accrued statutory entitlements, ongoing benefits under the CEO Plan as though the CEO remained employed for the full term of the employment contract; a payment of \$750,000 plus payment of a pro rata amount under the short term incentive scheme up to the date of termination on the basis of 100% of salary package.

The CEO may terminate his contract of employment by giving 12 months' notice to Challenger, in which case the CEO will be entitled to receive all accrued statutory entitlements and Challenger Shares which have vested under the CEO Plan but no other benefits or termination payments. In these circumstances, Challenger (at its election) may make payments to the CEO in lieu of the CEO working out the 12 month notice period.

The employment contract contains restraint provisions which apply in various circumstances. At the conclusion of the contract term or in the event of the contract being terminated early, a 12 month restraint applies to prevent solicitation of staff or clients. This restraint applies from the date of termination, or, if the CEO gives notice of termination of his employment contract, from the date the notice is given. Furthermore, in the following circumstances, a 12 month restraint applies to prevent the CEO from being involved in employment in Australia with a competitor of Challenger or having more than an immaterial interest in a company or business which competes with Challenger in Australia:

• if the non recourse loan under the CEO Plan is being utilised;
• if the CEO gives notice of termination of his employment contract (in which case the restraint applies from the date the notice is given); or
• if the CEO's employment is terminated by Challenger for cause or incapacity.

In addition, prior to the Restructure and listing on ASX, Challenger will approve the termination payments described above for the purposes of Part 2D.2 of the Corporations Act, which requires that benefits paid in connection with a person's "retirement" from office (which includes the loss of the office or resignation) to be approved by members at general meeting (unless Part 2D.2 provides otherwise).

The Independent Directors have sought the advice of an external remuneration consultant in relation to market competitive levels of remuneration for chief executive officer roles that are appropriate for companies of similar size and complexity to Challenger. The terms of the CEO's proposed service agreement with Challenger are considered reasonable and appropriate, based on that advice.

ASX has advised Challenger that it would be likely to grant a waiver from ASX Listing Rule 10.11 to the extent necessary to enable Challenger to issue to the CEO 40 million Challenger Shares without shareholder approval on condition that Unitholders approve resolution 6 under ASX Listing Rule 10.11. Resolution 6 authorises the terms of the CEO's proposed employment contract with Challenger, including the issue of 40 million Challenger Shares to the CEO to be funded by a loan to be provided by Challenger on the terms set out in the CEO Plan, including that the loan is non recourse to the CEO. Based on an issue price of 53 cents, the amount of the loan would be \$21.2 million.

The Independent Directors have assessed the value of the entitlement to 40 million Challenger Shares, on the terms described above, at \$5.8 million. This valuation is based on a modified Black Scholes methodology using a volatility of 30% (based on long term historical volatility) and a Unit price of \$0.52, with a 20% discount applied for the loan terms, vesting conditions and performance hurdles in the terms of the CEO Plan.

Resolution 6 seeks Unitholders' approval of the CEO's proposed employment contract, including the issue of Challenger Shares to the CEO, for the purposes of ASX Listing Rule 10.11 and Chapter 2E of the Corporations Act, which cover related party transactions.

4.4 Explanation of Resolutions

The following is an explanation for each of the Resolutions contained in the Notice of Meeting. This explanation should be read together with the entirety of this Disclosure Document.

It should be noted, as stated earlier in this Disclosure Document, that for the Restructure to be approved EACH OF RESOLUTIONS 1 TO 6 (inclusive) MUST BE PASSED. If any Resolution is defeated the Restructure will not be implemented.

Resolution 1 - Financial benefits to be provided to CPH

This Resolution seeks approval for the financial benefits which are being provided to CPH as part of the Restructure described in section 4.3 and elsewhere in this Disclosure Document.

Unitholders are required to approve the financial benefits being provided to CPH in accordance with ASX Listing Rules 10.1 and 10.11, Chapter 2E and Part 5C.7 of the Corporations Act, which deal with related party transactions. The Resolution, being an ordinary resolution, must be approved by a majority of votes which are cast at the meeting. Neither CPH nor its associates can vote on Resolution 1. CPH and its associates, Conpress Holdings Pty Limited and Cavalane Holdings Pty Limited, hold approximately 25% of all the issued Units on behalf of CPH. CPH Management holds no Units in Challenger.

The nature of the financial benefits to be provided to CPH if Resolution 1 is passed and the Restructure takes effect are described in detail in section 4.3.

As mentioned in section 2, each of the Directors of CPH Management, other than Mr Packer and Mr Jacob, makes a recommendation in relation to this Resolution. Mr Packer and Mr Jacob do not make a recommendation because, as directors and executives, and being closely associated with CPH which is to be provided the financial benefits, they do not consider themselves justified in making a recommendation.

The Directors of CPH Management, other than Mr Packer and Mr Jacob recommend that Unitholders vote in favour of Resolution 1 for the reasons explained in section 3. Unitholders should read section 3 in its entirety as it sets out the Directors' recommendation in full. In summary:

• the Directors who are giving a recommendation believe the Restructure is in the best interests of Unitholders:
• in order for the Restructure to be implemented it is necessary for Resolution 1 to be passed; and
• in the opinion of Directors giving a recommendation, the financial benefits being given to CPH under the Restructure, including the CPH Transactions, are reasonable having regard to the benefits and disadvantages to Unitholders in having the Restructure implemented.

Grant Samuel has stated that, in its opinion, the financial benefits of the Restructure should outweigh the value transfer to CPH and, accordingly, non associated Unitholders are likely to be better off if the Restructure is implemented than if it is not.

The taxation treatment of the CPH Transactions is reflected in the Pro Forma Financial Information in section 6. The taxation implications of the Restructure for Unitholders are set out in the Taxation Report in section 8.

The interests of the Directors of CPH Management in Resolution 1 are as follows:

• (i) as disclosed in section 11.6, some of the CPH Management Directors hold Units. As Unitholders, they have the same interest as other Unitholders in the outcome of Resolution 1:
• (ii) Mr Packer and Mr Jacob are executives and directors of, but have no shareholding interest in CPH, which is to be provided the financial benefits; and
• (iii) each of the Directors is also a Director of Challenger. If Resolution 1 is approved and the Restructure takes effect they will receive certain benefits as a result of being a Challenger Director (for example, the payment of Board fees), as disclosed in this Disclosure Document.

Other considerations are:

Jurlique

As part of the Restructure, Challenger Group is selling the Jurlique Investment to CPH. The sale of Jurlique is consistent with Challenger's objective of reducing its exposure to private equity investments over time.

There is a risk that Challenger Group may have sold the Jurlique Investment too early or at a discount to its value in future years, as at this time the full potential value of Jurlique may not yet be fully apparent. Challenger's investment in Jurlique was made in September 2002. Jurlique is still in an expansionary phase of its operations, and its expansion and profitability in future years may be higher or lower than currently anticipated.

CPH relationship

As part of the Restructure, CPH Management will retire as Responsible Entity of Challenger Group. CPH will be represented on the Challenger Board if the Restructure is approved by Unitholders, but will not have an ongoing active role in the management of Challenger Group. CPH is an extremely successful company which has many talented and experienced managers who, other than Mr Cuffe, will no longer have responsibility for or be able to participate in the day-to-day management decisions of Challenger Group. As required under ASX Listing Rule 10.10:

• the Independent Directors have obtained the Independent Expert Report which contains the opinion that the provision of the financial benefits, including the CPH Transactions, is fair and reasonable to the holders of Units other than CPH and its associates; and
• the Notice of Meeting contains the voting exclusion required by the ASX Listing Rules. Further, the Corporations Act provides that CPH Management and its associates (which include CPH and its subsidiaries) must not cast a vote on Resolution 1. CPH Management will ensure that the votes which are cast on Resolution 1 are recorded in the manner required by section 225 of the Corporations Act.

The 300 million Challenger Options will be issued within one month after the Effective Date.

Resolution 2 - Amendments to the Constitution of Challenger Group

Resolution 2 authorises the amendments to the Challenger Group Constitution to enable the Restructure to be implemented.

In summary, subject to Resolutions 1 to 6 being passed and the Conditions being satisfied, the proposed Challenger Group Constitution amendments will:

• permit the Responsible Entity, as agent for each Ineligible Overseas Holder, to transfer Units to the IOH Transferee in accordance with the Restructure;
• permit the Responsible Entity to issue the five Units which are issued to Challenger on the Record Date;
• permit the Responsible Entity as agent for each Unitholder to take such action as may be required to permit the Units (other than the five Units which are to be issued to Challenger on the Record Date) to be redeemed in accordance with the Restructure;
• permit the Responsible Entity, as agent for each Unitholder (other than Challenger), to subscribe for Challenger Shares and to agree to become a member of Challenger in accordance with the Restructure:
• permit the Responsible Entity to issue to Challenger for nominal consideration such number of Units as represent the number of Units which are redeemed as set out above;
• authorise the Responsible Entity to enter into the CPH Transactions in accordance with the Restructure:
• limit the liability of the Responsible Entity in connection therewith to the assets of Challenger Group;
• authorise the payment of the management fee to CPH Management on a pro rata basis to the date when CPH Management retires as Responsible Entity; and
• remove the requirement to pay fees to the $\bullet$ Responsible Entity on and from the Effective Date.

The proposed amendments to the Constitution are set out in Supplemental Deed Poll No. 6 which will be lodged with ASIC on the date of the meeting provided each of the Restructure Resolutions is passed and all Conditions of the Restructure have been satisfied, or as soon as practicable after the Conditions of the Restructure have been satisfied. A draft of Supplementary Deed No. 6 is a schedule to the Implementation Deed, a copy of which is contained in section 12.

Resolution 2 is required under section 601GC(1) of the Corporations Act which requires the amendments to the Challenger Group Constitution to be made by a special resolution of members. To be approved as a special resolution, not less than 75% of the votes which are cast at the Unitholders' Meeting on Resolution 2 must be cast in favour of Resolution 2.

Resolution 3 - Approval of issue of Units to Challenger

Resolution 3 authorises the Responsible Entity to issue five Units to Challenger on the Record Date after the Units held by the Ineligible Overseas Holders have been transferred to IOH Transferee.

These Units are to be issued to Challenger prior to the redemption by the Challenger Group of Units on issue at the Record Date. All Units on issue at the Record Date will be redeemed, other than these five Units that are to be issued to Challenger. After the redemption has taken place, Challenger will be issued with an equivalent number of new Units to the number of Units that have been redeemed.

Accordingly, upon the redemption being implemented, Challenger will hold all of the issued Units and Challenger Group will be wholly owned by Challenger, subject to the CGHL Options, further details of which appear in section 11.1.

Resolution 3 is required under section 611 (item 7) of the Corporations Act.

Section 606 of the Corporations Act prohibits the acquisition of units or interests in a listed managed investment scheme if the acquisition would increase a person's voting rights in the scheme to more than 20%.

However, section 611 (item 7) of the Corporations Act permits the acquisition if it has previously been approved by a Resolution of members where no votes are cast in favour of the Resolution by a person acquiring the interest and its associates (that is, Challenger and its associates) or by persons from whom the acquisition is to be made and their associates.

Accordingly, Resolution 3, if approved, operates to satisfy the requirement of section 611 (item 7) of the Corporations Act so as to permit the issue of five Units in Challenger Group to Challenger thus giving Challenger voting rights in 100% of Challenger Group.

Resolution 3 must be passed as an ordinary resolution.

Resolution 4 - Approval of Challenger Option exercise

Resolution 4 authorises CPH Investments to acquire a relevant interest in Challenger Shares upon the exercise of the Challenger Options. CPH Investments is a subsidiary of CPH. It should be noted that CPH Investments is not required to exercise all the Challenger Options at the same point in time and under the Corporations Act. CPH Investments is entitled to increase its voting rights in Challenger Shares by not more than 3% in every six months. However, despite this right, the Independent Directors believe that it is appropriate and reasonable for CPH Investments to have the right to exercise any of the Challenger Options at any time even if, as a result, the relevant interest of CPH Investments and its associates would exceed the 3% in a six month period.

Section 606 of the Corporations Act prohibits the acquisition of relevant interest in Challenger Shares if the acquisition would increase a person's voting rights in Challenger to more than 20%.

Upon the Restructure taking effect, CPH and its associates including CPH Investments will hold voting rights in Challenger of approximately 25% (which represents CPH's interest in Challenger Group Units at the date of this Disclosure Document).

Accordingly, CPH Investments would not be permitted to exercise all of the Challenger Options at the same time because its voting rights in Challenger would increase beyond 25% to approximately 32.7% (based on the issued capital of Challenger on the date the Restructure is implemented after taking into account the issue of 40 million Challenger Shares to the CEO).

Section 611 (item 7) of the Corporations Act permits such an acquisition if the acquisition has previously been approved by a Resolution of members of the company, where no votes are cast in favour of the Resolution by the person acquiring the interest and its associates; in this instance, CPH Investments and its associates.

ASIC has modified section 611 (item 7) in relation to the Restructure. Further details of the modifications are contined in section 11.12. In summary, the modifications of section 611 (item 7) treat the approval of Unitholders (other than those Unitholders who at the date of the Meeting have a registered address for their Unitholding which is outside Australia and New Zealand) to this Resolution as an approval of Challenger Shareholders for the purposes of section 611 (item 7) of the Corporations Act.

Resolution 4 operates to satisfy the requirements of section 611 (item 7) of the Corporations Act as amended by ASIC, to permit CPH Investments to exercise the Options at any time and thus increase its voting rights in Challenger to a maximum 33% based on the existing capital of Challenger Group or 32.7% based on the existing capital of Challenger Group and the additional 40 million Challenger Shares which will be issued to the CEO.

Unitholders should note the following:

• (a) The associates of CPH Investments are Mr K F B Packer, CPH and CPH's related bodies corporate;
• (b) The maximum extent of the increase of voting power of CPH and its associates in Challenger that would result from the exercise of all the Challenger Options is 300 million Challenger Shares. Based on Challenger's issued share capital when the Restructure takes effect (being equivalent to the number of Units on issue at the date of this Disclosure Document, namely 2,439,035,734 Units plus the 40 million Challenger Shares to be issued to

the CEO), this would have the result of increasing CPH's voting rights to 32.7% of all Challenger Shares. However, if all the Challenger Shares are issued pursuant to the LTIP pursuant to Resolution 6, the maximum extent of CPH's voting power will be to 30.5% of all Challenger Shares;

• (c) As a result of the Challenger Options being issued to CPH Investments there is no increase in its voting power in Challenger. Any such increase is dependent upon, and to the extent of, CPH exercising the Challenger Options. If all the Challenger Options were exercised the maximum voting power that CPH Investments would have as a result would be as set out in paragraph (b) above; and
• (d) The maximum extent of increase in the voting power of each of CPH's associates in Challenger Shares that would result from the exercise of all the Challenger Options is the same as applies to CPH as set out in paragraph (c) above.

In accordance with ASIC policy, the Independent Directors have obtained the Independent Expert Report to provide an opinion in relation to Resolution 4. The Independent Expert has stated in that report that:

"the impact of the Restructure on control of Challenger Group is not material, notwithstanding that CPH's interest in Challenge could increase from 25% to 33%. CPH will arguably be able to exercise less control over Challenger as CPH Management, a wholly owned subsidiary of CPH, will no longer be responsible for managing Challenger Group."

Resolution 4 must be passed as an ordinary resolution. Neither CPH nor its associates can vote on this resolution. In accordance with the ASIC modification of section 611 (item 7) which is referred to above, Unitholders who at the date of the Meeting have a registered address outside Australia or New Zealand cannot vote on Resolution 4.

For the reasons set out in section 2 the Independent Directors recommend that Unitholders vote in favour of Resolution 4.

Resolution 5 - Change of Responsible Entity

Resolution 5 authorises the change of the Responsible Entity to take effect as soon as practicable after the Record Date of the Restructure.

If the Restructure does not proceed then CPH Management will remain the Responsible Entity of Challenger Group.

Resolution 5 is required under section 601FL(1) of the Corporations Act which provides that Unitholders must vote on a resolution to choose a new Responsible Entity when the existing Responsible Entity retires.

Challenger Managed Investments will consent in writing to the proposed change in the Responsible Entity prior to the Unitholders' Meeting on the terms and subject to the conditions of the Implementation Deed (and in accordance with the Constitution of the Challenger Group). Challenger Managed Investments will remain Responsible Entity pending deregistration by ASIC of Challenger Group as a managed investment scheme.

Resolution 5 must be passed as an ordinary resolution.

Resolution 6 - Approval of the CEO employment contract and issue of 40 million Challenger Shares to the CEO

Resolution 6 seeks Unitholders' approval of the CEO's proposed employment contract with Challenger, including the issue of Challenger Shares thereunder.

Unitholder approval is required under ASX Listing Rule 10.11 in relation to the acquisition of 40 million Challenger Shares by the CEO and under Chapter 2E of the Corporations Act in order to approve the CEO's employment contract, including the proposed issue of 40 million Challenger Shares.

If Resolution 6 is approved, 40 million Challenger Shares will be issued to the CEO within one month of the Effective Date on the terms of the CEO Plan, referred to in section 4.3.

Section 4.3 sets out the details of the CEO's proposed employment contract with Challenger.

The nature of the financial benefits to be provided to the CEO if Resolution 6 is passed and the Restructure is implemented are detailed in the summary of the CEO's proposed employment contract in section 4.3.

Details of the Challenger Shares that may be issued to the CEO under the CEO Plan, and the loan to be provided to the CEO in order to fund that issue are also summarised in section 4.3.

As mentioned in section 3, each of the Directors of CPH Management, other than Mr Packer, Mr Jacob and Mr Cuffe, make a recommendation in relation to Resolution 6.

Mr Packer and Mr Jacob do not make a recommendation because, as directors and executives of, and being closely associated with CPH, which is to be provided the financial benefits if the Restructure is approved, including if Resolution 6 is approved, they do not consider themselves justified in making a recommendation.

Mr Cuffe does not consider himself justified in making a recommendation in relation to this Resolution because it concerns his proposed employment contract with Challenger.

The Directors of CPH Management, other than Mr Packer, Mr Jacob and Mr Cuffe, recommend that Unitholders vote in favour of Resolution 6 for the following reasons, as explained in section 2 and also in section 4.3. In summary:

• those Directors who are giving a recommendation in relation to Resolution 6, believe the Restructure is in the best interests of Unitholders;
• in order for the Restructure to be implemented it is necessary for Resolution 6 to be passed; and
• in the opinion of those Directors who are giving a recommendation in relation to Resolution 6, they believe that the CEO's proposed employment contract is on reasonable terms having regard to the interests of Challenger, the interests of Unitholders and the CEO's interests.

The interests of the Directors of CPH Management in relation to Resolution 6 are as follows:

(a) as disclosed in section 12 some of the CPH Management Directors hold Units. They have the same interest as other Unitholders in the outcome of Resolution 6;

• (b) Mr Packer and Mr Jacob are executives and directors of, but have no shareholding interest in, CPH, which is to be provided the financial benefit under the Restructure which can only occur, amongst other things, if Resolution 6 is passed; and
• (c) Mr Cuffe has an interest in Resolution 6 as he is the party to the proposed employment contract. Mr Cuffe will receive benefits under that proposed employment contract which are summarised in section 4.3 if Resolution 6 is approved and the Restructure takes place.

The income tax and fringe benefits tax implications for Challenger of entering into the CEO employment contract should not differ materially from those relating to similar contracts entered into by other listed companies in respect of senior executives. The Challenger Shares issued under the agreement will be taken into account in determining ongoing compliance with the continuity of ownership test for the purposes of carrying forward tax losses of Challenger and its subsidiaries.

The Resolution must be approved as an ordinary Resolution. Neither the CEO nor his associates or CPH and its associates are able to cast a vote on Resolution 6. A voting exclusion statement as required by the ASX Listing Rules, is included in the Notice of Meeting in relation to Resolution 6.

CPH Management will record the details of the votes cast on Resolution 6 in the manner required by the Corporations Act.

ASX has advised Challenger that it would likely grant a waiver from ASX Listing Rule 10.11 to the extent necessary to enable Challenger to issue securities to the CEO without shareholder approval on condition that Unitholders approve Resolution 6, including the issue of 40 million Challenger Shares to the CEO, under ASX Listing Rule 10.11.

Resolution 7 - LTIP approval

Resolution 7 seeks Unitholder approval for the implementation of the LTIP in Challenger Group.

A summary of the terms of the LTIP and the background to the establishment of the LTIP is set out in the section 9. Resolution 7 is proposed for the purpose of ASX Listing Rule 7.1.

Under ASX Listing Rule 7.1, without the approval of Unitholders, Challenger Group must not issue or agree to issue more Units than 15% of the Units on issue in the 12 months after the date of issue. ASX Listing Rule 7.2 provides a number of exceptions to securities which are counted as part of the 15% described above and includes as an exception the issue under an employee incentive scheme (such as the LTIP) provided, within three years before the date of issue, the Unitholders have approved the issue of securities under the scheme. Accordingly, Resolution 7 seeks this approval.

The Directors have resolved that it is in the best interests of Challenger Group that Unitholders approve Resolution 7 in order to allow the LTIP to operate as an exception to ASX Listing Rule 7.1. Non executive Directors, being all the Directors other than Mr Cuffe, are ineligible to participate in the LTIP or any other employee incentive scheme in relation to Challenger Group or Challenger.

The total number of LTIP securities that can be issued cannot exceed 10% of the number of Units on issue and, at the date of the Resolution, no Units have been issued in accordance with the LTIP.

ASX has advised Challenger that it would likely grant a waiver from ASX Listing Rule 7.1 to the extent necessary to permit securities issued under the LTIP, to count as an exception to ASX Listing Rule 7.1 for a period of three years after Challenger is admitted to the Offical List of ASX, on condition that Unitholders approve the LTIP in accordance with ASX Listing Rule 7.2, exception 9. The effect of this waiver (if granted) will be to treat the issue of Challenger Shares pursuant to the LTIP, during the three year period from the date the Resolution is passed, as an exception to the 15% limitation which is referred to in Listing Rule 7.1 in its application to Challenger.

Certain Unitholders are excluded by the ASX Listing Rules from voting on Resolution 7.

A voting exclusion statement as required by the ASX Listing Rules, is included in the Notice of Meeting in relation to Resolution 7.

Resolution 8 - Amendment of Constitution - LTIP

Resolution 8 authorises the amendments to the Constitution to enable the LTIP to be put into effect if Resolutions 7 and 8 are approved by Unitholders but the Restructure does not proceed.

The effect of the amendment to the Constitution, proposed by Resolution 8, is to authorise the Responsible Entity to implement the LTIP including by issuing the Units in accordance with the terms of the LTIP and providing a non-recourse loan to fund the consideration which is payable for Units to be issued under the LTIP. The interest on each loan will be equal to the distributions paid on the Units.

The proposed amendments to the Constitution are to be set out in a draft Supplemental Deed No. 7 set out in section 12.

If the Restructure is approved then the LTIP will not be implemented in Challenger Group and Supplemental Deed No. 7 will not be lodged with ASIC.

Resolution 8 must be passed as a special resolution of members

4.5 Chairman of Unitholders' Meeting

In accordance with section 2525 of the Corporations Act, CPH Management proposes to appoint an independent Director, Mr Tilley, to act as chairman of the Meeting.

Section 5. Challenger

5.1 Corporate Structure

Incorporation

Challenger was incorporated in Victoria as a public company limited by shares on 6 November 2003.

Share capital

At the date of this Disclosure Document:

• there is 1 Challenger Share on issue, which is held legally and beneficially by an employee of Challenger Group; and
• there are 2,439,035,734 Units in Challenger Group on issue. Subject to the matters described below, under the terms of the Restructure, in consideration of Challenger Group's redemption of Units on the Record Date, Challenger will on the Record Date issue 2,439,035,734 Challenger Shares to Unitholders.

In addition, CGHL (formerly Challenger International Limited) which is wholly owned by Challenger Group, has outstanding the CGHL Options. Further information about the CGHL Options and the proposed treatment of those options is set out in section 11.1.

5.2 Principal activities

Challenger has not commenced business at the date of this Disclosure Document.

Challenger Group's long term strategic goal is to be a competitive and multi-faceted financial services organisation. The Board believes Challenger Group's ability to achieve this vision will be strengthened by the implementation of the Restructure. Management will continue to focus on building Challenger Group's strength and presence across its core business groups:

• annuities:
• funds management and administration platforms;
• financial planning;
• mortgage financing; and
• margin lending.

A description of the activities of each of these business groups is provided below.

Annuities

Challenger Group's annuities business provides investors with the right to receive a series of fixed payments over time in return for the up-front payment of a lump sum or premium. Annuities are predominantly bought by retirees who are able to convert lump sums received towards the end of employment into an income stream over the period of their retirement.

Challenger Group is one of Australia's leading providers of annuities, having sold more than \$700 million worth of annuities in the year to 30 June 2003.

Challenger Group's annuity model

Challenger Group's annuity model allows it to provide annuities with competitive rates. Challenger Group invests some of its annuity premiums in geared growth assets with the gearing being limited recourse. To date, the growth assets have typically been commercial and government properties with long term leases. Challenger Group also invests annuity premiums in fixed interest and other assets.

The income earned from these assets (whether property or fixed interest or other assets) is used to service debt and also to pay annuity obligations. Over time, the income generated by the assets, net of interest, is designed to extinguish the annuity obligations. Once all annuity obligations have been extinguished, only the outstanding debt remains. This means that Challenger Group indirectly owns the residual equity, being the market value of the assets at that time less the outstanding debt. In addition to residual equity in the market value of the assets, Challenger Group is entitled to retain the income after the annuity obligations expire.

In addition to marketing annuities under the Challenger name, Challenger Group also makes its annuity products available to investors via co-branding arrangements with financial planning groups, as well as providing annuities - as unbadged wholesale investments - to other financial institutions. These marketing and distribution arrangements provide benefits to both parties: giving the clients of financial planning groups and other institutions access to Challenger Group's competitive annuity rates, while providing Challenger Group with regular inflows at a relatively low distribution cost.

Direct Property Portfolio

The property portfolio that largely underpins Challenger Group's complying annuities products was independently valued at \$2.61 billion at 30 June 2003 (52 properties with an average value of \$50 million).

Challenger Group's property portfolio is characterised by high occupancy (better than 99%), long tenancy (an average lease expiry of 11.2 years) and solid yields (an average yield of 7.92% on current valuations and 8.35% on cost base).

The portfolio is diversified across the major Australian capital cities, the UK and US, and largely consists of investment grade commercial property in each region.

As part of the ongoing management of the portfolio, Challenger continues to assess both acquisitions and divestments. Currently, properties totalling 5% of the portfolio value have been approved for disposal.

Value by region (as at 30 June 2003)

Value by sector (as at 30 June 2003)

WA 1.6%

Retail 1.0%

Funds management and administration platforms

Challenger currently offers a range of managed investments and other investment options across different asset classes and investment structures including unit trusts, superannuation and retirement incomes in both the retail and institutional markets. Challenger's investment offering currently includes:

• · a suite of Australian equity funds;
• fixed interest and mortgage funds;
• · specialised investments; and
• a range of property trusts.

A brief description of the major investment products is provided below.

Challenger's suite of Australian Share Funds

By the end of November 2003, Challenger will offer five funds in its Australian Equities suite:

• Challenger Australian Share Fund;
• Challenger Smaller Companies Fund;
• Challenger Financial Sector Fund;
• Challenger Orion Australian Share Fund (launching November 2003); and
• · Challenger Boutique Australian Share Portfolio (launching November 2003).

The Challenger Australian Share Fund is designed to provide investors with a "style neutral" Australian share portfolio that aims to outperform the S&P/ASX 300 Accumulation Index over rolling three-year periods. The fund is designed to provide investors with an opportunity to build wealth over the longer term and to participate in the growth prospects of Australian companies. Since inception in 1994, the Challenger Australian Share Fund has generated a pre-tax return of 13.08% per annum, outperforming the benchmark by 4.39% per annum.

The Challenger Smaller Companies Fund invests in a diversified portfolio of smaller Australian companies. The fund's key performance objective is to outperform the S&P/ASX Small Ordinaries Accumulation Index over rolling five-year periods. The small size and lower public profile of smaller companies, often means they are not well known or researched and so the market is less likely to recognise their investment potential. This presents opportunities for those who can recognise and

take advantage of these inefficiencies in the market. As at 30 September 2003, the Challenger Smaller Companies Fund has delivered a pre-tax return of 33.9% per annum since its inception in July 2000.

The Challenger Financial Sector Fund aims to provide investors with a combination of tax-effective income and potential for medium to long term capital growth. The fund invests in banks, insurance companies and other Australian financial services sector shares listed on ASX. The fund was renamed Challenger Financial Sector Fund in August this year, when the investment management of the fund was brought in-house from Aberdeen Asset Management.

The Challenger Orion Australian Share Fund is the result of a strategic alliance between Challenger and a boutique specialist Australian equities company, Orion Asset Management. The fund's key performance objective is to outperform the S&P/ASX 300 Accumulation Index over rolling three year periods. Utilising a "growth" style, Orion aims to find and invest in companies that have been mis-priced by the market in terms of their potential to grow earnings and create sustainable profitability. The fund is due to be launched in November 2003.

Expected also to launch in November 2003, the Challenger Boutique Australian Share Portfolio has been designed to take advantage of two recent trends in the Australian financial services industry - the emergence of boutique investment firms and the popularity of the outsourcing of portfolio construction. Using a sector specialist investment approach, the portfolio combines five complementary leading boutique managers to create a largely style "neutral" portfolio of Australian shares.

Extending product offerings

In the future, Challenger will continue to expand its investment suite by launching new funds in several asset classes, using both in-house and external expertise. For example, through a strategic alliance with a leading international investment manager, Challenger intends to offer a suite of international funds.

The recently announced alliance with Orion Asset Management, the launch of a multi-manager boutique Australian share fund and the expected future launch of a property securities fund are examples of this expansion.

Challenger's Howard Mortgage Trust

The Howard Mortgage Trust is an unlisted unit trust where investor funds are pooled and invested in mortgage loans and short term securities. The Howard Mortgage Trust provides competitive returns, appealing to retirees and other investors seeking a regular income stream.

Already Australia's largest mortgage trust, the Howard Mortgage Trust continued its strong growth, achieving net increase in funds under management of 46.8% in the last financial year (on top of an increase of 44.5% in 2002).

Challenger's High Yield Fund

Challenger's High Yield Fund - launched in July 2001 - invests in hybrid equity-income securities. In August 2002, Challenger made the Fund available to retail investors and has begun promoting it to financial planners as part of the broader product suite.

Challenger's specialised investment products

As well as providing a suite of mainstream investment funds, Challenger also offers a range of specialised investment products.

Specialised products offered include the following:

The Beston Wine Industry Trust is a specialist funding vehicle that provides capital to wine companies and grape growers by the sale and leaseback of vineyards and infrastructure to allow for growth in brand building, wine inventories and receivables. Listed on ASX in July 1999, the trust currently has 28 investment properties, including 25 vineyards and three wineries in the premium wine growing regions of South Australia, New South Wales, Victoria, Western Australia and New Zealand. The trust has total assets of more than \$131 million, and is currently seeking to raise an additional \$100 million.

BioTech Capital Limited invests primarily in entities developing technology-driven medical research for life science and healthcare applications. The BioTech Capital portfolio typically includes 10 to 20 unlisted investments.

Currently closed to new investment, the Challenger Long Short Australia Fund undertakes hedge fund activities, investing in equal long and short positions in shares. In October 2003 GMO Australia was appointed as the new manager of the fund, which is expected to benefit the fund's performance.

Challenger's Socially Responsive Investment Fund aims to give investors the opportunity to integrate their social values with their long term investment objectives without compromising their investment returns. Challenger employs an active style neutral approach to managing the fund's investment portfolio with the objective of outperforming the S&P ASX 300 Accumulation Index over rolling three-year periods.

Challenger's property trusts

Challenger currently manages over \$400 million across a number of different property trusts. Challenger's latest trust, offered in August 2003, provided investors with an opportunity to share in the benefits of owning the prestigious Park Hyatt Hotel in Sydney, via an investment in the PH Sydney Hotel Group. The Hotel is one of Australia's best performing tourism properties, and the PH Sydney Hotel Group (whose sole asset is the Park Hyatt, Sydney) is designed to provide tax-effective investment returns over a five-year investment term. Originally scheduled to close on 14 November 2003, strong interest in the fund led to the offer closing a month and a half early having raised the full \$69.3 million dollars sought.

Challenger's administration platforms

Through a wholly owned subsidiary, Synergy Capital Management Limited (Synergy), Challenger provides multi-manager administration platforms for intermediaries. Its flagship product, the Synergy master trust commenced in 1994 and has grown strongly since then, now having \$1.5 billion in funds under management.

In September 2002 Synergy launched a range of "multi-manager" funds, each consisting of a number of underlying managed funds, designed to achieve more consistent performance than investing through a single fund manager. In the nine months to September 2003 the Funds have grown to over \$140 million in funds under management.

The launch of the multi-manager funds was followed in December 2002 with the launch of the Galaxy Investment Wrap (Galaxy), a comprehensive asset administration service that broadened the range of assets that the Challenger platforms can administer to include shares listed on ASX.

In addition to Synergy and Galaxy, Challenger is currently assessing broader administration platforms to bring to market in the future.

Challenger Superannuation Services (CSS) is a superannuation administration application service provider with funds under administration of \$1.5 billion on behalf of over 100,000 members. In addition to corporate superannuation administration services, CSS also offers master trust and pooled superannuation trust products.

Financial planning

Garrisons Financial Planning is a licensed financial planning dealership and registered life broker that is wholly owned by Challenger Group. As well as its own national network of financial advisers, Garrisons provides a range of corporate and dealer services to other financial planning groups around Australia.

In the 2003 financial year, Garrisons experienced strong growth in its adviser network, increasing its number of offices from 80 to 92, with the number of Garrisons financial planners growing 26% from 128 to 162.

Garrisons has recently formed an exclusive alliance with COTA National Seniors, the largest representative body for Australians aged 50 plus, to provide financial planning services to its 280,000 members around Australia

Mortgage financing

On 29 September 2003, Challenger announced that it had completed the acquisition of the Australian Principal Finance business from Zurich Capital Markets. The focus of this acquisition was Interstar, one of the largest independent mortgage financiers in Australia. Interstar finances and services residential home loans originated by third party distributors (mortgage managers).

The acquisition of the business is seen as an important strategic piece in Challenger's drive to build a competitive and multi-faceted financial services company. With many financial planners expanding their

service offerings into debt management solutions, the Interstar business is seen as complementing the existing suite of products offered by Challenger.

Interstar has the potential to be a strong contributor to Challenger's growth with continued benefits expected to flow from the trend by home borrowers away from banks to mortgage brokers and originators. In the past four years Interstar has grown its loan portfolio from \$2 billion to \$11 billion.

As well as Interstar, the purchase also included a high-yield fixed interest portfolio, which Challenger has incorporated into its existing fixed interest business, and forestry assets. Given that the forestry assets are non-core, Challenger intends to sell this asset even though it is expected to provide a strong long term yield, provided it can realise a satisfactory price on sale.

Margin lending

Margin Lending allows investors to borrow funds to invest in equities, effectively increasing the gearing of their portfolio and leveraging returns on that portfolio. The business is an important part of Challenger's overall suite of financial products and reflects a commitment to providing a holistic range of options for clients looking to build their wealth.

In the first half of the 2003 financial year, the business launched Premium Option, which includes instalment gearing, and Portfolio 25 (giving investors leverage of up to 80% against 21 of the top ASX stocks and four managed funds) - making it more attractive to active investors and traders.

At 30 September 2003, the closing balance of share financed securitised loans was \$164.1 million.

Private equity assets

Challenger Group holds a portfolio of listed and unlisted investments which, given that they are not considered to be core to Challenger's strategy, will continue to be reviewed on an ongoing basis. The table below summarises the "book value" as at 30 June 2003. Book value means that the investments, other than investments in associates, are carried at fair value. The fair value of unlisted investments is based on a valuation by the Responsible Entity at the relevant balance date. Associates are carried at the lower of equity accounted amount and recoverable amount.

As at 30 June 2003	Book value (\$m)
Listed securities	13.1'
Jurlique International Pty Limited 2	28.1
AVC Holdings Pty Limited 2	16.8
Endeavour Health Care Limited	10.0
Australian Fast Foods Pty Limited	9.1
Other unlisted investments	6.8
Total	83.9

Notes

1. \$2.6 million at 30 October 2003 as a result of sales since 30 June 2003.

2 Associates.

As part of the Restructure the Jurlique Investment will be transferred to CPH.

5.3 Prospects and strategic intentions

Challenger Group's long term strategic goal is to be a competitive and multi-faceted financial services organisation. The aim of the Challenger Group is to operate as a market leader in the provision of high quality, value-adding financial services and products to intermediaries and their clients. Challenger aims to deliver these products and services in a cost efficient manner, while also offering superior service to clients.

During the year, Challenger Group has employed a team of highly skilled and experienced individuals. As a result Challenger Group now has specialised management skills across a broad number of areas including funds management, superannuation, structured finance and securitisation, platform development, retail distribution, brand management and communications and mortgage administration.

In addition to putting in place a strong management team, Challenger has also undertaken a full review of the current business systems and operating environment and begun implementing the following:

• the introduction of highly efficient, best-of-breed
• technology and administration platforms across all areas of the business;

• simplification of existing products and development of new products;

• exiting of non-core and unprofitable businesses;

• improved robustness of risk controls and compliance frameworks;
• a sustainable and transparent annuities business model; and
• transparent accounting policies and communications strategy.

The key sources of future growth for Challenger will be organic expansion and development of our existing businesses, establishment of strategic alliances and a focused acquisition strategy.

The financial services industry in general has delivered strong growth historically and has strong growth prospects for the future. Challenger is well positioned to take advantage of these opportunities through the five core business groups:

• · annuities;
• funds management and administration platforms;
• financial planning;
• mortgage financing; and
• margin lending.

In particular, within the funds management and administration platform business, superannuation presents a significant growth opportunity. This growth will be driven by the compulsory superannuation policy that exists in Australia, which ensures that superannuation inflows exhibit resilience regardless of any equity market volatility. Furthermore, the retirement incomes segment of this market favours annuity products because of the advantageous taxation and social security treatment.

Within the mortgage financing business, Interstar has benefited from the significant shift that has been seen in the home lending sector, with consumers trending away from the banks towards mortgage brokers and originators. This has resulted in substantial growth over the past four years for Interstar (achieving a compound annual growth rate of 50%). In addition, many financial planners are expanding their businesses to offer their clients debt management solutions - further fuelling the long term growth trend.

Prospective financial information

No "prospective financial information" (including financial forecasts and projections) has been included in this Disclosure Document.

The Boards of CPH Management and Challenger believe that there are no reasonable grounds for the inclusion of any prospective financial information, and that such information would be unduly speculative and potentially misleading for Challenger Unitholders. The Boards of CPH Management and Challenger have made this decision consistent with ASIC policy on the inclusion of prospective financial information, which provides (among other things) that prospective financial information should not be included where it is based on hypothetical assumptions or based on estimations. In addition:

• Challenger Group's earnings are dependent on a number of external factors over which CPH Management and Challenger have no control; for instance, changes in domestic and international inflation and interest rates, foreign exchange rates, commercial property yields, and government regulation. As a consequence, only "best estimates" could be made at this time as to the future impact of these variables on earnings; and
• Challenger Group's business is not a static business but has undergone, and continues to undergo, substantial development, restructuring, change and growth. This will continue during the current financial period and can be seen in Challenger Group acquiring Interstar, implementing changes in its product mix and closing down or disposing of non-core activities. At this stage, it is not possible to provide any reasonable assessment of Challenger's future earnings during this dynamic stage of Challenger's development, and historical earnings provide little guidance given the Merger which was implemented in July 2003 and the changes referred to above.

In making the determination that prospective financial information cannot be reliably provided, the Boards of CPH Management and Challenger have also taken into account the fact that the Restructure is, essentially, an internal reorganisation, with no additional capital being raised. Earnings forecasts have not previously been provided for the merged CPHIC/Challenger group and therefore any decisions to trade in Challenger Units

since the announcement have been made without the benefit of any such prospective financial information.

In addition, this Disclosure Document contains disclosure in relation to the risks associated with the Restructure, discussion of Challenger Group's intentions and prospects as well as consideration of the arguments for and against the Proposal.

5.4 Capital management plan for regulated subsidiaries

The objectives of Challenger Group's capital management strategy are to support existing and future annuities business and ensure that statutory solvency and capital adequacy requirements are appropriately provided for, having regard to both the quality and quantity of capital. These objectives are pursued within the broader Challenger Group objective of achieving an appropriate return on capital.

In connection with the Merger, CPH Management developed a capital management plan (Merger Capital Management Plan), which APRA had indicated was consistent with the obligations of the Life Companies under the Life Insurance Act 1995 (Cth) and did not give rise, as far as could be ascertained, to any prudential concerns. In accordance with the Merger Capital Management Plan, \$235 million in cash was contributed to CLL2 to enhance the level of statutory fund capital supporting existing business and to assist in the financing of new business. Separately, the property trust income and capital units held by the Life Companies were written down to the value of the underlying properties less debt plus foreign exchange and interest rate swaps and certain fair value adjustments were made to the book value of certain business assets.

Following the Merger and change of management, the plans for the group have evolved. As a result, Challenger has updated the Merger Capital Management Plan and has presented a revised capital management plan (Revised Capital Management Plan) to APRA.

The Revised Capital Management Plan, which updates the Merger Capital Management Plan, is as follows:

• CPHICI, which holds certain private equity investments, will be transferred into the CLL2 shareholders' funds, resulting in an increase in that entity's net assets of approximately \$78 million. The private equity investments of CPHICI Limited include the Jurlique Investment which, if the Restructure occurs, will be transferred to CPH;
• Garrisons Financial Planning, and its subsidiary, Synergy, will not be transferred out of CLL2;
• Challenger intends to amalgamate the Life Companies in accordance with the provisions of the Life Insurance Act 1995 (Cth). This will involve the business and net assets of CLL being transferred into CLL2 through a transfer under Part 9 of the Life Insurance Act (which is subject, among other things, to court approval), resulting in an increase in the net assets of CLL2;
• Challenger Life (UK) Limited (CLUK) is in the process of liquidation and has made a return of capital of approximately \$18 million to shareholder funds of CLL2. The proceeds of that liquidation together with approximately \$9 million cash from the sale of the Jurlique Investment (if the Restructure occurs) will be lent to CLL to allow CLL to satisfy its obligation to pay a declared dividend of \$27 million to CFSG; and
• excess cash in the shareholders fund of CLL2 may be used to provide short term secured borrowings to the Challenger Group to facilitate efficient working capital management across the group.

