market release

Transcription

market release

MARKET RELEASE
30 August 2004
CHALLENGER FINANCIAL SERVICES GROUP LIMITED
FULL YEAR RESULTS TO 30 JUNE 2004
30 August 2004, Sydney – Challenger Financial Services Group Limited (CGF) today
announced a statutory “Margin on Services” net profit after tax but before goodwill of $97
million for the year ending 30 June 2004. On a historical cost basis net profit after tax and
before goodwill was $47 million.
The statutory result after goodwill (amortisation and a write down in the carrying value) was a
loss of $203 million.
The Board of Challenger has determined to write down the carrying value of goodwill as at 30
June 2004 by $280 million (after goodwill amortisation in 2004 of $20 million). This decision
has been taken after giving consideration to the high standard of corroborative evidence
associated with the impairment test under the pending introduction of International Accounting
Standards, and reflects a conservative approach to the outlook for annuity sales post
September following changes in the Federal Government’s retirement income policy. It also
assumes a more conservative perspective of the Group’s broad business plans even though
more favourable outcomes may eventually result.
Earnings per share before goodwill were 3.7 cents and (7.8) cents per share after goodwill.
Underlying business performance was sound in a year of significant change and restructuring:
•
Challenger Life produced strong earnings and defined new investment strategies.
•
Challenger Wholesale Finance grew assets from $2.1 billion to $16.2 billion.
•
Challenger Wealth Management made a commitment to major expansion and funds
under management grew strongly.
At the half year, Challenger introduced a modified accounting methodology for its Life business
to increase transparency in the accounts and improve comparability with its other core
businesses of Wholesale Finance and Wealth Management. Challenger’s modified accounting
has been further refined at the full year and now reflects historical cost accounting for
Challenger Life.
Further enquiry:
Tanya Atkins, Head of Shareholder & Media Relations, Challenger Financial Services Group. 02 9994 7125
Angela Warburton, Senior Manager, Media Relations, Challenger Financial Services Group. 02 9994 7509
2004 was a year in which both the company’s strategy and business model were refined and
new businesses integrated. Highlights for the Challenger group include:
•
Establishment of a clear strategy for Challenger Life; and the development and
successful implementation of a comprehensive compliance, credit and risk management
framework to support the business.
•
Successful acquisition of Interstar Securities, and the successful launch of a new nonconforming mortgage business in Challenger Wholesale Finance.
•
Significant investment in Challenger Wealth Management with the introduction of new
products, growth in funds under management, strong investment performance, an
increase in the number of researcher ratings for many Challenger managed funds and
the agreement to acquire Associated Planners.
In the coming year, Challenger will focus on enhancing shareholder value by pursuing growth
in its existing businesses and managing capital and costs more effectively. In total, funds
under management and administration from all of these activities exceeded $24 billion at the
end of June 2004. Every operation of Challenger involves Challenger earning fees or margins
for managing or advising on the management of other people’s assets.
Revenue growth in the year ahead, will be achieved by enhancing investment returns within
Challenger Life, strong annuity sales ahead of 20 September retirement income changes,
continuance of the strong growth in assets in the Challenger Wholesale Finance business, and
growth in funds under management and funds under advice (including the acquisition of
Associated Planners) in Challenger Wealth Management.
These efforts will be supported by a company wide commitment to improve the cost to
revenue ratio and achieve an 18 per cent return on the historic cost of net assets (RONA)
benchmark in each of the company’s three core businesses within the next three years.
It is anticipated that Challenger Wholesale Finance will achieve this benchmark in the 2005
financial year.
Challenger Life
Overall pre-tax profit for Challenger Life was $124 million on a statutory basis. Pre-tax profit
for the business using historic cost accounting was $55 million for the 2004 year. Annuity sales
were $545 million for the year with sales of long-term annuities (> than 6 years) accounting
for $351 million.
Further enquiry:
During the year, Challenger Life commenced the review and reorganisation of its investing
activities with the successful sale of 12 non-core properties for $160 million and the
announcement of its intention to sell its overseas property holdings.
Challenger Life invests in a wide range of financial products. Challenger Life had
approximately $1.6 billion of cash and liquid securities at 30 June 2004 and will grow its
earnings through the investment of these funds in property, fixed interest securities,
mezzanine debt, mortgages, infrastructure and other appropriate asset classes where the
unique differentiated nature of Challenger Life’s investment profile can generate superior
returns.