Update on securitisation proposal

Challenger Group continues to develop a proposal to replace all or part of the current non-recourse lending facilities, by creating securities backed by the rental income from the majority of properties in the Challenger Life Group portfolio.

The benefits of this program would be to:

• remove refinancing risk on the property portfolio;
• reduce loan to value ratio (LVR) covenant risk; and
• . ensure all future capital and maintenance expenditure requirements on the properties are fully provided for.

In addition, Challenger Group continues to be in discussions with international insurance companies to provide a highly rated wrap to the rental cash flows of the property portfolio. The benefits of this would be:

• to reduce the risk to Challenger Group of tenant defaults on the rental stream derived from the property portfolio;
• a wrapped security is likely to have a higher credit standing and may be less complex to sell to the international capital markets; and
• · lower borrowing costs.

Both the wrapped and the unwrapped structure involve significant financial structuring and complexity. Challenger is continuing to progress discussions with the above financial institutions but there can be no assurances as to whether or not the proposal will proceed or the timing if it is to proceed.

5.5 Dividend policy

As outlined to the market previously, the Board of CPH Management believe that the Challenger Group requires the retention of capital while it is still building its structure and developing and acquiring new business streams, as demonstrated by the recent Interstar acquisition and Orion strategic alliance. At this stage in Challenger Group's development, both the CPH Management and Challenger Boards believe capital is better deployed internally and expect that no dividends will be paid in the near to medium term. However, the Challenger Board will continue to monitor and assess the company's capacity to pay dividends to shareholders and the ongoing dividend policy of Challenger.

5.6 Board of Directors

The Directors of CPH Management Limited and Challenger are:

James Packer - Chairman

As well as being Chairman of CPH Management Limited, James Packer is also Executive Chairman of Publishing and Broadcasting Limited (PBL), a position he has held since May 1998, prior to which he was Chief Executive Officer of that company. Since 1998, Mr Packer has worked in various senior positions within the CPH and PBL groups and he is a member of PBL's Investment Committee. Mr Packer is also the joint Chief Executive Officer of CPH and a director of various companies, including Regal Entertainment Group, Foxtel and Puma AG.

Michael Tilley - Deputy Chairman (Challenger)

Michael Tilley is currently a director of Orica Limited and was a Director of Incitec Limited until 31 March 2003. Mr Tilley also spent a number of years with the investment bank Merrill Lynch where he held the positions of Chairman, Merrill Lynch (Australia), Head of Mergers and Acquisitions in the Asia Pacific region, and was a member of the Merrill Lynch Asia Executive Committee. Prior to joining Merrill Lynch, Mr Tilley was principal and managing partner of Centaurus Corporate Finance Pty Limited and a partner at Deloitte Touche Tohmatsu. Mr Tilley joined the Board of CPH Management in July 2003.

Chris Cuffe - Managing Director and CEO

Chris Cuffe was appointed Chief Executive Officer of CPH Management Limited on 3 February 2003 and joined the Board of CPH Management Limited as Managing Director in July 2003 when the Merger became effective.

Ashok Jacob

Ashok Jacob, along with James Packer, is joint Chief Executive Officer of CPH. Prior to joining CPH he was the Managing Director of the investment arm of the Pratt group of companies. Mr Jacob is also a director of Publishing and Broadcasting Limited.

James Service - Independent Director

James Service was a non-executive director of Challenger International Limited and joined the Board of CPH Management Limited in July 2003. Mr Service has extensive experience in the areas of the financial services and property. He is Executive Chairman of JG Service Pty Limited a specialist property consulting company and Deputy Chairman of Australand Holdings Limited. Mr Service is also a past National President of the Property Council of Australia and was Chairman of Advance Bank Limited prior to its merger with St George Bank Limited.

Brenda Shanahan - Independent Director

Brenda Shanahan was also a non-executive director of Challenger International Limited and joined the Board of CPH Management following the Merger in July 2003. Ms Shanahan is a finance specialist who possesses extensive marketing and promotion experience in the financial services sector. Ms Shanahan is also a former member of the Australian Associated Stock Exchange, and former executive director of a stockbroking firm, a fund management company and an actuarial company. She is chair of St Vincent's Health and St Vincent's Medical Research Institute and a non-executive director of JM Financial Group Limited.

Russell Hooper - Independent Director

Russell Hooper was previously a director and Chairman of the Audit Committee for Commonwealth Insurance Limited (a subsidiary of the Commonwealth Bank). Mr Hooper was also previously Chief General Manager, Funds Management at St George Bank Limited and prior to that held senior positions at Advance Bank including that of Managing Director of Advance Asset Management Limited. Mr Hooper joined the Board of CPH Management Limited in July 2003.

Peter Polson - Independent Director

Peter Polson retired from the Commonwealth Bank in October 2002, where he held the position of Group Executive, Investment and Insurance Services. In this capacity Mr Polson was responsible for all investment and insurance services for the group, including the funds management, master funds, superannuation, property and insurance businesses and third party support services for brokers, agents and financial advisers. Mr Polson joined the Colonial group, later acquired by the Commonwealth Bank, in 1994. Prior to joining the Colonial group, Mr Polson was Managing

Director of National Mutual Funds Management (International) Limited. Mr Polson joined the Board of CPH Management Limited in July 2003.

5.7 Senior management

Chris Cuffe - Chief Executive Officer

Chris Cuffe entered the funds management industry in 1985 following a five year period with chartered accountants, Peat Marwick Mitchell & Co, now KPMG. In 1988 he joined the newly formed investment arm of State Bank NSW, First State Fund Managers (renamed Colonial First State Investments in 1998) and assumed the position of CEO in 1990. During his tenure as CEO, Mr Cuffe led Colonial First State, from a small start-up operation to be one of Australia's leading fund managers. In early 2003 when Mr Cuffe left Colonial First State, the company was estimated to be valued at around \$5 billion, managed nearly \$70 billion on behalf of 500,000 plus investors and employed more than 1,000 staff. In February 2003, Mr Cuffe joined CPH Management as CEO.

Tim Foster - Chief Financial Officer

Tim Foster joined Challenger in May 2003 as Chief Financial Officer. Mr Foster was previously Chief Financial Officer of Colonial First State, the Australian funds management arm of the Commonwealth Bank. Mr Foster joined the Colonial group in January 1995 and held a number of senior positions before being appointed Chief Financial Officer of Colonial First State in August 2000. Prior to joining the Colonial group, Mr Foster worked for Coopers & Lybrand in the UK.

Dominic Stevens - General Manager Capital Management

Dominic Stevens joined Challenger in September 2003. Prior to joining, Mr Stevens was Senior Managing Director Zurich Capital Markets (Asian region) specialising in the areas of structured finance, derivative solutions and risk management products to investors in alternative assets. Challenger's Capital Management team led by Mr Stevens oversees the investment allocation of assets held on Challenger's balance sheet and the market and credit risk as it pertains to those investments.

Rob Adams - General Manager Funds Management and Distribution

Rob Adams joined Challenger in July 2003 and has more than 17 years' experience in the funds management and broader financial services industry in Australia and overseas. Prior to that, Mr Adams held a variety of senior roles including Chief Executive Officer of First State Investments, the global asset management operation of the Commonwealth Bank of Australia, based in the UK. First State Investments managed more than A\$15 billion with a team of 60 investment professionals.

Brian Benari - General Manager Mortgage Financing and Property

Brian Benari is a chartered accountant with extensive experience in investment banking in Australia and overseas. Most recently, Mr Benari was with Zurich Capital Markets (ZCM) in the role of Chief Financial Officer and Chief Operating Officer for ZCM Asia Limited and was responsible for investment approvals for equity and debt participations, new transaction approvals and the development and management of all operational and reporting infrastructure. Mr Benari also held a number of committee roles, including executive, credit and market risk and human resources.

Derek Goh - General Manager Information Technology

Derek Goh has a strong reputation for technology development in the financial services industry, having developed numerous systems and infrastructure for large and small businesses in Australia. Mr Goh previously held the position of General Manager Information Technology for Colonial First State and was a director of the Colonial group subsidiary, Colonial e.Com before joining Challenger in March 2003.

Hayden King - General Manager Administration and Operations

Hayden King has more than 20 years' experience in the financial services industry covering both banking and funds management. In the early 1980s, Mr King joined the Commonwealth Bank before moving to Australian Bank and later to Lend Lease/MLC, where he held a number of senior roles. In November 1996, Mr King joined First State Fund Managers, later renamed Colonial First State, and assumed the role of General Manager, Administration Services and Business Systems in 1997, a position he held until his departure in 2003 to join Challenger.

Joanna Wagstaff - General Manager Marketing and Communications

Joanna Wagstaff has worked in the financial services industry for more than 12 years and most recently held the role of General Manager, Marketing and Client Services for Colonial First State. In this role Ms Wagstaff led a team of 150 people and was ultimately responsible for Colonial First State's successful brand and advertising strategy, communications, marketing and call centres. Prior to this role, Ms Wagstaff held a number of senior distribution roles for both Colonial First State and Rothschild Australia Asset Management. Ms Wagstaff joined Challenger in March 2003.

Steve Rowe - General Manager Human Resources Development

In November 2002 Steve Rowe joined Challenger International, as it was then known. Prior to joining the group, Mr Rowe owned a management consulting business in the UK. Mr Rowe has also held a number of senior Human Resources roles in companies including UBS Warburg, Redland plc, International Computers Limited, Sony Broadcast Limited and Honeywell Control Systems Limited.

Blair Beaton - Head of Corporate Development

Blair Beaton joined Challenger in 2002. Previously, Mr Beaton worked in a number of senior executive roles in the areas of corporate finance and accounting in Canada and Australia. Mr Beaton has more than 20 years' experience in mergers and acquisitions, capital raisings and advisory work.

Tanya Atkins - Head of Shareholder and Media Relations

Tanya Atkins joined the Challenger Group in March 2003. Previously, Ms Atkins was Head of Media Relations at Colonial First State Investments. Prior to joining Colonial First State in 2001, Ms Atkins worked as a journalist, including Editor, Investor Weekly and Finance Producer/Reporter ABC TV News.

5.8 Statement of intended principal corporate governance policies of Challenger

Challenger Group's current corporate governance policies will be adopted by Challenger, allowing for differences between the company structure of Challenger as compared to the managed investment scheme structure of Challenger Group.

5.8.1 Board of Directors of Challenger

The Board of Challenger will be responsible for Challenger's overall corporate governance. This will include setting strategic direction, establishing management's performance objectives and monitoring the achievement of those objectives. It will also include ensuring that significant risks facing the company have been identified, and that appropriate and adequate control, monitoring and reporting mechanisms are in place.

The relationship between the Board and senior management will be important to Challenger's long term success. Day-to-day management of Challenger's affairs and the implementation of the corporate strategy and policy initiatives are intended to be delegated by the Board to the Chief Executive Officer and senior executives.

In addition to the current Challenger Directors, the Challenger Board intends to invite Graham Cubbin to be a Director of Challenger after the Restructure is implemented. Mr Cubbin is the Finance Director of CPH and of the CPH Group and he is also a director of Publishing and Broadcasting Limited.

The Challenger Board proposes to consider the further appointment of Directors, where appropriate, and with regard to the size of Challenger. Each Director will have the right to seek independent professional advice at Challenger's expense. It is intended that the Board's prior consent to obtaining such advice will be required and that the Director concerned will not participate in the decision.

5.8.2 Governance structure

It is the intention of the Challenger Board that the management structure is to be overlaid with a formal governance structure to provide stringent compliance and review across all of Challenger's operations.

To assist the Board in the execution of its duties, it is intended that several permanent board committees will be established as follows:

• Board Audit and Compliance Committee;
• Board Remuneration Committee; and
• · Board Property Investment Committee.

5.8.3 Group Board Audit and Compliance Committee

The intended members of the Board Audit and Compliance Committee at the time the Restructure is implemented are:

Brenda Shanahan (Chairperson) Ashok Jacob Russell Hooper

It is intended that the primary objectives of the Board Audit and Compliance Committee will be to ensure:

• effective management of financial and operational risks^.
• compliance with laws and regulations;
• accurate management and financial reporting;
• maintenance of an effective and efficient audit; and
• high standards of business ethics.

Meetings are intended to be held quarterly, or more frequently at the discretion of the chairperson.

5.8.4 Board Remuneration Committee

The intended members of the Board Remuneration Committee at the time the Restructure is implemented are:

Peter Polson (Chairperson) James Packer Michael Tilley

It is intended that the function of the Board Remuneration Committee will include:

• setting policies for senior officers' and Directors' remuneration;
• making specific recommendations to the Board on remuneration of Directors and senior officers;
• setting the terms and conditions of employment for the CEO; and
• overseeing management succession plans.

Meetings are intended to be held semi-annually, or more frequently at the discretion of the chairperson.

5.8.5 Board Property Investment Committee

The intended members of the Board Property Investment Committee at the time the Restructure is implemented are:

James Service (Chairman) Peter Polson Russell Hooper

The intended function of the Board Property Investment Committee will include:

• approving the acquisition and disposal of properties held on the statement of financial position;
• approving the acquisition and disposal of properties held within single asset property trusts;
• assessing the appropriateness of the property assets and the property risks contained in the overall portfolio held on the statement of financial position;
• reviewing the performance of the property portfolio; and
• approving the investment criteria for the property portfolio.

Meetings are intended to be held quarterly, or more frequently at the discretion of the chairman.

5.8.6 Ethical standards

Challenger's Directors and other employees will be expected to act lawfully, in a professional manner, and with the utmost integrity and objectivity in their dealings with clients, contractors, candidates and competitors, the community and each other, striving at all times to enhance the reputation and performance of Challenger.

5.8.7 Compliance with March 2003 ASX Corporate Governance Council Guidelines

The Challenger Board and management are currently reviewing the ASX's March 2003 "Principles of Good Corporate Governance and Best Practice Recommendations". Upon completion of the review, modifications to Board charters, policies and Challenger's website may be made to enable the practical application of these principles and recommendations to the company.

Section 6. Pro Forma Financial Information and Independent Accountant's Report

6.1 Introduction

This section outlines the pro forma financial position of Challenger as though the Restructure occurred as at 30 June 2003 and compares it with the pro forma financial position of the Challenger Group (prior to the Restructure).

6.2 Pro forma statement of financial position as at 30 June 2003

The pro forma statement of financial position of Challenger has been based on the audited consolidated statement of financial position of Challenger Group as at 30 June 2003. Adjustments have been made to reflect:

• material events subsequent to 30 June 2003, namely the acquisition of the net assets from Zurich Capital Markets' Australian Principal Finance Business, including Interstar (ZCM Assets); and
• the proposed Restructure of Challenger Group, including the establishment of Challenger and the issue of shares and options by Challenger as outlined in this Disclosure Document.

The pro forma statement of financial position of Challenger as at 30 June 2003 has been compiled on the basis of the following key assumptions and as if the transactions and events set out in these assumptions occurred at 30 June 2003:

• adjustments to the Challenger Group financial position to reflect the fair value of net assets acquired through the acquisition of ZCM Assets. These adjustments have been determined in accordance with the relevant accounting standards and the accounting policies of the Challenger Group; and
• the Restructure and LTIP proposals as outlined in this Disclosure Document.

The following pro forma statements of financial position have been compiled as follows:

	Challenger Group The audited consolidated statement of financial position of the Challenger Group as at
30 June 2003	30 June 2003.
Audited
Pro forma	This represents a pro forma consolidated statement of financial position as at 30 June 2003.
	Challenger Group This adjusts the Challenger Group 30 June 2003 audited statement of financial position for the
Unaudited	29 September 2003 acquisition of the ZCM Assets. This acquisition has been reflected as if it had occurred at 30 June 2003, and accordingly uses the fair value of the 30 June 2003 balances of the acquired net assets.
Pro Forma	This represents a pro forma consolidated statement of financial position of Challenger as at
Challenger	30 June 2003. It reflects:
Unaudited	• the acquisition of the ZCM Assets; and
	• the effect of the Restructure and LTIP proposals contained in this Disclosure Document

In order to assess the likely effects of the Restructure and LTIP proposals on the reported financial position of Challenger Group, the pro forma statement of financial position of Challenger Group should be compared with the pro forma statement of financial position of Challenger.

6.3 Pro forma statements of financial position as at 30 June 2003

		Pro forma
	Challenger Group	Challenger	Pro forma
	30 June 2003	Group	Challenger
	audited	unaudited	unaudited
	\$million	Smillion	Smillion	Notes
Assets
Cash assets	660.4	530.6	525.6	1
Receivables	243.6	266.0	393.2	$\overline{\phantom{a}}$
Debt securities	846.2	892.5	892.5
Other financial assets	19.6	19.6	19.6
Equity securities	229.5	229.5	229.5
Investment properties	2,613.8	2,613.8	2,613.8
Land and plantation timber		54.0	54.0
Fixed assets	10.8	12.4	12.4
Deferred tax assets	29.3	32.3	61.1	3
Investment in associates	47.4	47.4	19.3	$\overline{4}$
Intangible assets	278.5	426.8	554.4	5
Other assets	11.3	100.3	100.3
Excess of net market value of the interests of
Challenger Life Limited in its subsidiaries over
their net assets	375.4	375.4	375.4
Total Assets	5,365.8	5,600.6	5,851.1
Liabilities
Payables	223.1	263.8	263.8
Current tax liabilities	4.6	2.4	5.3	6
Interest bearing liabilities	2,023.4	2,181.9	2,181.9
Provisions	34.1	45.3	45.3
Deferred tax liabilities	69.9	96.5	96.5
Life insurance policy liabilities	1,806.1	1,806.1	1,806.1
Total Liabilities	4,161.2	4,396.0	4,398.9
Net Assets	1,204.6	1,204.6	1,452.2
Equity
Units on issue	1,140.5	1,140.5		$\overline{7}$
Issued capital		$\overline{\phantom{0}}$	1,390.5	7
Option premium reserve	1.7	1.7	61.7	8
Asset revaluation reserve	23.3	23.3
Undistributed Income	39.1	39.1
Total Equity	1,204.6	1,204.6	1,452.2	9

The pro forma statements of financial position should be read in conjunction with the notes in this section. The pro forma Challenger Group statement of financial position should be read in conjunction with the summary of adjustments to derive the pro forma Challenger Group in section 6.4.

6.4 Summary of adjustments to derive the Challenger Group pro forma financial position

	Fair value of ZCM controlled entities' assets and liabilities acquired 1 Smillion	Fair value of other ZCM assets Smillion	ZCM acquisition acquired 2 consideration 3 Smillion	Repayment/ refinancing 4 Smillion	NOVEMENT - Challenger Group 30 June 2003 audited to pro forma Challenger Group unaudited Smillion
Cash assets	16.5		(123.2)	(23.1)	(129.8)
Receivables	22.4				22.4
Debt securities	46.3				46.3
Land and plantation timber		54.0			54.0
Fixed assets	1.6				1.6
Deferred tax assets	3.0				3.0
Other assets 5	89.0				89.0
Payables	(40.7)				(40.7)
Current tax liabilities	2.2				2.2
Interest bearing liabilities	(116.6)		(65.0)	23.1	(158.5)
Provisions 5	(11.2)				(11.2)
Deferred tax liabilities	(26.6)				(26.6)
Fair value of net assets/(liabilities) acquired	(14.1)
Goodwill on consolidation	148.3				148.3
Consideration/total 7, 8	134.2	54.0	(188.2)

Notes

1. Interstar Securities NZ Limited was acquired by the Challenger Group as part of the acquisition of ZCM Assets. As at the date of preparing the pro forma financial information Interstar Securities NZ Limited holds a call option in respect of the issued capital of Arcturus Management Pty Limited. In the event Challenger decides to exercise the call option to acquire Arcturus Management Pty Limited, it would be able to do so without further cost and \$90 million of mortgage receivables and \$90 million of related interest bearing liabilities would be acquired.

2. Represents the fair value of 84,500 hectares of forestry assets acquired under a deferred settlement agreement with ZCM. Under the terms of this deferred settlement agreement, settlement will be effected no later than September 2004. Through entering into this agreement, Challenger Group is exposed to the risk and benefits associated with ownership of the forestry assets.

3. The consideration includes \$65 million of interest bearing deferred consideration (including the \$54 million noted in 2 above).

4. Immediately subsequent to acquisition, a net \$23.1 million of Interstar's interest bearing liabilities were repaid using Challenger Group's funds pursuant to a refinancing.

5. Other assets represent the deferred portfolio and origination costs associated with the mortgage portfolios of Interstar.

6. Included in provisions is an amount of \$10 million being the estimated amount of deferred consideration owing by an entity acquired (as part of the acquisition of the ZCM Assets) to the previous owner of Interstar. The ultimate amount payable will depend on the future financial performance of Interstar. The amount recognised has been estimated using information available at the time of preparing the pro forma financial information.

7. The total of the individual movement in assets and liabilities arising from the acquisition is "nil", reflecting the fact that pro forma net assets and pro forma Total Equity do not alter as a result of the acquisition.

8. For the information of readers an alternate breakdown of the consideration paid for ZCM Assets is shown below.

	Smillion
Controlled Entities acquired (including Interstar)
- Interstar	84.2
- High Yield Fixed Interest Portfolio (acquired by CLL2)	46.3
- Acquisition Costs	3.7
Consideration for Controlled Entities acquired	134.2
Consideration for Forestry assets (acquired directly)	54.0
	188.2

6.5 Notes on movements between pro forma Challenger Group and pro forma Challenger financial position

The Restructure and LTIP proposals resulted in pro forma adjustments which affected assets and liabilities as follows:

1. Cash

Costs associated with the implementation of the Restructure proposal are estimated to be \$5 million. These costs include adviser's fees, ASX listing fees, registry fees and the costs of investor communications. These costs have been adjusted against the issuance of Challenger Shares as described in note 7 below.

2. Receivables

As detailed in section 9, a key feature of the LTIP will be a non recourse loan to eligible employees. The \$127.2 million increase in receivables reflects an estimate of the value of this non recourse loan. This loan to eligible employees is secured against the value of the shares issued under the LTIP. The value of the loan equals the estimated fair value of the shares issued (as at issue date) under the LTIP. Refer note 7 below for further information in relation to the valuation of the shares issued under the LTIP.

3. Deferred tax assets

The cost of the management rights buyout is expected to result in a future tax benefit of \$28.8 million (representing 30% of the consideration payable to CPH Management for discharge of its management rights). This has been recognised as a deferred tax asset.

4. Investment in associates

As detailed in section 4, the equity accounted Jurlique investment is to be sold to CPH Management as part of the Restructure proposal. As at 30 June 2003 Jurlique had a book value of \$28.1 million. The pro forma is based on proceeds on sale of \$36 million.

5. Intangible assets

The movement in intangible assets relates to the goodwill arising on Challenger's acquisition of Challenger Group. The components of goodwill arising on acquisition are detailed below.

	Smillion	Smillion
Estimated fair value of new equity issued		1,268.3
Estimated fair value of options issued by Challenger in exchange for
options held in Challenger Group at 30 June 2003		1.7
		1,270.0
Net assets of Challenger Group before Restructure	1.204.6
After tax gain on disposal of the Jurlique Investment	5.0
After tax consideration for management rights discharged	(67.2)
Fair value of net assets acquired		1,142.4
Goodwill arising		127.6

6. Current tax liabilities

The movement of \$2.9 million represents the estimated tax payable on the gain on disposal of Jurlique.

7. Units on issue and issued capital

Challenger will acquire Challenger Group through an exchange of units in Challenger Group for Challenger shares. The exchange of Units in Challenger Group for Challenger shares is to occur on a one for one basis. Challenger Shares will be issued at the fair value at the effective date of issue.

Since the fair value of shares to be issued is not known, for the purposes of preparing the pro forma statement of financial position of Challenger, the issue price of these shares has been estimated. The price used is \$0.52 per share determined by reference to the recent market prices of Challenger Group units. The actual fair value ascribed to the shares issued will be determined at the time that the Restructure proposal proceeds. Transaction costs of \$5 million have been adjusted against the issuance of these shares.

As noted elsewhere in this Disclosure Document, up to 10% of the issued shares of Challenger are allowed to be issued in accordance with the terms of the LTIP. For the purposes of preparing the pro forma financial information it is assumed that the maximum number of shares are issued under the LTIP (10% of the issued shares of Challenger). The shares issued under the LTIP to the CEO will be issued at a price of \$0.53 per share. All other shares issued under the LTIP will be issued at a price approximating the market price of the shares in Challenger at the effective date of issue. For the purposes of preparing the pro forma statement of financial position this has been estimated to be \$0.52 per share.

Refer to section 9 of this Disclosure Document for an overview of the features of the LTIP.

8. Option premium reserve

The movement in the option premium reserve is explained as follows.

Options issued to CPH Management

The \$60 million movement in the option premium reserve reflects the value of Challenger Options issued to CPH Management. These options have been recognised as equity at a value determined by the Independent Directors and supported by the Independent Expert.

Refer to section 10 of this Disclosure Document for further information in relation to the valuation of the options.

Options issued in exchange for options held in CGHL at 30 June 2003

As reported in the 30 June 2003 audited financial report of Challenger Group, \$1.7 million of options were held in CGHL. The following table shows the impact on total equity of the exchange of these options held in CGHL for options in Challenger (using the valuation assigned to the CGHL options in the 30 June 2003 audited financial report of Challenger Group).

	Smillion
Cancellation of existing options held in Challenger Group	(1.7)
Issuance of new options in Challenger
Movement in option premium reserve and impact on total equity	Nil
Refer to section 11.1 for further information on the CGHL Options.

9. Total equity

The following table illustrates the composition of the total equity of Challenger.

	Issue price	Number '000	Value Smillion
Shares exchanged for units Estimated Shares issued under LTIP to eligible employees Shares issued under LTIP to the CEO	0.52 0.52 0.53	2,439,036 203,904 40,000	1,268.3 106.0 21.2
Total number of shares issued		2,682,940	1,395.5
Estimated value of options issued to CPH Management Estimated value of reissued options held in			60.0
Challenger Group at 30 June 2003			1.7
Transaction costs			(5.0)
Total equity of Challenger			1.452.2

6.6 Accounting policies

The pro forma statements of financial position contained in this section have been prepared using accounting policies consistent with those applied by and disclosed in Challenger Group's 30 June 2003 annual financial report.

Accounting policies with particular relevance to the adjustments reflected in the pro formas include:

Acquisition of assets

The purchase method of accounting is used for the acquisition of assets. Cost is determined as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs incidental to the acquisition. Where shares are issued in an acquisition, the value for the shares is determined having reference to the assessed fair value of the assets or net assets acquired, including goodwill or discount on acquisition where applicable.

The fair value of acquired tax losses is determined via their recoverability in the hands of the acquirer and probability of recognition in future periods.

Deferred portfolio and origination costs

Portfolio costs represent expenses incurred by Interstar in establishing mortgage backed pooled funds whose management has transferred to Challenger Group following the acquisition of Interstar. Origination costs represent expenses incurred in originating mortgages for inclusion in the pooled funds.

Portfolio and origination costs incurred are recognised as an asset and subsequently amortised over the life of the future economic benefits expected to be received. Total deferred portfolio and origination costs are not carried at an amount above their recoverable amount.

The fair value of deferred portfolio and origination costs acquired from Interstar represents the written down value of these costs as at 30 June 2003.

Intangibles

The excess of the fair value of the cost of acquisition over the fair value of the identifiable net assets acquired, including any liability for restructuring costs, is brought to account as goodwill and amortised on a straight line basis over the period which the benefits are expected to arise, being no more than 20 years.

ELLERNST & YOUNG

The Ernst & Young Building 321 Kent Street Sydney NSW 2000 Australia

Tel 61 2 9248 5555 Fax 61 2 9262 6565 DX Sydney Stock Exchange 10172

GPO Box 2646 Sydney NSW 2001

6.7 Independent Accountant's Report

10 November 2003

The Directors CPH Management Limited as the Responsible Entity of Challenger Financial Services Group Level 41, Aurora Place 88 Phillip Street SYDNEY NSW 2000

Dear Directors

Independent Accountant's Report on reviewed Pro Forma Financial Information

We have prepared this Independent Accountant's Report (Report) on the Pro Forma Financial Information for inclusion in a disclosure document to be dated on or about 10 November 2003 (the Disclosure Document). The Disclosure Document has been prepared for lodgement with the Australian Securities and Investments Commission (ASIC) and consists of a prospectus, notice of meeting and explanatory memorandum in connection with the Restructure and LTIP proposals of Challenger Financial Services Group (Challenger Group).

The pro forma financial information consists of:

• the audited statement of financial position of the Challenger Group at 30 June 2003 (Challenger Group 30 June 2003 Audited);
• the unaudited pro forma statement of financial position of the Challenger Group at 30 June 2003 (pro forma Challenger Group Unaudited);
• the unaudited pro forma statement of financial position of Challenger at 30 June 2003 (pro forma Challenger Unaudited); and
• explanatory notes thereto.

Collectively hereafter, they are referred to as the "Pro Forma Financial Information".

Expressions defined in the Disclosure Document have the same meaning in this Report.

Scope

You have requested Ernst & Young to prepare a report, for inclusion in the Disclosure Document, on the Pro Forma Financial Information

The Pro Forma Financial Information is included in section 6 of the Disclosure Document. The Directors of CPH Management, in its capacity as the responsible entity of Challenger Group, are responsible for the preparation of the Pro Forma Financial Information. This Report does not extend to pro forma financial information other than that contained in section 6 of the Disclosure Document.

JERNST & YOUNG

The pro forma Challenger Group Unaudited has been prepared on the basis of the audited financial statements of Challenger Group for the year ended 30 June 2003, on which Ernst & Young issued an unqualified audit opinion, together with adjustments to reflect certain material transactions that have occurred subsequent to 30 June 2003. In particular, the audited financial statements of the Challenger Group as at 30 June 2003 have been adjusted to

• the 29 September 2003 acquisition of net assets from Zurich Capital Markets (ZCM) including Interstar Securities Holdings Pty Limited, as if the acquisition occurred at 30 June 2003; and
• fair value adjustments to those net assets.

The pro forma Challenger Unaudited adjusts the pro forma Challenger Group Unaudited to reflect the Restructure and LTIP proposals including:

• the consideration to CPH to extinguish the existing management agreement with Challenger Group;
• the sale of the Jurlique Investment to CPH;
• the issue of shares in Challenger in exchange for Units in Challenger Group; and
• the issue of shares in Challenger under the LTIP.

The significant adjustments within the Pro Forma Financial Information are outlined in sections 6.4 and 6.5 in the Disclosure Document (hereafter referred to as the "pro forma Adjustments").

The pro forma Challenger Unaudited has been prepared on the assumption that the Restructure and LTIP proposals proceed.

Review of Pro Forma Financial Information

We have performed a review of the Pro Forma Financial Information in order to state whether, on the basis of the procedures described, anything has come to our attention that would indicate that the Pro Forma Financial Information, as set out in section 6, is not presented fairly in accordance with the recognition and measurement requirements (but not all of the disclosure requirements) of applicable Australian Accounting Standards and other mandatory professional reporting requirements to the extent to which they are relevant to the information presented.

We have conducted our review of the Pro Forma Financial Information in accordance with the Australian Auditing and Assurance Standard AUS 902 "Review of Financial Reports". We conducted our review of the Pro Forma Financial Information by completing such enquiries and performing such procedures as we, in our professional judgement, considered reasonable in the circumstances, including:

• attendance at executive interviews performed by the due diligence committee;
• a review of documents provided by the due diligence committee;
• a review of the reasonableness of the pro forma Adjustments used to compile the Pro Forma Financial Information;
• a review of the audited financial information used in the preparation of the Pro Forma Financial Information; and
• a comparison of consistency in application of the recognition and measurement principles in Australian Accounting Standards and other mandatory professional reporting requirements in Australia, and the accounting policies adopted in preparation of the Pro Forma Financial Information disclosed in section 6.

These procedures do not provide all the evidence that would be required in an audit, thus the level of assurance provided is less than given in an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.

ELLERNST & YOUNG

Review statement on Pro Forma Financial Information

Based on our review, which is not an audit, nothing has come to our attention that causes us to believe that the Pro Forma Financial Information set out in section 6, does not present fairly the pro forma Challenger Group Unaudited and pro forma Challenger Unaudited in accordance with the pro forma Adjustments and the measurement and recognition requirements (but not all of the disclosure requirements) of applicable Australian Accounting Standards and other mandatory professional reporting requirements in Australia.

Subsequent events

Apart from the matters dealt with in this Report and elsewhere in the Disclosure Document, and having regard to the scope of our Report, to the best of our knowledge and belief no material transactions or events outside of the ordinary business of the Challenger Group have come to our attention that would require comment on, or adjustment to, the information referred to in our Report or that would cause such information to be misleading or

Independence or disclosure of interest

Ernst & Young does not have any interest in the outcome of the Restructure other than in the preparation of this Report and the Taxation Report in section 8 and participation in due diligence procedures for which normal professional fees will be received. Ernst & Young also acts as the statutory auditor of Challenger Group and CPH

Yours faithfully

Ernst & Young

Section 7. Challenger
and Challenger Group
business risks

Challenger

69

Set out below are the general risk factors of Challenger Group. These risk factors will also apply to investments in Challenger upon the Restructure being implemented. Investors should be aware that there are various risks associated with any investment in securities and that the prices of securities can fall as well as rise.

7.1 General economic risks

The financial performance of Challenger Group may be affected by changes in economic conditions in Australia, in other countries in which it operates and also by changes in economic conditions globally. No assurances can be made that Challenger Group's market performance will not be adversely affected by such changes, which include:

• changes in inflation and interest rates. In particular, this may impact the investment decisions of clients of the Challenger Group, adversely affecting the level of funds under management;
• changes in employment levels and labour costs which may affect the cost structures of the business;
• changes in aggregate investment and economic output;
• . investor sentiment and local and international stock market conditions:
• changes in fiscal, monetary and regulatory policies; and
• developments in technology, finance and property markets generally.

Additionally, terrorism and hostilities associated with terrorism could have an adverse impact on the financial position and earnings of Challenger Group. As noted above, Challenger Group's financial performance is sensitive to general economic conditions which could be impacted by global tensions and the commencement of any military action.

7.2 Exchange rate risk and interest rate risk

Challenger Group derives a significant portion of its investment income from property investments in countries outside of Australia, in particular the United Kingdom and the United States. In Australian dollar terms, this investment income will be affected by changes in the exchange rates between the Australian dollar and the relevant foreign currencies. Challenger Group has hedging programs in place to reduce the exposure to foreign exchange movements. Any unhedged foreign exchange exposure on investment related properties and debt is recorded in the period's statement of financial performance. Management is actively managing and refining the foreign exchange hedging program.

It is Challenger Group policy to protect part of the loans from exposure to increasing interest rates. This is achieved by entering into interest rate swap contracts that effectively swap variable rate loans into fixed rates.

7.3 Property related risks

7.3.1 Value of property portfolio

Properties held by the life companies are marked to market, and their value may change from balance date to balance date, with any change taken through the profit and loss statement. Following the Merger, Challenger Group implemented a new valuation policy for its property assets, with the result they are now carried at the value of the underlying properties less debt plus or minus the market value of any swaps. This means that Challenger Group's financial position and performance is sensitive to those factors influencing the Australian dollar value of property investments, including movement in interest rates, property values and foreign exchange rates.

73.2 Credit risk

Each major tenant is assessed in terms of credit risk when entering into a long term lease. Should a tenant default on its payment obligations, Challenger would need to find a new tenant to replace the existing one. There are many risks involved in this process, including costs, delays in finding a suitable tenant, suffering a lower rental on the property with the new tenant, or being unable to find a new tenant. This risk is reduced by having a spread of tenants across industries, property type and geographies. The risk is increased where Challenger has more concentrated exposures to particular sectors, for instance cinemas, or for single tenant or special purpose properties.

7.3.3 Tenancy risk

Challenger Group's property portfolio provides long term rental streams which are used to back issued annuity products. Under a number of property leases, the tenant has the discretion to terminate the lease, or the lease expires where the tenant has an option to renew, prior to the expiry of the term of the underlying annuity obligations. For some properties, only a portion of the rental stream is subject to this risk (relating to minor tenants). Should current tenants terminate or choose not to renew their leases at expiry, there is a risk that Challenger Group may not be able to re-let the premises at the same rent as previously, or at all.

7.3.4 Refurbishment and capital expenditure

The buildings in which Challenger invests may require significant refurbishment during and at the end of each lease which may need to be funded by Challenger.

7.3.5 Availability of appropriate properties

The ability to match obligations to policyholders under new annuities against rental income streams under the leases held by Challenger Group is dependent on the availability of suitable rental properties and tenants and the level of positive margins between yields on properties and interest rates. Therefore, a risk for growth of the annuities business and future profitability thereof, is the availability of appropriate properties and the positive margin between property yields and interest rates.

7.3.6 Falls in market rents

This risk refers to the effect of a reduction in market rents on the ability of Challenger to service the debt arrangements associated with the properties and the ability of the Life Companies to service the annuity obligations to policyholders. The risk applies where the rental growth following market review is lower than the assumed growth for the purpose of matching rental from properties to annuity obligations. This could adversely affect Challenger Group's profits and the capital position of the Life Companies.

7.3.7 Geared nature of the property investments

The annuity model employed by Challenger Group uses debt to fund a significant portion of the purchase price of new properties. Some loan contracts contain loan to value ratio (LVR) covenants which govern the maximum level of debt that can be secured against a property compared to the total value of the property. There is a risk that, with fluctuations in the value of the underlying property, some LVRs may be breached, requiring immediate reduction of debt to reduce the ratio below the covenanted level. Part of this risk is mitigated where the properties have amortising debt.

In addition, the fact that properties are geared will magnify the property related risks.

7.3.8 Refinancing risk

Approximately 60% of the financing arrangements used to fund property purchases have a term of three to five years. However, the annuity obligations which are supported by these properties have a much longer term, some up to 15 years. Therefore, the Challenger Group will need to refinance some properties in the medium term. There is a risk that, at that time, financing will not be available on terms at least as favourable as existing loans, or may not be available at all. This could adversely affect the ability of the Life Companies to meet the payments due under their annuity obligations to policyholders that are backed by the rental stream from those properties and would require Challenger to inject more capital into the Life Companies.

By way of example, a significant portion of the debt in the Life Companies' property portfolio is funded by way of a commercial mortgage backed securitisation (CMBS) program. Funding through the CMBS market enabled Challenger Group to secure debt on more favourable terms than bank debt because of the wider range of lenders available compared with debt provided by commercial banks. However, approximately one half of the CMBS debt matures in June 2005 and the remainder matures in June 2007. That debt must be refinanced to ensure the Life Companies' continuing obligations to pay annuities can be met. Rolling over the CMBS debt exposes the Life Companies to increases in margins (margins for property financing recourse to the property) and therefore a higher cost of funds.

One strategy currently being considered to mitigate this risk is the long term securitisation of property assets.

7.4 Prudential requirements

Challenger Group must maintain minimum levels of capital in the Life Companies in order to comply with the capital adequacy requirements under the Life Insurance Act 1995 (Cth) and meet payments due under their annuity obligations to policy holders. Challenger Group faces the risk that it may need to inject additional capital into the Life Companies if interest rates fall or if the value of the properties from which Challenger Group derives a significant portion of its income (being the rental stream from those properties that backs the Life Companies' annuity obligations) falls (including if the Australian dollar value of the properties falls due to exchange rate fluctuations) or if there is significant growth in new business above current expectations.

7.5 Government policy changes

The business of Challenger Group is subject to a complex regulatory regime which is susceptible to the impact of changes in government policy. Challenger provides financial services including annuities, superannuation and investment products. Providers of these products in Australia are subject to various legislative and prudential requirements, including the Corporations Act, the Life Insurance Act 1995 (Cth), the Superannuation Industry (Supervision) Act 1993 (Cth) and the Financial Services Reform Act 2002 (Cth). This regulatory regime is complex and subject to change.

Challenger Group's regulated entities are required to meet the solvency and capital adequacy standards issued under the Life Insurance Act 1995 (Cth). Any significant change in the standards prescribed by APRA, or the application of those standards, may have a significant impact on the financial position and performance of Challenger Group.

Challenger Group is subject to ongoing review and enquiries by regulators regarding compliance with regulations. If Challenger Group does not comply with regulations, there is a risk that it may suffer penalties such as fines, obligations to pay compensation or the cancellation or suspension of authorities and licences issued to it under which its business is conducted. Non-compliance may also lead to adverse publicity for Challenger Group.

7.6 Financial services reform requirements

The FSR reforms commenced in March 2002 with an extended transition period. The reforms extend the consumer protection measures applying to the sale and ongoing servicing of many of Challenger Group's products, including annuities, managed investments and superannuation products and imposed a new financial services licence regime on operations.

This regime includes increased transparency of fees and high standards for advice associated with sales and ongoing servicing, with more specific rights for consumers to seek compensation for inappropriate presale disclosure or mis-selling by planners. Challenger Group has applied for the requisite licences under the new regime and is in the process of upgrading its risk and compliance management systems in order to ensure compliance.

7.7 Regulatory risks

Challenger Group operates in a highly regulated industry, under the supervision of the key regulators APRA and ASIC. It is important for Challenger to maintain a positive relationship with those regulators.

As part of new management's review of compliance matters following the Merger, several past breaches of the Corporations Act were discovered in relation to financial products issued by Challenger and have been notified to ASIC. While Challenger has appropriately addressed these matters, these notifications may or may not lead to further action by ASIC. There is also a risk that further breaches may be discovered during implementation of Challenger Group's new risk and compliance management system.

7.8 Integration risk

Following the Merger and independently of the new systems which are being implemented to accommodate FSR reforms, new management has been conducting a thorough review of Challenger Group's compliance, administrative and reporting procedures and systems, and is currently updating these to comply with industry best practice.

Until the implementation of all new systems is complete, there are risks in relying on Challenger's existing systems, which may lead to errors and inadvertent breaches of regulatory requirements.

Implementation of a new system of risk and compliance management is and will remain a priority for new management.

7.9 Loss of key personnel

The success of Challenger Group, as a services business, relies to a large extent on it continuing to attract and retain qualified and experienced management personnel. There can be no assurance that key personnel will continue to be employed by, or contracted to, Challenger Group or that Challenger Group will be able to attract and retain qualified personnel in the future. Failure to retain or attract key personnel could have a material adverse impact on Challenger Group's business. The LTIP Proposal is being advanced to assist the retention of key personnel.

7.10 Competition

The financial services sector in Australia, in which Challenger Group operates, is highly competitive and has a number of large and well-established players. There is a risk that the earnings of Challenger Group may be impacted by the ongoing need to compete in this marketplace.

7.11 Insurance risk

Challenger Group would be adversely impacted by increases in the cost of insurance premiums or an inability to access insurance coverage arising from circumstances that might or might not be related to the business of Challenger Group. In addition, some risks may not be insurable or may exceed sums insured. Such events, if they arise, could have a material adverse impact on Challenger Group.

7.12 Liquidity requirement risk

The structure of investments backing Challenger Group's annuities is such that from approximately 2005 to 2010, cash flow to cover expenses and annuity payments and service debt is greater than cash flow generated by the backing assets. Challenger Group holds sufficient liquid assets under its "quality of capital" requirements to cover the present value of this shortfall.

7.13 Strategy implementation risks

Following the completion of the Merger, Challenger Group's new management team has undertaken a complete review of the operations of the business. The aim of this review has been to simplify and clarify Challenger Group's business, including its products and systems, and position it for future growth. As a result of the ongoing review process, Challenger Group can be viewed as being in a transitional and transformational stage. While management strongly believe that this process is in the long term interests of all stakeholders, it is not without risks.

In particular, as with any organisation undergoing substantial change, there is a risk of confusion among staff, customers and investors if the direction and reason for the change is not clearly communicated to them. New systems and products also take time to implement and integrate and there is a risk that errors will be made in the business due to lack of familiarity with the new regime. Further, staff may become distracted from their day-to-day activities as they attempt to adjust to changes around them.

7.14 Risks relating to funds management

The funds management operations of Challenger Group have been identified as an area where management intend to substantially expand and strengthen current product offerings. There is a risk that the funds management strategy may not be successful, for example due to unfavourable investment market conditions or because the product offering may not be attractive to investors.

7.15 Funding risk

Challenger Group currently accesses the debt capital markets and commercial bank facilities for borrowings. There is a risk that one or more of these sources may become unavailable or there may be a significant increase in borrowing costs, as a result of either a systemic or company specific event.

7.16 Systems risk

Challenger Group relies to a significant degree on its information technology systems and incurs considerable expenditure on systems development and maintenance. The Challenger Group's IT systems are essential to maintaining an effective interface with customers and for the execution of the group's growth strategy. As a result, Challenger Group is potentially exposed to a number of risks, including the capacity of the existing systems to accommodate planned growth and the integration of potential acquisitions.

7.17 Risks associated with the interstar acquisition

As discussed in section 5.2, Challenger Group recently completed the acquisition of Interstar. While this acquisition is seen as an important expansion of Challenger Group's product offering and a good potential source of growth, there are certain risks

associated with the acquisition which are outlined below:

7.17.1 Acquisition risks

As with any substantial addition to a business through acquisition, there are risks involved in the integration of the new business with the old. Such risks encompass areas such as IT platform integration and cultural clash between new and existing staff members. There is a risk that if such issues are not managed appropriately the new business may not contribute in as meaningful a way as originally envisaged.

7.17.2 Property market risk

The Australian property market has experienced a considerable upswing over the course of the last few years. This has seen a fairly substantial rise in the value of many properties. There is a risk that should this trend reverse the value of properties against which loans made by Interstar are secured could fall. Interstar has fully insured all loans, but if the underwriters fail to meet claims, Interstar may not be able to recoup the full value of its net interest margin with respect to the specific part of loans which Interstar securitised.

7.17.3 Interest rate changes

Official interest rates in Australia are currently at historically low levels. This has encouraged strong growth in borrowing from mortgage providers such as Interstar due to the low cost of finance. Should the Reserve Bank of Australia continue to increase official interest rates, as occurred on 5 November 2003, this has the potential to reduce the level of new borrowing taken out by Australians. Further, an increase in repayments may cause existing borrowers to default on their loans, exposing Interstar to the risk of capital loss should the loan security not prove sufficient to cover the outstanding loan value. Interstar has fully insured all loans, but if the underwriters fail to meet claims, Interstar may not be able to recoup the full value of the net interest margin with respect to the specific pool of loans which Interstar securitised.

7.17.4 Forestry assets

To secure the acquisition of Interstar, Challenger Group acquired an investment whose value is underpinned by 84,500 hectares of forestry assets. A value of \$54 million was placed on this investment. While the investment can be consummated at Challenger Group's discretion at any time, Challenger Group can utilise a 12 month deferred settlement. The investment acquired is not core to the business of Challenger Group and outside parties have expressed an interest in acquiring these assets from Challenger Group. However, should a suitable purchaser not be found for these forestry assets, Challenger Group will have to fund the acquisition price and acquire these assets at the settlement date in September 2004.

7.18 Availability of further acquisition opportunities

Challenger Group has stated that in developing its financial services business it is interested in acquiring other businesses which fit strategic gaps in its current product offering or entering into alliances with other parties to provide these additional products. There is a risk that appropriate acquisition opportunities or alliance partners may not be available or interested in dealing with Challenger Group which will impact on its ability to fulfil these strategic goals.

7.19 Private equity portfolio risks

Challenger Group currently holds a variety of unlisted investments as a result of the activities of its predecessor, CPH Investment Corp. The total value of these assets was approximately \$70 million at 30 June 2003. As part of the Restructure, the Jurlique Investment will be sold to CPH, which will materially reduce the total value of the portfolio.

7.19.1 Liquidity

Despite the best efforts of Challenger Group to determine a future exit strategy for each investment, there remains a risk that the private equity investments of Challenger Group may lack an adequate level of liquidity, and this may restrict the ability of Challenger Group to dispose of these investments in a timely manner.

7.19.2 Minority position in investments

Challenger Group holds minority interests in some of its private equity investments, exposing it to actions and decisions of majority investors. CPH Management has sought to mitigate this risk through the use of appropriate terms in the relevant shareholder agreements, and in a number of circumstances through board positions.

7.20 International Accounting Standards

International Financial Reporting Standards (IFRS) are to be adopted for all entities reporting under the Corporations Act for financial years commencing on or after 1 January 2005. This will mean that Challenger will be required to report under IFRS for the year ending 30 June 2006. As those reporting requirements are not yet mandatory, the pro forma financial information contained in section 6 of the document has been prepared under existing Australian reporting requirements (AGAAP).

Certain significant components of the proposed IFRS are yet to be released in relation to insurance contracts. The International Accounting Standards Board (IASB) has split the insurance contracts requirements into two phases. The IASB has recently issued its exposure draft on Phase 1. It is expected that the resulting IFRS, and the equivalent Australian standards, will be issued in the first half of 2004.

Phase I allows for the reporting of those contracts which satisfy the definition of "insurance' to continue to be based on local reporting requirements (in this case existing AGAAP). A significant proportion of Challenger's insurance business will, however, not satisfy the definition of "insurance" proposed for Phase 1. Reporting of contracts which do not satisfy the definition, will be subject to other standards, most notably those relating to financial instruments.

New fair value based reporting requirements for insurance contracts are expected to be introduced under Phase II. An exposure draft on Phase II is unlikely to be issued until the end of 2004, with a planned effective date of 2007 or 2008.

Challenger Group has initiated a project to assess the impact of IFRS. While this work is still at a preliminary stage, it is likely that, were the pro forma financial information prepared under IFRS, the financial information disclosed in this document would differ. Such differences could include reclassification or changes in the basis of measurement and recognition of profit and loss and balance sheet components. This may include the recognition of certain assets and liabilities held in securitised entities. It is also possible that a change to consolidated retained earnings will arise on transition to IFRS. This change would not be reported as part of the consolidated statement of financial performance. The impact of IFRS on the financial position and ongoing reported results will only be able to be determined once all applicable standards have been released.

Section 8. Taxation Report

ELLERNST & YOUNG

The Ernst & Young Building 321 Kent Street Sydney NSW 2000 Australia

GPO Box 2646 Sydney NSW 2001 Tel 61 2 9248 5555 Fax 61 2 9262 6565 DX Sydney Stock Exchange 10172

7 November 2003

The Directors CPH Management Limited Level 41 Aurora Place 88 Philip Street SYDNEY NSW 2000

Dear Directors,

This report has been prepared for inclusion in the Disclosure Document to be dated on or about 10 November 2003. Words and terms in this report have the same meaning as in the Disclosure Document, unless the context requires

Taxation report

The following is our report on the Australian income tax consequences of the proposed corporatisation of Challenger

This report is based upon the taxation laws of Australia in effect at the date of this report. Except as otherwise stated, the report does not take into account or anticipate changes in the law, whether by way of judicial decision or legislative action, nor does it take into account tax legislation of other countries apart from Australia. Unitholders should be aware that there are constant changes to Australian income tax law which could affect them and they should monitor these changes for themselves.

This report is not an authoritative or complete analysis of the taxation laws of Australia as they may apply to the circumstances of Challenger Unitholders, Challenger Group or Challenger. This report is general in nature and the specific circumstances of each Challenger Unitholder may affect the taxation implications for them of the Corporatisation. This report does not apply to Unitholders who acquired their Challenger Units under an employee share plan or option plan. Nor does it apply to Unitholders that are, for example, banks, insurance companies, tax exempt organisations, superannuation funds or dealers in securities, which determine their tax position in accordance with specific tax legislation or established industry practice approved by the Australian Taxation Office.

Challenger Unitholders should seek appropriate independent professional advice that considers the taxation implications in respect of their own specific circumstances. We disclaim all liability to any Unitholder or other party for all costs, loss, damage and liability that the Unitholder or other party may suffer or incur arising from, or relating to, or in any way connected with, the contents of this report or the provision of our report to the Unitholder or other party or the reliance on this report by the Unitholder or other party.

This report is based on the Corporatisation being effected as detailed in the section entitled "Background".

Background

We outline below our understanding of how the proposed Corporatisation is to be implemented.

One of the elements of the proposal is that trading in Units will be suspended four business days up to and including the Record Date, being the date on which the Restructure will take effect.

EII FRNST & YOUNG

For the purpose of implementing the Corporatisation on the Record Date, CPH Management, as Responsible Entity in its capacity as Trustee of Challenger Group, is to be granted power to act as agent for:

• . Ineligible Overseas Holders for the purpose of entering into a contract to transfer and transferring their Challenger Units to the IOH Transferee; and
• the Exchanging Unitholders for the purpose of entering into a contract allowing the redemption of their Challenger Units.

Challenger will, subject to the condition precedent that the Exchanging Unitholders' Challenger Units are redeemed and an equivalent number of Units are issued to it by Challenger Group, undertake to issue shares on a one for one basis to Exchanging Unitholders.

The timing of the suspension of trading in the Units, and therefore of the Record Date, in part depends upon satisfaction of certain conditions of the Restructure by 16 December 2003. Where those conditions are satisfied (scenario 1 in section 1.4 of this Disclosure Document), trading in Units will be suspended at the close of trading on 16 December 2003 and the Corporatisation will be effected on 22 December 2003 (the Record Date).

Where the conditions of the Restructure are not satisfied by 16 December 2003 (scenario 2 in section 1.4 of this Disclosure Document), the suspension from trading of Units will occur on the Notification Date, being the date CPH Management notifies the ASX that the preconditions have been satisfied, and the Corporatisation will take place on the fourth business day following the Notification Date (also the Record Date).

On the Record Date we understand the following transactions will occur, and that they will occur in the sequence outlined:

• The IOH Transferee will acquire all Challenger Units held by Ineligible Overseas Holders under a compulsory transfer which will be authorised by changes to the Challenger Group Constitution. The IOH Transferee will, prior to Units being issued to Challenger, be registered as the Unitholder on the Challenger Group Register and will become the owner of all Units it acquires from Ineligible Overseas Holders.
• Challenger will enter into a contract to acquire and acquires five (only) Challenger Units. Challenger will not prior to this time acquire Challenger Units. At all times from incorporation to the completion of the following step, Challenger will not undertake any transactions or activities other than the transactions detailed herein and which are required for the purposes of the Restructure.
• All Challenger Units, except for those held by Challenger, are redeemed. Simultaneously with this redemption, Challenger Group issues an equivalent number of Units to Challenger, and Challenger issues to each Unitholder one ordinary share in exchange for each Unit redeemed. Contemporaneously with these redemptions and issues, the issues of the Challenger Shares will be registered on the Challenger Share Register.

Under both scenarios, trading in Challenger Shares will commence on a deferred settlement basis on the business day immediately following the Record Date.

The constituent documents of Challenger will provide that no transfers of shares or interests in shares in Challenger can be effected until the business day immediately following the Record Date.

This report on the Australian taxation consequences of the Corporatisation is based upon our understanding of the form and timing of the transactions, as described above. Should either the form or substance of the transactions alter from our understanding or the sequence of the steps change, the taxation implications of the Corporatisation may differ from those outlined below.

JI ERNST & YOUNG

Part A - Implications for Australian Resident Unitholders

The Federal Government announced on 27 March 2003 that it intends to amend the Australian income tax law in order to treat certain trusts, such as Challenger Group, as companies for all income tax purposes (referred to as the "Proposed Tax Law Amendments"). The form of capital gains tax ("CGT") roll-over relief available for Australian resident Unitholders from the Corporatisation will ultimately depend on whether the proposed legislation is enacted by the Government. The taxation implications of the Corporatisation for Unitholders, where the proposed legislation is enacted, and where it is not enacted, are considered separately below.

1. Implications if the Proposed Tax Law Amendments are enacted

The taxation implications for Australian resident Unitholders will depend on the manner in which each Unitholder holds their interests in Challenger Group.

1.1 Implications for Unitholders who hold their Units on capital account

The redemption of Challenger Units in accordance with the Corporatisation will give rise to a disposal of Challenger Units for CGT purposes. CGT roll-over relief should be available to Exchanging Unitholders in accordance with Subdivision 124-G of the Income Tax Assessment Act 1997 ("the 97 Act") provided, as expected, that Challenger chooses that the CGT roll-over relief applies.

(a) What is the effect of CGT Roll-over Relief?

Where CGT roll-over relief applies in relation to the redemption of the Challenger Units, any capital gain or capital loss which would otherwise be realised by each Unitholder as a result of the redemption is disregarded.

Unitholders will be taken to have their cost base in the Challenger Units transferred to the shares they acquired in Challenger under the Corporatisation. The cost base held in each of the Challenger Shares should be equal to the aggregate cost base held in the Challenger Units divided by the number of Challenger Shares received. For the purposes of both indexation and discount capital gains (where applicable), the Challenger Shares will be taken to have been acquired on the date of acquisition of the Challenger Units.

To the extent Unitholders acquired Challenger Units as a result of the previous merger of Challenger International Limited and CPH Investment Corp (as Challenger Group was then known), and chose CGT roll-over under Subdivision 124-M, the Challenger Shares received by them as a result of the Corporatisation will be taken to have been acquired at the date of the acquisition of their shares in Challenger International Limited. These Unitholders will generally hold a cost base in each of those Challenger Shares equal to the aggregate cost base they previously held in the shares in Challenger International Limited, divided by the number of Challenger Shares received.

(b) Unitholders are deemed to have chosen CGT roll-over relief

Unitholders will be deemed to have chosen CGT roll-over relief to apply to the exchange of their Challenger Units for Challenger Shares. In this instance, Unitholders do not have a choice of whether to claim the CGT roll-over, regardless as to whether they would otherwise realise a capital gain or a capital loss.

1.2 Implications for Unitholders who hold their Units as trading stock or otherwise on revenue account

Unitholders who hold their Units as trading stock or otherwise on revenue account should not include any net assessable gain or loss otherwise arising from the exchange of their Challenger Units for Challenger Shares in the determination of their taxable income. These Unitholders will be deemed to have a tax cost in the Challenger Shares issued to them equal to the tax cost of their Challenger Units. Where the Challenger Units were held as trading stock at the end of the immediately preceding income year, the tax cost in them is taken to be the closing value of the Units in that income year.

EII FRNST & YOUNG

Due to the complexity of the provisions with regard to Unitholders who hold their Units as trading stock or otherwise on revenue account, we recommend these Unitholders seek appropriate independent professional advice that considers the taxation implications in respect of their specific circumstances.

2. Implications if the Proposed Tax Law Amendments are not enacted

2.1 Implications for Unitholders who hold their Units on capital account

The redemption of Challenger Units in accordance with the Corporatisation will give rise to a disposal of Challenger Units for CGT purposes. CGT roll-over relief should be available pursuant to Subdivision 124-H of the 97 Act provided, as expected, Challenger chooses that roll-over under that Subdivision applies. Challenger's choice, which need only be made should the Proposed Tax Law Amendments not be enacted, must however be made within two months following the Record Date or within such further time as the Commissioner of Taxation allows. Where the Proposed Tax Law Amendments have not been enacted prior to this time, we understand that Challenger intends to approach the Commissioner of Taxation to request an extension of time for the making of this choice.

(a) What is the effect of CGT roll-over relief?

Where CGT roll-over relief applies in relation to the redemption of the Challenger Units, any capital gain or capital loss which would otherwise be realised by each Unitholder as a result of the redemption is disregarded.

Unitholders will be taken to have their cost base in the Challenger Units transferred to their Challenger Shares that were acquired as a result of the Corporatisation. The cost base held in each of the Challenger Shares should be equal to the aggregate cost base held in the Challenger Units divided by the number of Challenger Shares received. For the purposes of both indexation and discount capital gains (where applicable), the Challenger Shares will be taken to have been acquired on the date the Unitholder acquired their Challenger Units that were redeemed.

Where the Proposed Tax Law Amendments are not enacted, to the extent Unitholders acquired Challenger Units as a result of the previous merger of Challenger International Limited and CPH Investment Corp (as Challenger Group was then known), the Challenger Shares received by them as a result of the Corporatisation will be taken to have been acquired at the date of the acquisition of their Challenger Units. These Unitholders will generally hold a cost base in each of those Challenger Shares equal to the aggregate fair market value of the shares in Challenger International Limited at the date they were exchanged for Challenger Units, divided by the number of Challenger Shares received.

(b) Unitholders are required to choose to obtain CGT roll-over relief

In order for CGT roll-over relief to apply to a Unitholder, the Unitholder must choose to obtain it. The choice must be made on or before the lodgement date of the Unitholder's income tax return for the year in which the redemption of their Units occurs.

The way in which the Unitholders' income tax return is prepared is sufficient evidence of the making of the choice. That is, if no capital gain or capital loss is disclosed in the income tax return, that is sufficient evidence of the choice having been made.

(c) Where CGT roll-over relief was not claimed in relation to the disposal of the Challenger Units.

In the event that a Unitholder does not choose to claim CGT roll-over relief in relation to the disposal of their Challenger Units, the Unitholder will be required to determine the CGT implications of the disposal. The calculation of any capital gain or loss will depend upon the date on which the Unitholder acquired the Challenger Units, the length of time the Challenger Units were held and the taxpayer profile of the Unitholder (i.e. if the Unitholder is an individual, superannuation fund or company).

ELERNST&YOUNG

Where CGT roll-over relief is not claimed in relation to the disposal of Challenger Units, the Unitholder will be taken to have acquired the Challenger Shares at the time that they were issued. The Unitholder will originally have a cost base in the Challenger Shares equal to the consideration given to acquire those Shares, namely, the market value of the Challenger Units at the time of redemption.

No indexation will be available in relation to the cost base of the Challenger Shares that are acquired. The 12 month holding period with respect to the availability of discount capital gains (where applicable) will be reset upon the acquisition of the Challenger Shares. This means that in order to utilise the discount capital gains provisions, the Challenger Shares must be held for a minimum of 12 months following their issue to former Challenger Unitholders.

2.2 Implications for Unitholders who hold their Units as trading stock or otherwise on revenue Account

Unitholders who hold their Units as trading stock or otherwise on revenue account will be required to include in the determination of their taxable income any net gain or loss arising from the Corporatisation having regard to the market value of the Challenger Shares received as a result of the Corporatisation and the tax cost they held in the Units immediately before their redemption.

3 Implications of holding Challenger Shares rather than Challenger Units

The ongoing taxation implications for members will be materially the same for holding Challenger Shares as they were for holding Challenger Units, regardless as to whether the Proposed Tax Law Amendments are enacted.

3.1 Taxation of dividends from Challenger

As detailed in section 6.5 of this Disclosure Document, it is proposed that Challenger will not pay dividends in the near to medium term. Generally, dividends paid by Challenger should be included in the assessable income of Australian resident shareholders. Where the dividend is franked, the franking credit associated with the dividend should generally also be included in the shareholder's assessable income. This amount is generally then available as a credit against any income tax assessed to the shareholder for the year of income. In some instances, certain shareholders (e.g. individuals) may be entitled to a refund of the excess of the franking credit over tax assessed for the year of income.

Unfranked dividends paid to non-residents are prima facie subject to Australian dividend withholding tax ("DWT") at 30%, which may be reduced pursuant to a Double Tax Treaty concluded by Australia with the country in which the shareholder is resident. The existing DWT for NZ resident shareholders who qualify for relief under the tax treaty between Australia and New Zealand is, for example, 15%.

3.2 Taxation on subsequent disposal of Challenger Shares

The taxation implications for Australian residents of a subsequent disposal of Challenger Shares will depend on the manner in which each Shareholder holds their interests in Challenger.

3.2.1 Shareholders in Challenger that hold their Shares on capital account.

Resident Shareholders who hold Challenger Shares otherwise than as trading stock or as a revenue asset will generally hold the shares subject to the capital gains provisions. Under these provisions, any capital gain made when the Shares are sold should be included in assessable income. Capital gains (and losses) are generally determined as the excess (or deficit) of the sale price over the acquisition cost of the Shares, reduced by non-deductible transaction

EII FRNST & YOUNG

In certain circumstances, individuals who are shareholders that hold their Challenger Shares in excess of 12 months from their acquisition date (or deemed acquisition date) need only include 50% of the capital gain in their assessable income. Please refer to the discussion in sections 1 and 2 above for applicable deemed acquisition dates where CGT roll-over choices have been made in the context of an exchange of shares in Challenger International Limited for Challenger Units, and/or of an exchange of Challenger Units for Challenger Shares.

Non-resident Shareholders will generally only be subject to the capital gains provisions where they hold an associate-inclusive interest in Challenger of 10% or more of its issued capital, or where they hold the Shares at or through a permanent establishment in Australia.

As the application of the capital gains provisions is complex and dependent upon the shareholder's specific circumstances, we recommend shareholders seek appropriate independent professional advice on the taxation implications of selling their Challenger Shares.

3.2.2 Implications for Australian resident Shareholders who hold their shares as trading stock

Where Challenger Shares are held as trading stock, any capital gain or loss is disregarded for the purposes of the capital gains provisions. Generally, however, any profit or loss arising on the disposal of Challenger Shares will be taxed as ordinary income.

Those Shareholders that hold their Challenger Shares as trading stock will be required to include in their assessable income the disposal proceeds of the Shares at the time that they are disposed. They should however, be entitled to a deduction equal to the tax cost of the Shares when they are sold. The tax cost of the Challenger Shares when they are sold will generally be the cost of the Shares when they were acquired in the income year they are sold, or alternatively, the tax closing value of the Shares in the immediately preceding income year.

As detailed above, if CGT roll-over is available under Subdivision 124-G in respect of the Corporatisation, the cost that is held by the Shareholder in the Challenger Shares should be equal to the closing tax cost to them of the Challenger Units they previously held.

Due to the complexity of the provisions with regard to Shareholders who hold their Challenger Shares as trading stock, we recommend these Shareholders seek appropriate independent professional advice that considers the taxation implications in respect of their specific circumstances.

3.2.3 Implications for Australian resident Shareholders who hold their Shares on revenue account otherwise than as trading Stock.

Any profit or loss arising on the disposal of Challenger Shares held on revenue account otherwise than as trading stock will be taxed as ordinary income. Whilst the capital gains provisions will also apply in respect of the disposal, any capital gain (or loss) should be reduced to the extent the disposal produces assessable income (or allowable deductions).

As detailed above, if CGT roll-over is available under Subdivision 124-G in respect of the Corporatisation, the cost that is held by the Shareholder in the Challenger Shares will be equal to the cost to them of the Challenger Units they previously held.

Due to the complexity of the provisions with regard to Shareholders who hold their Challenger Shares on revenue account otherwise than as trading stock, we recommend these Shareholders seek appropriate independent professional advice that considers the taxation implications in respect of their specific circumstances.

El ERNST & YOUNG

Part B - Australian income tax Implications for non-resident Challenger Unitholders of the Corporatisation

The Australian income tax implications for non-resident Unitholders, detailed below, are the same regardless of whether the Proposed Tax Law Amendments are enacted.

For a Unitholder in Challenger Group who is not a resident of Australia for Australian tax purposes and who holds the Challenger Units on capital account, the disposal of the Challenger Units pursuant to the Corporatisation proposal will only result in Australian CGT implications if that Unitholder (together with any associates) owned 10% or more of the issued Challenger Units at any time during the period five years before the Record Date or, alternatively, had a permanent establishment in Australia and their Unitholding was used at any time in carrying on a business through that permanent establishment.

Any non-resident Unitholder that is not an Ineligible Overseas Holder (such as New Zealand resident Unitholders) that meet the ownership requirements above should be able to choose for CGT roll-over to apply in respect of the Corporatisation.

If any non-resident Unitholder meets the ownership requirements above, or holds their Challenger Units as trading stock or otherwise on revenue account, we strongly advise that such Unitholders seek appropriate independent professional advice that considers the taxation implications in respect of their own specific circumstances.

Yours faithfully

Ernst & Young

~ Young

Section 9. Long term
incentive plan

9.1 Background to LTIP

Resolutions 7 and 8 (the LTIP Resolutions) seek Unitholder approval for the implementation and administration of a long term equity based executive incentive plan, referred to as the LTIP, in Challenger Group. Further information concerning Resolutions 7 and 8 are included in section 4.4.

If the Restructure is approved and Resolution 7 is passed, then the LTIP will be implemented by Challenger, not by Challenger Group. In anticipation of the Restructure, and Resolution 7 being approved, the existing Challenger shareholder will pass the resolutions which are described in section 9.7.

Challenger's total reward strategy

At the time of the Merger, CPH Management stated its intention to consider establishing a long term incentive scheme for executives linking a portion of their remuneration to the performance of the Challenger Group Unit price.

After the Merger, CPH Management approved the recommendations of the Remuneration Committee for a reward strategy that has the objective of "attracting and retaining high calibre employees to facilitate the sustained profitable growth of Challenger Group". To this end, the Board adopted a strategy designed to achieve the following:

• · alignment of business and individual performance;
• · market competitive outcomes;
• · internal consistency in application;
• recognition of role type, labour markets and skills scarcity:
• · differentiation between employees to achieve positive individual contribution; and
• transparency.

The CPH Management Board has identified the link between reward and business performance as being particularly critical.

The Challenger Group reward strategy for all permanent employees has the following elements:

Salary package

• the objective being a market-competitive salary package based on individual competency with superannuation inclusive;

Short Term Incentive Plan

the objective being a market competitive payment for individual contribution aligned to divisional and Challenger Group performance through structured performance measurement and management processes; and

Employee benefits

the objective being market competitive, low cost and simply administered benefits to support the development of organisational culture.

In addition to the three elements outlined above, the Board considered it necessary and appropriate to establish a long term incentive plan (LTIP) for senior Challenger Group executives "to retain key players and encourage behaviour in the long term best interests of Challenger Group". The Board considered that a reward strategy for senior executives with a heavy weighting on long term incentives was essential in aligning executive and Unitholders' interests, whereas the individual contributions of all other Challenger Group employees could appropriately be rewarded through the Short Term Incentive Plan. Additionally, the Board is giving consideration to the establishment of a tax efficient employee share scheme that will allow all employees to be issued with up to \$1,000 in value of Shares, although no final decision has been made in relation to such a plan.

Background to specific LTIP proposal

The Challenger Group currently has no LTIP in place, other than a limited cash-based "shadow equity" long term scheme which, to date, has been utilised to attract key executives who have joined Challenger Group this year.

Historically, the executives of CGHL, prior to the Merger being implemented, were granted options annually on a discretionary basis by the CGHL Board of Directors. Such options have now expired, except for the CGHL Options, which have an exercise price significantly above the current market price for Units.

In February 2003, the proposed Merger was announced together with Mr Cuffe's appointment as chief executive officer of the proposed merged entity. After his appointment, Mr Cuffe identified the need to quickly re-focus the operations of Challenger Group in order to allow it to better capitalise on business opportunities in the financial services sector, particularly given the enlarged capital base that would result from the Merger being implemented. To capitalise on these opportunities, it was necessary for a new group of senior executives to be attracted to become employees of Challenger Group. A number of senior executives were then recruited on the assumption that the Merger would be implemented. Subsequently, the employment contracts of these executives were assigned to Challenger Group after the Merger was implemented. Challenger Group has continued to recruit a number of other key executives.

Initial executive recruits to Challenger Group, totalling approximately 20 in number, were provided incentives to join Challenger Group, including participation in the cash-based "shadow equity" long term incentive scheme. Other executive recruits, and some existing executives, were promised to be considered for participation in the LTIP, subject to the approval of the LTIP by Unitholders and the participation being confirmed by the Board.

The Board now wishes to implement the LTIP which is outlined below in section 9.2. The LTIP design principles seek to satisfy the following requirements:

• to incentivise senior executives within Challenger Group and reward them in alignment with growing Unit value over the long term;
• to attract and retain an outstanding executive team with a proven track record in a scarce skills labour market;
• to aggressively drive the development of Challenger Group's business as a multi-faceted financial services company;
• to successfully transition executives from their existing cash-based long term incentive scheme;

• to meet commitments made to other Challenger Group executives that, subject to the LTIP being approved by Unitholders, they would be considered for participation in the LTIP;

• for Challenger Group to keep abreast of its competitors in providing suitable long term incentive arrangements for its senior executives; and

• to follow through on the intentions expressed at the time of the Merger.

It is the view of the Board that Challenger Group's senior executive team is among the most talented in the financial services sector. They consider that it is essential to confirm appropriate long term incentive arrangements for the senior executives to facilitate profitable growth and increase shareholder value.

Comparison of cash-based scheme and proposed LTIP

As mentioned earlier, Challenger Group currently has in place a cash-based "shadow equity" long term incentive scheme, which operates in respect of approximately 20 senior executives.

Both the cash-based "shadow equity" scheme and the proposed LTIP seek to reward growth in the market value of Units or Shares over a five year period, with phased vesting skewed towards the end of that period. Except as described below, performance hurdles have been set at a 15% per annum compound total shareholder return (based on unit or share price and distributions), which the Board considered to be aggressive in the current financial services environment. Senior executives currently participating in the cashbased scheme will be invited to transfer into the proposed LTIP, subject to its approval by Unitholders. However, if the 20 executives who are entitled to receive payments under the cash-based "shadow equity" scheme transfer into the LTIP, they will continue to have an entitlement to receive cash payments but these will be capped at a \$0.53 Unit price. For all such executives this will equate to a payment of \$10.27 million over a five year period, which will be payable only if the hurdles set in the cash-based scheme are satisfied. These hurdles mirror the LTIP hurdles. The cash payments totalling \$10.27 million are included in the amounts described in the table overleaf.

The proposed LTIP is superior to the existing cash-based plan in its allocation of capital given that it will substantially reduce the cash payments which Challenger Group may need to make over the next five year period, depending on performance against the hurdles.

The table below summarises the cash impact on Challenger Group in future years, assuming the current contractual commitments under the cash-based scheme were required to be made, on the basis that al performance targets are met but not exceeded. This assumes the cash-based scheme is not replaced by the LTIP.

Cash impact 1.5	4.4	6.7	141	77
(\$m) -	2005 2006 2007 2008 2009
Year ending 30 June

If performance targets are exceeded there will be greater cash impact on Challenger Group. If the LTIP is not approved, the cash based scheme will be required to be expanded.

9.2 Summary of proposed LTIP

A reference in this summary to:

(a) "Participating Shares'" is a reference to:

• (i) Challenger Shares which, assuming the LTIP is implemented in Challenger, are issued or transferred to Participants under the LTIP; or
• (ii) Units issued pursuant to the LTIP, if the LTIP is implemented in Challenger Group, which will only be the case if the Restructure is not approved but the LTIP Resolutions are approved; and
• (b) "Board" means where paragraph (a)(i) applies the Board of Challenger and where paragraph (a)(ii) applies the Board of CPH Management.

The material terms of the LTIP are:

Participants: Senior Executives as determined by the Board. Non executive Directors are ineligible to participate in the LTIP.

Limits on LTIP Issues: 10% of the Challenger Shares on issue at the time of the relevant LTIP issue, which includes the 40 million Challenger Shares proposed to be issued to Mr Cuffe.

Issue Price: The volume weighted average price of Challenger Shares as traded on ASX over the five trading days up to and including the date of issue.

Funding of Issue Price: The acquisition of Participating Shares will be funded by a non-recourse loan to be provided by Challenger (Loan) and secured solely against the Participating Shares. The Participating Shares will be held by a Custodian, appointed by Challenger, until those shares are disposed of. The material terms of the Loan are:

• interest on the Loan will be equal to the cash amount of dividends paid on the Participating Shares:
• capital distributions which are made on Participating Shares will, to the extent of the capital distribution, be applied to reduce any outstanding Loan amount on Participating Shares;
• subject to early repayment provisions discussed below, the Loan in respect of Participating Shares is repayable on the earlier of the sixth anniversary of the Reference Date for the Participating Shares and time the Participating Shares are sold. The "Reference Date" is the date of issue of the Participating Shares or, in respect of the Initial Participating Shares (see below), a date determined by the Board being not earlier than 10 April 2003;
• if the Participant defaults in repaying the Loan when due, the Participating Shares may be sold by the Custodian, bought back by Challenger or cancelled, subject to compliance with legal requirements. The net proceeds are to be applied to repay the Loan with any excess, in respect of vested Participating Shares, to be paid to the Participant;
• the Participant does not need to make up any shortfall if the proceeds of sale are insufficient to discharge the Loan amount. In other words the amount of the Loan is non recourse to the Participant but recourse to the Participating Shares;
• 50% of any non cash distributions (other than rights issues and bonus issues) on Participating Shares must be applied to reduce any outstanding Loan amount on the shares, with the balance being provided to the Participant. Bonus issues will become part of the Participating Shares; and

• if a Participant does not, at his or her own cost, fund any rights issue entitlements then, to the extent possible, the Custodian will sell a sufficient number of rights to fund both the exercise of the remaining rights and a payment to the Participant of 50% of the net proceeds of sale. Rights which are exercised will on this basis become part of the Participating Shares.

Restrictions on dealing with Participating Shares:

Participants will be restricted as follows from dealing (for example, transferring or granting encumbrances) in the Participating Shares until any Loan in respect of the shares is repaid and the relevant vesting conditions are met:

• . Participants will not be entitled to vote Participating Shares;
• Participants must facilitate the placing of a holding lock on Participating Shares until vesting conditions are met and any outstanding Loan is repaid;
• subject to performance hurdles being met, 20% of the Participating Shares issued to a Participant will be released on each of the second, third and fourth anniversaries of the date the shares are issued with the remaining 40% balance released on the fifth anniversary;
• the performance hurdle is 15% per annum compounded annually, based on total shareholder return (TSR). The TSR is determined by reference to the 20 day VWAP for Challenger Shares adjusted for capital restructures and Distributions (dividends, capital returns and other distributions excluding franking credits),
• if the TSR for a period equals or exceeds the performance hurdle for that period, the relevant proportion of Participating Shares will be immediately released. This may include Participating Shares that have not been released in an earlier period because the TSR for that earlier period was not achieved; and
• on the release of Participating Shares (because vesting and performance hurdles have been met) Participants may, but are not obliged, to sell the shares.

Initial Participating Shares and initial participants:

The Board has identified a number of Initial Participants for whom special conditions will apply, having regard to:

• the significant improvement in the Unit price since the relevant senior executives were recruited;
• the significant efforts made to date by the relevant senior executives in re-structuring the Challenger business to prepare for future growth; and
• the fact that Challenger will continue to be in a significant development phase for the next few years and the Board wishes to ensure that absolute performance hurdles do not drive short-term behaviour at the expense of long-term planning and decision-making.

The special conditions to apply to Initial Participants are as follows:

• the release dates of shares will be calculated from a Reference Date which is nominated by the Board (rather than the date of issue of shares), being no earlier than 10 April 2003;
• the Issue Price for the Initial Participating Shares to be allocated to the Initial Participants will be 53 cents (rather than the market price at the date of $(gq)$
• . no performance hurdle will be required to be met for the initial 20% of the Participating Shares to be released after two years from the Reference Date;
• a 15% per annum compound TSR performance hurdle will be required to be met for the release of shares after the third, fourth and fifth anniversaries from the Reference Date, with the starting price for that calculation being 53 cents and the starting date for that calculation being the second anniversary of the Reference Date.

Termination of employment and related issues:

In the event of resignation (at the end of the notice period), termination for gross misconduct or termination for poor performance, Participants will not be entitled to any Participating Shares that have not been released to them as at the date of termination. Furthermore, the Loan on any released shares must be repaid within seven trading days of such event otherwise the Custodian may sell the Participating Shares.

In the event of death, incapacity or total and permanent disablement, redundancy, expiry of a fixed term contract or any other termination by Challenger other than for gross misconduct or poor performance, the Participant may continue in the LTIP as though they were a continuing employee (providing certain employment related restraints are observed). In such case, the Loan in respect of such shares will be repayable within 30 days of the fifth anniversary of the Reference Date.

Change of control: All Participating Shares will be released to permit the shares to participate in a change of control event (for example, a takeover bid or scheme of arrangement).

Unreleased Participating Shares: Unreleased Participating Shares must be sold by the Custodian to reduce any outstanding Loan or bought back under the LTIP or cancelled by Challenger, subject to compliance with law.

Variation of LTIP: The Board may vary the terms of the LTIP for all or some Participants or future Participants provided that any such variation does not adversely affect (in a material way) existing issues of Participating Shares.

9.3 Allocation of proposed LTIP in the context of Challenger's total reward strategy

Senior executives of Challenger Group who participate in the existing cash-based plan or who have been made commitments under their Challenger Group employment contracts are expected to be offered participation in the LTIP, subject to the LTIP being approved.

Participation in the LTIP will also be offered to other key senior executives who are assessed by the Board as likely to have a significant impact on the Challenger Group's business performance.

Participation in the LTIP is expected to be offered to around 60 to 70 executives, heavily weighted to the most senior executives.

9.4 Recommendation of Directors

The CPH Management Board and the Challenger Board have both approved the remuneration strategy for Challenger Group, as outlined above, and also the LTIP. Directors have participated in that decision, which followed:

• (a) a long and rigorous evaluation and debate of the various options with respect to suitable long term incentive arrangements;
• (b) consideration of the advice of an external remuneration consultant, John V Egan Associates Pty Limited, who concluded that:
• the LTIP is reasonable having regard to Challenger Group's recruitment imperatives and its requirement to both motivate and retain top talent; and
• the performance and vesting hurdles and vesting conditions reflect the current environment and are clearly aligned to the Unitholders' interests; and
• (c) consideration of the various advantages and disadvantages of the LTIP, as identified below.

In particular, the Boards are satisfied that the adoption of the proposed LTIP is in the best interests of Unitholders and that its terms are reasonable having regard to the circumstances of Challenger Group. Accordingly, the Directors recommend that you vote in favour of the LTIP Resolutions.

9.5 Reasons why you should vote in favour of the proposed LTIP Resolutions

The Directors of CPH Management and Challenger believe that the main advantages of the LTIP are the following:

Alignment of the interests of participants and investors

Through their holdings under the LTIP, the remuneration of participants will be materially and directly linked to investor returns, both through security price appreciation and distributions, thus aligning participants' and securityholders' interests. Participants will also be restricted from selling securities granted under the LTIP over its five year duration with participating securities vesting in phases skewed towards the end of the five years. As a result, participants are incentivised to ensure that business decisions are being made in the best long term interests of the Challenger Group or Challenger.

Issue of securities is subject to performance hurdles

Without significant market price growth over the LTIP period, participants in the LTIP will be limited in deriving full value from allocations under the LTIP.

No immediate cash flow impact

The issue of securities under the LTIP will not require any immediate outflow of cash from Challenger Group or Challenger as it is funded through the creation of a receivable - being the non recourse loan to Participants. This allows significant incentives to be provided to the senior executive team, while not locking up cash.

Improved ability to attract and retain talented employees

The success of the Challenger Group is largely dependent on the performance of its employees, and in particular its senior executives. As a "people" business, it is the human capital of Challenger Group that drives performance. Implementation of the LTIP is an important tool in ensuring that Challenger Group is able to attract and retain top talent.

Outstanding contractual commitments

Outstanding cash-based commitments which are in place could be substantially converted to LTIP participation. If converted as expected this will result in significant cash-flow advantages for Challenger Group.

9.6 Reasons why you should vote against the LTIP proposal

The Directors believe that the main disadvantages of the LTIP are the following.

Share issue is dilutive to existing shareholders

The issue of Challenger Shares to participants under the LTIP will increase the capital base of Challenger, effectively reducing the percentage of Challenger that will be held by existing Unitholders.

If the maximum number of shares were to be issued under the LTIP, current Unitholders would be diluted by 10%. The proposed maximum LTIP issue is higher than average for employee share ownership plans adopted by many ASX listed entities.

Allocation under the LTIP is heavily concentrated

A substantial portion of securities to be issued under the LTIP is expected to be heavily weighted to the most senior executives. While the Directors believe that executives who are offered participation in the LTIP will be the key contributors to the long term success of Challenger, the attraction and retention of all other employees will, in large part, be dependent upon the effectiveness of the other elements of the Challenger total reward strategy.

Share acquisition funded by the company

As the loans to purchase shares will be made on a nonrecourse basis, if the value of the Challenger Shares (or Challenger Group Units, as the case may be) fall below the loan amount outstanding, then Challenger (or Challenger Group, as appropriate) will be exposed to the shortfall.

9.7 Challenger Resolutions

If the Restructure Resolutions and Resolution 7 in the Notice of Meeting are approved then the LTIP will be implemented in Challenger. In this event, but prior to Challenger being listed on ASX, the current Challenger Group Unitholders will pass shareholder resolutions which:

• (a) approve the LTIP as an employee share buy-back scheme, thus allowing Challenger to buy-back LTIP shares which have not vested in participants subject to compliance with the Corporations Act; and
• (b) approve the LTIP for the purposes of section 260A of the Corporations Act which will have the consequence that any financial assistance which is given by Challenger in connection with the implementation of the LTIP, including the provision of the non-recourse loan, is exempted from the financial assistance prohibition in section 260A of the Corporations Act.