Challenger Wholesale Finance
The Wholesale Finance business contributed strongly to Challenger earnings reporting a pretax profit of $33 million for the year of which Interstar Securities contributed $21 million. The
Challenger Wholesale Finance mortgage loan book grew to $16.2 billion up 21 per cent in the
nine months to 30 June 2004.
Highlights within this business include the completion of the largest ever residential mortgage
backed security (RMBS) transaction by an Australian non-bank issuer, the first ever RMBS
issuance in GBP Sterling and the launch in early May of its non-conforming mortgage provider,
The Mortgage Alternative (TMA) which celebrated its first $100 million of loan applications after
only six weeks of operations.
Challenger Wholesale Finance is a high growth, low capital intensity business.
Challenger Wealth Management
Challenger has been a minor participant in funds management for some years. A decision was
made in July 2003 to commit to a major expansion and investment in Wealth Management
using existing funds, such as the Challenger Australian Share Fund, the Challenger High Yield
Fund and the Challenger Smaller Companies Fund, as a base for this investment.
205 new people were recruited either as replacements or in new roles and approximately $8
million was invested in new registry and portfolio systems.
Equity and fixed interest funds under management more than doubled during 2004, while
funds under management in the Howard Mortgage Trust rose by 21 per cent to $3.1 billion.
Growth was achieved through Challenger’s existing stable of fund managers and products.
New fund manager hires and the launch of new products together with outstanding researcher
ratings will contribute to growth in the year ahead.
Further enquiry:
Agreement was reached to acquire financial planning firm Associated Planners Limited and this
acquisition was completed at a cost of $91.3 million on 13 August 2004, boosting funds under
advice to more than $7.5 billion at that date.
Wealth Management incurred a loss before tax of $9 million for the year to 30 June 2004 and
is likely to continue to be unprofitable, although at a lower level, in the 2005 year. It is
anticipated that Wealth Management will achieve regular profitable operation in the January to
June half 2006.
Capital management
Challenger will not pay a dividend in respect of the year ended 30 June 2004. Challenger will
continue to monitor and assess its capacity to pay dividends to shareholders. The Board of
Challenger continues to manage Challenger’s capital position while building the Wealth
Management business. The Challenger Board and management desire to commence paying
dividends from the 2005 financial year retained earnings.
Share consolidation
Challenger’s Annual General Meeting will be held in Sydney on 25 November 2004. It is
intended the Challenger Board will ask shareholders to approve a five into one share
consolidation at that time. The company believes the consolidation to be in the best interest of
shareholders, as it is likely to increase the nominal value of Challenger shares to levels more
commonly expected for companies of Challenger’s size. Further details will be included in a
notice of meeting that will be posted to shareholders in October.
Foreign property divestment
In May 2004, Challenger announced its intention to dispose of overseas properties owned by
Challenger Life. The company has entered into contracts for the sale of four properties in the
United Kingdom and a property in the United States for AU$828 million.
No agreements have been reached in respect of the remaining properties located in Boston,
Massachusetts and Denver, Colorado.
ENDS
Further enquiry:
Appendix 4E
Challenger Financial Services Group Limited
Period 6 November 2003 to 30 June 2004
The directors of Challenger Financial Services Group Limited (Challenger) announce the
audited consolidated results of the company and its subsidiaries for the period 6
November 2003 to 30 June 2004 (incorporating the trading result for the period from 23
December 2003 to 30 June 2004) as follows .
The Appendix 4E is to be read in conjunction with Challenger's announcement to the
market, the attached audited financial statements and the pro-forma financial report .
Results for announcement to the market
The Company presents the following information as required under listing rule 4 .3A.
$'000's
% Change
446,475
N/A
2.1
Revenue from ordinary activities
2.2
Loss from ordinary activities after tax attributable
to members
(235,445)
N/A
2 .3
Net Loss for the period attributable to members
(235,445)
N/A
2.4
No Dividend is proposed to be paid for the period
2.5
Not applicable
Explanation of the figures reported above:
The Company was incorporated on 6 November 2003 and the period ended 30 June
2004 is the first reporting period that a financial report has been prepared for the
Company. Accordingly comparative information is not available for the Company .