Section 10. Independent Expert Report

CPH Management Limited as responsible entity for

Challenger Financial Services Group

Independent Expert's Report in relation to the corporatisation of

Challenger Financial Services Group

Grant Samuel & Associates Pty Limited

(ACN 050 036 372)

10 November 2003

$\blacksquare$ $\blacksquare$ $\blacksquare$

Table Of Contents

1		Details of the Proposal
		Scope of the Report
$\mathbf{2}$		Purpose of the Report
	2.1	Basis of Evaluation
	2.2	Sources of Information
	2.3	Limitations and Reliance on Information
	2.4
		Profile of Challenger Group
$\overline{3}$	3.1	Background
	3.2	Overview of Businesses
	3.3	Financial Performance and Position
	3.4	Capital Structure and Ownership
	3.5	Unit Price History
	3.6	Management Fees
		Profile of Jurlique
$\overline{\mathbf{4}}$		Background
	4.1	Industry Overview
	4.2
	4.3	Profile of Operations Operating Performance and Outlook
	4.4	Financial Position
	4.5	Capital Structure and Ownership
	4.6
		Evaluation of the Restructure
$\mathbf{5}$		Summary
	5.1	Approach
	5.2	Financial Analysis
	5.3	Other Potential Advantages
	5.4	Disadvantages and Risks
	5.5	Taxation
	5.6 5.7	Control Premium
		Qualifications, Declarations and Consents
6		Qualifications
	6.1	Disclaimers
	6.2	Independence
	6.3	Declarations
	6.4	Consents
	6.5	Other
	6.6

• Appendices
  1. Sharemarket Ratings of Selected Comparable Companies
  2. Recent Transaction Evidence

$\mathbf{1}$ Details of the Proposal

On 10 November 2003, the directors of CPH Management Limited ("CPH Management"), the responsible entity for Challenger Financial Services Group ("Challenger Group"), announced the details of a proposal to restructure the Challenger Group (the "Restructure"). If approved, the Restructure will

• the internalisation of the management agreement for Challenger Group. CPH Management will retire and be replaced as responsible entity by a wholly owned subsidiary of Challenger Group; and
• the corporatisation of Challenger with unitholders exchanging their units in Challenger Group (technically a unit trust) for shares in a new holding company, Challenger Financial Services Group Limited ("Challenger"), on a one-for-one basis.

The internalisation of management involves the following steps:

• CPH Management will retire as responsible entity of Challenger Group and be replaced by Challenger Managed Investments Limited, a wholly owned subsidiary of Challenger Group. CPH Management will cease to be entitled to management and performance fees;
• the investment management agreement between CPH Management and CPH Investments Pty Limited, a wholly owned subsidiary of Consolidated Press Holdings Limited ("CPH"), pursuant to which CPH is required to make available certain investment opportunities to CPH Management for Challenger Group to consider as investments for Challenger Group will be terminated;
• in consideration for CPH Management forgoing its management rights as responsible entity for Challenger Group, CPH will receive \$96 million. However, an entity in the CPH Group will acquire (for a total consideration of \$96 million):
• Challenger Group's interest in Jurlique International Pty Limited ("Jurlique"), a South Australian based manufacturer and distributor of natural skin, hair and body products, for \$36 million. Challenger Group holds a 25% interest in Jurlique together with the associated call options and rights under the Jurlique shareholders agreement (the "Jurlique Interest"); and
• 300 million options over Challenger shares ("Options") for \$60 million. The options, which represent approximately 11% of the fully diluted capital, will have an exercise price of 65 cents and be exerciseable at any time up until the 10th anniversary of their issue date (which will be the effective date under the Restructure). The Options will not be listed securities and will not
• Mr Chris Cuffe will cease to be employed by CPH Management and will become the Chief Executive Officer ("CEO") of Challenger. Mr Cuffe will enter into a five year service agreement with Challenger under which he will receive an initial annual base salary (inclusive of superannuation) of \$675,000 (to be reviewed annually) and a performance bonus of up to 150% of base salary dependent upon achieving targets set by the Challenger board. He will also be issued 40 million Challenger shares under a long term incentive plan ("LTIP"). The key terms of the LTIP as they apply to Mr Cuffe's shares are:
• the Challenger shares will be issued at 53 cents and will be funded by a non recourse interest free loan from Challenger to Mr Cuffe. Dividends will be applied as interest payments on the
• 20% of the Challenger shares will vest on 9 April 2005 and not be subject to the performance hurdle (recognising that Challenger Group is in a development stage); and
• 20% of the Challenger shares will vest on each of 9 April 2006 and 9 April 2007 and the balance (40%) on $\overline{9}$ April 2008. Shares will vest subject to achievement of an annual performance hurdle. The performance hurdle will be met where the total return to unitholders (share price increase plus dividends) exceeds 15% per annum. The starting price of shares for

Challenge 96

the purposes of calculating the performance hurdle will be 53 cents with the hurdle calculated from 10 April 2005.

The corporatisation of Challenger Group involves the following steps:

• unitholders will exchange their units in Challenger Group for an equal number of new shares in Challenger through the redemption of their units and the issue of new shares in Challenger. $\blacksquare$ Challenger will be issued five units in Challenger Group immediately prior to the redemption of units. Following the redemption of all other units, Challenger will subscribe for additional units in Challenger Group equal to the number redeemed for nominal consideration. Accordingly, following the redemption, Challenger will own 100% of the units in Challenger Group; and
• units held by ineligible overseas unitholders (being those whose registered address is outside Australia and New Zealand) will be acquired by one of two subsidiaries of investment bank UBS (or an equivalent party if a final agreement with one of these parties cannot be reached) at a price equal to the average of the daily volume weighted average price over the first ten days trading of Challenger shares on the ASX following listing. Unitholders, other than ineligible overseas unitholders, will hold precisely the same number of shares in Challenger as they held units in Challenger Group immediately prior to the Restructure. However, the issue of shares to the CEO pursuant to the LTIP will reduce their percentage interest in Challenger.

The implementation of the Each of the elements comprising the Restructure is interdependent. Restructure will be implemented via a series of interdependent resolutions to be voted on by unitholders in general meeting. In particular, the redemption and exchange of units and shares will be effected by amendment of the Trust's constitution. Unitholders will be provided with documentation which will constitute a notice of meeting, explanatory memorandum and a disclosure document (prepared pursuant to Chapter 6D of the Corporations Act) in relation to the Restructure (the "Disclosure Document").

All of the directors of CPH Management (five independent directors, two nominees of CPH and the CEO) will become directors of Challenger upon listing. Following the Restructure, the board of Challenger intends to invite Graham Cubbin to become a director. Graham Cubbin is the Finance Director of CPH.

The impact of the Restructure is depicted in the following diagrams:

Note: $\bar{1}$ Before dilutionary impact of Options.

The Restructure is subject to a number of conditions including:

• approval of unitholders in general meeting of each of the interdependent steps involved in the Restructure (which will be approved by ordinary resolution in the case of each resolution other than in respect of the amendment to Challenger Group's constitution which requires a special resolution);
• approval of the Federal Treasurer;
• admission for quotation of Challenger shares on the Australian Stock Exchange ("ASX");
• approval from the holders of options in Challenger Group Holdings Limited, previously known as Challenger International Limited ("Challenger International"), of a scheme of arrangement pursuant to which optionholders will vary the terms of their options so that upon exercise, optionholders receive shares in Challenger rather than units in Challenger Group;
• termination of the investment management agreement and other related agreements between CPH

Challenger Group also proposes to seek approval for the implementation of an LTIP for the senior management team following the Restructure. The LTIP is designed to replace an existing "shadow" equity scheme established following the merger of Challenger Group (then CPH Investment Corp ("CPHIC")) and Challenger International. Other than in respect of the Challenger shares to be issued to the CEO under the LTIP, approval of the LTIP is not interdependent on the Restructure.

п

Scope of the Report $\overline{2}$

Purpose of the Report $2.1$

The Restructure is subject to the approval of Challenger Group unitholders not associated with CPH Management in accordance with:

• Listing Rule 10.1 of the ASX Listing Rules ("Listing Rule 10.1");
• Section 208(2) of the Corporations Act ("Section 208(2)"); and
• Item 7 of Section 611 of the Corporations Act. ă.

Listing Rule 10.1 prohibits a responsible entity from disposing of trust property worth more than 5% of the trust's net assets to a related party without the approval of non associated unitholders. Under the Restructure Proposal, the sale of the Jurlique Interest to CPH and the issue of Options amount to a disposal of greater than 5% of Challenger Group's net assets and therefore approval of unitholders not associated with CPH (the "non associated unitholders") is required. Listing Rule 10.10 requires the notice of meeting at which such approval is sought to include an independent expert's report on whether the transaction is fair and reasonable to non associated unitholders.

Section 208 of the Corporations Act prohibits a public trust giving a financial benefit to a related party unless the giving of the benefit is approved by unitholders or it falls within specified exceptions. The sale of the Jurlique Interest to CPH and the issue of the Options involves the provision of financial benefits to CPH, a related party of Challenger Group by virtue of its ownership of CPH Management and its 25% interest in Challenger Group. Therefore, Challenger Group is seeking approval of non associated shareholders under Section 208(2) for the giving of those financial benefits. An independent expert's report is not required for the purpose of Section $208(2)$ .

Section 606 of the Corporations Act effectively prohibits a person from acquiring a relevant interest in units in a company, where that person or another person already has voting power in excess of 20% and that acquisition would further increase that person's voting power, except in certain limited circumstances. CPH already has a relevant interest in 25% of the units in Challenger Group and will hold the same number of the shares in Challenger (although this will represent a slightly smaller proportion after the issue of shares to the CEO pursuant to the LTIP). The issue of Options to CPH does not, of itself, breach Section 606. However, the ultimate issue of shares upon exercise of the Options could increase CPH's voting power in Challenger in breach of Section 606, if the shares issued in any six month period represent more than 3% of Challenger's issued capital.

Item 7 of Section 611 allows non associated shareholders to waive the Section 606 prohibition by passing a resolution in a general meeting. Accordingly, advance approval is being sought for the issue of shares to CPH Investments Management Pty Limited ("CPH Investments"), a wholly owned subsidiary of CPH, if and when CPH Investments exercises any of its Options.

Policy Statement 74 issued by the Australian Securities Commission, the predecessor to the Australian Securities & Investments Commission ("ASIC"), requires that shareholders voting on a resolution pursuant to Section 623 of the Corporations Law (the predecessor to Item 7 of Section 611) be provided with a comprehensive analysis of the proposed transaction including whether the proposed transaction is fair and reasonable. The directors of the company may satisfy their obligations to provide such an analysis by commissioning an independent expert's report.

The directors of CPH Management who are not associated with CPH ("the independent directors") have engaged Grant Samuel & Associates Pty Limited ("Grant Samuel") to prepare an independent expert's report for the purposes of Listing Rule 10.1, Section 208 and Section 611 stating whether, in Grant Samuel's opinion, the Restructure is fair and reasonable to the non associated unitholders. The independent directors have also requested Grant Samuel to state

г

whether in its opinion, the Restructure is in the best interests of unitholders (in their capacity as

Grant Samuel's report has been prepared for the benefit of non associated unitholders (and no other party) to assist them in considering the resolutions concerning the Restructure. The report is to be sent to unitholders of Challenger Group together with the Disclosure Document (incorporating the Notice of Meeting for the unitholder meeting at which the resolution dealing with the Restructure will be considered).

The report does not address, and Grant Samuel offers no opinion in relation to, the reasonableness or otherwise of Mr Cuffe's remuneration package or the LTIP for senior management.

$2.2$ Basis of Evaluation

The term "fair and reasonable" has no legal definition although over time a commonly accepted interpretation has evolved. However, fair and reasonable has different meanings for different regulatory purposes.

ASIC Policy Statement 74 provides that the assessment of whether a Section 623 (the predecessor to Item 7 of Section 611) proposal is fair and reasonable should involve a comparison of the likely advantages and disadvantages for non associated shareholders if the proposed transaction is implemented with the advantages and disadvantages to those shareholders if it is not. ASIC Policy Statement 74 implies that fair and reasonable is a single concept to be judged in all the circumstances of the transaction. In essence, the proposal will be "fair and reasonable" if the non associated shareholders are better off if the proposal is implemented. They will be better off if the expected benefits to the non associated shareholders outweigh the disadvantages that might result. This treatment is in contrast to ASIC Policy Statement 75 relating to the assessment of takeover offers where ASIC draws a distinction between the terms "fair" and "reasonable" rather than treating "fair and reasonable" as a single concept.

Similarly, there is no legal definition of the term "in the best interests". ASIC Policy Statement 75 which is primarily directed towards reports prepared for the purpose of what is now Section 640 of the Corporations Act comments on the meaning of "fair and reasonable" in the context of a takeover offer. The statement gives limited guidance as to the regulatory interpretation or meaning of "in the best interests" other than to imply that it is similar to "fair and reasonable".

The term "in the best interests" must be capable of a broad interpretation to meet the particular circumstances of each transaction. This involves a judgement on the part of the expert as to the overall commercial effect of the transaction, the circumstances that have led to the proposal and the alternatives available. Similar to the meaning of "fair and reasonable" implied by Policy Statement 74, the expert must weigh up the advantages and disadvantages of the proposal and form an overall view as to whether the non associated unitholders are likely to be better off if the proposal is implemented than if it is not.

In Grant Samuel's opinion, the most appropriate basis on which to evaluate the Restructure is to assess its overall impact on the non associated unitholders of Challenger Group and to form a judgement as to whether the expected benefits to them outweigh any disadvantages that might result. In this context, the Restructure will be in the best interests of non associated unitholders if it is fair and reasonable.

The following factors, inter alia, have been considered in determining whether the Restructure is fair and reasonable, having regard to the interests of the non associated unitholders:

• the estimated value or cash flow impact of internalising the management agreement compared to the estimated value of the consideration given to CPH;
• the likely impact of the increase in CPH's relevant interest on control of Challenger Group;
• the likely impact on the market for Challenger Group securities; and

any other benefits or disadvantages of the Restructure.

Sources of Information $2.3$

The following information was utilised and relied upon, without independent verification, in preparing this report:

Publicly Available Information

• the Disclosure Document in relation the Restructure issued by Challenger Group;
• annual reports of Challenger Group (and its antecedents) for the three years ended 30 June 2003;
• press releases, public announcements, media and analyst presentation material and other public filings for Challenger Group and its predecessors;
• corporate brochures, product material and other publicly available information on the business operations of Jurlique including information available on Jurlique's website;
• industry data and reports for the cosmetics industry;
• recent press articles on Jurlique;
• recent brokers reports on Challenger Group and comparable publicly listed companies from a variety of stockbroking firms and investment banks; and
• other information on the cosmetics industries and publicly listed companies with operations broadly comparable to Jurlique including annual reports, interim financial results, websites, broker analyst reports, press reports, industry studies and information regarding the prospective financial performance of companies in Australia and overseas.

Non Public Information

• financial accounts, management accounts, budgets and other financial information and the shareholders' agreement in relation to Jurlique; and
• briefing papers prepared by financial advisers to Challenger Group.

Grant Samuel has also held discussions with, and obtained information from, directors and senior management of CPH Management, Jurlique and Challenger Group's financial and legal advisers.

Limitations and Reliance on Information $2.4$

Grant Samuel believes that its opinion must be considered as a whole and that selecting portions of the analysis or factors considered by it, without considering all factors and analyses together, could create a misleading view of the process underlying the opinion. The preparation of an opinion is a complex process and is not necessarily susceptible to partial analysis or summary.

Grant Samuel's opinion is based on economic, sharemarket, business trading, financial and other conditions and expectations prevailing at the date of this report. These conditions can change significantly over relatively short periods of time. If they did change materially, subsequent to the date of this report, the opinion could be different in these changed circumstances. However, Grant Samuel has no obligation or undertaking to advise any person of any change in circumstances which has come to its attention after the date of this report or to review, revise or update its report or opinion.

This report is also based upon financial and other information provided by Challenger Group and its advisers. Grant Samuel has considered and relied upon this information. Challenger Group has

represented in writing to Grant Samuel that to its knowledge the information provided by it was complete and not incorrect or misleading in any material aspect. Grant Samuel has no reason to believe that any material facts have been withheld.

The information provided to Grant Samuel has been evaluated through analysis, inquiry and review for the purposes of forming an opinion as to whether the Restructure is fair and reasonable, having regard to the interest of the non-associated unitholders and whether it is in their best interests. However, Grant Samuel does not warrant that its inquiries have identified or verified all of the matters that an audit, extensive examination or "due diligence" investigation might disclose. "Due diligence" is the responsibility of CPH Management as responsible entity of Challenger Group and its management and is beyond the scope of an independent expert. In any event, an opinion of the kind expressed in this report is more in the nature of an overall review rather than a detailed audit or investigation.

An important part of the information used in forming an opinion of the kind expressed in this report is comprised of the opinions and judgement of management. This type of information was also evaluated through analysis, inquiry and review to the extent practical. However, such information is often not capable of external verification or validation.

Preparation of this report does not imply that Grant Samuel has audited in any way the management accounts or other records of Challenger Group. It is understood that the accounting information that was provided was prepared in accordance with generally accepted accounting principles and in a manner consistent with the method of accounting in previous years (except

The information provided to Grant Samuel included the budget for Jurlique for the year ending 30 June 2004 prepared by management of Jurlique who are responsible for the budget. Grant Samuel has had regard to the budget for the purposes of its analysis but has not relied on it.

In forming its opinion, Grant Samuel has also assumed that:

• matters such as title, compliance with laws and regulations and contracts in place are in good standing and will remain so and that there are no material legal proceedings, other than as publicly disclosed;
• the information set out in the Disclosure Document sent by CPH Management as responsible entity of Challenger Group to unitholders is complete, accurate and fairly presented in all material respects;
• the publicly available information relied on by Grant Samuel in its analysis was accurate and not misleading;
• the Restructure will be implemented in accordance with its terms; and
• the legal mechanisms to implement the Restructure are correct and will be effective.

To the extent that there are legal issues relating to assets, properties, or business interests or issues relating to compliance with applicable laws, regulations, and policies, Grant Samuel assumes no responsibility and offers no legal opinion or interpretation on any issue.

Profile of Challenger Group $\overline{\mathbf{3}}$

Background $3.1$

Challenger Group is an Australian based financial services organisation listed on the ASX which was formed following the merger of Challenger International and CPHIC in July 2003 (the "Merger").

The businesses inherited from Challenger International today form the core operating businesses of Challenger Group. The Challenger businesses grew rapidly in the late 1990s. This growth, particularly in the annuities business, required a significant amount of capital. The Merger with CPHIC, which had as its principal asset more than \$400 million in cash and liquid assets, provided the combined entity with the resources to continue to grow and develop the Challenger businesses.

As part of the Merger, CPH Management took control of the management of the combined business. CPH Management appointed Mr Chris Cuffe as its CEO with a view to him having management control of Challenger Group after the Merger. Mr Cuffe also employed a number of new senior executives to manage the business and run key business units. The new management team is focussed on developing the Challenger Group into a multi-faceted financial services group.

In pursuit of this objective, a number of initiatives have been, or are in the process of being implemented, including:

• divestiture and/or closure of a number of non-core businesses including Howard Finance, the endowment warrants business and the corporate finance business; $\blacksquare$
• acquisition of the assets of Zurich Capital Markets Limited ("ZCM") for \$188 million (part These assets include Interstar Securities Limited $\blacksquare$ on a deferred payment basis). ("Interstar"), one of Australia's largest independent wholesale mortgage financiers, a highyield fixed interest and loan portfolio and certain forestry assets; and
• introduction of a range of new funds management products.

Challenger Group's operations now comprise five major operating divisions as well as its various private equity investments which were inherited from CPHIC:

$3.2$ Overview of Businesses

Annuities

Annuities are a "single premium" business where an investor makes an upfront capital payment in return for a series of guaranteed fixed payments (which include both a capital return and an investment return) over a number of years. Short term annuities generally involve payments over periods of up to five years while long term annuities generally involve periods of five to twenty

Challenger Group invests annuity premiums in growth assets and borrows against these assets on a limited recourse basis. To date, the growth assets have typically been commercial and government properties with long term leases. Challenger Group's business model is unique. Challenger Group borrows against these assets on a limited recourse basis, using income earned from these investments to service the debt and pay down its annuity obligations. Once the annuity is extinguished, Challenger Group will own the properties less any external debt. The property portfolio that underpins the annuities business comprised 52 properties with a value of \$2.6 billion at 30 June 2003. The portfolio is characterised by high occupancy, long term tenancies and strong yields. This model has been the foundation of the annuities business' success as the higher yields on property enables annuities to be offered on more attractive terms than competing products (which are primarily backed by fixed income securities).

The annuity business has grown rapidly over the past four years with total annual annuity sales growing from less than \$100 million in 1998/99 to over \$700 million in 2002/03. Future demand is expected to continue to grow strongly in view of Australia's ageing population and the resultant surge in the number of retirees, combined with the overall growth in superannuation savings anticipated over the next decade.

$\blacksquare$

Funds Management and Administration

Challenger Group operates in all parts of the funds management chain - as an asset manager, product manufacturer and distributor and platform provider. It offers a range of investment products and services to both retail and institutional markets including:

• various Australian share funds;
• fixed cash and fixed interest funds including high yield funds;
• property securities funds and the successful mortgage fund, Howard Mortgage Trust;
• administration and wrap investment products such as the Synergy Master Trust and Galaxy Investment Wrap; and
• a range of investment products over alternative assets classes.

At 30 June 2003, Challenger had \$9.8 billion funds under advice and management (including direct property). The Funds Management business has grown strongly in recent years primarily as a consequence of the performance of the Howard Mortgage Trust and the Synergy Master Trust / Galaxy Investment Wrap but also through acquisition.

Mortgage Financing

Interstar was established in 1992 and is one of Australia's largest independent wholesale mortgage financiers sourcing mortgages from a nationwide distribution network of over 450 retail mortgage originators. After packaging the loans, Interstar sells mortgage backed securities into the US, Australian and European markets to fund its portfolio and earns a net interest margin after trustee servicing and financing costs.

Interstar has experienced strong growth over the last four years with its portfolio growing from under \$2 billion in 2000 to approximately \$11 billion in 2003. This growth has been driven by increasing house lending and rapid growth in mortgage securitisation. In the year ended 30 June 2003, Interstar generated a profit before tax of \$20 million.

Financial Planning

Challenger Group owns Garrisons Financial Planning, a licensed financial planning network with more than 90 offices and 160 financial planners around Australia. Garrisons Financial Planning provides a source of distribution for various Challenger Group products (as well as other financial products).

Margin Lending

Challenger Group offers margin lending products as part of its strategy to provide a comprehensive range of financial services. At 30 June 2003, Challenger Group had share backed margin loans of \$163 million. Although a relatively small operation, Challenger Group expects margin lending to be one of its key businesses moving forward.

Other Investments

Challenger Group has a range of other investments, most of which were contributed to the merged entity by CPHIC. These investments include a portfolio of listed securities and a number of unlisted investments including:

the Jurlique Interest;

• a \$9 million investment in notes, convertible into up to 16.4% of the equity in Australian Fast Foods Pty Limited, owner of the Red Rooster fast food chain;
• a 43% interest in AVC Holdings Pty Limited, a Victorian based producer of vinyl resin and specialty products; and
• a 25% interest in Endeavour Healthcare Limited, a medical centre operator based in Western Australia.

$3.3$ Financial Performance and Position

Financial Performance

The financial performance of Challenger Group is largely determined by the performance of the Challenger International businesses. Since the Merger, Challenger Group has revised its accounting policies for the Challenger business such that an historical profit and loss accounts on a consistent basis are not available and pro forma accounts would be of limited meaning. No forecasts have been prepared by Challenger Group for inclusion in the Disclosure Document.

Financial Position

The actual and proforma consolidated financial position of Challenger Group at 30 June 2003 is summarised below:

Challenger Group - Consolidated Financial Position at 30 June 2003 (\$ millions)
An Angele 2010, 42, 2010, 42, 2010, 42, 42, 42, 42, 42, 42, 42, 42, 42, 42	Actual	Proforma
Receivables	243.6	393.2
Trade creditors and provisions	(257.2)	(309.1)
the College was had the property Net working capital	(13.6)	84.1
Investment properties	2.613.8	2,613.8
Debt Securities	846.2	892.5
Equity Securities	229.5	229.5
Policy liabilities	(1,806.1)	(1,806.1)
Plant and equipment (net)	10.8	12.4
Investments in associates	47.4	19.3
Intangibles	278.5	554.4
Deferred tax assets/liabilities (net)	(45.2)	(40.7)
Excess value in Challenger Life over net assets	375.4	375.4
Other (net)	30.9	173.9
Total funds employed 눈이 유효하림은 좀. Tack Confidence	2,567.6	3,108.5
Cash	660.4	525.6
Borrowings	(2.023.4)	(2,181.9)
Net borrowings	(1,363.0)	(1,656.3)
Unitholders' funds	1,204.6	1.452.2

Source: Challenger Group

The proforma consolidated balance sheet has been prepared based on the audited balance sheet as at 30 June 2003. Proforma adjustments have been made for:

• the acquisition of the assets of ZCM; and
• the effect of the Restructure.

In analysing the proforma consolidated position of Challenger Group, the following should be noted:

the Restructure will increase the net assets of Challenger Group by around \$122 million. This largely relates to the difference between the price at which shares are issued (in exchange for units) and the net asset backing of those units and the value attributed to the

Options to be issued to CPH. The balance of the increase in the net assets relates to the value of the shares to be issued under the LTIP; and

the acquisition of the assets of ZCM was funded by cash (\$123.2 million) and vendor finance (\$65 million).

Capital Structure and Ownership $3,4$

As at 31 October 2003, Challenger Group had 2,439,035,734 ordinary units on issue. In addition Challenger International had 4,832,041 options over unissued shares outstanding (equivalent to options over 21.7 million units in Challenger Group under the option scheme implemented in connection with the Merger).

The top ten unitholders accounted for 48.3% of the ordinary units on issue:

Challenger Group - Major Unitholders at 31 October 2003
	Number of Units	Percentage
Shareholder	324,242,691	13.3%
Cavalane Holdings Pty Limited	271,701,967	11.1%
Conspress Holdings Pty Limited	143,423,395	5.9%
Westpac Custodian Nominees Pty Ltd	100,082,245	4.1%
ANZ Nominees Limited	84,223,206	3.5%
National Nominees Limited	81,392,831	3.3%
Universal Equity Pty Ltd	75,351,279	3.1%
Invia Custodian Pty Ltd	46, 351, 278	1.9%
JP Morgan Nominees Australia Limited	26,719,461	1.1%
Audant Investments Pty Ltd	24,796,674	1.0%
RBC Global Services Australia Nominees Pty Limited	1,178,285,027	48.3%
Subtotal - Top 10 shareholders and the Subtotal - Top 10 shareholders	1,260,750,707	51.7%
Other unitholders (43,280 unitholders) 그 동네는 사용을 받는 것이	2,439,035,734	100.0%

Source: Challenger Group

Challenger Group has received substantial unitholder notices only from CPH. CPH has a relevant interest in $609,941,381$ units equivalent to $25.0\%$ of the total issued units (on an undiluted basis).

All the issued options are out of the money. The options have exercise prices (per Challenger Group unit) of 63.8-94.6 cents per unit with a volume weighted average exercise price of 78.5 cents per unit. The options all have expiry dates between 31 June 2004 and 31 January 2005.

$3.5$ Unit Price History

A summary of the price history of Challenger Group units since 2001 is set out below:

		Challenger Group - Unit Price History
		Unit price (\$)		Average Weekly
	Hich	Low	Close	Volume (000's)	Average Weekly Transactions
Year ended 31 December
2001 2002 Month ended	0.60 0.45	0.34 0.33	0.40 0.38	3,868 3,621	316 417
January 2003 February 2003 March 2003 April 2003 May 2003 June 2003 July 2003 August 2003 September 2003 October 2003	0.50 0.57 0.55 0.55 0.58 0.56 0.57 0.56 0.60 0.53	0.38 0.48 0.45 0.47 0.50 0.50 0.50 0.48 0.50 0.51	0.50 0.54 0.47 0.53 0.50 0.54 0.53 0.53 0.52	30,539 13,812 8.147 8,636 8,922 10,086 24.373 55,545 93,194	773 543 330 333 382 363 578 1,018 1.929
Source: IRESS			0.52	28,100	622

From early 2001 to early 2003, Challenger Group units consistently traded at around 35-40 cents, despite Challenger Group having net asset backing in excess of 50 cents with a cash asset backing (since June 2001) of around 40 cents per share. Following the announcement of the Merger on $20$ January 2003, the Challenger Group unit price rose to just over 50 cents. Since completion of the Merger, units have generally traded in the range 50 to 58 cents. Trading volumes have increased significantly following the Merger reflecting the large increase in the number of units on issue as well as the inclusion of Challenger Group in the ASX/S&P 100 on 26 August 2003.

3.6 Management Fees

Under Challenger Group's constitution, CPH Management as responsible entity is entitled to both a base management fee and performance fees.

Base Management Fees

CPH Management is entitled to an annual base management fee of 1.5% of Challenger Group's gross asset value. In determining Challenger Group's "gross asset value" for the purposes of the base management fee:

• any listed securities must be adjusted to reflect their market value;
• any unlisted securities must be adjusted to reflect their most recent valuation, being either historical cost or the gross asset value of Challenger Group as assessed by a valuer (which is to be undertaken every five years). The first "five year" assessment for unlisted assets will occur on 30 June 2005; and
• the equity value of the investment in Challenger International rather than the gross assets of Challenger International must be used. For the period to 30 June 2005, the equity value will be based on the acquisition cost of the investment calculated by reference to the value of the units issued at the time of announcement of the Merger using a unit price of $40.5$ cents (\$616 million in aggregate). From 30 June 2005, the equity value will be adjusted to reflect the most recent valuation (on the same basis as other unlisted securities).

No base management fee will be payable in respect of the investment in Challenger International until the volume weighted average price of Challenger Group units on the ASX over a 10 day period exceeds 60 cents. To date, this threshold has not been met.

The base management fee is payable to CPH Management half-yearly in arrears. $CPH$ Management pays a number of expenses out of this management fee including costs associated with the CEO, directors fees, company secretarial costs and related administration costs.

Performance Fees

CPH Management is entitled to performance fees which have two components:

Realisation performance fees

CPH Management is entitled to realisation performance fees equal to 20% of any returns on Challenger Group's gross asset value (as adjusted) over a hurdle rate of return of 10% compounded per annum (pre-tax) on an investment-by-investment basis. This fee is payable once investments are realised subject to:

• the making up of any shortfall on returns from previously realised investments or unrealised investment valuations; and
• a rebate of any five year performance fees already paid in relation to the investment; and
• Five year performance fees $\blacksquare$

Five year performance fees allow CPH Management to be rewarded for successful unrealised investments based on returns on gross asset value (as adjusted) achieved over the hurdle rate across the entire portfolio once every five years. This five year performance fee is to be based on an independent valuation of the portfolio by an internationally recognised investment bank.

As the five year performance fees relate to unrealised gains, only 70% of the normal performance fee will be payable, with payment of the balance of 30% being dependent on the ultimate realised value. The first assessment of these fees will occur on 30 June 2005 and will be assessed every five years thereafter.

There is no clawback on the performance fees paid to CPH Management except in the event of the termination of the trust structure of Challenger Group. However, if an investment is realised which does not achieve the hurdle rate of return or the entire portfolio of Challenger Group has not achieved the hurdle rate of return when valued every five years, no further performance fees will be payable until the shortfall is made up. A shortfall (in terms of aggregate value not fees) of approximately \$138 million existed at 30 June 2003.

$\overline{\mathbf{4}}$ Profile of Jurlique

$4.1$ Background

Jurlique manufactures, distributes and retails a range of natural skin, hair and body care products, as well as aromatherapy essential oils, herbal medicines and colour cosmetics. The company also operates a number of Jurlique Wellness day spas.

Founded in 1985 by Dr Jurgen Klein and Ulrike Klein, the business has grown on the back of rapidly increasing demand for natural beauty therapies. Jurlique products are sold in more than 20

On 23 September 2002, Challenger Group (then CPHIC), acquired a 25% interest in Jurlique together with two options, each to acquire an additional $25%$ equity interest in Jurlique, for \$25

$4.2$ Industry Overview

Jurlique operates within the personal care products sector with a particular focus on the skin care segment. The table below summarises the global personal care market and forecast growth rates:

	World Personal Care Market Size and Forecast Growth
Segment	Global Market Size (2002)		Compound Annual
	USS billions	% of total	Growth Rate
Haircare	37.2	18.8%	2003-2006 (%)
Skincare			4.0%
- Cosmeceuticals	33.6	17.0%	4.0%
- Suncare	12.0	6.1%	15.0%
- Depilatories	3.5	1.8%	6.0%
Colour cosmetics	2.4	1.2%	$10.0\%$
Oral Care	25.2	12.8%	5.0%
	19.0	9.6%
Men's grooming	15.6		$5.0\%$
Natural personal care		7.9%	5.0%
- Aromatherapy	10.2	5.2%	$8.0\%$
Antiperspirants/deodorants	2.0	$1.0\%$	$10.0\%$
Spa/salons	9.3	4.7%	$6.0\%$
	5.0	2.5%
Beauty food supplements	0.3		7.0%
Total personal care		0.2%	20.0%
Source: Citigroup Smith Barney	197.4	100.0%	4.7%

Ţ

Within the personal care sector, Jurlique's products are focused on the niche but fast growing natural personal care segment. Natural products represent one of the fastest growing product segments with a projected annual growth rate of 8% per annum. By 2006, the global market value of this segment is expected to be worth almost US\$14 billion, approximately 6% of the overall personal care market. There are a number of factors driving this growth:

• increased social importance of physical appearance and body image awareness;
• increased consumerism driving a shift in product demand from "mass market" to mass prestige and boutique products;
• increased awareness and demand for organic and hypo-allergenic products; and
• an ageing population contributing to demand for cosmetic and "anti-ageing" products.

The personal care industry is highly competitive and has historically been dominated by the larger global cosmetics and consumer products companies. These companies benefit from substantial economies of scale, established brand names, financial resources to strongly promote new

Ē $\blacksquare$ п

products and strong influence on retail distribution channels. The natural personal care products segment, however, is still relatively underdeveloped and fragmented with a large number of smaller producers and private label products. While the large multinational cosmetic companies have only a relatively small presence in the segment, the strong growth anticipated is expected to draw them further into the market. Increasing participation from the multinational cosmetic companies is likely to not only drive growth in the segment, but may also fuel increased levels of competitive behaviour.

Profile of Operations 4.3

4.3.1 Products

Jurlique produces more than 250 different personal care products. The products are produced from natural, plant-based ingredients that are grown organically without the use of pesticide or herbicides, providing a major point of differentiation for Jurlique's products. Jurlique's products, which have all been developed in-house, are highly regarded for their quality and purity. Main product lines include:

	Jurlique Product Range
Product Segment	Key Products
Skin care	cleansers, toners/hydrators, moisturisers, night treatments, sun care
Body care	exfoliants, body gels, hand & body lotions, hand creams, massage & body oils
Personal care	bath & shower products, hair & scalp care, men's care, natural fragrances, deodorants
Cosmetics	foundations & lipsticks
Aromatherapy	essential oils, starter kits, blended essential oils, carrier oils
Baby care	cleansing products, moisturisers & skin protectors, massage oils, bath products

As an adjunct to product sales, Jurlique also provides beauty and natural therapy treatment through its Jurlique Wellness Spas (attached to selected Jurlique operated retail outlets). Using Jurlique products, these treatments include facials, massages, hand and foot therapy, body treatments and spa packages.

4.3.2 Distribution

Jurlique's products are sold in Australia and in more than 20 countries around the world. Its products are distributed through more than 30 of its own or franchised stores and through a variety of other retail outlets including department stores, pharmacies and health food stores. The products are also used in a number of day and resort spas around the world.

Sales in Australia accounted for more than 50% of Jurlique's revenue in the year ended 30 June 2003, with US sales of increasing importance:

In Australia, Jurlique operates 12 branded concept stores and has 11 franchised stores. These stores accounted for approximately 50% of Australian revenue in the year ended 30 June 2003. The balance of revenue is derived largely from sales to major department stores, David Jones and Myers/Grace Brothers, and from wholesale sales to pharmacies, health stores and duty free outlets. Jurlique's products have developed a strong presence in the Australian market. This has been achieved largely through word of mouth, with very limited spend on marketing although the company is presently looking to increase the resources devoted to marketing.

Jurlique commenced distributing its products to Canada and the US in 1985, opening its first US retail store in 1995. The US represents its primary international market. Its network of concept stores has grown significantly with the opening of 13 stores in 2002 and 2003 and now comprises 15 outlets concentrated on the core east and west coast markets. Sales through these retail outlets accounted for more than 35% of Jurlique's US sales in the year ended 30 June 2003 although this is expected to increase significantly as the stores become more established. The balance of sales in the US are made to the day and resort spa market. In a similar manner to Australia, the philosophy in the US has been to minimise marketing expenditure and rely on alternative approaches to building product awareness.

Exports to other markets are predominantly through local distributors.

4.3.3 Operations

Jurlique's products are manufactured and packaged at its facility in the Adelaide Hills region, South Australia. The manufacturing plant is relatively modern having been constructed in 1991. The plant has some surplus capacity but can be readily scaled up although there is a lead time in creating capacity to manage substantial increases in demand.

Over 90% of plants and herbs used in Jurlique's products are grown organically and biodynamically on Jurlique's 30 acre farm, close to the manufacturing operation. The farm is leased from Dr Klein under a 25 year lease. Each year, Jurlique produces sufficient herbs and plants to maintain inventories of dried stock sufficient for approximately two years of production (at current sales levels). By carrying this level of inventory, agricultural risk is minimised.

Operating Performance and Outlook $4.4$

Set out below are Jurlique's proforma earnings for the year ended 30 June 2002 and actual (but unaudited) earnings for the year ended 30 June 2003:

Jurlique – Earnings Performance (\$ 000s)	Year ended 30 June
	2002 proforma	2003 actual
	15,797	16,485
EBITDA 1	(838)	(931)
Depreciation and amortisation	14,959	15,554
EBITA 2	0	(125)
Amortisation of goodwill	129	226
Net interest income/(expense)	0	(133)
Loss on disposal of non-current assets	15,088	15,522
Operating profit before tax		(5,198)
Income tax expense		10,324
Operating profit after tax
Significant items (net of tax)		(281)
Outside equity interests		10,043
Profit after tax attributable to Jurlique shareholders

Source: Jurlique Management Accounts, 2003 unaudited statutory accounts

In analysing the financial performance of Jurlique, the following should be noted:

• as part of CPHIC's initial investment in Jurlique, Jurlique's corporate structure was reorganised to bring Jurlique's United States operations, which were owned by Dr Klein in a separate vehicle, into the Jurlique group of companies. The proforma earnings for 2002 have been prepared on the basis that this restructure had taken place as at 1 July 2002;
• the unaudited accounts for the year ended 30 June 2003 include nine months performance of Jurlique's United States operations. The impact of inclusion of the additional three months performance of the United States operations would be to reduce EBITA and EBITDA by \$0.4 million principally reflecting the fact that the US operations were loss making;
• sales growth. Including the first three months sales from Jurlique's United States operations, Jurlique's revenue in the year ended 2003 would have shown growth of 11%. Sales in the United States increased significantly following the opening of 13 additional stores, while domestic and export sales were adversely affected by the SARS epidemic and the war in Iraq;
• EBITA in 2003 was essentially flat (after allowing for the inclusion of the three months performance of the United States operation). Earnings from the Australian operation improved. However there was a significant increase in the losses incurred in the United States as the company established an expanded retail presence during the year; and
• EBITA in 2003 includes a net foreign exchange loss of \$1.3 million relating predominantly to the depreciation of the value of the funding provided to expand Jurlique's presence in the United States.

EBITDA is earnings before net interest expense, tax, depreciation and amortisation.

EBITA is earnings before net interest expense, tax and amortisation of goodwill.

$\overline{a}$

Forecasts of Jurlique's financial performance are not available. Budgets prepared in May 2003 are based on assumptions that are no longer valid (eg, for exchange rates). Management however, anticipate growth in earnings for the year ending 30 June 2004. This growth is expected to be

• while the United States operation is currently losing money, its performance is expected to turn around as the new stores become more established; and
• continued organic growth in Australian sales together with the opening of a number of new outlets at key department store locations.

$4,5$ Financial Position

Jurlique's financial position as at 30 June 2003 is summarised below:

Jurlique - Financial Position (\$ 000s)
	As at 30 June 2003
Net working capital Property, plant and equipment (net)	unaudited 4,252
Intangibles	10,501
Other	75,173
Total funds employed contract that the contract of the contract of the contract of the contract of the contract of the contract of the contract of the contract of the contract of the contract of the contract of the contra	(3, 473)
	86,453
Net assets $\frac{1}{2}$ . The contract of the contract of the contract of the contract of the contract of the contract of the contract of the contract of the contract of the contract of the contract of the contract of the co Outside equity interests
Shareholders' funds attributable to members of Jurlique Group	(266)
$Source: 2003$ upoudited $-1$	95,852

rce: 2003 unaudited statutory accounts

• In analysing Jurlique's balance sheet, the following should be noted:
• intellectual property, trademarks and other intangibles form the vast majority of Jurlique's net assets. Jurlique's net tangible assets at 30 June 2003 were \$20.9 million;
• Jurlique owns very little property, leasing 30 acres of land for its herb farms; and
• outside equity interests relate to a 15% interest in Jurlique's US wholesale and distribution company. As at the date of this report, Jurlique was in the process of finalising the acquisition of this interest (for an immaterial sum).

Capital Structure and Ownership 4.6

Challenger Group has a 25% interest in Jurlique. Dr Klein and his wife hold the balance through a number of entitles. Challenger Group also has two options over Dr Klein's shares. Each option allows Challenger Group to acquire an additional $25\%$ of equity from the Kleins on the following

• First Tranche Option: exercisable by giving notice to the Kleins during the period from 23 September 2003 and expiring on 23 March 2004. The purchase consideration is equal to 25% of Jurlique's equity value calculated by multiplying the EBITA for the year ended 30 June 2003 by the "Relevant Multiple" and deducting borrowings. The Relevant Multiple is dependent on total EBITA and ranges from $5.0$ to $9.5$ ; and
• Second Tranche Option: exercisable by giving notice to the Kleins during the period from 23 September 2004 and expiring on 23 March 2005. The purchase consideration is equal to 25% of Jurlique's equity value calculated by multiplying the EBITA for the year ended 30 June 2004 by the "Relevant Multiple" and deducting borrowings. The relevant multiple is dependent on total EBITA but ranges from 5.0 to 11.0.

Challenger Group has not yet decided whether or not to exercise its First Tranche Option.

Evaluation of the Restructure 5

$5.1$ Summary

In Grant Samuel's opinion, the Restructure is fair and reasonable to the non associated unitholders and is also in the best interests of unitholders.

The removal of the obligation to pay management fees to CPH Management will generate significant savings for unitholders. While some additional costs will be incurred, including those associated with operating a board and employing a CEO (which are currently borne by CPH Management), the net savings to unitholders are expected to be substantial.

The key financial question for non associated unitholders is whether the value of the savings associated with the internalisation of management more than offsets the value of the Jurlique Interest transferred to CPH and the Options which will be granted to CPH.

Grant Samuel has undertaken this analysis using two approaches. The first approach calculates the estimated net present value ("NPV") of management fees saved (less the employment and other costs absorbed) for a variety of different scenarios for Challenger Group. These NPVs are then compared to the value of the Jurlique Interest plus the value that would be ultimately realised from the Options when exercised (discounted back to determine an estimated NPV) under the same scenarios. This calculation assesses the options on a "look back" basis to determine, with the benefit of hindsight, the eventual cost to unitholders of issuing the Options.

This approach reflects the fact that the value of the management fee saving and the ultimate value of the Options are heavily dependent on the total return on investment achieved by Challenger Group over the period and whether that return is retained or distributed (which drives growth in gross asset value). Moreover, the NPV is very sensitive to the net capital growth rate. Grant Samuel does not believe it is possible to estimate that growth rate with sufficient precision to determine a reliable point estimate, or even a usefully narrow range, of value. Rather, it believes it is more meaningful and helpful to unitholders to undertake the analysis across a spectrum of potential scenarios and to consider in what circumstances unitholders may be better or worse off.

At the same time, this analysis has limitations. For example, even if Challenger Group produced zero capital growth over the next 10 years and the Options ultimately proved to have no value, the Options clearly have a significant value today based on current market values and present expectations as to future performance.

Accordingly, Grant Samuel has also undertaken the analysis using a second approach of attributing a "current" value to the Options (rather than a "look back" value). This analysis is referred to in this report as the "forward looking" approach. This value was calculated using a modified Black and Scholes methodology (the most widely accepted option valuation methodology). However, it must be recognised that this methodology also has significant limitations. For example, the Options are not freely transferable, the impact of which is not reflected in the Black and Scholes methodology and it does not necessarily capture maybe what is ultimately the full cost to unitholders.

The analysis indicates that unitholders will be significantly better off after the Restructure where capital growth rates are high regardless of whether the Options are assessed using a "forward looking" approach or a "look back" approach. Only where capital growth rates are particularly low and stay low, is there a risk that unitholders might not be better off and only then by assessing the Options on a "forward looking" basis. Unitholders are still better off on a "look back" basis as the low capital growth impacts both the management fee saving and the ultimate gain on the Options. While the analysis is dependent on a number of assumptions that are open to debate, the analysis is not overly sensitive to changes in these assumptions.

There are a number of other benefits and advantages for Challenger Group unitholders from the Restructure:

• the Restructure should result in improved corporate governance arrangements. For instance, shareholders in Challenger will be able to directly elect directors, annual general meetings will be a statutory obligation, the potential for conflicts of interest between CPH, as owner of CPH Management and other unitholders will be reduced and CEO remuneration will be fully disclosed:
• the Restructure eliminates.
• incentives for CPH Management to pursue highly geared investments (as it currently receives fees on the gross asset value except in relation to Challenger International); and
• impediments to future mergers and acquisitions which exist because a portion of earnings from any new business or asset will be diverted to paying CPH Management's fee entitlement:
• Challenger may be more attractive to the investment community. Challenger Group's peers are structured as companies, making valuation benchmarking between Challenger Group and its peers more difficult under the existing structure. Moreover, Challenger Group's current corporate governance regime may act as a disincentive to some investors. For instance, the inability to elect directors may cause some reluctance on the part of investors to invest. The Restructure should remove these impediments to investment; and
• the regulatory regime applicable to Challenger as an ASX listed company may be more favourable than as a trust. In particular, the fundraising provisions applicable to companies will provide more flexibility.

There are also a number of disadvantages:

• as a result of the Restructure, CPH would have the potential (upon exercise of the Options) to increase its relevant interest in Challenger Group from 25% to up to 33% (depending on any share issues in the interim). Arguably, this increase gives CPH greater control over Challenger Group but it can also be argued that with the removal of CPH Management as responsible entity, CPH will have less control in relation to Challenger;
• loss of guaranteed access to investment opportunities that become available to CPH. However, given Challenger Group's focus on financial services operating businesses this is unlikely to have any material negative impact;
• exposure to unexpected changes in the cost of CEO and director remuneration; and
• one-off transaction costs of approximately \$5 million with be incurred if the Restructure is implemented.

Overall, Grant Samuel does not consider these advantages and disadvantages to be material compared with the financial consequences of the Restructure.

The Restructure is tax neutral in so far as unitholders are expected to receive "rollover relief" in relation to the exchange of units in Challenger Group for shares in Challenger.

In Grant Samuel's opinion, unitholders are likely to be better off if the Restructure is implemented than if it is not. The benefits, particularly the potential financial benefits, outweigh any disadvantages.

Approach $5.2$

The Restructure will be "fair and reasonable" to non associated unitholders if the expected benefits of the Restructure outweigh any disadvantages. In assessing whether unitholders are likely to be better off, Grant Samuel has examined the financial impact of the Restructure on unitholder interests together with any other potential benefits and disadvantages.

An assessment of the financial impact on unitholders involves a comparison of the value of potential savings from internalisation of management (for which CPH will receive compensation with a notional value of \$96 million in the Restructure) with the value of the assets to be acquired by CPH, being the Jurlique Interest and the Options (for which it will pay a total price of \$96 million). However, determining a precise value for each of the elements of the Restructure, and in particular the net savings attributable to internalisation of management and the Options, is difficult:

• the net present value of net savings attributable to the internalisation of management will in large part be dependent on the future growth in the underlying value of equity (ie. capital $\blacksquare$ growth) in Challenger International, which is the key driver of the "gross asset value" of the Challenger Group used to calculate the management fee. Many factors need to be considered in making such judgements. For instance, the growth in underlying value of the former Challenger International businesses will depend on the extent to which dividends are paid out of this corporate entity to Challenger Group and then distributed to unitholders, but the long term distribution policy is unknown. Moreover, the estimated net present value of the savings is highly sensitive to the total return on investment assumed, yet the rate of return capable of being generated by Challenger Group over the long term is difficult to predict with a high degree of certainty. Grant Samuel does not believe it is possible to estimate the capital growth with sufficient precision to determine a reliable point estimate of value for the savings or even a range that was narrow enough to be useful as a definitive measure of value;
• the long term sustainability of the current level of the base management fee (1.5% of gross assets) is subject to some doubt but how the fee may change and over what time frame is unknown (see Section 5.3.6);
• it is possible to assess the value of the Options by reference to a theoretical option pricing model. A range of models exist, the most recognised of which is the model developed by Black and Scholes. The basic version of this model is used to value European call options over non-dividend paying shares. However, such models suffer from a variety of limitations stemming from the simplifying assumptions that need to be adopted. In the current context, it should be noted that:
  • the Options are American options over what are likely eventually to be dividend paying shares (at least after, say, five years). Assumptions as to volatility and future dividends, particularly where Challenger Group has undergone a significant transformation, are highly judgemental; and
  • the Options are not freely transferable. The impact of this attribute of the Options on value as determined by an option pricing model cannot be determined with any reliability; and
  • the ultimate cost of the Options to unitholders could prove to be significantly greater than the value determined using an option pricing model which assesses only today's value. An alternative to the Black and Scholes option pricing model is to assess the NPV of the Options by determining what the ultimate cost of the Options was in hindsight. This "look back" approach may be more appropriate given the fact that the Options are not freely tradeable and therefore may be of limited value today. This value will, in turn, be heavily dependent on the growth rate achieved over the term of the option. Equally, this "look back" approach has limitations as it recognises only the ultimate cost. For example, if the capital growth rate was zero, the Options would ultimately have no value under this approach. This fails to recognise that the Options clearly do have a value today based on current market prices and present expectations about future performance of the business.

Given the uncertainty relating to the value of the individual elements, in Grant Samuel's view it would be more meaningful and helpful to unitholders to assess the financial impacts across a wide range of plausible scenarios (and other assumptions) to provide an overview of the circumstances in which unitholders might be better off or worse off. The need for this approach is reinforced by

• capital growth assumptions impact on both the NPV of the internalisation savings and the "look back" NPV of the Options (ie. they have the same key value driver); and
• dividend assumptions impact on the internalisation savings (in relation to base management

In undertaking this analysis, Grant Samuel has adopted two approaches for each scenario:

• a comparison of the estimated NPV of the internalisation savings (management fees less the employment costs of the CEO and certain other costs) with the aggregate of:
• the value ascribed to the Jurlique Interest; plus
• the estimated NPV of the value realised from the Options on a "look back" basis; and
• a comparison of the estimated NPV of the internalisation savings with the aggregate of:
• the value ascribed to the Jurlique Interest; plus
• the estimated current value of the Options on a "forward looking" basis using a modified version of the Black and Scholes model.

Both approaches have limitations but also provide some insights. Grant Samuel has then considered the circumstances where unitholders are worse off or better off.

The key assumptions adopted in assessing the net benefit of the Restructure to non associated unitholders on these bases are set out in Sections 5.3.1 to 5.3.4. Where possible, Grant Samuel has adopted a conservative approach (at least from the perspective of non associated unitholders) in selecting its base assumptions for the analysis. The outcomes are summarised in Section 5.3.5.

The discussion of the non financial factors (advantages and disadvantages) is set out in

5.3 Financial Analysis

5.3.1 Savings from Internalisation of Management

The potential savings attributable to the internalisation of management consist of several components. Under the Restructure, Challenger Group will no longer be required to pay management or performance fees to CPH Management. However, Challenger Group will incur additional costs. These additional costs relate primarily to the appointment of a board of directors for Challenger and the employment of a CEO, initially Mr Chris Cuffe. The net savings in the first year following the Restructure (excluding performance fees and costs associated with Mr Cufffe's options) are expected to be approximately \$14-

For the purposes of Grant Samuel's analysis, the value of the savings from internalisation of management under the various scenarios has been determined by discounting the expected cash flows over a 20 year period from 1 January 2004. The key assumptions

management fees are payable half yearly and calculated by reference to the gross asset value (as adjusted) of Challenger Group. Gross asset value for the purposes of

calculating the management fees is assumed to only include the equity value of the Challenger business, once the 60 cents threshold is met. The timing for the meeting of the threshold is dependent on the scenario adopted for gross asset values and assumes that the ratio of the share price to gross asset values remains constant at its current level of 1.05 times;

• five-year performance fees are payable, but only if the total return (as adjusted and after base management fees) of Challenger Group exceeds 10% per annum. The first date for calculating whether a five-year performance fee is payable is 30 June 2005;
• no Challenger Group assets are sold (reflecting the fact that CPH Management sees the Challenger International business, the largest part of the Challenger Group gross assets, as a core business) and accordingly:
• no realisation performance fees are payable; and
• only 70% of the five-year performance fee calculated to be payable is in fact paid;
• all Challenger Group assets earn the same rate of return. In effect, it is assumed all spare cash is invested in businesses (ie unlisted assets). For the purposes of calculating the management and performance fees in relation to Challenger International, the gross asset value is adjusted so that the first review in June 2005 reflects growth from a base figure higher than the \$616 million level that applies in the first two years;
• distributions are paid to unitholders from 2007 at a rate equal to 50% of the total $\blacksquare$ return generated in each year. The effect of this assumption is that the growth in the capital value of assets grows at half the rate of return;
• annual cash costs in the first year following the Restructure associated with the board of directors and the appointment of a CEO (initially Mr Chris Cuffe) are \$2.2 million. These costs are assumed to grow at 5.0% per annum and, for conservatism, include an amount equal to the full short term cash bonus potentially payable to Mr Chris Cuffe;
• the costs associated with the shares issued to Mr Cuffe under his long term incentive × plan are treated as an ongoing cost associated with the Restructure notwithstanding that there is only one issue of shares agreed at this stage. Subsequent CEOs are assumed to be issued with shares on a similar basis as Mr Cuffe (although no performance hurdles are assumed). The shares issued to Mr Cuffe are equivalent in substance to options. The cost of these shares has been assessed on a "look back" basis similar to that adopted in relation to the Options. Assumptions as to growth in share price are the same as for the Options (see Section 5.3.3). The interest free loans are assumed not to be paid off until the end of the loan term (April 2009 in the case of Chris Cuffe but five years from issue for subsequent issues to CEOs);
• the terminal growth rate for the cashflows varies with the rate of return assumed over $\blacksquare$ the explicit forecast period. No terminal value has been calculated in respect of the performance fees; and
• the corporate tax rate is 30%. No tax deduction is available in respect of the cost incurred through the shares issued to Mr Cuffe (or subsequent CEOs).

The cash flows are discounted at an after tax rate of 12% per annum. A lower discount rate could be used to reflect the fact that the cash flow stream (at least the base management fee component) is arguably lower risk than the overall income stream of Challenger Group. However, for the purposes of Grant Samuel's analysis, and in the interests of conservatism, the discount rate has not been adjusted.

5.3.2 Jurlique Interest

For the purposes of Grant Samuel's analysis of the Restructure, a value of \$50 million has been assumed for the Jurlique Interest. The value incorporates Challenger Group's 25% shareholding and the two call options each over 25% of Jurlique's equity (to allow Challenger Group to increase its shareholding to a maximum 75% interest). This value does not purport to represent the current "fair market value" of the Jurlique Interest. A realistic range of values for the Jurlique Interest is probably between \$32 million and \$41 million.

The starting point for considering the value of the Jurlique Interest is the value of the Jurlique business operations. Grant Samuel believes that a value of \$130-145 million would be reasonable. This range implies the following multiples:

Jurlique – Implied Valuation Multiples
postali ve na stanovni velikom provinci u vrijem	Multiple (times)
Multiple of EBITDA (year ended 30 June 2003)	8.1	9.0
Multiple of EBITA (year ended 30 June 2003)	8.6	9.6
Multiple of Ungeared NTA (at 30 June 2003)	11.5	12.9
Note: . Earnings are based on unaudited accounts and adjusted to include three months comings from the US

de three months earnings from the US operations.

The implied valuation parameters set out above have been compared with the multiples implied by the share prices of comparable listed companies and the prices at which transactions involving comparable companies have been completed. An analysis of these multiples is set out in Appendices 1 and 2 to this report.

In Grant Samuel's opinion, while the market evidence is supportive of reasonably high multiples for the sector, it does not suggest that these multiples are too low for Jurlique (and therefore understate the value of Jurlique) having regard to the following factors:

• CPH's initial investment in September 2002 reflected a historical EBITA multiple of approximately 6.5 times. The acquisition price (\$25 million) and the multiple were the result of arm's length negotiations. Moreover, the investment has been held for only 12 months. It would be imprudent to assume the value has leapt significantly in that period. Results for 2002/03 were not inconsistent with CPH Management's expectations at the time of making the investment (if not somewhat weaker). Equally, the multiple of 6.5 reflects the fact that CPH was acquiring only an initial 25% stake with no liquidity and limited exit options (rather than a 100% interest);
• Jurlique's business is significantly smaller than all of the comparable listed companies and most companies the subject of recent transactions. Empirical evidence suggests that larger companies tend to trade (and be sold in transactions) on higher multiples than smaller companies. Jurlique is significantly smaller than almost all of the comparable listed companies and companies the subject of recent transactions;
• the natural skin care market is a high growth segment of the industry but it is becoming increasingly competitive. Large multinational companies are moving into the market aggressively and while the market is growing strongly, competition is expected to be fierce;
• Jurlique generates significantly higher margins than many of the comparable companies. However, Jurlique has historically had a very low spend on advertising and marketing. To continue to be successful in the natural skin care market, Jurlique is likely to need to spend more on marketing which will adversely affect margins;

$\blacksquare$

• Jurlique expects strong growth from its US operations which were stepped up in 2002 and are currently operating at a loss. When these operations reach profitability there should be an uplift in Jurlique's earnings. At the same time, there is considerable risk that Jurlique's US expansion may not achieve the expected level of growth, may take longer to penetrate the market or may cost more to achieve a presence in that market. The US is a notoriously difficult market; and
• the implied valuation represents high multiples of ungeared NTA.

This value flows through to an implied value for the equity interest (including option value) of \$37.2-45.9 million:

Jurlique -- Valuation Summary
	Value (\$ millions)
	Low	High
	130.0	145.0
Enterprise value	9.7	9.7
Net cash at 30 June 2003	(0.1)	(0.1)
Other adjustments	139.6	154.6
Equity value (100%)	34.9	38.7
Implied Value of 25%	2.3	7.2
Implied Value of Options	37.2	45.9
Challenger Group's share of underlying value

The option values are simple "in the money" values, assuming the exercise price is based on the formulas set out in the agreement.

However, this value is based on Challenger Group's effective share of the underlying value. Challenger Group does not own 100% of Jurlique. It currently owns only a 25% minority interest although its position is different from that of a passive minority shareholder:

• Challenger Group has the right to increase its holding from 25% to 75% through the options that it holds. The first tranche of options, which would take Challenger Group's interest to 50%, are currently exercisable. The second tranche will be exercisable in September 2004. Challenger Group's call options are fully transferable; and
• the shareholders agreement contains provisions covering the arrangements for major business and ownership decisions, giving Challenger Group some protection as a minority holder.

In Grant Samuel's opinion some discount from underlying value is warranted to reflect the fact that Challenger Group does not have unfettered control of Jurlique coupled with factors such as:

• there is no planned realisation process set out in the shareholders agreement, and in any case, exit options at present are limited;
• obtaining a 50% shareholding or 75% control position will depend on exercise of the options. Unless they are exercised, Dr Klein controls the company; and
• any buyer would need to develop and maintain an effective working relationship with Dr Klein.

While the extent of any such discount is highly judgemental, a discount of 10-15% to the underlying value is not unreasonable (and would bring the effective multiples closer to the multiples at the time of investment by Challenger Group). On this basis, the Jurlique Interest has a value in the range \$32-41 million.

At the same time, it needs to be recognised that, the value of Jurlique is subject to a considerable degree of uncertainty. Perceptions of value could vary significantly and there may be parties prepared to pay substantial prices to acquire a business with Jurlique's quality reputation, market position and upside potential.

In addition, there is material value increment that could arise in relation to the second option depending on whether Jurlique's earnings for the year ending 30 June 2004 reach targeted levels (the earnings multiple setting the exercise price drops significantly if the target is not attained) although it is highly unlikely any buyer would attribute a significant value to this possibility today.

Finally, having regard to the position of unitholders as effective vendors of this interest Grant Samuel believes it is sensible to adopt a full, if not aggressive, value in testing whether the Restructure is fair and reasonable (ie. if its fair and reasonable on this basis, it will be even more so using a mid point or other value).

Accordingly, Grant Samuel has assumed a value of \$50 million for the purposes of its analysis of the Restructure which provides a significant margin over the top end of the value range. This should account for even the most optimistic outcomes if the Jurlique Interest was to be sold in the current market environment. Nevertheless, if the more aggressive end of management expectations are met, the value of the Jurlique Interest could be substantially higher than this level in one to two years' time. Challenger Group unitholders are forgoing this upside. However, the assessment of the Restructure can only be made on estimates of the value today.

5.3.3 Assessment of Options

Look Back Basis

For the purposes of Grant Samuel's analysis, the value of the Options on a "look back" basis has been determined by discounting the expected cash flows to CPH Management from the exercise of the Options at year 10. The model reflects the potential dilutionary cost of the Options to unitholders rather than the value of the Options to CPH Management. The key assumptions adopted are:

• the ratio of the share price of Challenger Group to the net asset value remains constant over time. This is assumed to be $1.05$ times net assets (being the volume weighted average unit price over the first week of November of 51 cents divided by the net asset value as at $30$ June 2003 of 49 cents per unit). The effect of this assumption is that the total return and capital growth assumptions are the same for both the underlying investments and the Challenger share price and, accordingly, the return/growth assumptions for the management fee and option NPV calculations are identical in each scenario; and
• no tax is applied to the cash flows. Challenger Group will not receive any tax benefit from the exercise of the Options.

Cash flows are discounted at an after tax rate of 12% per annum (ie. the same rate used to discount the internalisation savings). This discount rate, higher than a weighted average cost of capital, is appropriate as the Options are a pure equity risk (the cost of equity capital is higher than the weighted average cost of capital where a company has net debt). A rate of 12% is consistent with a beta factor of 1.0 under the Capital Asset Pricing Model.

Forward Looking Basis

Grant Samuel has adopted a modified Black and Scholes pricing model to provide an estimate of the current value of the Options. The model is modified to reflect the fact that the Options are American options on what is likely to be a dividend paying stock (although not immediately). It has also been modified to reflect the dilutionary impact of the large number of units over which the Options are to be issued. The model makes the following assumptions:

• volatility of 35%. It is difficult to determine a reliable volatility factor for Challenger Group in light of the significant changes that have taken place to the group over the past 12-18 months. The measured volatility of Challenger Group's share price since the Merger on an annualised basis is 29.4% and for Challenger International, the predecessor to Challenger Group, for the year preceding the Merger was 31.5%. In the absence of any more reliable estimates of future volatility, Grant Samuel has adopted a volatility factor of 35% as a conservative estimate;
• a dividend of three cents per share is paid annually starting from the beginning of year four. Challenger does not anticipate paying dividends in the short to medium term. While the dividend is relatively modest representing a yield of less than 6% on the current share price (and lower at the time of payment if total returns to shareholders are positive), it reflects the significant uncertainty associated with the future dividend policy of Challenger Group. A higher dividend assumption would decrease the value attributed to the Option,
• a continuously compounding risk free rate based on the 10 year treasury bond rate of 5.8% as at 7 November 2003; and
• no tax benefit can be claimed by Challenger Group in respect of the cost of the Options.

5.3.4 Scenarios

The Restructure has been analysed under a range of scenarios for the underlying gross asset value of Challenger Group. Grant Samuel has considered a set of base scenarios that assume a constant rate of return on investments over time as well as a set of alternative scenarios that vary that return over time. The constant rate of return scenarios are set out below:

	Challenger Group - Constant Return Scenarios
	After Tax Annual Rate of Return on Assets $\gamma$ (Years 1-20)	Terminal Growth Rate in Management Fee
	8%	%۱ 2%
Low Return Medium Return	12% 16%	3%
High Return

The alternative scenarios allow an assessment of the impact of changes in rate of return assumptions over time. These scenarios are described below:

	Challenger Group - Alternative Scenarios
			After Tax Annual Rate of Return on Assets
	Years 1-5	Years $6-10$	Years 11-15	Year 16-20 8%
Scenario 1	8%	12%	16% 12%	8%
Scenario 2	16% 12%	12% 16%	12%	8%
Scenario 3

Challenger 123

A number of simplifying assumptions have been made under both the constant rate of return scenarios and alternative scenarios:

• rates of return have been applied uniformly across all assets held by Challenger Group. This assumption reflects the fact that Challenger Group expects to continue to grow through the acquisition of businesses related to its core financial services activities and it is therefore reasonable to assume all cash will be invested. For example, since the Merger approximately \$320 million of ex CPHIC cash has been invested in the Challenger International business and in the acquisition of the ZCM assets (including Interstar). It also implies that any acquisitions will not of themselves increase gross asset values (eg through the application of leverage in the investment);
• the rates of return represent the total return on investment after payment of base management fees. To the extent a dividend/distribution is paid (from investments and out to Challenger Group unitholders), the gross asset value is reduced. In other words, capital growth equals total return less dividends. The dividend reduces the gross asset value upon which base management fees are paid and the ultimate share price at the time of exercise of the Options. Challenger is assumed to pay a dividend equal to 50% of the total return to unitholders from 2007. The effect of this assumption is that capital growth is half the total rate of return (from 2007);
• the value adopted for the Jurlique Interest for the purposes of this analysis does not vary with changes in return rates; and
• the volatility of the Challenger Group share/unit price is not affected by changes in

Neither the constant return scenarios nor the alternative scenarios are forecasts. They have been prepared only to illustrate the potential impact of different investment returns and capital growth rates on the position of unitholders if the Restructure is implemented.

5.3.5 Outcomes

The fundamental question for unitholders is whether the value of the net savings from the internalisation of management more than offsets the value of the Jurlique Interest together with the value of the Options.

Grant Samuel's analysis has been based on both a "forward looking" and "look back" basis. Arguably, the forward looking basis which incorporates the a value for the Options as determined by a modified Black and Scholes valuation model is a fairer basis of analysis. The "look back" basis is an ex post analysis based on hindsight. As such its use has some limitations. For instance, the analysis ascribes no value to the Options where there is no capital growth (eg. if dividends equals total return on investments). Clearly, the Options have value today. However, the "forward looking" approach also has shortcomings. There is considerable uncertainty in determining a precise value for the Options in light of the limitations of the option pricing models. The value of the Options is significantly influenced by the volatility and dividend yield assumptions. Accordingly, both approaches need to be considered in determining whether the financial impact of the Restructure is likely to be beneficial to unitholders.

An analysis of the Base Scenarios, indicates that unitholders would be better off under all scenarios:

			Net NPV
Internalisation	Jurlique Interest	Options	Benefit/Cost
136.6	50.0	55.1	31.5
136.6	50.0	29.4	57.2
230.0	50.0	55.1	124.9
230.0	50.0	57.5	122.6
372.9	50.0	55.1	267.8
372.9	50.0	93.0	230.0
	Savings from	Medium Return (12% total return, 6% capital growth)	Financial Impact on Unitholders - Constant Return Scenarios (S millions)
	Low Return (8% total return, 4% capital growth)	High Return (16% total return, 8% capital growth)	CPH Compensation

The analysis indicates that with increasing rates of return, the Restructure becomes increasingly more attractive to non associated unitholders. As the rate of return/capital growth rate increases, the cost to unitholders associated with the management fees (both base and performance) increases more rapidly than does the value of the Options.

Conversely the position of unitholders worsens with lower rates of return. Where there are zero returns on investments or no capital growth over the 20 year period of the model, unitholders would be worse off, whether the Restructure was assessed on a "forward looking" or a "look back" basis. The model can be used to determine a "break even" point. Based on the assumptions utilised above, unitholders would be worse off where average returns to unitholders are below 2.4% when assessed on a "look back" basis and below 5.4% when assessed on a "forward looking" basis. However, assuming total returns to unitholders as low as these is extremely pessimistic and implies that Challenger Group is unable to meet its cost of capital over the long term. Grant Samuel does not believe this to be commercially realistic.

The NPV of the savings appears high as a multiple of the initial annual savings. For example, in the Medium Return scenario the NPV of \$230 million represents a multiple of approximately 17 times the annual pre tax saving (excluding performance fees and cost of approximately 17 unles the dimension provide the contaming performance recognition of the CEO's LTIP), equivalent to a "PE" multiple of approximately 24 times. While this is high, the value reflects:

• the effect of the anticipated significant uplift in gross asset value on 30 June 2005 in relation to Challenger International (from an initial low value based on the unit price of 40.5 cents at the time the Merger was announced which applies until then);
• the inclusion of the value of performance fees in the NPV; and
• $\blacksquare$ the impact of compound growth of 6% per annum over 20 years.

The effective PE multiple based on proforma 2005 net savings (excluding performance

fees) is substantially lower (less than 15 times).

The analysis is not sensitive (on the downside) to alternative rate of return/capital growth scenarios. As illustrated below, under each of the alternative scenarios considered, unitholders would be materially better off regardless of the approach adopted to assess the Restructure:

Scenario	Financial Impact on Unitholders - Alternative Scenarios (\$ millions) Savings from		CPH Compensation
Scenario 1	Internalisation	Jurlique Interest	Options	Net NPV Benefit/Cost
Forward Looking Look Back Scenario 2	227.7 227.7	50.0 50.0	55.1 42.6	film for parts 92.5 105.1
Forward Looking Look Back Scenario 3	284.2 284.2	50.0 50.0	55.1 76.4	179.0 157.8
Forward Looking Look Back	260.1 260.1	50.0 50.0	55.1 69.5	154.9 140.6

However, the analysis is sensitive to a range of other assumptions including the volatility assumed in the modified Black and Scholes pricing model, the discount rate and the proportion of total returns paid out as distributions. The sensitivity of the analysis to these three key assumptions is illustrated below assuming a low return scenario and a "forward"

The sensitivity in relation to total return paid as distribution has not been applied to the Black and Scholes value of the Options. The value of the Options declines significantly (and hence the Integrative impact of this change on the value of the management fees) as the amount of dividends $(2)$

The sensitivity in relation to total returns paid as distributions varies the distribution paid to unitholders from 0% (the most favourable outcome) to 100% (the most unfavourable outcome).

The dividend payout ratio assumption is an important sensitivity as it determines the effective capital growth rate which drives both the internalisation savings and the "look back" value of the Options. If the dividend payout is less than 50%, the value of both elements is higher but the effect on the internalisation savings is greater than the effect on Options (ie. it increases the NPV benefit in this case).

There are also dividend issues with the "forward looking" analysis. The dividend assumption for the Black and Scholes calculation is considered modest. If it was zero, the effect would be to increase the value of the Options by approximately \$18.0 million, but the

5.3.6 Management Fee Level

The analysis assumes that the current base management fee of 1.5% per annum is maintained in perpetuity. Grant Samuel believes this to be an appropriate assumption. It is CPH Management's legal entitlement that it is giving up. There is no basis on which to form a view that some other rate will apply in the future.

However, it should be recognised that the fee is substantial and has a significant profit component for CPH Management. Management fees across the entire funds management industry are under constant downwards pressure and there have been several instances of managers (eg. listed property trust managers) voluntarily reducing their fees (property trust management fees are generally 0.5% or less).

Accordingly, it is quite conceivable that at some future time CPH Management may well reduce the base management fee as a matter of commercial reality. Pressure from unitholders is almost certain if Challenger Group continues to grow in size, particularly as CPH Management is contributing only the CEO rather than a whole management team (ie. it bears few, if any, extra costs as the business becomes larger and more complex).

The analysis below sets out the NPV benefits if the CPH Management base fee was to be reduced from 1.5% per annum to 0.75% per annum from 1 January 2004:

	Financial Impact on Unitholders – Lower Management Fees (\$ millions)
		CPH Consideration		Net NPV
Scenario ನಾ ಕೆಲ್ಲಿ ಮತ್ತು ರಾಜಕ	Savings from Internalisation ti ne ministrik Igilia za Ka	Jurlique Interest	Options والمتألفات المتواصلة فالمورض والمتألف	Benefit/Cost
Low Return Forward Looking Back Looking	54.7 54.7	50.0 50.0	55.1 29.4	(50.4) (24.7)
Medium Return Forward Looking Back Looking	137.7 137.7	50.0 50.0	55.1 57.5	32.5 30.1
High Return Forward Looking Back Looking	253.7 253.7	50.0 50.0	55.1 93.0	148.6 110.8

The analysis indicates that even where the base management fee is half its current level (ie. 0.75% per annum), the Restructure is still expected to be NPV positive for unitholders so long as rates of return over the long term remain at levels consistent with, or greater than, the Medium Return scenario. This scenario represents a return generally consistent with what might be expected to be a cost of equity for Challenger Group.

The analysis is purely hypothetical. There is no basis for making judgements as to any reduction in the future fees by CPH Management. The analysis is also, on one view, relatively extreme. It assumes that the management fee is reduced from 1 January 2004. More realistically, the management fees, if they were to be reduced voluntarily by CPH Management, would be reduced in a stepped fashion. To the extent that any fall is not immediate, the value of the internalisation savings will be greater.

Other Potential Advantages 5.4

5.4.1 Improved Corporate Governance

The Restructure should result in improved corporate governance arrangements. These potential improvements include:

unitholders will have the right to elect the board, which is responsible for managing Currently, unitholders only recourse if unhappy with the Challenger Group.

performance of Challenger Group is the removal of CPH Management as manager. Removing CPH Management in light of CPH's 25% interest in Challenger Group would be difficult. Following implementation of the Restructure, shareholders in Challenger will be able to directly elect the directors of the board at annual elections although voting out directors will face similar hurdles (ie CPH's shareholding). Nevertheless, the directors will be directly accountable to shareholders of Challenger. In summary, while CPH will continue to be able to significantly influence the selection of directors, shareholders position will arguably improve; and

• CPH Management, as responsible entity for Challenger Group, is not statutorily $\blacksquare$ required to hold an annual general meeting for the benefit of unitholders. While CPH Management has publicly committed to maintaining appropriate levels of disclosure, under the new corporate structure, Challenger will be statutorily required to hold Annual General Meetings; and
• disclosure of the terms of the CEO's remuneration (in particular incentive structures and hurdles) and other conditions of employment (eg. termination provisions). This will include the impact of any future changes to Corporations Act disclosure and other requirements (eg shareholder votes on remuneration).

5.4.2 Elimination of Management Fee Issues

The present management fee structure for Challenger Group gives rise to two significant issues:

• it provides an incentive for CPH management to pursue highly geared investments. For investments made outside the Challenger International entity (ie. where utilising ex CPHIC cash resources), CPH Management will be entitled to claim management fees on the gross assets of the investment rather than the equity invested. This issue arose in relation to Interstar and CPH Management has agreed to base its fee on the equity invested. However, this may not always be the case; and
• it creates an impediment to acquisitions. The management fee will effectively reduce the return from any investment brought in under the Challenger Group umbrella except where it replaces existing assets or is within Challenger International. This would include the assets of any potential merger partner (assuming Challenger Group remained the holding entity). This impost will make it harder to justify investments and/or dilute the return to unitholders.

The Restructure eliminates these problems.

5.4.3 Increased Investor Interest

The Restructure may increase the level of investor interest in Challenger Group:

• listed financial services providers, Challenger Group's peers, tend to operate under corporate structures. Challenger Group's existing corporate structure makes comparisons with its peers more difficult primarily because of the impact of the management fees. The Restructure will ensure that investors can make a more direct comparison of Challenger Group with its peer group;
• Challenger Group's unit trust structure and the associated corporate governance arrangements may deter some investors. A unit trust structure is more commonly used for entities which generate the bulk of their income from passive investments (eg shares or property). However, Challenger Group is an operating business. In this context, the inability to directly elect the board and the lack of some of the protective provisions as they are applied to shareholders in listed companies (eg in relation to notice requirements for members meetings, disclosure of CEO remuneration and the

requirement to hold an Annual General Meeting) may cause some reluctance among investors to invest in Challenger Group; and

the unit trust structure gives rise to various issues in relation to management fees (see 5.4.2 above). The fee arrangements were established in 2000 at the time CPHIC was restructured as an opportunistic investor that would seek a range of listed and unlisted investments which would be realised in due course. That type of fee structure is not appropriate for what is now essentially an operating business with a single industry focus and a long term business plan.

Senior management of Challenger Group has held discussions with a range of potential institutional investors that suggest that these impediments have contributed (at least in part) to decisions not to invest in Challenger Group. Removal of these potential impediments to investment, may lead to greater investor interest in Challenger and have a positive impact on the share price although it is recognised that the major impediment is probably the lack of clarity around current performance and future earnings prospects.

5.4.4 More Favourable Regulatory Environment

The regulatory regime applicable to Challenger Group as an ASX listed company may be more favourable than as a trust:

• the fundraising provisions applicable to companies will provide Challenger Group with more flexibility. The Corporations Act (as modified by ASIC Class Order 98/52) effectively prevents management investment schemes from raising more than 10% of the issued capital without investor approval. In the case of listed company, the cap on new equity raisings without shareholder approval (as specified in the ASX Listing Rules) is 15% and could be increased to 20% if new Listing Rule amendments are adopted. These restrictions could impinge upon Challenger Group's ability to fund its operations and in particular its ability to fund any acquisition; and
• the regulatory regime for managed investment schemes imposes an additional and costly compliance regime on Challenger Group. This regime requires CPH $\blacksquare$ Management to operate a compliance committee, the cost of which is borne by Challenger Group. Such a compliance plan is not required for a company, although Challenger Group will incur additional costs in relation to the operation of its new board of directors.

5.4.5 Certainty of Ability to Offer Rollover Relief for Share Consideration

Challenger Group's existing structure may make it difficult to issue scrip as consideration for any acquisition. Under the current provisions of the tax law, it is uncertain as to whether the issue of units as consideration for an acquisition will attract roll over relief for the recipient. While it is anticipated that new legislation (which has already been announced) will clarify the position, there is no certainty that this will in fact occur. With a corporate structure, roll over relief will be available for any shareholders of businesses acquired by Challenger (subject to meeting the requirements of the relevant tax laws).

Disadvantages and Risks $5.5$

5.5.1 Control

CPH currently has a relevant interest of 25% in the ordinary issued capital of Challenger Group. If the Restructure is approved, CPH will potentially increase its relevant interest in Challenger to up to 33% on a fully diluted basis (depending on issues of additional voting shares to third parties is the interim). Arguably, the increase in relevant interest may confer greater control to CPH over Challenger Group.

However, CPH will only increase its voting power in Challenger if it chooses to exercise the Options. There is no certainty they will be exercised. Whether the Options are

exercised or not depends on the future performance of the share price. Moreover, even if CPH ultimately exercises the Options, CPH's stake in Challenger would be significantly less than 50%. While the stake would confer significant influence on CPH it is not a fully

In any case, CPH already exercises significant influence if not control over Challenger Group through CPH Management's role as responsible entity. While CPH Management can be removed as manager of Challenger Group, CPH's 25% interest in Challenger Group makes doing so difficult. In this context, CPH will arguably be able to exercise less control over Challenger following the Restructure as CPH Management no longer has the ability to manage Challenger Group. It can exercise influence only through its shareholding and its nominees on the board of directors.

At an overall level, it is Grant Samuel's view that there is no material change in the level of practical control exercised by CPH as a result of the Restructure.

5.5.2 Loss of Access to CPH Investment Opportunities

The Restructure involves the termination of the investment management agreement pursuant to which CPH is required to offer Challenger Group access to certain investment opportunities that it receives. This agreement was set up prior to the Merger between CPHIC and Challenger International.

In Grant Samuel's view, termination of this agreement is unlikely to have a material adverse impact on unitholders. Challenger Group/Challenger is focussed on creating a multifaceted financial services organisation. It is not interested in acquiring general investments (particularly private equity type investments) in other sectors. In any event, it is likely to "see" any significant opportunities in financial services in its own right.

5.5.3 Exposure to Unexpected Costs

After the Restructure, Challenger will have full responsibility for all employment costs associated with the CEO and the board of directors. Grant Samuel's financial analysis made an allowance for these costs using certain assumptions.

However, Challenger will bear any unexpected changes in these costs. These might

• termination costs for an unsatisfactory CEO;
• costs of finding a new CEO; and
• remuneration (including incentive schemes) above the level assumed.

These variations are not expected to be material in the context of Challenger's earnings, net assets or market capitalisation.

5.5.4 One Off Transaction Costs

CPH Management has estimated that total transaction costs of the Restructure will be approximately \$5 million. These transaction costs include costs such as stamp duty, professional fees, the costs of negotiating, publicising and implementing the Restructure and costs associated with listing Challenger on the ASX. These costs while not insignificant, are not material by comparison to the earnings, net assets and market capitalisation of Challenger Group.

In addition, Challenger Group may have a liability to pay capital gains tax in respect of the transfer of its interest in Jurlique. The price ascribed to the Jurlique Interest as part of the Restructure of \$36 million exceeds its cost base by approximately \$10 million. Challenger

П $\blacksquare$

Group may be able to offset this capital gain, at least in part, against carried forward losses depending on whether new tax legislation is passed. While Challenger Group may face a tax liability, such a liability may have arisen upon ultimate disposal of the Jurlique Interest in any event. The Jurlique Interest was acquired prior to the Merger with a view to achieving an ultimate realisation of the investment within a reasonable time frame. The tax payment generates franking credits.

5.6 Taxation

The Restructure should be tax neutral for Challenger Group unitholders (other than ineligible overseas unitholders who will be bought out as part of the Restructure). Grant Samuel has been advised that "rollover relief" should be available to unitholders under proposed (but not enacted) new tax legislation when they exchange their units in Challenger Group for shares in Challenger. Even if rollover relief is not obtained under the new tax laws (which have been proposed but not enacted), CPH Management has advised that the current transaction structure should ensure that no tax is payable by unitholders (other than possibly ineligible overseas unitholders). This relief will, however, not apply to those ineligible overseas unitholders who will transfer their units for cash.

$5.7$ Control Premium

Policy Statement 74 requires the independent expert to identify whether any person will receive a premium for control as a consequence of the Restructure.

CPH has a 25.0% relevant interest in Challenger Group. If CPH exercises the Options, its relevant interest will increase to 33.0%. Any premium paid by CPH will only be able to be finally quantified, if and when the Options are exercised by comparison of the exercise price with Challenger Group's share price at that time. Currently the exercise price of the Options (65 cents) is significantly in excess of Challenger Group's share price (50-52 cents and it could be argued this represents a premium for control. On the other hand, the NPV of the exercise price is well below the current share price so it could be argued there is in fact a discount. At the time of exercise, the discount could be very substantial. In any event:

• any premium is ultimately received by Challenger (rather than an existing unitholder) and therefore will benefit all shareholders; and
• Grant Samuel's financial analysis demonstrates that the NPV of the management fees saved (net of costs) is well above the value of the Jurlique Interest and the value of the Options. Theoretically this differential (which varies widely depending on the rate of return on investment assumed) could be deemed to be an additional premium that CPH is paying for its options (and therefore its shares), if it is assumed the value of the Jurlique Interest is constant. This approach would imply a very substantial effective premium for control being paid by CPH.

$\blacksquare$

Qualifications, Declarations and Consents 6

Oualifications 6.1

The Grant Samuel group of companies provide corporate advisory services (in relation to mergers and acquisitions, capital raisings, corporate restructurings and financial matters generally), property advisory services and manages private equity and property development funds. The primary activity of Grant Samuel & Associates Pty Limited is the preparation of corporate and business valuations and the provision of independent advice and expert's reports in connection with mergers and acquisitions, takeovers and capital reconstructions. Since inception in 1988, Grant Samuel and its related companies have prepared more than 270 public expert and appraisal reports.

The persons responsible for preparing this report on behalf of Grant Samuel are Stephen Wilson MCom(Hons) CA(NZ) FSIA and Stewart Hindmarsh BEc LLB MBus. Each has a significant number of years of experience in relevant corporate advisory matters. Damien Elias BSc (Psychol) Hons MCom assisted in the preparation of the report. Each of the above persons is an authorised representative of Grant Samuel pursuant to its Dealers Licence under Part 7.3 of the Corporations Act.

Disclaimers $6.2$

It is not intended that this report should be used or relied upon for any purpose other than as an expression of Grant Samuel's opinion as to whether the Restructure is fair and reasonable to non associated unitholders and in the best interests of unitholders. Grant Samuel expressly disclaims any liability to any Challenger unitholder who relies or purports to rely on the report for any other purpose and to any other party who relies or purports to rely on the report for any purpose whatsoever.

This report has been prepared by Grant Samuel with care and diligence and the statements and opinions given by Grant Samuel in this report are given in good faith and in the belief on reasonable grounds that such statements and opinions are correct and not misleading. However, no responsibility is accepted by Grant Samuel or any of its officers or employees for errors or omissions however arising in the preparation of this report, provided that this shall not absolve Grant Samuel from liability arising from an opinion expressed recklessly or in bad faith.

Grant Samuel has had no involvement in the preparation of the Disclosure Document issued by Challenger Group and has not verified or approved any of the contents of the Disclosure Document. Grant Samuel does not accept any responsibility for the contents of the Disclosure Document (except for this report).

Grant Samuel has had no involvement in Challenger Group's due diligence investigation in relation to the Disclosure Document and does not accept any responsibility for the completeness or reliability of this process which is the responsibility of Challenger Group.

Independence $6.3$

Grant Samuel and its related entities do not have at the date of this report, and have not had within the previous two years, any shareholding in or other relationship with Challenger Group, that could reasonably be regarded as capable of affecting its ability to provide an unbiased opinion in relation to the Restructure. Grant Samuel prepared an independent expert's report dated 9 May 2003 for Challenger International in relation to the Merger. A subsidiary of CPH is a minor investor in a property development fund managed by a member of the Grant Samuel group of companies. Grant Samuel had no part in the formulation of the Restructure. Its only role has been the preparation of this report.

Grant Samuel will receive a fixed fee for the preparation of this report. This fee is not contingent on the outcome of the Restructure. Grant Samuel will receive no other benefit for the preparation of this report.

$\blacksquare$

Grant Samuel considers itself to be independent in terms of Practice Note 42 issued by the ASIC (previously known as Australian Securities Commission) on 8 December 1993.

$6.4$ Declarations

CPH Management, as responsible entity of Challenger Group, has agreed that it will indemnify Grant Samuel and its employees and officers in respect of any liability suffered or incurred as a result of or in connection with the preparation of the report. This indemnity will not apply in respect of the proportion of any liability found by a court to be primarily caused by any conduct involving gross negligence or wilful misconduct by Grant Samuel. CPH Management, as responsible entity of Challenger Group, has also agreed to indemnify Grant Samuel and its employees and officers for time spent and reasonable legal costs and expenses incurred in relation to any inquiry or proceeding initiated by any person. Where Grant Samuel or its employees and officers are found to have been grossly negligent or engaged in wilful misconduct Grant Samuel shall bear the proportion of such costs caused by its action. Any claims by CPH Management, as responsible entity of Challenger Group, are limited to an amount equal to the fees paid to Grant

Advance drafts of this report were provided to CPH Management and its advisers. Certain changes were made to the drafting of the report as a result of the circulation of the draft report. There was no alteration to the methodology, evaluation or conclusions as a result of issuing the drafts.

65 Consents

Grant Samuel consents to the issuing of this report in the form and context in which it is to be included in the Disclosure Document to be sent to unitholders of Challenger Group. Neither the whole nor any part of this report nor any reference thereto may be included in any other document without the prior written consent of Grant Samuel as to the form and context in which it appears.

6.6 Other

The accompanying letter dated 10 November 2003 and the Appendices form part of this report.

GRANT SAMUEL & ASSOCIATES PTY LIMITED 10 November 2003

Grat Samel & Associate

Appendix 1

Sharemarket Ratings of Selected Comparable Companies

Set out below are the sharemarket ratings of listed international cosmetics and skin care companies comparable to Jurlique. There are no directly comparable listed cosmetics companies in Australia. It should be noted that none of these companies are precisely comparable to Jurlique as each company is substantially larger, has a broader product range and has a broader focus than the natural products segment. Moreover, each company is based overseas and hence faces different industry, market and regulatory environments to Jurlique which has Australia as its primary market. These companies also face different growth and inflationary expectations, differing interest rates and tax regimes. These factors impact share market valuations and implied multiples. However, the sharemarket data provides some framework to assess the value of Jurlique.

				EBITDA Multiple			EBITA Multiple		NTA Multiple
Company	Market Capitalisation (billions)	Year End	Historical	Vear 1 Forecast	Year 2 Forecast	Historical	Year 1 Forecast	Year 2 Forecast	Ungeared diluted
	US\$3.8	30 Sept	13.4	11.8	10.8	16.1	13.9	12.7	6.3
Alberto-Culver Company Avon Products Inc.	US\$16.4	31 Dec	164	14.9	13.3	18.6	16.9	150	19.3
Body Shop International			6.0	5.5	5.1	9.3	8.3	7.9	2.5
Plc	£0.3	1 Mar	10.9	9.0	8.1	14.7	12.7	11.3	3.6
Clarins SA	€13	31 Dec	8.6	8.8	8.0	11.5	11.5	10.2	nc
Elizabeth Arden Inc.	US\$0.4	31 Dec
The Estee Lauder		30 Jun	12.8	12.1	11.2	17.2	16.0	14.7	9.5
Companies Inc.	US\$9.3	31 Dec	16.4	15.2	14.3	20.4	18.4	17.3	30.5
L'Oreal SA	$\in$ 43.1 $\epsilon$ 0.1	31 Dec	7.2	6.4	5.8	9.9	8.8	7.9	4.0
Mirato S.p.A	US\$1.3	$30 \text{ Jun}$	9.6	9.3	8.5	11.6	11.1	10.1	5.4
Nu Skin Enterprises Inc.	US\$0.3	31 Dec	136.4	nc	nc	nc	nc	ПĊ	nc
Revion Inc.
Shiseido Company	JPY 506.9	31 Mar	5.9	6.2	5.4	9.2	10.0	8.1	1.8
Limited
			22.1	9,9	9.0	13.8	12.8	11.5	7.1
Simple Average			15.4	13.8	12.8	18.6	16.9	15.6	11.8

Source: Bloomberg, Company Reports, Brokers Reports

The multiples are based on sharemarket prices as at 30 October 2003 and do not include a premium for control. The companies have a range of year ends. Year one forecast multiples represent multiples of earnings for the 2002/2003 financial year for companies with a 31 December year end and for 2003/2004 for the remainder.

A brief description of each company is set out below:

Avon Products Inc.

Avon Products Inc. ("Avon") is the world's largest direct seller and sixth largest global manufacturer/marketer of beauty products. Avon markets beauty and related products in 143 countries via the internet and through a network of approximately 3.9 million independent representatives. In 2002, Avon had net sales of over US\$6.2 billion coming from four product categories: cosmetics, fragrances, and toiletries (63.1%); jewellery, watches and apparel (18.6%); home products, candles and decorative products (15.1%); and vitamins, aromatherapy, exercise equipment, stress relief and weight management products $(3.2\%)$ .

Alberto-Culver Company

Alberto-Culver Company ("Alberto-Culver") is a manufacturer/marketer of hair and skin care products. In 2002, Alberto-Culver had net sales of over US\$2.6 billion with 23% derived from North America and 15% from international sales. The remainder of sales came from a subsidiary, Sally Beauty Company, which is the largest marketer of professional beauty care products in the world, with over 2,700 stores (including 130 franchise stores). Alberto-Culver's consumer products are sold in over 120 countries under major brands such as Alberto VO5, St. Ives and TRESemme.

Body Shop International Plc.

Body Shop International Plc. ("Body Shop") is a retailer of naturally-based skin and body care products that promote environmental awareness. In 2002, the Body Shop had net sales of over £378 million, with 64% of sales derived from company-owned stores, mail order and The Body Shop At Home (direct selling). The balance of sales was made up of wholesale sales to franchisees. The Body Shop operates in 50 countries with over 1,900 retail outlets offering a wide range of best sellers from Vitamin E Moisture Cream to Banana Shampoo.

Clarins SA

Clarins SA ("Clarins") manufactures and markets skin care, make-up and perfume products. In 2002, Clarins had net sales of over $\epsilon$ 922 million with 58% coming from Europe. Skin care constitutes approximately 48% of sales, fragrances 39%, cosmetics 9% and sun care 4%. Skin care and make-up is sold under the Clarins brand. Clarins is also the primary U.S. distributor for fragrances such as Hugo Boss, Lacoste and Burberry. Clarins' products are sold in over 150 countries through nearly 17,000 outlets.

Elizabeth Arden Inc.

Elizabeth Arden Inc. ("Elizabeth Arden") was formed in 2000 following the acquisition of the Elizabeth Arden brand. In 2002, Elizabeth Arden had net sales of US\$752 million, with 68% coming from the United States. Fragrances account for 77% of sales, skin care 15% and colour cosmetics 8%. Elizabeth Arden sells its prestige beauty products in more than 50,000 separate retail locations worldwide under brands such as Red Door, Elizabeth Arden and Elizabeth Taylor's White Diamonds.

The Estée Lauder Companies Inc.

The Estée Lauder Companies Inc. ("Estée Lauder") is one of the world's largest manufacturers/marketers of personal care and cosmetic products. In 2002, Estée Lauder had net sales of over US\$5.1 billion with 50% coming from North America. Estée Lauder's business comprises skin care (36% of sales), makeup (37%), fragrances (22%), and hair care products (5%). Estée Lauder markets its products through almost 17,000 retail outlets in over 130 countries. Key brand names include Estée Lauder, Clinique and Tommy Hilfiger.

L'Oréal SA

L'Oréal SA ("L'Oréal") is the world's largest cosmetics company with 19% market share worldwide. In 2002, L'Oréal had net sales of over €14.2 billion comprising hair care (24%), skin care (20%), make-up (22%), colourants (18%), and perfumes (11%). L'Oréal is also active in luxury goods (3%), dermatology (2%) and pharmaceuticals (through its stake in the Sanofi-Synthélabo Group). L'Oréal products are marketed in over 130 countries worldwide. Key brand names include L'Oréal, Lancome, Maybelline and Ralph Lauren.

Mirato S.p.A.

Mirato S.p.A. ("Mirato") is one of Italy's leading manufacturers/marketers of personal hygiene and hair care products. In 2002, Mirato had net sales of over €122 million with 79% coming from Italy. Mirato is the leader in the Italian hairspray market with a marketshare of 28% and is a major player in hair gels

$(21%)$ , conditioners (12%) and styling mousses (10%). Mirato sells its products in over 60 countries under such brands as Malizia, Intesa and Splend'or.

Nu Skin Enterprises Inc.

Nu Skin Enterprises, Inc. ("Nu Skin") is a global direct selling company that distributes personal care products and nutritional supplements. In 2002, Nu Skin had net sales of over US\$964 million comprising Nu Skin (48.8%, skin and personal care products), Pharmanex (45.5%, dietary supplements) and Big Planet (5.7%, business services and home care product.

Revlon

Revlon Inc. ("Revlon") is a U.S. manufacturer/marketer of cosmetics, fragrances and personal care products. In 2002, Revlon had net sales of over US\$1.1 billion with approximately 68% coming from the U.S. and Canada. Revion has a market share of over 22% of the U.S. colour cosmetics market. The company's products are sold in more than 100 countries under brands including Revlon, ColorStay and Charlie.

Shiseido Company Limited

Shiseido Company Limited ("Shiseido") is Japan's largest manufacturer/marketer of cosmetics and a leader in the fast-growing Chinese prestige cosmetics markets. In 2002, Shiseido had net sales of over US\$5.1 billion, with 80% coming from Japan. In addition to cosmetics, Shiseido manufactures and distributes toiletries, beauty salon products, pharmaceuticals, fine chemicals and health and beauty foods. Cosmetics constitute 78% of sales, toiletries 11% and other businesses 11%. Shiseido sells its products in 60 countries under major brands such as Shiseido, Clé de Peau Beauté and D'ici La.

Appendix 2

Recent Transaction Evidence

There have been relatively limited transactions within the cosmetics and skincare industry in relation to which information is publicly available. A selection of relevant recent transactions is set out below:

	Recent Transaction Evidence
Date	Target	Transaction	Consider- ation		EBITDA Multiple		EBITA Multiple	Ungeared NTA
			(millions) 1	Historical	Forecast	Historical	Forecast	multiple
May 2003	Cork Asia Pacific	Acquisition by Mcpherson's Limited	\$101.0	8.5	6.6	8.5	6.7	nc
May 2003	Sabre Group Ltd	Scheme of arrangement with Henderson Private Capital	S69.5	6.6	8.6	7.3	9.8	3.2
Mar 2003	Wella AG	Acquisition of 98% of voting shares by Procter & Gamble	€ 5.404.3	14.0	18.6	18.9	18.6	6.4
May 2001	Clairol	Acquisition by Procter $\&$ Gamble	S4.050.0	12.1	12.9	13.1	12.9	21.1

Source: IRESS, Bloomberg, Company Reports, Brokers' Reports

A brief outline of each transaction is set out below:

Acquisition of Wella AG by Procter & Gamble Co.

On 18 March 2003, the Procter & Gamble Company ("P&G") announced an agreement to acquire 77.6% of the ordinary shares in Wella AG ("Wella"), equating to 50.7% of Wella's diluted capital. The consideration offered was €92.25 per ordinary share. Subsequently P&G launched an offer for the remaining ordinary and preference shares for $\epsilon$ 92.25 and $\epsilon$ 61.50 per share respectively. Following expiry of the offer in June 2003, P&G held interests in 98% of Wella's ordinary shares (79% of diluted capital).

P&G markets almost 300 consumer and personal care products in over 140 countries. Wella is a leading beauty care company selling its products in more than 150 countries with sales of almost $63.4$ billion in 2002. Wella's business comprises hair care, retail hair care, cosmetics and fragrances. Wella provided a strong strategic fit for P&G in terms of product categories and geography. The acquisition substantially increased P&G's Beauty Care Products segment and also provided a number of cost synergies.

Acquisition of Clairol by Procter & Gamble Co.

On 21 May 2001, the P&G announced that it would acquire the Clairol business from the Bristol-Myers Squibb Company. The consideration offered was US\$4.95 billion. The acquisition also qualified for a tax deduction with an estimated present value of US\$900 million, reducing the effective consideration to US\$4.05 billion. Grant Samuel has valued the offer consideration on the basis of this reduced value.

Clairol's product lines include hair care, hair colourants and personal care products. Clairol had annual sales of over US\$1.6 billion in 2001. The Clairol acquisition cemented P&G's leadership within the US hair care market and substantially increased its global market share. The acquisition also provided significant distribution synergies for P&G in continental Europe.

137

Challenge

Implied value if 100% of entity acquired.

Acquisition of Cork International's Asia Pacific business by McPherson's Limited

On 1 July 2003, McPherson's Limited announced that it had acquired Cork International's Asia Pacific business ("Cork") by private treaty for A\$101 million. Cork manufactures/markets branded beauty and hair care products and had annual sales of over A\$100 million for the year ended 30 June 2002.

McPherson's is a publicly listed Australian company with annual sales of over A\$248 million for the year ended 30 June 2003. McPherson's business operations include housewares and printing. Cork provided a strong strategic fit with McPherson's existing Housewares business and was expected to deliver cost synergies of up to A\$6 million per annum.

Acquisition of Sabre Group Limited by Henderson Private Capital

On 8 May 2003, Henderson Private Capital ("HPC"), a private equity investment company, announced a friendly offer to acquire Sabre Group Limited ("Sabre") via scheme of arrangement. The consideration offered was \$2.15 cash per share, a 21% premium to Sabre's closing price the day prior to announcement. The Scheme was approved by shareholders in August 2003.

Sabre imports, exports and distributes hair care, personal care and animal care products both locally and internationally. Sabre reported sales of approximately \$58.8 million for the year ended 30 June 2002. HPC is a leading management buyout and development capital fund. The acquisition of Sabre was consistent with HPC's investment strategy within the consumer goods sector.

Section 11. Additional information

11.1 CGHL options

CGHL, formerly known as Challenger International Limited, has granted the following options which are outstanding:

No. of options	Exercise Price	Expiry date
4,295,000
(19, 327, 500)	\$3.66 (\$0.813)	31 July 2004
37,698 (169,641)	\$3.499 (\$0.778)	31 January 05
113,296 (509,832)	\$2.872 (\$0.638)	31 January 05
111,878 (503,451)	\$4.256 (\$0.946)	31 January 05
134,302 (604,359)	\$3.517 (\$0.782)	31 January 05
139,867 (629,401)	\$3.24 (\$0.72)	31 January 05

It is a term of the scheme of arrangement which was approved by the Federal Court of Australia on 27 June 2003 (Options Scheme) that when a CGHL Option is exercised into a share in CGHL that share is transferred to the Responsible Entity in consideration for the issue of 4.5 Units to the person who exercised the CGHL Option.

Column 1 of the table set out above, includes in parenthesis the number of Units which will be issued under the Options Scheme if the relevant CGHL Options are exercised.

Column 2 in the table above sets out the exercise price for each CGHL Option and the figure in parentheses is the implied exercise price of the option on the basis that, when exercised, the holder will have 4.5 Units transferred to him or her under the Options Scheme.

Each CGHL Option has an exercise price which is in excess of the price at which Units have traded at any time during the current year (based on the 4.5:1 exchange ratio under the Options Scheme).

CPH Management proposes to procure CGHL to implement a further scheme of arrangement between CGHL and the holders of CGHL Options.

Under the scheme of arrangement, it is proposed that the holders of CGHL Options who exercise an option will receive 4.5 Challenger Shares, rather than 4.5 Units, for each CGHL Option which is exercised.

It is proposed that the scheme of arrangement will be considered in tandem with the Restructure.

The scheme of arrangement will be subject to a condition that the Restructure is implemented.

If the Restructure is not implemented then the scheme of arrangement will not proceed.

If the Restructure is approved and the scheme of arrangement is not approved, either by holders of CGHL Options or the Court, it is the intention of Challenger to take all steps possible to compulsorily acquire the CGHL Options. To enable compulsory acquisition to proceed, it is necessary for ASIC to modify certain provisions of the Corporations Act. Challenger has made an application to ASIC for such modifications to be granted. It is a condition of the Implementation Deed and the Restructure that either the proposed scheme of arrangement for CGHL Options is approved or ASIC grants such modifications to the Corporations Act as may be required to enable compulsory acquisition of the CGHL Options to proceed if the Restructure is implemented.

11.2 Constitution summary

Set out below is a summary of the material provisions of the Challenger Constitution. This summary does not purport to be exhaustive or to constitute a definitive statement of the rights and liabilities of Challenger Shareholders. Unitholders should also have regard to section 11.8 of this Disclosure Document which contains a summary comparison of rights of Unitholders as compared to rights of Challenger Shareholders.

A copy of the Challenger Constitution will be provided free of charge to any Unitholder on request to the Challenger Information Line on 1300 733 343 (toll free within Australia) and +61 2 9240 7450 (from outside Australia).

Voting

Resolutions are decided by a show of hands unless a poll is demanded.

At a general meeting, every Challenger Shareholder has one vote on a show of hands. On a poll, every Challenger Shareholder has one vote for each Challenger Share held (subject to the Challenger Share being fully paid).

A Challenger Shareholder may vote in person or by proxy, attorney or representative.

General Meetings

Each Challenger Shareholder is entitled to receive notice of and to attend and vote at general meetings of Challenger.

Dividends

The Directors of Challenger may distribute Challenger's profits from time to time by declaring and paying dividends. Dividends will be paid in proportion to the amounts paid on the Challenger Shares, subject to any rights or restrictions attached to any Challenger Shares.

Issue of further Shares

The Directors of Challenger may issue or allot further Challenger Shares or any other form of security in the company, or grant options over unissued shares in the company, on such terms and conditions as they think fit.

Transfer of Challenger Shares

No transfer of Challenger Shares can be registered on or before the Record Date for the Restructure.

Challenger Shareholders may transfer Challenger Shares by a proper transfer effected in accordance with the SCH Business Rules and the ASX Listing Rules or as otherwise permitted by the Corporations Act, or as the Directors may otherwise approve.

In the limited circumstances permitted under the ASX Listing Rules, the Challenger Board may ask SCH to apply a holding lock to prevent a Proper ASIC Transfer (as defined in the Corporations Act) of Challenger Shares or decline to register a transfer of Challenger Shares when the transfer is not in registrable form. If the Challenger Board declines to register a transfer of Challenger Shares, Challenger must give the holder of the Challenger Shares, or the party lodging the transfer, written notice of the refusal and the reason for refusal.

Non-marketable Parcels

If a Challenger Shareholder holds less than a marketable parcel of Challenger Shares (as defined in the SCH Business Rules), Challenger's Directors may invoke the procedure for the sale of those Challenger Shares. Challenger may invoke the power only once in any 12 month period by notifying the Challenger Shareholder of its intention to do so. If the Challenger Shareholder tells Challenger that it wishes to retain

Challenger Shares, Challenger is not permitted to sell those shares.

Winding Up

Subject to any special or preferential rights and to any restrictions attaching to any Challenger Shares or classes of Challenger Shares, Challenger Shareholders will be entitled in a winding up to share in any surplus assets of Challenger in proportion to the Challenger Shares held by them, less any amounts which remain unpaid on these shares at the time of distribution.

Proportional Takeover Provisions

The Challenger Constitution requires a resolution of Challenger Shareholders to approve a proportional takeover bid (a bid for some but not all of the shares in Challenger). This provision will lapse unless it is renewed by special resolution of Challenger Shareholders in general meeting within three years from the date that constitution is adopted.

Directors

The minimum number of Directors is three and the maximum is to be fixed by the Directors but may not be more than 12 unless Challenger Shareholders pass a resolution in general meeting varying that number. The Challenger Constitution provides for the compulsory retirement of Directors. Subject to Corporations Act requirements, retiring Directors are eligible for re-election.

Directors' remuneration

The maximum amount that can be paid to all Directors by way of remuneration is \$950,000 per annum. This amount can only be varied if Challenger Shareholders approve the increase by ordinary resolution. If a Director performs extra services or makes special exertions in connection with Challenger, the Directors may arrange for additional remuneration to be paid to that Director, either in addition to or in substitution for the Director's share of the maximum annual amount referred to above that may be paid to Directors.

Indemnity

Challenger, to the extent permitted by law, indemnifies each Director, alternate director or executive officer (and any person who has previously served in any such capacity) of Challenger against all losses, liabilities, costs, charges and expenses incurred by the person as an officer of Challenger, a subsidiary of Challenger, a

related body corporate of Challenger, or a joint venture company in which Challenger has an interest.

The indemnity may be extended to other current or former officers, or any auditor or former auditor, of Challenger or related body corporate of Challenger at the discretion of Challenger's Directors.

The indemnity does not operate where, among other things, the liability arises out of conduct which was not in good faith, or which involves wilful misconduct, gross negligence, reckless misbehaviour or fraud (except for a liability for legal costs).

The indemnity includes, to the extent permitted by law, liability for negligence or for legal costs incurred in defending proceedings in which judgment is given in favour of the person or in which the person is acquitted on a full indemnity basis.

The Constitution empowers Challenger, to the extent permitted by law, to purchase and maintain insurance or pay or agree to pay a premium for insurance for any person to whom the indemnity applies, including Directors.

The Constitution empowers Challenger to enter into a deed with any person, including Directors of Challenger, to whom the indemnity applies to give effect to the rights conferred by the indemnity.

Access

The Constitution empowers Challenger to enter into deeds with its Directors or former Directors agreeing to provide continuing access for a specified period after the director ceases to be a director to books and records of Challenger to which such persons had access while a director.

Amendment

The Challenger Constitution can only be amended by a special resolution passed by at least three quarters of Challenger Shareholders present and voting at a general meeting of Challenger. At least 28 days' written notice specifying the intention to amend the Challenger Constitution by special resolution must be given.

Dividend plans

Challenger's Directors may implement a dividend reinvestment plan and a dividend selection plan on the terms they think fit.

11.3 Deeds of access indemnity and insurance

If the Restructure is approved, Challenger intends to put in place a deed of access, indemnity and insurance in favour of each Challenger Director. The indemnity subject to the restrictions as set out in the Corporations Act and the Constitution outlined above. The deeds will give each Challenger Director a right of access to Board and committee papers and requires Challenger to maintain insurance cover as permitted by the Corporations Act for a period of seven years following the Director's retirement from office.

11.4 Restructure contracts disclosure

The Directors consider that the following contracts, summarised below, are significant or material to the proposed Restructure.

Implementation Deed

The Implementation Deed dated 10 November 2003 is between Challenger, CPH Investments Management Pty Limited (Investment Manager), CPHICI, CPH Management and CPH. It sets out the procedures to be followed to implement the Restructure and related matters. A copy of the Implementation Deed (omitting all schedules other than schedules 2, 4 and 5) is contained in section 12.

In addition to those elements of the Restructure described elsewhere in this Disclosure Document, the Implementation Deed deals with the following material matters:

(a) Conditions of the Restructure

The Implementation Deed sets out the conditions of the Restructure (referred to below as the Conditions). They are, in summary:

• approval of each of the Restructure Resolutions at the Unitholders' Meeting by the required majorities;
• the Supplemental Deed No. 6 being executed by CPH Management and lodged with ASIC;

• the Treasurer gives the FSSA Approval on terms acceptable to CPH Management and Challenger;

• ASX agrees to admit Challenger to the ASX Official List and to quote Challenger Shares on terms acceptable to Challenger and CPH Management;

• the CEO employment contract is executed by all parties thereto;
• all third party consents necessary to transfer the Jurlique Investment to CPH are given on terms acceptable to Challenger, CPHICI and CPH; and
• the proposed scheme of arrangement in relation to the CGHL Options which is referred to in section 11.1 is approved or ASIC grants such modifications to the Corporations Act as are necessary to enable the compulsory acquisition of the CGHL Options to proceed if the Restructure is implemented, if required.

Each party to the Implementation Deed must use all reasonable endeavours to ensure that each Condition is fulfilled before 30 June 2004.

(b) Termination

Any party may terminate the Implementation Deed at any time before completion of the Implementation Deed (Completion) if:

• a Condition is incapable of fulfilment;
• each Condition is not satisfied before 5.00 pm on 30 June 2004 or such later date which is agreed to by the parties; or
• a Condition, having been fulfilled, does not remain fulfilled at all times before Completion.

(c) Completion Steps

The Implementation Deed sets out the steps which must be undertaken to complete the Restructure. In summary those steps are:

• the agreement between CPH Management, $(i)$ Challenger, the IOH Transferee and the IOH Guarantor referred to in section 5.1(d) must be executed if it has not been entered into before Completion;

• (ii) CPH Management, as agent and attorney for each Ineligible Overseas Holder, must transfer all the right, title and interest of and in the Units held by the Ineligible Overseas Holders to the IOH Transferee and CPH Management must register the IOH Transferee as holder of such Units;

• (iii) Challenger must subscribe for five Units at a price per Unit equal to the closing price on ASX for Units on the Suspension Date and CPH Management must issue and allot such Units to Challenger and register Challenger as the holder of these Units;

• (iv) CPH Management must redeem the Units to be redeemed in accordance with the Restructure and, as agent and attorney of each Unitholder, agree to accept Challenger Shares and be bound by the Challenger Constitution, and Challenger must issue such Challenger Shares so that each Unitholder receives one Challenger Share for each Unit it holds that is redeemed;
• (v) Challenger must subscribe for one Unit for each Unit that is redeemed in accordance with paragraph (iv) and CPH Management must, in consideration for the payment by Challenger of \$1.00, allot such Units to Challenger and register Challenger as the holder of these Units;
• (vi) CPH Management must lodge the notification required under the Corporations Act that the Unitholders have resolved to appoint Challenger Managed Investments Limited as the new responsible entity of Challenger Group;
• (vii) the parties to the Deed of Termination (summarised below) must execute that Deed;
• (viii) the parties to the Deed of Retirement and Appointment (summarised below) must execute that Deed:
• (ix) CPH Management must pay to CPH \$96 million for CPH procuring CPH Management to retire as the Responsible Entity of Challenger Group and terminating the Investment Management Agreement and associated agreements,
• (x) CPH must pay CPHICI \$36 million for the acquisition by it or a subsidiary of CPH of the Jurlique Investment and the agreement to effect this must be executed by the relevant parties; and
• (xi) CPH must pay Challenger \$60 million for the acquisition by it or a subsidiary of CPH of the 300 million Challenger Options, the terms of which are set out in Schedule 2 to the Implementation Deed.

(d) Issuing of Holding Statements

Challenger agrees to notify and request the Registry to despatch holding statements in relation to the issue of Challenger Shares to Unitholders pursuant to the terms of the Restructure no later than five Business Days after those shares are issued.

(e) Warranties

Each party to the Implementation Deed represents and warrants to each other that:

• it has the power to enter into and perform its obligations under the Implementation Deed and (subject to obtaining those approvals and consents expressly contemplated by the Implementation Deed) has obtained all necessary approvals and consents to enable it to do so; and
• the Implementation Deed is valid and binding upon it.

(f) Dealing in Units

For the purposes of establishing who is a Unitholder at the Record Time, the Implementation Deed provides that dealings in Units or any ownership interest in Units will be only recognised provided that:

• in the case of dealings effected on CHESS, the transferee is registered in the Unit Register as the holder of the relevant Units by the Record Time; and
• in all other cases, the registrable transmission applications or transfers in respect of those dealings are received on or before the Record Time at the place where the Unit Register is kept.

(g) Stamp Duty

The Implementation Deed provides that any stamp duty liability in connection with the steps referred to in paragraphs (c) (vii) - (xi) of this summary must be paid by CPH, but in respect of any other transaction contemplated by the Implementation Deed, by Challenger Managed Investments.

(h) Limitation of Liability - CPH Management

The liability of CPH Management in respect of any cause of action, claim or loss arising under the Implementation Deed or in connection with any transaction or conduct or other agreement contemplated by the Implementation Deed is

limited to the property of the Challenger Group. This limitation does not apply in the event that CPH Management acts negligently, with wilful misconduct or in breach of trust, in which event CPH Management may be personally liable.

Deed of Termination

CPH Investments, CPHICI, CPH Management, CPH B2B Co. Limited and CPH have entered into a deed of termination with respect to the Investment Management Agreement. In addition to those elements of the Restructure described elsewhere in this Disclosure Document, the deed of termination provides for the termination and release of the obligations of the parties under the Investment Management Agreement, but does not affect the rights of CPH Investments to be indemnified under the indemnities set out under the agreement. The deed is subject to a condition precedent, being the completion of the transactions under the Implementation Deed.

Deed of Retirement and Appointment

CPH Management and Challenger Managed Investments have entered into a deed setting out the terms on which CPH Management will retire and Challenger Managed Investments will accept its appointment as new Responsible Entity. The deed provides that Challenger Managed Investments undertakes to CPH Management and to each Unitholder jointly and severally to exercise all the powers and rights and be subject to the obligations as Responsible Entity from the completion of the transactions contemplated by the Implementation Deed.

The deed releases CPH Management from all further duties, obligations and liabilities in connection with Challenger Group (other than for those matters that CPH Management would not have been indemnified for out of trust property, for instance, negligence or breach of trust). Challenger Managed Investments also grants CPH Management an indemnity against claims made arising out of its conduct as Responsible Entity. This indemnity is only to the extent that Challenger Managed Investments is entitled to be and is indemnified out of the assets of Challenger Group in respect of such claims. It does not extend to a claim that may arise out of negligence, fraud or breach of trust.

CPH Management is entitled to fees up to the completion date of the Restructure under the deed. The deed sets out certain actions that CPH Management must take in relation to its retirement as Responsible Entity pursuant to the applicable provisions of the Corporations Act.

Management Agreement

This Agreement will be terminated as a condition of the Implementation Deed and the Restructure.

Accordingly all rights that Challenger Group has under the agreement, including to receive investment opportunities as described below, and all obligations that Challenger Group has under the agreement will terminate if the Restructure is approved.

Under the Investment Management Agreement between CPH, CPH Management, CPH B2B Co. Limited and CPH Investments Management Pty Limited (Investment Manager) which is a wholly owned subsidiary of CPH, CPH agrees, through the Investment Manager, up until 26 May 2007 to make available to Challenger Group the opportunity to invest to a level of at least 20% in all other new "Investment Opportunities". "Investment Opportunities" is defined to mean any new opportunities to invest in securities, not including certain nominated Excluded Investments.

CPH Management also has the right to make investments independently of CPH.

The Investment Management Agreement provides that any co-investment that is to be made by CPHIC with the CPH Group will be on arm's length terms or will need to comply with Chapter 10 of the ASX Listing Rules. Further, each co-investment is to be made on terms which include a first right of refusal to CPH Group if a Responsible Entity of Challenger Group, other than CPH Management proposed to dispose of the co-investment and in certain circumstances which are not relevant to the Restructure a right to acquire the Challenger Group's co-investment at fair market value.

The Investment Manager is the investment manager of Challenger Group and is entitled to be paid by CPH Management an amount equal to 80% of all fees which it is paid pursuant to the terms of the Constitution of Challenger Group including, in certain circumstances, for some years after CPH Management has ceased to be the Responsible Entity.

OneVue

A wholly owned subsidiary of Challenger, CPHICI, has entered into a series of contractual arrangements in relation to the OneVue software platform, a new ".NET" based registry services IT platform. The intellectual property rights to the OneVue software are held by Pentafin Pty Limited, a company that is associated with Mr Derek Goh. Mr Goh is a member of the senior management team at Challenger and is General Manager Information Technology (section 6.7 above).

The contractual arrangements include a minority equity investment in a company, Pentasoft Pty Limited. This investment may require CPHICI to make further equity funding contributions of up to \$6 million. Pentafin Pty Limited is the other party to this contract.

In addition, the parties have entered into a software licence and sub-licence arrangement which has the effect of giving CPHICI an exclusive licence in relation to the use, modification and adaptation of the OneVue software in the financial services sector in Australia for a minimum period of three years.

None of the agreements referred to above involve a transfer of the intellectual property rights associated with OneVue to CPHICI or any other Challenger entity.

11.5 Litigation

There are no material legal proceedings currently commenced or threatened against the Challenger Group.

11.6 Trading of Units

The latest recorded sale price of Units on ASX before the date of this Disclosure Document was 49.5 cents.

The highest and lowest recorded closing prices for Units on ASX during the three months prior to the date of this Disclosure Document were 58 and 49.5 cents respectively.

The following graph sets out the closing price of Units on ASX since 1 July 2000.

11.7 Interest in Units

Directors

The following table sets out the marketable securities of Challenger Group in which Directors of CPH Management have voting power as at the date of this Disclosure Document.

	Number of Units
	in which Directors have
James Packer	a relevant interest
	Nil
Ashok Jacob
Chris Cuffe	100,000
	1,000,000
James Service
Brenda Shanahan	182,714
	1,142,002
Russell Hooper	Nil
Peter Polson
Michael Tilley	10,000
	Nil

Mr G Cubbin has a relevant interest in 488,506 Units.

11.8 Information disclosed to ASX and documents lodged with ASIC

Challenger Group is a "disclosing entity" for the purposes of the Corporations Act and as such is subject to continuous reporting and disclosure obligations. As a listed entity, Challenger Group is subject to the ASX Listing Rules which require continuous disclosure.

Publicly disclosed information about all listed entities, including Challenger Group, is available on the ASX website www.asx.com.au.

In addition, Challenger Group is also required to lodge various documents with ASIC. Copies of documents lodged with ASIC by Challenger Group may be obtained from, or inspected at, ASIC offices.

Challenger Group will provide free of charge, to any Unitholder who requests it before the Unitholders' Meeting, a copy of:

• the financial report of Challenger Group and its controlled entities for the year ended 30 June 2003 (being the annual financial report most recently lodged with ASIC before the date of this Disclosure Document); and
• each continuous disclosure notice given to ASX by Challenger Group after the lodgement for registration with ASIC of the annual report referred to above and before the date of this Disclosure Document. The following is a list of all continuous disclosure notices:

Date	Announcement
29/10/2003	Challenger Group completes
	acquisition of Interstar Securities
	and other assets
24/10/2003	Ceasing to be a substantial holder
	for QPSX Limited

Copies of any of the documents referred to above can be obtained by calling the Challenger Information Line on 1300 733 343 (toll free within Australia), or +61 2 9240 7450 (from outside Australia).

11.9 Comparison of rights attaching to Challenger Shares

Below is a comparison, by way of summary, of the rights and liabilities of Challenger Shareholders and Challenger Group Unitholders. These rights are found under the Corporations Act, ASX Listing Rules, SCH Business Rules, Challenger Group Constitution (in the case of Challenger Group Unitholders) and Challenger Constitution (in the case of Challenger Shareholders). This comparison does not purport to be exhaustive of the differences between, or the rights and liabilities attaching to, Challenger Shares and Challenger Group Units.

References to CPH Management should be read as references to the Responsible Entity of Challenger Group. Further the summary below does not reflect the proposed amendments to the Constitution of Challenger Group which are the subject of Resolutions 2 and 8 in the Notice of Meeting.

Challenger Group Units

Source of Rights

Unitholder rights are found under the Challenger Group Constitution and the Corporations Act. The Challenger Group Constitution is also subject to the ASX Listing Rules and the SCH Business Rules.

Objects

CPH Management is empowered under the Challenger Group Constitution to determine the investment policy of Challenger Group and may vary that investment policy from time to time by an ASX announcement.

The trust is constituted for the benefit of Unitholders. A Unitholder may neither interfere with, nor exercise the rights or powers of, CPH Management as Responsible Entity in respect of any Challenger Group property, liability or obligation.

Voting

Every Resolution at a meeting of Unitholders is decided on a show of hands, unless a poll is demanded.

At a meeting each Unitholder is entitled to one vote on a show of hands and, on a poll, one vote per Unit (subject to any special rights attaching to a Unit and the Unit being fully paid).

A Unitholder may vote in person or by proxy or authorised representative.

Challenger Shares

Source of Rights

Challenger Shareholder rights are found under the Challenger Constitution and the Corporations Act. The Challenger Constitution is also subject to the ASX Listing Rules and the SCH Business Rules.

Objects

No equivalent provision exists.

Voting

Resolutions are decided by a show of hands unless a poll is demanded.

At a general meeting, every Challenger Shareholder has one vote on a show of hands. On a poll, every Challenger Shareholder has one vote for each Challenger Share held (subject to the Challenger Share being fully paid).

A Challenger Shareholder may vote in person or by proxy, attorney or representative.

Challenger Group Units

General Meetings

Each Unitholder must receive notice of a meeting of Unitholders as provided under the Corporations Act.

There is no requirement under the Corporations Act or the Challenger Group Constitution for Challenger Group to hold annual general meetings of Unitholders.

Distributions

Subject to the terms of offer and issue of any Units, each Unitholder is entitled to a share of the distributable income of Challenger Group (being CPH Management's estimate of the net income of the trust in a period, excluding any amounts CPH Management elects to exclude). CPH Management may elect to distribute to Unitholders any amount (capital or income in nature) pro rata to the number of Units held.

Issue of Further Units

CPH Management may at any time elect to issue, consolidate or divide Units (fully or partly paid) or grant options to subscribe Units. Those Units may take any preferred, deferred or special rights or restrictions as CPH Management may decide.

The Challenger Group Constitution contains provisions, consistent with the Corporations Act, that regulate the minimum price at which a Unit may be sold or created.

Transfer of Units

Unitholders may transfer Units in such manner as CPH Management from time to time prescribes, including in accordance with the Corporations Act, ASX Listing Rules and the SCH Business Rules.

Challenger Shares

General Meetings

Each Challenger Shareholder is entitled to receive notice of to attend and vote at general meetings of Challenger.

The Corporations Act requires that Challenger hold an annual general meeting not least once in a calendar year and within five months after the end of its financial year.

Dividends

The Directors of Challenger may distribute Challenger's profits from time to time by declaring and paying dividends. Dividends will be paid in proportion to the amounts paid on the Challenger Shares, subject to any rights or restrictions attached to any Challenger Shares.

Issue of Further Shares

The Directors of Challenger may issue or allot further Challenger Shares or any other form of security in the company, or grant options over unissued shares in the company, on such terms and conditions as they think fit.

Transfer of Shares

Challenger Shareholders may transfer Challenger Shares by a proper transfer effected in accordance with the SCH Business Rules and the ASX Listing Rules, as otherwise permitted by the Corporations Act, or as the Directors may otherwise approve.

In the limited circumstances permitted under the ASX Listing Rules, the Challenger Board may ask SCH to apply a holding lock to prevent a Proper ASIC Transfer (as defined in the Corporations Act) of Challenger Shares or decline to register a transfer of Challenger Shares when the transfer is not in registrable form. If the Challenger Board declines to register a transfer of Challenger Shares, Challenger must give the holder of the Challenger Shares, or the party lodging the transfer, written notice of the refusal and the reason for refusal.

Challenger Group Units

Non-marketable Parcels

CPH Management may, in accordance with the ASX Listing Rules, buy-back, redeem or sell any Units held by a Unitholder where that holding is less than a marketable parcel (as defined in the SCH Business Rules).

Winding Up

Unless terminated earlier, Challenger Group continues for 80 years (less one day) after 24 October 1997 (being the date of this original trust deed). CPH Management may terminate the trust in circumstances contemplated by the Corporations Act. On termination CPH Management will release all trust property, pay all liabilities of the trust and distribute any net proceeds to Unitholders pro rata to the number of Units held.

Proportional Takeover Provisions

No equivalent provision exists.

Nature of Governing Body

The responsible entity of Challenger Group is CPH Management. The Responsible Entity must, in accordance with the Corporations Act, be a public company that holds an Australian financial service licence authorising it to operate a managed investment scheme. The Responsible Entity must act in accordance with Challenger Group's Constitution and Part 5C.2 of the Corporations Act.

Challenger Shares

Non-marketable Parcels

If a Challenger Shareholder holds less than a marketable parcel of Challenger Shares (as defined in the SCH Business Rules), Challenger's Directors may invoke the procedure for the sale of those Challenger Shares. Challenger may invoke the power only once in any 12 month period by notifying the Challenger Shareholder of its intention to do so. If the Challenger Shareholder tells Challenger that it wishes to retain its Challenger Shares, Challenger is not permitted to sell those shares.

Winding Up

Subject to any special or preferential rights and to any restrictions attaching to any Challenger Shares or classes of Challenger Shares, Challenger Shareholders will be entitled in a winding up to share in any surplus assets of Challenger in proportion to the Challenger Shares held by them, less any amounts which remain unpaid on these shares at the time of distribution.

Proportional Takeover Provisions

The Challenger Constitution requires a resolution of Challenger Shareholders to approve a proportional takeover bid (a bid for some but not all of the shares in Challenger). This provision will lapse unless it is renewed by special Resolution of Challenger Shareholders in general meeting within three years from the date that constitution is adopted.

Nature of Governing Body

The Board of Directors is the governing body of Challenger. The Directors are subject to duties of good faith, care and diligence which are set out in Part 2D.1 of the Corporations Act.

Challenger Group Units

Directors

CPH Management may be replaced as Responsible Entity of Challenger Group by an ordinary Resolution of Unitholders. Unitholders have no power to appoint or vote on the appointment of Directors of CPH Management.

Indemnity

CPH Management is entitled to be indemnified out of the trust property for any liability incurred by it in properly performing its duties, or exercising any of its powers in relation to the trust, or attempting to do so. CPH Management is not required to do anything for which it does not have a full right of indemnity out of Challenger Group property available for that purpose.

The Challenger Group Constitution limits CPH Management's liability (when acting in good faith, without negligence, fraud or breach of trust) to any Unitholder or any future Responsible Entity or any other person, for loss caused by certain specified matters and to the amount which CPH Management is entitled to and does not recover through its right of indemnity from Challenger Group.

Amendment

Subject to the Corporations Act, CPH Management may by supplemental deed, make any amendment to the Challenger Group Constitution. The Corporations Act provides that CPH Management must seek Unitholder approval, by special resolution, if a proposed amendment would adversely affect Unitholders' rights.

Dividend Plans

CPH Management may offer a distribution reinvestment facility.

Challenger Shares

Directors

The minimum number of Directors of Challenger is three and the maximum is to be fixed by the Directors but may not be more than 12 unless Challenger Shareholders pass a Resolution in general meeting varying that number. The Challenger Constitution provides for the compulsory retirement of Directors. Subject to Corporations Act requirements, retiring Directors are eligible for re-election.

Indemnity

Challenger, to the extent permitted by law, indemnifies each Director, alternate director or executive officer of Challenger (and any person who has previously served in any such capacity) against all losses, liabilities, costs, charges and expenses incurred by the person as an officer of Challenger, a subsidiary of Challenger, a related body corporate of Challenger, or a joint venture company in which Challenger has an interest.

The indemnity may be extended to other current or former officers, or the auditor or former auditor, of Challenger or related body corporate of Challenger at the discretion of Challenger's Directors.

The indemnity does not operate when, among other things, the liability arises out of conduct which was not in good faith, or which involves wilful misconduct, gross negligence or fraud (except for a liability for legal costs).

The indemnity includes, to the extent permitted by law, liability for negligence or for legal costs incurred in defending proceedings in which judgment is given in favour of the person or in which the person is acquitted on a full indemnity basis.

Amendment

The Challenger Constitution can only be amended by a special resolution passed by at least three quarters of Challenger Shareholders present and voting at a general meeting of Challenger. At least 28 days' written notice specifying the intention to amend the Challenger Constitution by special resolution must be given.

Dividend Plans

Challenger's Directors may implement a dividend reinvestment plan and a dividend selection plan on the terms they think fit.

11.10 Dividend Reinvestment Plan

Challenger proposes to adopt a Dividend Reinvestment Plan (DRP) prior to the Effective Date of the Restructure. The Challenger Board may activate the DRP in its discretion. The Challenger Board has not yet determined when, or if, the DRP will be activated.

The DRP will have the following key features:

• Challenger Shareholders will have the option to elect to receive Challenger Shares in lieu of dividends on some or all of their Shares subject to limitations on participation determined by the Board from time to time;
• Challenger Shares that are issued under the DRP may be issued by Challenger or acquired on behalf of the participant on market;
• the number of Challenger Shares to be issued (or transferred) under the DRP will be determined by dividing the dividend payable in relation to participating Challenger Shares by either a price equal to the average of the daily weighted average market price of the Challenger Shares on ASX on the five trading days following the relevant record date, or at a discount (to be set by the Board) to the weighted average market price of the Challenger Shares over that period;
• no brokerage, commission or other transaction costs are charged on Challenger Shares issued or transferred under the DRP;
• shareholder participation in the DRP will be open to all Challenger Shareholders (this may be restricted to Shareholders resident in Australia and New Zealand depending on the legal regulations of the country in which the Shareholder is resident and on the Board's decision as outlined in the DRP) or as decided by the Challenger Board;
• the Board will be permitted to implement, modify, suspend or terminate the DRP as it sees fit; and
• Challenger will apply to ASX for quotation of Challenger Shares issued under the DRP.

11.11 Restructure -Australian tax consequences

The taxation treatment of the Restructure is reflected in the Pro Forma Financial statements in section 6 and 3.2.3. The taxation implications of the Restructure for Unitholders are set out in the Taxation Report in section 8.

11.12 ASIC modifications

ASIC has granted the following exemptions and modifications to the Corporations Act in respect of the Restructure and the Disclosure Document:

• a modification of item 7 in section 611 of the Corporations Act the effect of which is to permit the approval for the acquisition by CPH Investments of Challenger Shares on exercise of Challenger Options to be passed at a meeting of Challenger Group Unitholders as opposed to a meeting of Challenger Shareholders. At the meeting of Challenger Group Unitholders neither CPH and its associates nor Unitholders who have a registered address outside Australia or New Zealand at the date of the Meeting, can vote;
• a modification to section 601FC(1)(d) of the Corporations Act to enable CPH Management to treat the Ineligible Overseas Holders and Challenger (in respect of the five Units to be issued to it) in the way described in this Disclosure Document on the condition that CPH Management considers it would be in the best interests of Unitholders and not unfair to the Ineligible Overseas Holders to transfer their Units to the IOH Transferee and the Ineligible Overseas Holdings receive the consideration which is referred to in section 5.1(d); and
• certain relief from Chapter 6D of the Corporations Act to enable Challenger Shares to be issued to Unitholders without the Unitholders receiving or completing an application form in respect of the Challenger Shares to be issued and to permit advertisements and publications to be made without reference to an application form.

11.13 ASX listing rule waivers and exemptions

Challenger made application to ASX for in principle approval in relation to a number of ASX Listing Rule matters which are associated with the admission of Challenger to the Official List of ASX and the Restructure.

ASX has advised Challenger that it would be likely to do each of the following:

• agree, until 6 February 2004, to the use of the Disclosure Document for the purposes of Listing Rule 1.1 condition 3;
• grant Challenger a waiver from Listing Rule 1.1 condition 8 to the extent necessary to permit Challenger to be admitted to the official list without complying with either Listing Rules 1.2 or 1.3, on the condition that Challenger Group satisfies Listing Rules 12.1 and 12.2 at the time Challenger is admitted to the official list;
• grant Challenger a waiver from Listing Rule 7.1 to the extent necessary to permit securities issued under the LTIP to count as an exception to Listing Rule 7.1 for a period of three years after Challenger is admitted to the official list, on condition that Unitholders approve the LTIP in accordance with Listing Rule 7.2 exception 9;
• grant Challenger a waiver from Listing Rule 10.11 to the extent necessary to enable Challenger to issue securities to the CEO without shareholder approval, on condition that Unitholders approve the issue of securities under Listing Rule 10.11.

11.14 Application for listing of Challenger Shares

Within 10 Business Days of the date of this Disclosure Document, Challenger will apply to ASX for admission to the Official List and quotation of the Challenger Shares on the exchange operated by ASX. Challenger will, in connection with that application, seek the waivers from the ASX Listing Rules which are referred to in section 11.13.

11.15 CHESS

The Challenger Shares will participate from the date of commencement of quotation in the CHESS System operated by ASX Settlement & Transfer Corporation Pty Limited. The Challenger Shares will be held in uncertificated form either on the CHESS sub-register under sponsorship of a broker or non-broker participant, or on the Challenger sponsored sub-register.

Arrangements can be made at any subsequent time to convert your holding from the Challenger sponsored sub-register to the CHESS sub-register or vice versa.

11.16 Ownership restrictions on new shares

The sale and purchase of Challenger Shares is requiated by a number of laws that restrict the level of ownership or control by any one person (either alone or in combination with others). This section contains a general description of these laws.

Financial Sector (Shareholdings) Act 1998 (Cth) (FSSA)

The FSSA generally restricts ownership and acquisition in a financial sector company (such as a general or life insurance company and any 100% holding company of a general or life insurer) by a person and its associates to 15% of shares or voting power unless the prior approval of the Federal Treasurer is obtained. The Treasurer may give approval to hold a stake of more than 15%, or an increased stake where approval to hold more than 15% is already held, if the Treasurer is satisfied that it is in the national interest to do so.

Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA)

Generally, the FATA applies to acquisitions of shares and voting rights in a company of 15% or more by a single foreign person and its associates (substantial interest), or 40% or more by two or more unassociated foreign persons and their associates (aggregate substantial interest). Where an acquisition of a substantial interest meets certain

criteria, the acquisition may not occur unless notice of it has been given to the Federal Treasurer and he has either stated that there is no objection to the proposed acquisition in terms of the Federal government's "Foreign Investment Policy" or a statutory period has expired without an objection from the Treasurer. An acquisition of a substantial interest or an aggregate substantial interest meeting certain criteria may also lead to divestment orders unless a process of notification, and either a statement of non-objection or expiry of a statutory period without objection, has occurred.

Corporations Act 2001 (Cth)

The takeover provisions in Chapter 6 of the Corporations Act restrict acquisitions of shares in listed companies, and unlisted companies with more than 50 members, if the acquirer's (or another party's) voting rights would increase to above 20%, or would increase from a starting point that is above 20% and below 90%, unless certain gateways and exemptions are used. This restriction does not apply to the initial issue of Challenger Shares in accordance with the Restructure.

If the Restructure is implemented, the effect of Resolution 4 in the Notice of Meeting is that the restrictions referred to above will not apply to CPH exercising the Challenger Options and increasing its voting power in Challenger in the manner referred to in this Disclosure Document.

11.17 Disclosure of interests

• (a) Other than as set out in section 11.7 or elsewhere in this Disclosure Document, no Director or proposed Director of Challenger, no promoter of Challenger, and no person named in this Disclosure Document as performing a function in a professional, advisory or other capacity in connection with the preparation or distribution of this Disclosure Document, have any interest, and have not held any interest at any time during the last two years in connection with:
• (i) the formation or promotion of Challenger;

(ii) property acquired or proposed to be acquired by Challenger in connection with its formation or promotion of the offer; or

(iii) the offer.

• (b) Other than as set out in section 11.7 or elsewhere in this Disclosure Document, no amount or benefit has been paid or given or has been agreed to be paid or given to a Director, or proposed Director of Challenger to induce them to become or to qualify as a Director of Challenger.
• (c) Other than as set out in section 11.18 or elsewhere in this Disclosure Document, no amount or benefit has been paid to or given or has been agreed to be paid or given to a Director or proposed Director of Challenger, a promoter of Challenger or any person named in this Disclosure Document as performing a function in a professional, advisory or other capacity in connection with the preparation or distribution of this Disclosure Document in connection with the formation or promotion of Challenger.

11.18 Interests of experts and advisers

Ernst & Young has acted as tax adviser and Independent Accountant in respect of the Restructure and has or will be paid fees of approximately \$790,000 as at the date of this Disclosure Document.

Gilbert + Tobin has acted as Australian legal adviser in respect of the Restructure and has or will be paid fees of approximately \$750,000 as at the date of this Disclosure Document. Gilbert + Tobin may receive further fees for additional work done following the date of this Restructure.

Grant Samuel & Associates Pty Limited has acted as independent expert in respect of the Restructure and has or will be paid fees of approximately \$225,000 as at the date of this Disclosure Document.

John V Egan Associates Pty Limited has acted as external remuneration consultant in respect of the Restructure and LTIP and has or will be paid fees of approximately \$40,000 as at the date of this Disclosure Document.

UBS has acted as financial adviser in respect of the Restructure and has or will be paid fees of approximately \$2 million for so acting

11.19 Expenses of the offer

The expenses of the Restructure (including all advisers fees, independent expert fees, printing and related costs) are expected to be \$5 million.

11.20 Consents

Consolidated Press Holdings Limited has given and has not withdrawn its consent to be named in this Disclosure Document in the form and context in which it is named. Consolidated Press Holdings Limited has also given and not withdrawn its consent to be named in this Disclosure Document in relation to the statements in the Disclosure Document attributed to it in the form and context in which they appear. Other than in respect of those statements attributed to it, Consolidated Press Holdings Limited has not authorised or caused the issue of this Disclosure Document, does not make, or purport to make, any statement in this Disclosure Document and takes no responsibility for any part of this Disclosure Document (except to the extent required by the Corporations Act).

UBS Advisory and Capital Markets Australia Limited has given and has not withdrawn, its consent to be named in this Disclosure Document as financial adviser in the form and context in which it is named. UBS Advisory and Capital Markets Limited has not authorised or caused the issue of this Disclosure Document, does not make, or purport to make, any statement in this Disclosure Document and takes no responsibility for any part of this Disclosure Document (except to the extent required by the Corporations Act).

Gilbert + Tobin has given and has not withdrawn, its consent to be named in this Disclosure Document as Australian legal adviser in the form and context in which it is named. Gilbert + Tobin has not authorised or caused the issue of this Disclosure Document, does not make, or purport to make, any statement in this Disclosure Document and takes no responsibility for any part of this Disclosure Document (except to the extent required by the Corporations Act).

Ernst & Young has given and has not withdrawn its consent to be named in this Disclosure Document as tax advisers and independent accountant in the form and context in which it is named. Ernst & Young has also given and not withdrawn its consent to be named in this Disclosure Document in relation to the statements in this Disclosure Document attributed to it in the form and context in which they appear. Other than in respect of those statements attributed to it. Ernst & Young has not authorised or caused the issue of this Disclosure Document, does not make, or purport to make, any statement in this Disclosure Document and takes no responsibility for any part of this Disclosure Document (except to the extent required by the Corporations Act).

Grant Samuel & Associates Pty Limited has given and has not withdrawn its consent to be named in this Disclosure Document as independent expert in the form and context in which it is named. Grant Samuel & Associates Pty Limited has also given and not withdrawn its consent to be named in this Disclosure Document in relation to the statements in the Disclosure Document attributed to it in the form and context in which they appear. Other than in respect of those statements attributed to it, Grant Samuel & Associates Pty Limited has not authorised or caused the issue of this Disclosure Document, does not make, or purport to make, any statement in this Disclosure Document and takes no responsibility for any part of this Disclosure Document (except to the extent required by the Corporations Act).

Computershare Investor Services Pty Limited has given, and has not withdrawn, its consent to be named in this Disclosure Document as share registrar to Challenger in the form context in which it is named. Computershare Registry Services Pty Limited has not authorised or caused the issue of this Disclosure Document, does not make, or purport to make, any statement in this Disclosure Document and takes no responsibility for any part of this Disclosure Document (except to the extent required by the Corporations Act).

John V Egan Associates Pty Limited has given and has not withdrawn its consent to be named in this Disclosure Document in the form and context in which it is named. John V Egan Associates Pty Limited has also given and not withdrawn its consent to be named in this Disclosure Document in relation to the statements in the Disclosure Document attributed to it in the form and context in which they appear. Other than in respect of those statements attributed to it, John V Egan Associates Pty Limited has not authorised or caused the issue of this Disclosure Document, does not make, or purport to make, any statement in this Disclosure Document and takes no responsibility for any part of this Disclosure Document (except to the extent required by the Corporations Act).

11.21 Governing law

This Disclosure Document is governed by the law applicable in New South Wales and each Unitholder submits to the exclusive jurisdiction of the courts of New South Wales.

11.22 Approval of the disclosure document

Each of the Directors of Challenger has consented to the lodgement of this Disclosure Document.

Each of the Directors of CPH Management has consented to the lodgement of this Disclosure Document.

Aylad Filly

Michael Tilley Director

Section 12.
Implementation Deed

Implementation Deed

Date

10 November 2003

Parties

Challenger Financial Services Group Limited ACN 106 842 371 (Challenger)

CPH Investments Management Pty Limited ABN 31 092 008 172 (Investment Manager)

CPHIC Investments Pty Limited ABN 95 093 340 526 (CPHICI)

CPH Management Limited in its capacity as responsible entity of Challenger Financial Services Group

ABN 68 080 207 496 (Retiring Responsible Entity)

Consolidated Press Holdings Limited ABN 64 008 394 509 (CPH)

Background

• A. The parties wish to implement the Restructure on the terms set out in this deed (conditional on receiving the approval of Unitholders to the Restructure Resolutions).
• B. Certain ASIC and ASX relief has been obtained to facilitate the implementation of the Restructure.

1. Defined terms & interpretation

1.1 Defined terms

In this deed:

APRA means the Australian Prudential Regulation Authority

ASIC means Australian Securities and Investments Commission.

ASX means Australian Stock Exchange Limited.

B2B means CPH B2B Co. Ltd (ACN 092 267 135).

Business Day means a day that is not a Saturday, Sunday, public holiday or bank holiday in New South Wales, Australia.

CEO Services Agreement means the agreement between Chris Cuffe, Challenger and the Retiring Responsible Entity to be entered into prior to the Effective Date and substantially in accordance with terms specified in section 5.3 of the Disclosure Document

CGHL means Challenger Group Holdings Limited (ABN 50 002 993 302) formerly Challenger International Limited

CGHL Options means the options granted by CGHL as described in section 12.1 of the Disclosure Document.

Challenger Constitution means the Constitution of Challenger as at the date of the Unitholders' Meeting.

Challenger Group means Challenger Financial Services Group (ARSN 091 545 185).

Challenger Group Unit Registry means Computershare Registry Services Pty Limited.

Challenger Option means an option entitling the holder to subscribe for one Challenger Share per option on the Challenger Option Terms.

Challenger Option Application means an application substantially in the form of Schedule 8.

Challenger Option Number means 300 million.

Challenger Option Payment means \$60 million.

Challenger Option Terms means the terms and conditions set out in Schedule 2.

Challenger Restructure Shares means the number of Challenger Shares that the Retiring Responsible Entity must subscribe for as agent and attorney of each Eligible Unitholder to ensure that each Eligible

Unitholder receives one Challenger Share for each Eligible Unitholder Unit it holds which is redeemed.

Challenger Share means one ordinary share in Challenger.

Challenger Share Registry means Computershare Registry Services Pty Limited.

Challenger Share Subscription Notice means a notice substantially in the form of Schedule 7.

Challenger Share VWAP means the average of the daily volume weighted average sale price of Challenger Shares sold on ASX during each of the first 10 days on which Challenger Shares trade (including trading on a deferred settlement basis) excluding any Challenger Shares which are sold other than in the ordinary course of trading on ASX (including any transaction referred to in the ASX Business Rules as special, crossings prior to the commencement of normal trading, crossings during the closing phase and the after hours adjust phase, any overseas trades or trades pursuant to the exercise of options over shares and any overnight crossings).

Challenger Unit Subscription Price means the issue price of a Challenger Unit determined in accordance with the Constitution (as amended by the First Constitutional Modification Deed).

Challenger Units has the meaning given in clause $5.1(d)$ .

Completion means completion on the Effective Date of the transactions contemplated in clause 5 of this deed.

Completion Date means the date when Completion has taken place.

Conditional Provisions means clause 5 of this deed.

Conditions means the Unitholder Meeting Conditions and the Third Party Conditions, being the conditions precedent to Completion set out in clause 2.1.

Constitution means the Challenger Group deed dated 24 October 1997, as amended, which established the Challenger Group.

Corporations Act means the Corporations Act 2001 $(Cth)$ .

CPH Payment means \$96 million.

Deed of Retirement and Appointment means the deed between the Retiring Responsible Entity and the New Responsible Entity under which the Retiring Responsible Entity agrees, inter alia, to resign as the responsible entity of Challenger Group, substantially in the form contained in Schedule 11.

Disclosure Document means the disclosure document and notice of meeting in connection with the Restructure which is authorised by the Retiring Responsible Entity and Challenger and, where the context requires, means the draft Disclosure Document lodged with ASIC on or about the date of this deed.

Effective Date means the effective date of the Restructure, being, subject to ASX approval, the same day as the Record Date.

Eligible Unit Number means the number of Eligible Unitholder Units.

Eligible Unitholder means a Unitholder other than Challenger and for the avoidance of doubt includes the IOH Transferee but excludes each Ineligible Overseas Holder.

Eligible Unitholder Unit means the Units registered in the name of an Eligible Unitholder in the register of Units as at the Record Time.

FSSA means the Financial Sector (Shareholdings) Act 1998 (Cth).

First Constitutional Modification Deed means a deed modifying the Constitution, substantially in the form contained in Schedule 4 together with such other consequential amendments to the Constitution as the responsible entity of Challenger Group reasonably considers necessary to implement the Restructure or otherwise required by ASIC.

Ineligible Overseas Holder means a Unitholder who at 4.00pm on the Record Date has a registered address which is outside Australia and its external territories or New Zealand unless the Retiring Responsible Entity and Challenger are satisfied that Challenger is not prevented from lawfully issuing Challenger Shares to such a Unitholder, either unconditionally or after compliance with such conditions as Retiring Responsible Entity and Challenger regard as acceptable. Investment Management Agreement means the Investment Opportunities and Management Agreement between CPH, the Investment Manager, CPH B2B Co Limited and the Retiring Responsible Entity dated 10 April 2000.

IOH Guarantor means the related entity of the IOH Transferee that has been assigned a credit rating of not less than A by Standard & Poor that will guarantee the payment required to be made by the IOH Transferee to the Challenger Share Registry, as further described in clause 6.2 and the Disclosure Document.

IOH Payment Date means the date that is 20 Business Days after the Record Date.

IOH Proceeds means the Challenger Share VWAP multiplied by the IOH Unit Number.

IOH Transferee means the party that holds a dealer's licence or Australian financial services licence issued by ASIC to whom the IOH Units will be transferred on the Record Date, as further described in clause 6.2 and the Disclosure Document.

IOH Unit means the Units registered in the name of an Ineligible Overseas Holder in the Units Register as at 4.00pm on the Record Date.

IOH Transferee Deed means a deed or letter agreement to be entered into between the IOH Transferee, the IOH Guarantor, the Retiring Responsible Entity and Challenger, which includes provisions substantially in accordance with those referred to in clause 6.2 and is otherwise consistent with the relevant disclosures regarding Ineligible Overseas Holders in the Disclosure Document.

IOH Unit Number means the number of IOH Units.

Jurlique Condition means the Condition set out in clause 2.1(h).

Jurlique Investment means the 25 million ordinary shares held by Challenger Group, through its wholly owned subsidiary CPHICI, in Jurlique International Pty Limited (representing 25% of its issued capital) and all of the rights and obligations of CPHICI pursuant to the following related documents:

• (a) Share Subscription and Purchase Agreement dated 9 September 2002;
• (b) Jurlique Shareholders Agreement dated 23 September 2002;
• (c) Escrow Deed dated 23 September 2002; and

(d) Mortgage of Shares dated 23 September 2002.

Jurlique Payment means \$36 million.

Jurlique Transfer means the Deed of Novation and Transfer in connection with the Jurlique Investment substantially in the form of Schedule 9.

Liabilities means all liabilities, losses, damages, outgoings, costs and expenses of whatever description.

LTIP Resolutions means resolutions 7 and 8 substantially in the form set out in Schedule 3.

Merger means the merger of CPH Investment Corp and Challenger International Limited that became effective on 1 July 2003.

New Responsible Entity means Challenger Managed Investments Limited (ABN 94 002 835 597)

Portfolio Investment Management Deed means the deed dated 24 May 2002 between the Investment Manager and CPHICI.

Recapitalisation Units has the meaning given in clause 5.1(h).

Restructure means the restructuring proposal that will have the result of corporatising Challenger Group on the terms and conditions contained in this deed.

Restructure Resolutions means resolutions 1 - 6 substantially in the form set out in Schedule 3.

Record Date means the date nominated as the Record Date for the purposes of the Restructure either in the Disclosure Document or by announcement to be made by the Retiring Responsible Entity to ASX.

Record Time means some time after 5.00pm on the Record Date after the steps referred to in clauses 5.1(a) - (e) have been completed.

Second Constitutional Modification Deed means a deed modifying the Constitution, substantially in the form contained in Schedule 5, the loan terms applicable to the LTIP and such other consequential amendments to the Constitution as the responsible entity of Challenger Group reasonably considers necessary to implement the LTIP or otherwise required by ASIC.

Suspension Date means the date on which Units are suspended from trading on ASX in accordance with the Disclosure Document.

Termination Deed means a deed to be entered into by each party to the Investment Management Agreement and the Portfolio Investment Management Deed, substantially in the form set out in Schedule 10.

Third Party Conditions means all Conditions other than the Unitholder Meeting Conditions.

Timetable means the timetable set out in Schedule 1 or such other timetable agreed by the parties acting reasonably.

Unit means a fully paid ordinary unit in the Challenger Group.

Unit Register means the register of Unitholders kept pursuant to the Corporations Act.

Unit Subscription Application means an application substantially in the form set out in Schedule 6.

Unitholder means a person registered in the Unit Register as a holder of Units.

Unitholder Meeting Conditions means the Conditions which can only be satisfied if the Unitholders approve the Restructure Resolutions at the Unitholders' Meeting, being the conditions set out in clauses 2.1(a) and (b).

Unitholders' Meeting means the meeting of Unitholders to be convened by the Retiring Responsible Entity to consider the Restructure Resolutions and the LTIP Resolutions.

1.2 Interpretation

In this deed, except where the context otherwise requires:

(a) the singular includes the plural and vice versa, and a gender includes other genders;

(b) another grammatical form of a defined word or expression has a corresponding meaning;

(c) a reference to a clause, paragraph, schedule or annexure is to a clause or paragraph of, or schedule or annexure to, this deed, and a reference to this deed includes any schedule or annexure;

(d) a reference to a document or instrument includes the document or instrument as novated, altered, supplemented or replaced from time to time;

(e) a reference to A\$, \$A, dollar or \$ is to Australian currency;

(f) a reference to time is to Sydney, Australia time;

(g) a reference to a party is to a party to this deed, and a reference to a party to a document includes the party's executors, administrators, successors and permitted assigns and substitutes;

(h) a reference to a person includes a natural person, partnership, body corporate, association, governmental or local authority or agency or other entity;

(i) a reference to a statute, ordinance, code or other law includes regulations and other instruments under it and consolidations, amendments, re-enactments or replacements of any of them;

(j) a word or expression defined in the Corporations Act has the meaning given to it in the Corporations Act;

(k) the meaning of general words is not limited by specific examples introduced by including, for example or similar expressions;

(I) any deed, representation, warranty or indemnity by two or more parties (including where two or more persons are included in the same defined term) binds them jointly and severally;

(m) any deed, representation, warranty or indemnity in favour of two or more parties (including where two or more persons are included in the same defined term) is for the benefit of them jointly and severally;

(n) a rule of construction does not apply to the disadvantage of a party because the party was responsible for the preparation of this deed or any part of it; and

(o) if a day on or by which an obligation must be performed or an event must occur is not a Business Day, the obligation must be performed or the event must occur on or by the next Business Day.

1.3 Headings

Headings are for ease of reference only and do not affect interpretation.

2. Conditions

2.1 Conditions

The Conditional Provisions have no effect and the transactions contemplated by the Conditional Provisions will not occur until all of the following Conditions are fulfilled:

• (a) approval of each of the Restructure Resolutions at the Unitholders' Meeting by the required majority;
• (b) the First Constitutional Modification Deed executed by the Retiring Responsible Entity is lodged with ASIC pursuant to section 601GC(2) of the Corporations Act;
• (c) ASX agrees to admit Challenger to the official list of ASX and to the quotation of Challenger Shares on conditions which are acceptable to the Retiring Responsible Entity and Challenger;
• (d) Challenger and the Retiring Responsible Entity obtaining from ASX and ASIC all waivers from the Listing Rules or relief from the provisions of the Corporations Act that are reasonably necessary for the implementation of the Restructure:
• (e) the Treasurer of the Commonwealth of Australia (Treasurer) approving each of Challenger and New Responsible Entity to hold a stake (as that term is defined in the FSSA) of 100% in Challenger Financial Services Group Limited under the FSSA and, if such approval is subject to conditions, those conditions are reasonably acceptable to the New Responsible Entity and, if the conditions relate to either the Retiring Responsible Entity or Challenger, such party;
• (f) the approval of the Treasurer under the FSSA being in place for CPH and its associates to each hold up to a percentage stake of 35% or more in Challenger Financial Services Group Limited (whether by way of the approval of the Treasurer given on 16 June 2003 in connection with the Merger continuing with or without modification or that approval being revoked and a new approval given in respect of CPH and its associates and, if such approval is subject to conditions, those conditions are reasonably acceptable to CPH);

• (g) the CEO Services Agreement is duly executed by the parties thereto;

• (h) each third party whose consent is required to tränsfer the Jurlique Investment to CPH in accordance with clauses 5.2(i) and (j) provides its consent in a form acceptable to Challenger, CPHICI and CPH, being the third party consents and approvals set out in the Jurlique Transfer; and

• (i) the scheme of arrangement which is to be proposed in relation to the CGHL Options as described in section 12.1 of the Disclosure Document is approved or ASIC grants such modifications to the Corporations Act as may be required to enable, if required, compulsory acquisition of the CGHL Options to proceed if the Restructure is implemented.

2.2 Conduct of the parties

• (a) Each party must use all reasonable endeavours within its own capacity to ensure that each Condition is fulfilled before 30 June 2004.
• (b) A party must notify each other party as soon as possible after it becomes aware that a Condition is satisfied or becomes incapable of being satisfied.

2.3 Failure of Condition

Any party may terminate this deed by giving notice in writing to the other parties at any time before Completion if:

• (a) a Condition is incapable of fulfilment, or where a party gives notice to the other parties that a Condition is incapable of fulfilment pursuant to clause $2.2(b)$ ;
• (b) each Condition is not satisfied before 5.00pm on 30 June 2004 or such later date which is agreed to by the parties; or
• (c) a Condition having been fulfilled, that Condition does not remain fulfilled in all respects at all times before Completion.

2.4 Waiver

(a) Subject to clause 2.4(b), the Conditions are included for the benefit of the Retiring Responsible Entity, Challenger and CPH. No Condition may be waived without the written agreement of each of the Retiring Responsible Entity, Challenger and CPH in their absolute discretion.

(b) The Jurlique Condition is included for the benefit of CPHICI, Challenger and CPH. The Jurlique Condition may not be waived without the written agreement of each of CPHICI, Challenger and CPH.

2.5 Nature of Conditions

The Conditions are conditions precedent to the formation of any contract to undertake the completion steps referred to in clause 5. Unless and until each of the Conditions is satisfied or, as applicable, waived, no contract to undertake the completion steps referred to in clause 5 will come into force or be binding on any party or any Unitholder under the terms of the Constitution.

2.6 Action on termination

On termination of this deed under clause 2.3:

• (a) clauses 2A, 12.4, 12.5, 12.13, 12.14, 12.15, 12.16 and 13 continue to apply;
• (b) accrued rights and remedies of a party are not affected; and
• (c) subject to clauses 2.6(a) and (b), the parties are released from further performing their obligations under this deed.

2A. Second Constitutional Modification Deed

2A.1 Clause 2A - When Operative

This clause 2A is only operative if:

• (a) the Restructure does not Complete, including for the reason that a Condition is incapable of fulfilment ; and
• (b) the LTIP Resolutions are approved at the Unitholders' Meeting by the required majority.

2A.2 Lodgement of Second Constitutional Modification Deed

As soon as practicable after it becomes aware that this clause 2A is operative, the Retiring Responsible Entity must execute the Second Constitutional Modification Deed and lodge it with ASIC pursuant to section 601GC(2) of the Corporations Act.

3. Retiring Responsible Entity's obligations

Upon execution of this deed, the Retiring Responsible Entity must:

• (a) announce the Restructure to ASX in a form agreed to by the parties; and
• (b) convene the Unitholders' Meeting and dispatch the Disclosure Document to the holders of Units,

in each circumstance, so far as is reasonably practicable, in accordance with the Timetable.

4. Listing of Challenger

Without limitation to clause 2.2(a), Challenger must, prior to Completion, apply for listing and quotation of Challenger Shares on ASX, initially on a deferred settlement basis, and thereafter on an ordinary settlement basis with effect from the date required by the Timetable, or such other date agreed by the Retiring Responsible Entity and Challenger.

5. Completion Steps

5.1 Completion Steps - Restructure

Subject to the satisfaction or waiver of the Conditions and this deed not having being terminated before Completion, Completion must occur on the Effective Date and at Completion the following events are to occur in the following sequence:

• (a) the Retiring Responsible Entity and Challenger, must, and the Retiring Responsible Entity must procure the IOH Transferee and the IOH Guarantor to, enter into the IOH Transferee Deed if it has not been entered before Completion;

• (b) the Retiring Responsible Entity must, as agent and attorney for each Ineligible Overseas Holder, transfer all the right, title and interest of and in IOH Units held by the Ineligible Overseas Holders to the IOH Transferee by executing a transfer of such IOH Units in favour of the IOH Transferee;

• (c) immediately after execution of the transfers under clause 5.1(b), the Retiring Responsible Entity must register the IOH Transferee as holder of the IOH Units transferred to the IOH Transferee under clause $5.1(b)$ :

• (d) Challenger must apply for five Units (Challenger Units) by completing a Unit Subscription Application in respect of the Challenger Units and deliver this, together with payment of the Challenger Unit Subscription Price in respect of the Challenger Units, to the Retiring Responsible Entity;
• (e) the Retiring Responsible Entity must immediately accept the payment tendered pursuant to clause 5.1(d) and issue and allot the Challenger Units to Challenger and register Challenger as holder of the Challenger Units;
• (f) the Retiring Responsible Entity must:
• (i) redeem all Eligible Unitholder Units in accordance with the terms of the First Constitutional Modification Deed in consideration for the issue and allotment to each Eligible Unitholder of the Challenger Restructure Shares in accordance with clause 5.1(g); and
• (ii) as agent and attorney of each Eligible Unitholder subscribe for the Challenger Restructure Shares and on behalf of each Eligible Unitholder agree to accept the Challenger Restructure Shares and be bound by the Challenger Constitution as amended from time to time by completing the Challenger Share Subscription Notice and delivering it to Challenger;
• (g) Challenger must immediately accept the Challenger Share Subscription Notice delivered by the Retiring Responsible Entity under clause 5.1(f), issue the Challenger Restructure Shares and allot them to each Eligible Unitholder on a one for one basis such that for each Eligible Unitholder Unit that is redeemed under clause $5.1(f)(i)$ the relevant Eligible Unitholder will receive one Challenger Restructure Share:

• (h) Challenger must apply for such number of Units by completing a Unit Subscription Application to ensure that Challenger subscribes for one Unit for each Unit redeemed pursuant to clause 5.1(f)(i) (Recapitalisation Units) and deliver this, together with payment of \$1, to the Retiring Responsible Entity:

• (i) the Retiring Responsible Entity must accept the payment tendered pursuant to clause 5.1(h) and issue and allot the Recapitalisation Units to Challenger and register Challenger as holder of the Recapitalisation Units; and

• (j) the Retiring Responsible Entity must lodge a notice with ASIC under section 601FL of the Corporations Act giving notice that the Unitholders have resolved to appoint the New Responsible Entity as Challenger Group's responsible entity.

5.2 Completion Steps - CPH Consideration

In consideration of:

• (a) CPH, the Investment Manager and CPHICI hereby agreeing to procure the termination of the Investment Management Agreement and the Portfolio Investment Management Deed by executing the Termination Deed on the Completion Date in accordance with clause $5.2(c)$ ;
• (b) CPH procuring the Retiring Responsible Entity to resign as responsible entity of the Challenger Group on and from the Effective Date by executing the Deed of Retirement and Appointment in accordance with clause 5.2(d),

subject to the CEO Services Agreement being duly executed by the parties thereto in satisfaction of the Condition in clause 2.1(g), each of the steps in clause 5.1 having been performed and subject to clause 5.3, the following events are to occur in the following sequence:

• (c) CPH, the Investment Manager, CPHICI and the Retiring Responsible Entity must, and CPH must procure B2B to, execute the Termination Deed;
• (d) the Retiring Responsible Entity must, and Challenger must procure the New Responsible Entity to, execute the Deed of Retirement and Appointment if it has not been executed prior to Completion;
• (e) the Retiring Responsible Entity in its capacity as responsible entity of Challenger Group must, on receipt of the Termination Deed duly executed by each of CPH, the Investment Manager, CPHICI, the Retiring Responsible Entity and B2B and the Deed of Retirement and Appointment executed by the Retiring Responsible Entity, pay to CPH the CPH Payment and by executing this deed, CPH irrevocably directs the Retiring Responsible Entity to apply the CPH Payment to make the Challenger

Options Payment and the Jurlique Payment in the manner referred to in clause 5.2(f) and (i);

• (f) in accordance with clause 5.2(e), CPH must pay the Challenger Options Payment to Challenger as consideration for the issue to Investment Manager of CPH of the Challenger Option Number of Challenger Options;
• (g) Investment Manager must deliver to Challenger the Challenger Option Application duly executed by it;
• (h) Challenger must, on receipt of the Challenger Options Payment and the Challenger Option Application executed by Investment Manager, grant Investment Manager the Challenger Option Number of Challenger Options;
• (i) in accordance with clause 5.2(e), CPH must pay the Jurlique Payment to CPHICI in consideration for the transfer of the Jurlique Investment in accordance with clause 5.2(j) below; and
• (i) CPHICI must, upon receipt by it of the Jurlique Payment, execute the Jurlique Transfer and CPH must procure that CPH Products Pty Limited (ACN 106 918 638) executes the Jurlique Transfer.

No part of the CPH Payment is attributable to the transfer of any trust property from the Retiring Responsible Entity to the New Responsible Entity upon change of responsible entity of Challenger Group pursuant to this deed.

5.3 CPH Consideration - variation to timing

Notwithstanding clause 5.2, the parties may agree in writing to vary the terms of clause 5.2 so as to permit the performance of some or all of the steps in clause 5.2 at a date after the Completion Date.

5.4 Interdependence

No party is obliged to perform any step under clauses 5.1 or 5.2 unless all events required to occur under those completion steps will occur.

6. Further Completion Steps

6.1 Issue of Holding Statements

Upon the issue and allotment of the Challenger Restructure Shares in accordance with clause 5.1(a), Challenger must promptly notify the Challenger Share Registry and request it to dispatch holding statements in relation to the issue of those Challenger Restructure Shares not later than 5 Business Days after the date of issue of the Challenger Restructure Shares.

6.2 Ineligible Overseas Holders - IOH Transferee and IOH Guarantor

In accordance with the Disclosure Document, the Retiring Responsible Entity must procure that the IOH Transferee Deed includes a provision that in consideration of the transfer of IOH Units to the IOH Transferee in accordance with clause 5.1(b):

• (a) the IOH Transferee must as soon as practicable and by no later than by the IOH Payment Date remit the IOH Proceeds to the Challenger Share Registry; and
• (b) the IOH Guarantor must unconditionally and irrevocably guarantee the obligations of the IOH Transferee referred to in clause 6.2(a).

6.3 Ineligible Overseas Holders - Challenger Share Registry

Challenger must procure that the Challenger Share Registry within 5 Business Days of receipt of the IOH Proceeds does all things required to ensure the payment by cheque in Australian dollars to each Ineligible Overseas Holder of an amount equal to the Challenger Share VWAP multiplied by the number of IOH Units it was the holder of and which were transferred to the IOH Transferee pursuant to clause $5.1(b)$ .

7. Warranties

Each party represents and warrants to each other that:

• (a) it has the power to enter into and perform its obligations under this deed and (subject to obtaining those approvals and consents expressly contemplated by this deed) has obtained all necessary approvals and consents to enable it to do so: and
• (b) this deed is valid and binding upon it.

8. Undertaking

Each party undertakes to:

• (a) do, at its own expense, everything reasonably necessary (including executing documents) to give full effect to this deed and the transactions contemplated by it; and
• (b) without limiting the obligations of the parties under paragraph (a), comply so far as is reasonably practicable with the Timetable

9. Dealing in Units

9.1 Last day for dealing in Units

For the purpose of establishing who is a Unitholder at the Record Time, dealings in Units or any ownership interests in Units will only be recognised provided that:

• (a) in the case of dealings effected on CHESS, the transferee is registered in the Unit Register as the holder of the relevant Units by the Record Time; and
• (b) in all other cases, registrable transmission applications or transfers in respect of those dealings are received on or before the Record Time at the place where the Unit Register is kept.

9.2 No recognition of certain dealings

The Retiring Responsible Entity will not accept for registration or recognise for any purpose under this deed any transmission application or transfer in respect of Units or any ownership interest in Units which is received after the Record Time at the place where the Unit Register is kept.

10. GST

10.1 Interpretation

In this clause 10 a word or expression defined in the A New Tax System (Goods and Services Tax) Act 1999 (Cth) has the meaning given to it in that Act.

10.2 GST gross up

If a party makes a supply under or in connection with this deed in respect of which GST is payable, the consideration for the supply but for the application of this clause 10.2 (GST exclusive consideration) is increased by an amount equal to the GST exclusive consideration multiplied by the rate of GST prevailing at the time the supply is made.

10.3 Reimbursements

If a party must reimburse or indemnify another party for a loss, cost or expense, the amount to be reimbursed or indemnified is first reduced by any input tax credit the other party is entitled to for the loss, cost or expense, and then increased in accordance with clause 10.2.

10.4 Tax invoice

A party need not make a payment for a taxable supply made under or in connection with this deed until it receives a tax invoice for the supply to which the payment relates.

11. Notices and other communications

11.1 Service of notices

A notice, demand, consent, approval or communication under this deed (Notice) must be:

• (a) in writing, in English and signed by a person duly authorised by the sender; and
• (b) hand delivered or sent by prepaid post or facsimile to the recipient's address for Notices specified in the Details, as varied by any Notice given by the recipient to the sender.

11.2 Effective on receipt

A Notice given in accordance with clause 11.1 takes effect when taken to be received (or at a later time specified in it), and is taken to be received:

(a) if hand delivered, on delivery;

• (b) if sent by prepaid post, two Business Days after the date of posting (or seven Business Days after the date of posting if posted to or from a place outside Australia);
• (c) if sent by facsimile, when the sender's facsimile system generates a message confirming successful transmission of the entire Notice unless, within eight Business Hours after the transmission, the recipient informs the sender that it has not received the entire Notice,

but if the delivery, receipt or transmission is not on a Business Day or is after 5.00pm on a Business Day, the Notice is taken to be received at 9.00am on the next Business Day.

12. Miscellaneous

12.1 Alterations

This deed may be altered only by amending deed executed by each party.

12.2 Approvals and consents

Except where this deed expressly states otherwise, a party may, in its discretion, give conditionally or unconditionally or withhold any approval or consent under this deed.

12.3 Assignment

A party may only assign this deed or a right under this deed with the prior written consent of each other party.

12.4 Costs

Each party must pay its own costs of negotiating, preparing and executing this deed.

12.5 Stamp duty

Any stamp duty, duties or other taxes of a similar nature (including fines, penalties and interest) but excluding GST, income tax, capital gains tax and any other tax payable under the Income Tax Assessment Act (Cth) in connection with the transactions contemplated by clause 5.2 of this deed must be paid by CPH, but in respect of any other clause of this deed, by the New Responsible Entity.

12.6 Survival

Any indemnity or any obligation of confidence under this deed is independent and survives termination of this deed. Any other term by its nature intended to survive termination of this deed survives termination of this deed.

12.7 Counterparts

This deed may be executed in counterparts. All executed counterparts constitute one document.

12.8 No merger

The rights and obligations of the parties under this deed do not merge on completion of any transaction contemplated by this deed.

12.9 Entire deed

This deed constitutes the entire deed between the parties in connection with its subject matter and supersedes all previous deeds or understandings between the parties in connection with its subject matter.

12.10 Severability

A term or part of a term of this deed that is illegal or unenforceable may be severed from this deed and the remaining terms or parts of the term of this deed continue in force.

12.11 Exercise of Rights and Waiver

A party may exercise a right, power or remedy separately or concurrently with another right, power or remedy. A party does not waive a right, power or remedy if it fails to exercise or delays in exercising the right, power or remedy. A single or partial exercise of a right, power or remedy does not prevent another or further exercise of that or another right, power or remedy. A waiver of a right, power or remedy must be in writing and signed by the party giving the waiver.

12.12 Relationship

Except where this deed expressly states otherwise, it does not create a relationship of employment, Challenger Group, agency or partnership between the parties.

12.13 Confidentiality

• A party may only use confidential information of another party for the purposes of this deed, and must keep the existence and the terms of this deed and any confidential information of another party confidential except where:
• (a) the information is public knowledge (but not because of a breach of this deed) or the party has independently created the information;
• (b) disclosure is required by law or a regulatory body (including a relevant stock exchange); or
• (c) disclosure is made to a person who must know for the purposes of this deed on the basis that the person keeps the information confidential.

This clause 12.13 survives the termination of this deed.

12.14 Announcements

A public announcement in connection with this deed or a transaction contemplated by it must be agreed by the parties before it is made, except if required by law or a regulatory body (including a relevant stock exchange), in which case the party required to make an announcement must, to the extent practicable, first consult with and take into account the reasonable requirements of each other party.

12.15 Governing law and jurisdiction

This deed is governed by the law of New South Wales, Australia and each party irrevocably and unconditionally submits to the non-exclusive jurisdiction of the courts of New South Wales, Australia.

12.16 Remedies Cumulative

The rights, powers and remedies provided by this deed are cumulative with and not exclusive of the rights, powers or remedies provided by law independently of this deed

13. Limitation of liability - Retiring Responsible Entity

13.1 Capacity

The Retiring Responsible Entity enters into this deed in its capacity as responsible entity and trustee of the Challenger Group and in no other capacity.

13.2 Limitation

Subject to clause 13.4, the liability of the Retiring Responsible Entity in respect of any cause of action, claim or loss arising:

• (a) under or in connection with this deed;
• (b) in connection with any transaction, conduct or any other agreement contemplated by this deed; or
• (c) under or in connection with (to the extent permitted by law) any representation, warranty or undertaking given or to be given in connection with this deed (each, a Claim),

is limited to the property of the Challenger Group. The right of the parties other than the Retiring Responsible Entity to recover any amount in respect of any (and all) Claims is limited to a right to recover an amount not exceeding the amount which the Retiring Responsible Entity is entitled to and actually recovers from the property of the Challenger Group (after taking account of the costs of exercising its right of indemnity or exoneration) and if, after exercise of those rights, any such amount remains outstanding, no further Claim may be made against the Retiring Responsible Entity personally. Subject to clause 13.4 this limitation of liability applies despite any other provision of this deed.

13.3 Acknowledgment of limitations

The parties other than the Retiring Responsible Entity agree and acknowledge that they must not, in respect of any Claim:

• (a) subject to clause 13.4, bring proceedings against the Retiring Responsible Entity in its personal capacity;
• (b) seek to appoint an administrator or liquidator to the Retiring Responsible Entity,
• (c) commence the winding-up, dissolution, official management or administration of the Retiring Responsible Entity; or
• (d) appoint a receiver, receiver and manager, administrative receiver or similar official to all or any of the assets of the Retiring Responsible Entity except to the extent that the steps taken affect any property of the Challenger Group or the Retiring Responsible Entity's right of recourse against, and indemnity from, the property of the Challenger Group and nothing else.

13.4 Exception

If the Retiring Responsible Entity acts negligently, with wilful misconduct or in breach of Challenger Group with a result that:

• (a) the Retiring Responsible Entity's right of indemnity, exoneration or recoupment out of the property of the Challenger Group; or
• (b) the actual amount recoverable by the Retiring Responsible Entity in exercise of those rights,

is reduced in whole or in part or does not exist, then to the extent that such right or the amount so recoverable is reduced or does not exist, the Retiring Responsible Entity may be personally liable.

13.5 Retiring Responsible Entity not obliged to act

The Retiring Responsible Entity is not obliged to do or refrain from doing anything under this deed (including, without limitation, incur any liability) unless the Retiring Responsible Entity's liability is limited in the same manner as set out in clauses 13.1 - 13.3 (inclusive).

Schedule 2 - Challenger Option terms

Terms and conditions of issue of options to subscribe for ordinary shares in Challenger

1. Defined Terms

Defined terms in the Challenger Financial Services Group Restructure Implementation Deed have the same meanings where used in these option terms.

2. Entitlement

Each Challenger Option entitles the optionholder to subscribe for one fully paid Challenger Share.

3. Exercise Price

The exercise price of each Challenger Option is \$0.65.

4. Option Period

Each Challenger Option may be exercised at any time before the tenth anniversary of the Effective Date.

Any Challenger Option that is not exercised will automatically expire on the tenth anniversary of the Effective Date.

5. Transferability

Challenger Options may not be transferred.

6. Participation in bonus issues and pro rata issues

• (a) If Challenger makes a bonus issue of Challenger Shares or other securities convertible into Challenger Shares pro rata to holders of Challenger Shares (other than an issue in lieu of dividends or by way of dividend reinvestment pursuant to any shareholder election), the optionholder may participate in such issue in respect of such number of Challenger Options exercised by the optionholder on or before the books closing date for that issue, on the same basis as the holders of Challenger Shares.

• (b) If Challenger makes a pro rata issue (as defined in the ASX Listing Rules) to the holders of Challenger Shares the optionholder may participate in such offer in respect of such number of Challenger Options exercised by the optionholder on or before the books closing date for that offer, on the same basis as the holders of Challenger Shares.

• (c) Challenger must notify the optionholder at least 12 Business Days before the books closing date for determining entitlements to an offer referred to in paragraph (a) or (b) of:

• (i) the proposed terms of the issue or offer; and
• (ii) the right to exercise the optionholders' Challenger Options under paragraph (a) or (b) (as the case may be).

7. Adjustments for bonus issues and cash issues

(a) If Challenger makes a pro rata issue (as defined in the ASX Listing Rules) to the holders of Challenger Shares, the exercise price of each Challenger Option will be reduced with the new exercise price of each Challenger Option to be calculated in accordance with the following formula:

$$
NP = OP - \frac{E[P-(S+D)]}{N+1}
$$

where:

• $NP =$ the new exercise price of the Challenger Option
• $OP =$ the old exercise price of the Challenger Option
• the number of underlying securities into which $E =$ one Challenger Option is exercisable
• $P =$ the average market price per security (weighted by reference to volume) of the underlying securities during the five trading days ending on the day before the ex rights date or ex entitlement date
• $S =$ the subscription price for a security under the pro rata issue
• $D =$ the dividend (in the case of a trust distribution) due but not yet paid on the existing underlying securities (except those to be issued under the pro rata issue).
• $N =$ the number of securities with rights or entitlements that must be held to receive a right to one new security.

No change will be made to the number of shares to which the optionholder is entitled.

(b) If Challenger makes a bonus issue of Challenger Shares or other securities convertible into Challenger Shares pro rata to holders of Challenger Shares (other than an issue in lieu of dividends or by way of dividend reinvestment pursuant to any shareholder

election), the number of Challenger Shares issued on exercise of each option will be increased by the number of bonus shares that the optionholder would have received if the Challenger Option had been exercised prior to the record date for the bonus shares. No change will be made to the exercise price.

8. Reorganisation

If there is a reorganisation (including consolidation, sub-division, reduction or return) of the share capital of Challenger, the rights of the optionholder in respect of any unexercised Challenger Options will be changed to the extent necessary to comply with the Listing Rules applying to a reorganisation of capital at the time of the reorganisation.

9. Ranking of shares issued on exercise of Challenger Options

• (a) All shares allotted pursuant to the exercise of Challenger Options will, subject to the Constitution of Challenger, rank in all respects (including rights relating to dividends) pari passu with the existing Challenger Shares at the date of allotment.
• (b) Where any Challenger Shares are allotted during a period in respect of which a dividend is declared, the holder of those Challenger Shares is only entitled to receive a dividend where the Challenger Option pursuant to which such Challenger Shares were allotted was exercised on or before the dividend entitlement date.

10. Method of exercise of options

• (a) Options may be exercised by written notice to the Directors of Challenger in the form set out on the reverse side of the Challenger Option certificate. An exercise notice must specify the number of Challenger Shares required to be issued, which number must be a multiple of 1,000 if only part of the options are exercised. Challenger Options will be deemed to have been exercised on the date the application is lodged with Challenger. The optionholder must also surrender its option certificate to Challenger at the time of exercising a Challenger Option.
• (b) The optionholder must pay the exercise price in full to Challenger on the date of exercise of Challenger Options.
• (c) The exercise of less than all of the optionholder's Challenger Options will not prevent the

optionholder from exercising an Challenger Option in respect of the whole or any part of the balance of the entitlement under the optionholders' remaining Challenger Options.

• (d) If the optionholder exercises less than the total number of options then registered in its name Challenger must cancel that option certificate and issue to the holder a new option certificate in respect of the optionholder's unexercised Challenger Options.
• (e) Within 10 Business Days of receipt of the application for exercise of Challenger Options and payment by the optionholder of the exercise price, Challenger must issue to the optionholder the number of Challenger Shares specified in the application.
• (f) Challenger will as soon as practicable after issue make application for the shares issued on exercise of Challenger Options by the optionholder to be granted official quotation on the Australian Stock Exchange Limited.

11. ASX Listing Rules

For so long as Challenger remains listed on ASX, in the event of inconsistency between the option terms and conditions and the ASX Listing Rules, the Listing Rules will prevail to the extent of such inconsistency.

12. Notices

Any notices regarding Challenger Options will be sent to the registered address of the optionholder as recorded in the register of options maintained by Challenger.

13. Governing laws

The laws of New South Wales govern the terms and conditions of the Challenger Options.

14. Duties and taxes

Challenger is not responsible for any duties or taxes which may become payable in connection with the issue and allotment of Challenger Shares pursuant to an exercise of the Challenger Options or any other dealing with the Challenger Options or Challenger Shares.

15. No Assignment of Challenger Options

The Challenger Options may not be assigned by the optionholder to any other person.

16. No Listing on ASX

The Challenger Options will not be listed on ASX.

Schedule 4 - First Constitutional Modification Deed

Constitutional Modification Deed No. 6

Parties

Name	CPH Management Limited ACN 080 207 496
Short form name	Responsible Entity
Notice details	Level 3, 54 Park Street, Sydney NSW 1028

Background

• A The trust known as Challenger Financial Services Group ARSN 091 545 185 (Challenger Group) is governed by a trust deed dated 24 October 1997, as amended (Constitution).
• B Schedule 1 of the Constitution ceased to apply when the Responsible Entity acquired, directly or indirectly, all of the shares on issue as at 9 May 2003 in Challenger Financial Services Group Limited (formerly known as Challenger International Limited) and Schedule 2 of the Constitution now applies as the Fee Schedule to the Constitution for the purposes of determining the Responsible Entity's entitlement to fees.
• C Pursuant to clause 46 of the Constitution, the Responsible Entity may, by supplemental deed, make any modification, addition or deletion to the Constitution.
• D Section 601GC(1)(a) of the Corporations Act 2001 (Cth) permits the modification of the Constitution by special resolution of the members of the Challenger Group (Members).
• E A meeting of Members was held on [22] December 2003 and a special resolution was passed for the purposes of, amongst other things, section 601GC(1)(a) of the Corporations Act 2001 (Cth) to authorise and approve the modifications to the Constitution set out in this Constitutional Modification No. 6 (Deed).

Agreed terms

1. Defined terms and interpretation

In this Deed, words defined in the Constitution have the same meanings when used in this Deed.

2. Amendments

The Responsible Entity amends the Constitution in the manner set out in the Schedule to this Deed.

3. Commencement

This Deed will take effect on lodgement with ASIC.

SCHEDULE

1. Insert the following new clause 12A immediately following clause 12 of the Constitution:

"12A Implementation of Restructure

12A.1 Implementation of Restructure

The Responsible Entity has power to do all things which it considers necessary, desirable or reasonably incidental to give effect to the Restructure.

12A.2 Express powers of Responsible Entity

Without limiting clause 12A.1 and despite any other provision of this Deed, the Responsible Entity has power to:

• (a) transfer as agent and attorney for each Ineligible Overseas Holder, all the right, title and interest of and in IOH Units held by the Ineligible Overseas Holders to the IOH Transferee by executing and submitting all necessary transfer forms in accordance with the Implementation Deed and the IOH Transferee Deed;
• (b) register the IOH Transferee as holder of the IOH Units transferred to the IOH Transferee in accordance with the Implementation Deed;
• (c) issue and allot the Challenger Units to Challenger in consideration for the payment by Challenger for each such Challenger Unit of an amount equal to the closing price on ASX for Units on the Suspension Date and register Challenger as the holder of the Challenger Units in accordance with the Implementation Deed:

• (d) redeem all Eligible Unitholder Units in accordance with the Implementation Deed without needing further authority or approval from holders;

• (e) as agent and attorney of each Eligible Unitholder subscribe for the Challenger Restructure Shares and on behalf of each Eligible Unitholder agree to accept the Challenger Restructure Shares and be bound by the Challenger Constitution as amended from time to time by completing a subscription notice and delivering it to Challenger in accordance with the Implementation Deed;

• (f) in consideration of Challenger making payment to the Retiring Responsible Entity of \$1, issue and allot the Recapitalisation Units to Challenger and register Challenger as holder of the Recapitalisation Units in accordance with the Implementation Deed;
• (g) pay the CPH Payment to CPH:
• (h) pursuant to CPH's direction, pay the Challenger Option Payment to Challenger as consideration for the issue to Investment Manager of the Challenger Option Number of Challenger Options in accordance with the Implementation Deed; and
• (i) pursuant to CPH's direction, pay the Jurlique Payment to CPHICI in consideration for the transfer to CPH or its subsidiary of the Jurlique Investment.

12A.3 Appointment as agent and attorney for Holders

The Responsible Entity is irrevocably appointed the agent and attorney of each Unitholder to do all things which the Responsible Entity considers are necessary. desirable or reasonably incidental to give effect to the Restructure, including, without limitation, to:

• (a) execute as agent and attorney for each Ineligible Overseas Holder a transfer of the IOH Units in favour of the IOH Transferee in accordance with the Implementation Deed and the IOH Transferee Deed;
• (b) redeem all Eligible Unitholder Units in accordance with the Implementation Deed without needing further authority or approval from holders; and
• (c) as agent and attorney for each Eligible Unitholder, subscribe for the Challenger Restructure Shares and on behalf of each Eligible Unitholder agree to accept the Challenger Restructure Shares and be bound by the Challenger Constitution by completing a subscription notice and delivering it to Challenger in accordance with the Implementation Deed.

The Responsible Entity is authorised to execute these documents and do these things without needing further authority or approval from holders and may

do so even if it has an interest in the outcome of such exercise.

12A.4 Responsible Entity's limitation of liability

The Responsible Entity is entitled to be indemnified out of the Trust Property of Challenger Group for any liability incurred by it in properly performing any of its duties, or exercising any of its powers, in relation to the Restructure or attempting to do so. The Responsible Entity is not required to do anything for which it does not have a full right of indemnity out of Trust Property available for that purpose.

12A.5 Independent and separate powers and authorities

Each of the Responsible Entity's powers described in clause 12A and the appointments made under clause 12A.3 are separate and independent powers and appointments (as the case may be).

12A.6 Fees of Responsible Entity

Despite any other provisions of this Deed, the Responsible Entity will not be entitled to be paid fees out of the Trust Property for the period on and from the Effective Date, including without limitation the right to be paid Management Fees or Performance Fees under clause 30 and Schedule 2 of this Deed.

12A.7 Definitions

In this clause 12A the following words have these meanings unless the contrary intention appears:

Challenger means Challenger Financial Services Group Limited (ACN 106 842 371).

Challenger Constitution means the Constitution of Challenger as at the date of the Unitholders' Meeting.

Challenger Group means Challenger Financial Services Group (ARSN 091 545 185).

Challenger Group Unit Registry means Computershare Registry Services Pty Limited.

Challenger Option means an option entitling the holder to subscribe for one Challenger Share per option on the Challenger Option Terms.

Challenger Option Number means 300 million.

Challenger Options Payment means \$60 million.

Challenger Option Terms means the terms and conditions of the Challenger Options as set out in Schedule 2 of the Implementation Deed.

Challenger Restructure Shares means the number of Challenger Shares that the Retiring Responsible Entity must subscribe for as agent and attorney of each Eligible Unitholder to ensure that each Eligible Unitholder receives one Challenger Share for each Eligible Unitholder Unit it holds which is redeemed.

Challenger Share means one ordinary share in Challenger.

Challenger Share Registry means Computershare Registry Services Pty Limited.

Challenger Units means the five Units to be subscribed for by Challenger on the Effective Date in accordance with the Restructure.

CPH means Consolidated Press Holdings Limited (ABN 64 008 394 509).

CPHICI means CPHIC Investments Pty Limited (ABN 95 093 340 526).

CPH Management means CPH Management Limited (ABN 68 080 207 496).

CPH Payment means \$96 million.

Deed of Retirement and Appointment means the Deed between the Retiring Responsible Entity and the New Responsible Entity under which the Retiring Responsible Entity agrees, inter alia, to resign as the Responsible Entity of Challenger Group.

Disclosure Document means the disclosure document dated 10 November 2003 in connection with the Restructure which was authorised by the Retiring Responsible Entity and Challenger.

Effective Date means the effective date of the Restructure, being, subject to ASX approval, the same day as the Record Date.

Eligible Unitholder means a Unitholder other than Challenger and for the avoidance of doubt includes the IOH Transferee but excludes each Ineligible Overseas Holder.

Eligible Unitholder Unit means the Units registered in the name of an Eligible Unitholder in the register of Units as at the Record Time.

Implementation Deed means the deed between Challenger, CPH Investments Management Pty Limited, CPHICI, the Retiring Responsible Entity and CPH dated 10 November 2003 (if applicable, as amended) in relation to the Restructure.

Ineligible Overseas Holder means a Unitholder who at 4.00pm on the Record Date has a registered address which is outside Australia and its external territories or New Zealand unless the Retiring Responsible Entity and Challenger are satisfied that Challenger is not prevented from lawfully issuing Challenger Shares to such a Unitholder, either unconditionally, or after compliance with such conditions as Retiring Responsible Entity and Challenger, regard as acceptable.

Investment Management Agreement means the Investment Opportunities and Management Agreement between CPH, CPH Investments Management Pty Limited, CPH B2B Co Limited and the Retiring Responsible Entity dated 10 April 2000.

Investment Manager means CPH Investments Management Pty Limited (ABN 31 092 008 172).

IOH Guarantor means the related entity of the IOH Transferee that has been assigned a credit rating of not less than A by Standard & Poor's that will guarantee the payment required to be made by the IOH Transferee to the Challenger Share Registry, as further described in clause 6.2 of the Implementation Deed and the Disclosure Document.

IOH Transferee means the party that holds a dealer's licence or Australian financial services licence issued by ASIC to whom the IOH Units will be transferred on the Record Date, as further described in clause 6.2 of the Implementation Deed and the Disclosure Document.

IOH Transferee Deed means a deed or letter agreement to be entered into between the IOH Transferee, the IOH Guarantor, the Retiring Responsible Entity and Challenger, which includes provisions substantially in accordance with those referred to in clause 6.2 of the Implementation Deed and is otherwise consistent with the relevant disclosures regarding Ineligible Overseas Holders in the Disclosure Document.

IOH Unit means the Units registered in the name of an Ineligible Overseas Holder in the Unit Register at 4.00pm on the Record Date.

Jurlique Investment means the 25 million ordinary shares held by Challenger Group, through its wholly owned subsidiary CPHICI, in Jurlique International Pty Limited (representing 25% of its issued capital) and all of the rights and obligations of CPHICI pursuant to the following related documents:

• (a) Share Subscription and Purchase Agreement dated 9 September 2002;
• (b) Jurlique Shareholders Agreement dated 23 September 2002;
• (c) Escrow Deed dated 23 September 2002; and
• (d) Mortgage of Shares dated 23 September 2002.

Jurlique Payment means \$36 million.

LTIP Resolutions means Resolutions 7 and 8 in the Notice of Meeting that forms part of the Disclosure Document.

New Responsible Entity means Challenger Managed Investments Limited (ABN 84 002 835 597).

Portfolio Investment Management Deed means the deed dated 24 May 2002 between Challenger Investments Management Pty Limited and CPHICI.

Recapitalisation Units means Units redeemed by Challenger in consideration for the issue and allotment to each Eligible Unitholder of the Challenger Restructure Shares.

Record Date means the date nominated as the Record Date for the purposes of the Restructure either in the Disclosure Document or by announcement to be made by the Retiring Responsible Entity to ASX.

Record Time means some time after 5.00pm on the Record Date after the steps referred to in clauses $5.1(a) - (e)$ of the Implementation Deed have been completed.

Restructure means the restructuring proposal that will have the result of corporatising Challenger Group on the terms and conditions contained in the Implementation Deed.

Restructure Resolutions means Resolutions 1 to 6 in the Notice of Meeting that forms part of the Disclosure Document.

Retiring Responsible Entity means CPH Management Limited in its capacity as the responsible entity of Challenger Group.

Termination Deed means a deed to be entered into by each party to the Investment Management Agreement and the Portfolio Investment Management Deed under which each of the Investment Management Agreement and Portfolio Investment Management Deed are terminated.

Unit Register means the register of Unitholders kept pursuant to the Corporations Act.

Unitholders means a person registered in the Unit Register as a holder of Units.

Unitholders' Meeting means the meeting of Unitholders to be convened by the Retiring Responsible Entity to consider the Restructure Resolutions and the LTIP Resolutions.

1. Insert the following at the end of clause 2.1 of Schedule 2:

"If the Responsible Entity retires (Retiring Responsible Entity) during a 6 month period ending 30 June or 31 December (Relevant Period), then the Management Fee to which the Responsible Entity is entitled for the Relevant Period will be divided between the Retiring Responsible Entity and the new responsible entity of the Trust (New Responsible Entity) in proportion to the number of days that each was the responsible entity of the Trust in the Relevant Period.

For the avoidance of doubt, the entitlements of the Retiring Responsible Entity and the New Responsible Entity set out in the above paragraph are the only entitlements of such persons to receive Management Fees for the Relevant Period."

Schedule 5 - Second Constitutional Modification Deed

Constitutional Modification Deed No. 7

Parties

Name	CPH Management Limited ACN 080 207 496
Short form name	Responsible Entity
Notice details	Level 3, 54 Park Street, Sydney NSW 1028

Background

• A The trust known as Challenger Financial Services Group ARSN 091 545 185 (Challenger Group) is governed by a trust deed dated 24 October 1997, as amended (Constitution).
• B Pursuant to clause 46 of the Constitution, the Responsible Entity may, by supplemental deed, make any modification, addition or deletion to the Constitution.
• C Section 601GC(1)(a) of the Corporations Act 2001 (Cth) permits the modification of the Constitution by special resolution of the members of the Challenger Group (Members).
• D A meeting of Members was held on [##] December 2003 and a special resolution was passed for the purposes of, amongst other things, section 601GC(1)(a) of the Corporations Act 2001 (Cth) to authorise and approve the modifications to the Constitution set out in this Constitutional Modification Deed No. 7 (Deed).

Agreed terms

1. Defined terms and interpretation

In this deed, words defined in the Constitution have the same meanings when used in this Deed.

2. Amendments

The Responsible Entity amends the Constitution on the terms set out in the Schedule to this Deed.

3. Commencement

This Deed will take effect on lodgement with ASIC.

SCHEDULE

Insert the following new clause 12A immediately following clause 12 of the Constitution:

"12A Implementation of LTIP

12A.1 Implementation of LTIP

The Responsible Entity has power to do all things which it considers necessary, desirable or reasonably incidental to give effect to the LTIP.

12A.2 Express powers of Responsible Entity

Without limiting clause 12A.1 and despite any other provision of this Deed, the Responsible Entity has power to:

• (a) issue Units in accordance with the terms of the LTIP, which terms include the consideration that is to be paid to acquire a Unit pursuant to the LTIP, namely the volume weighted average price of Units over the four ASX trading days immediately preceding the date of issue of the Units and the day of issue; and
• (b) provide loans from Trust Property on the terms provided for in the LTIP to fund the consideration which is payable for Units to be issued under the LTIP

12A.3 Responsible Entity's limitation of liability

The Responsible Entity is entitled to be indemnified out of the Trust Property of the Challenger Group for any liability incurred by it in properly performing any of its duties, or exercising any of its powers, in relation to the LTIP or attempting to do so. The Responsible Entity is not required to do anything for which it does not have a full right of indemnity out of Trust Property available for that purpose.

12A.4 Independent and separate powers and authorities

Each of the Responsible Entity's powers described in clause 12A are separate and independent powers.

12A.5 Definitions

In this clause 12A the following words have these meanings unless the contrary intention appears:

LTIP means the Long Term Incentive Plan for Senior Executives as described in the Disclosure Document dated 10 November 2003 which was distributed to Unitholders on 27 November 2003."

Section 13. Notice of Meeting

Notice is given that a meeting of Unitholders of Challenger Financial Services Group (ARSN 091 545 185) will be held at:

Time:	11.00am
Date:	Monday, 22 December 2003
Place:	The Heritage Ballroom, The Hotel Westin Sydney, 1 Martin Place, Sydney, NSW 2000

In accordance with section 2525 of the Corporations Act, CPH Management intends to appoint Mr Michael Tilley to act as Chairman of the Meeting.

Capitalised terms used in this Notice of Meeting are defined in the Glossary in section 14 of the Disclosure Document.

Additional information concerning the Resolutions is contained in the Disclosure Document.

Business

The business of the Meeting is to consider and, if thought fit, pass the following Resolutions:

1. As an Ordinary Resolution:

"That, for the purposes of Australian Stock Exchange Limited Listing Rule 10.1, 10.11 and Chapter 2E and Part 5C.7 of the Corporations Act and as part of the Restructure of Challenger Group as more particularly described in the Disclosure Document, approval be given to:

• (i) the payment by Challenger Group of \$96 million to Consolidated Press Holdings Limited (CPH);
• (ii) the issue to CPH Investments of the Challenger Options, as more particularly described in the Disclosure Document, upon the payment by CPH to Challenger of \$60 million;
• (iii) the transfer to CPH or its subsidiary of the Jurlique Investment, as more particularly described in the Disclosure Document, upon the payment by CPH of \$36 million; and
• (iv) the financial benefits which may result to CPH by reason of the implementation of the Restructure as more particularly described in the Disclosure Document."

2. As a Special Resolution:

"The Constitution of Challenger Financial Services Group (Challenger Group) is amended as described in this Disclosure Document of which this Notice of Meeting forms part and in accordance with the provisions of Supplemental Deed No. 6 in the form tabled at the Meeting and initialled by the Chairman for the purposes of identification and the Responsible Entity of Challenger Group is authorised to execute and lodge with ASIC a supplemental deed poll to give effect to these amendments to the Constitution."

3. As an Ordinary Resolution:

"That for the purposes of section 611 (Item 7) of the Corporations Act, approval be given to the acquisition by Challenger of relevant interests in five Units to be issued in Challenger Group in accordance with the Restructure as more particularly described in the Disclosure Document."

4. As an Ordinary Resolution:

"That for the purpose of section 611 (Item 7) of the Corporations Act, as modified by declaration of ASIC dated 7 November 2003, approval be given to the acquisition by CPH Investments Management Pty Limited of relevant interests in up to 300 million Challenger Shares resulting from the exercise of all or any of the Challenger Options."

5. As an Ordinary Resolution:

"That subject to the approval of Resolutions 1 to 4 and 6 in this Notice of Meeting, the retirement of CPH Management Limited as Responsible Entity of Challenger Group be accepted and the appointment of Challenger Managed Investments Limited (ACN 002 835 592) as the new Responsible Entity of Challenger Group be approved and the Responsible Entity of Challenger Group be authorised to execute and lodge with ASIC on or after the Record Date for the Restructure which is more particularly described in the Disclosure Document, a notice requesting ASIC to record the change of Responsible Entity of Challenger Group, each on the terms and subject to conditions of the Restructure."

6. As an Ordinary Resolution:

"That for the purposes of Chapter 2E of the Corporations Act and Australian Stock Exchange Listing Rule 10.11, approval be given to the terms of the service agreement proposed between Challenger and Mr C Cuffe and the issue of 40 million Challenger Shares to Mr C Cuffe thereunder, each on the terms and conditions as more particularly described in the Disclosure Document."

7. As an Ordinary Resolution:

"That for the purposes of Australian Stock Exchange Listing Rule 7.1 and for the purposes of section 601GA(1) of the Corporations Act approval be and is hereby given to the LTIP and to the issue of Units in accordance with the terms of the LTIP and to the making of loans to participants in the LTIP each on the terms and conditions of the LTIP as more particularly described in the Disclosure Document."

8. As a Special Resolution:

"The Constitution of Challenger Group is amended as described in the Disclosure Document in accordance with the provisions of Supplemental Deed No. 7 in the form tabled at the Meeting and initialled by the Chairman for the purposes of identification and the Responsible Entity of Challenger Group is authorised to execute and lodge with ASIC a supplemental deed poll to give effect to these amendments to the Constitution."

Interdependence

For the Restructure, which is referred to in the Disclosure Document, to be approved each of Resolutions 1 to 6 inclusive must be passed.

Voting Exclusion Statement

CPH Management will disregard:

• (a) any votes cast on Resolutions 1 to 6 by CPH and its associates;
• (b) any votes cast on Resolution 4 by a Unitholder who has a registered address as recorded in the Unit Register at the date of the Meeting outside Australia or New Zealand;
• (c) any votes cast on Resolution 6 by any Director of CPH Management or Challenger (except a Director who is ineligible to participate in any employee incentive scheme in relation to Challenger Group or Challenger, including the LTIP) and their associates and Mr C Cuffe and his associates;
• (d) any votes cast on Resolution 7 by any Director of CPH Management or Challenger (except a Director who is ineligible to participate in any employee incentive scheme in relation to Challenger Group or Challenger, including the LTIP) and their respective associates.

However, CPH Management will not disregard a vote if it is cast by:

• a person as proxy for a person who is entitled to vote, in accordance with the directions on the proxy form; or
• the person chairing the Meeting as proxy for a person who is entitled to vote, in accordance with a direction on the proxy form to vote as the proxy decides.

Those Directors of Challenger Group and Challenger who are ineligible to participate in any employee incentive scheme in relation to Challenger Group and Challenger, including the LTIP, are Mr Packer, Mr Jacob, Ms Shanahan, Mr Tilley, Mr Service, Mr Hooper and Mr Polson.

ASX Listing Rule Approvals

If Unitholders approve Resolution 1, which includes an approval under ASX Listing Rule 10.11, approval is not required under ASX Listing Rule 7.1.

Proxies

If you do not plan to attend the Meeting in person, you may complete and return the proxy form that accompanies this Notice of Meeting.

• A Unitholder entitled to attend and vote at the Meeting is entitled to appoint not more than two proxies.
• Where more than one proxy is appointed, each proxy should be appointed to represent a specified proportion (or number) of the Unitholder's votes. If a Unitholder does not specify the proportion or number of the Unitholder's votes, each proxy may exercise half the votes. If you wish to appoint a second proxy, please contact:

Computershare Investor Services Pty Limited Level 3, 60 Carrington Street Sydney NSW 2000

FreeCall 1800 780 782 Fax +6 12 8235 8220

A proxy need not be a Unitholder.

The form appointing the proxy and the power of attorney or other authority (if any) under which the proxy is signed (or a certified copy of it) must be lodged with the Registry at:

Computershare Investor Services Pty Limited Level 3, 60 Carrington Street Sydney NSW 2000

FreeCall 1800 780 782 Fax +6 12 8235 8220

Proxies must be received not later than 48 hours before the time for holding the Unitholders' Meeting.

Dated this 27 November 2003

Robert Bernard Davis Company Secretary CPH Management Limited

Section 14. Glossary

The following capitalised terms, where used in this Notice of Meeting and Disclosure Document and any documents enclosed therewith (including the enclosed proxy form), have the meanings set out below.

60 Cent Threshold	has the meaning given to it on page 4.
APRA	means the Australian Prudential Regulation Authority.
ASIC	means the Australian Securities and Investments Commission.
ASX	means Australian Stock Exchange Limited ABN 98 008 624 691.
ASX Listing Rules or Listing Rules	means the listing rules of ASX which are applicable while the relevant entity is admitted to the official list of ASX, each as amended or replaced from time to time, except to the extent of any express written waiver by ASX.
Board	means the Board of Directors of Challenger or CPH Management.
Business Day	has the meaning given to it in the ASX Listing Rules.
CGHL	means Challenger Group Holdings Limited ABN 50 002 993 302 formerly Challenger International Limited.
CGHL Options	means the options granted by CGHL as described in section 11.1.
CGT	means capital gains tax.
Challenger	means Challenger Financial Services Group Limited ACN 106 842 371.
Challenger Constitution	means the constitution adopted by Challenger.
Challenger Group	means Challenger Financial Services Group ARSN 091 545 185.
Challenger Group Constitution or Constitution	means the constitution of Challenger Group set out in the deed of trust dated 24 October 1997, as amended by supplemental deeds.
Challenger Group Register or Unit Register	means the register of holders of Units kept pursuant to the Corporations Act.
Challenger Information Line	means 1300 733 343 (toll free within Australia) or + 61 2 9240 7450 (from outside Australia).
Challenger Managed Investments	means Challenger Managed Investments Limited ABN 94 002 835 592.
Challenger Options	means an option to subscribe for Shares to be issued in the capital of Challenger.
Challenger Share	means a fully paid ordinary Share issued in the capital of Challenger.
Challenger Share Register	means the register of Shareholders of Challenger to be kept pursuant to the Corporations Act.
CLL	means Challenger Life Limited ABN 60 006 381 193.
CLL 2	means Challenger Life No. 2 Limited ABN 44 072 486 938.
Conditions	means the Unitholder Meeting Conditions and the Third Party Conditions, being the conditions precedent to the Restructure becoming effective as set out in clause 2.1 of the Implementation Deed.
Corporations Act	means the Corporations Act 2001 (Cth) and any regulations made under the Act.
CPH	means Consolidated Press Holdings Limited ABN 64 008 394 509 and where the context requires CPH and its related bodies corporate.

CPH Group	means CPH and its subsidiaries.
CPH Investments	means CPH Investments Management Pty Limited ABN 31 092 008 172.
CPHIC	means CPH Investment Corp, the former name of Challenger Group.
CPHICI	means CPHIC Investments Pty Limited ABN 95 093 340 526.
CPH Management	means CPH Management Limited ABN 68 080 207 496 the existing Responsible Entity of Challenger Group.
CPH Transactions	has the meaning set out in section 1.5.
Director	a director of Challenger or CPH Management, as the context requires.
Disclosure Document	means the Notice of Meeting and Disclosure Document of which this Glossary forms part.
Effective Date	means the Record Date for the Restructure after the Conditions have been satisfied.
Expiry Date or Sunset Date	means 5.00pm on 30 June 2004.
FSSA Approval	means the satisfaction of the conditions which are set out in clauses 2.1(e) and (f) of the Implementation Deed, a copy of which is contained in section 12.
Grant Samuel	means Grant Samuel and Associates Pty Limited ABN 28 050 036 372.
Guarantor Entity	means the entity which guarantees the obligations of IOH Transferee, as referred to in section 4.1(d).
Implementation Deed	means the deed dated 10 November 2003 between Challenger, CPH Management, CPHIC Investments, CPHICI and CPH that relates to the Restructure, a copy of which (omitting the schedules to that deed other than Schedules 4 and 5) is contained in section 12.
	Independent Directors means the Directors of CPH Management other than Mr Packer, Mr Jacob and Mr Cuffe.
Independent Expert	means Grant Samuel.
Independent Expert Report	means the report of Grant Samuel in section 10.
Ineligible Overseas Holder	means a holder of Units who is referred to in section 4.1(d).
Interstar	means Interstar Securities Holdings Pty Limited which is described in section 5.
Investment Management Agreement	means the agreement entitled the "Investment Opportunities and Management Agreement" dated 10 April 2000 and entered into by CPH, CPH B2B Co. Limited, CPH Investments and CPH Management, and, in the context of this Disclosure Document (where appropriate), includes a reference to an agreement entitled the "Portfolio Investment Management Deed" dated 24 May 2002 and entered into by CPH Investments and CPHICI.
IOH Guarantor	means the related entity of the IOH Transferee that will guarantee the performance of the IOH Transferee's obligations.
IOH Transferee	means the person to whom the Units of Ineligible Overseas Holders are to be transferred in accordance with the Restructure.
Jurlique Investment	means the investment of Challenger Group which is described in section 2.
Life Companies	means CLL and CLL2.
LTIP	means the proposed long term incentive plan for senior executives as further described in section 9.
LTIP Resolutions	means Resolutions 7 and 8 in the Notice of Meeting.

	means the meeting of Unitholders to be held on 22 December 2003 convened by the
Meeting or Unitholders' Meeting	Notice of Meeting.
Merger	means the merger of CPHIC and Challenger International Limited that became effective on 1 July 2003.
Notice of Meeting	means the notice convening the meeting of Unitholders which forms part of this Disclosure Document.
Proxy Form	means the personalised proxy form sent to Unitholders with this Disclosure Document.
Proposed Tax Law Amendments	means the proposed amendments to the Australian income tax law, announced by the Federal government on 27 March 2003, in order to treat certain trusts, such as Challenger Group, as companies for all income tax purposes. This is further discussed in the Taxation Report.
Registry	Computershare Investor Services Pty Limited ABN 48 078 279 277.
Record Date	means the date nominated as the record date for the purposes of the Restructure by announcement to be made by CPH Management to ASX.
Resolution	means a resolution as set out in the Notice of Meeting.
Responsible Entity	means the responsible Entity of Challenger Group from time to time.
Restructure	means the restructure of Challenger Group which is more particularly described in this Disclosure Document.
Restructure Resolutions	means Resolutions 1 to 6 inclusive in the Notice of Meeting.
Suspension Date	means either 16 December 2003 or the Notification Date as described in section 1.4 being the date when the Units will be suspended from trading on ASX.
Taxation Report	means section 8 of this document.
	Third Party Conditions means all conditions other than the Unitholder Meeting Conditions.
UBS	means UBS Advisory and Capital Markets Australia Limited ABN 40 008 582 705.
Units	means fully paid units issued by Challenger Group.
Unitholder or	means each person listed in the Challenger Group Register as the holder of Units.
Challenger Unitholder Unitholder Meeting Conditions	means the Unitholders approving the Restructure Resolutions at the Unitholders' Meeting and CPH Management lodging with ASIC, Supplementary Deed No. 6 which is referred to in Resolution 2 in the Notice of Meeting, being the conditions set out in clauses 2.1(a) and (b) of the Implementation Deed.
VWAP	means the volume weighted average sale price of Challenger Shares sold on ASX (including trading on a deferred settlement basis) excluding any Challenger Shares which are sold other than in the ordinary course of trading on ASX (including any transaction referred to in the ASX Business Rules as special, crossings prior to the commencement of normal trading, crossings during the closing phase and the after hours adjust phase, any overseas trades or trades pursuant to the exercise of options over shares and any overnight crossings).

For further information, please contact the Challenger Information Line on 1300 733 343 (toll free within Australia) or +61 2 9240 7450 (from outside Australia)

Corporate directory

$\frac{\delta}{\delta}$ $\frac{1}{2}$

$\pmb{\ddagger}$

Challenger Financial Services Group Level 41 Aurora Place 88 Phillip Street

Sydney NSW 2000

Challenger Financial Services Group Limited Level 41 Aurora Place 88 Phillip Street Sydney NSW 2000

Responsible Entity CPH Management Limited

Level 3 54-58 Park Street Sydney NSW 2000

Financial Adviser

UBS Advisory and Capital Markets Australia Limited Level 25 Governor Phillip Tower 1 Farrer Place Sydney NSW 2000

Lawyers

$Gilbert + Tobin$ Level 37 2 Park Street Sydney NSW 2000

Accountants and Taxation Advisers

Ernst & Young The Ernst & Young Building 321 Kent Street Sydney NSW 2000

Registry

Computershare Investor Services Pty Limited Level 3 60 Carrington Street Sydney NSW 2000

SPAR Ho n te anes
dromatica (100 rel de celebracional
1960: Calebracional de Calebracion
1960: Calebracion .
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1980년 - 대학교 대학교 대학교 대학교 대학교 대학교 대학교 대학교 대학교 대학교 이 이 시간을 하는 것이 되면 그 사람이 있다.
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