A full explanation of the above figures are documented in Challenger's announcement to
the market and audited financial report .
Net tangible assets per security
The net tangible asset per security is $0 .19 . This has been calculated based on the
following information .
Net tangible assets at 30 June 2004 ($'000)
Shares on issue at 30 June 2004 (including LTIP)
Options on issue at 30 June 2004
$597,063
2,663,435,735
319,044,185
All other information requiring disclosure to comply with listing rule 4 .3A is contained in
Challenger's announcement to the market, pro-forma financial report and audited
financial report .
challenger
Financial Services Group
and its controlled entities
Pro-Forma Financial Report
For the Year Ended 30 June 2004
CHALLENGER FINANCIAL SERVICES GROUP LIMITED AND CONTROLLED ENTITIES
OVERVIEW
Challenger Financial Services Group Limited ("Challenger") commenced operations on 23 December 2003 when it acquired 100% of
the issued units in Challenger Financial Services Group ("CFSG Trust") and its controlled entities . The Pro-Forma Statement of
Financial Performance, Pro-Forma Statement of Financial Position and Pro-Forma Statement of Cash Flows present the results of the
operations of the combined group for the year ended 30 June 2004 . Comparative information has not been provided as the nature of
the operations of CFSG Trust fundamentally changed on 27 June 2003 upon the merger of CPH Investment Corp and Challenger
International Limited.
The Challenger consolidated Pro-Forma reported net loss after tax after adjusting for a $280,000,000 write-down in goodwill for the
year ended 30 June 2004 was $202,838,000 .
The Board of Challenger has determined to write down the carrying value of goodwill as at 30 June 2004 by $280 million (after
goodwill amortisation in 2004 of $20 million). This decision has been taken after giving consideration to the high standard of
corroborative evidence associated with the impairment test under the pending International Accounting Standards, and reflects a
conservative approach to the outlook for annuity sales post September 2004 following changes to the Federal Government's retirement
income policy. It also assumes a more conservative perspective of the Group's broad business plans even through more favourable
outcomes may eventually result .
The Pro-Forma Financial Report has been prepared to report the financial performance and financial position of Challenger Financial
Services Group Limited and its controlled entities for the year ended 30 June 2004 . Notes to the Pro-Forma Financial Report have been
provided to enable a reconciliation between the Pro-Forma Financial Report and the statutory reported results of CFSG Trust for the
period ended 21 December 2003 and Challenger for the period ended 30 June 2004, which have been subject to audit review and audit,
respectively .
The Pro-Forma Financial Report provides an aggregation of the results and cashflow statements for the two discrete statutory reporting
periods noting that prior to 22 December 2003 Challenger did not trade, and accordingly its individual contribution to the Pro-Forma
net profit after tax is for the period from 23 December 2003 to 30 June 2004. The Pro-Forma Statement of Financial Position as at 30
June 2004 is a direct extract from the statutory (audited) Statement of Financial Position of Challenger.
The accounting policies used in the preparation of the Pro-Forma Financial Report are the same as those used in the preparation of the
audited 30 June 2004 Challenger Financial Services Group Limited Annual Financial Report.
Pro-Forma Statement of Financial Performance
For the year ended 30 June 2004
Notes
Consolidated
2004
$000's
818,261
Expenses from ordinary activities
Borrowing costs
Write-down in goodwill
Share of net profits of associates accounted for using the equity method
552,303
152,515
280,000
3,857
3
Profit from ordinary activities before income tax expense
(162,700)
40,138
Income tax expense
Net profit attributable to shareholders after tax from ordinary activities
1
(202 838)
Total revenue, expenses and valuation adjustments attributable to
shareholders recognised directly in equity
Total changes in shareholders' funds from non shareholder transactions
Basic earnings per share (cents)
Diluted earnings per share (cents)
(202,838)
(7.82)
(7.00)
The above Pro-Forma Statement of Financial Performance should be read in conjunction with the notes to the
Pro-Fonna Financial Report.
Pro-Forma Statement of Financial Position
As at 30 June 2004
Notes
Assets
Cash assets
Receivables
Debt securities
Other financial assets
Equity securities
Investment properties
Fixed assets
Deferred tax assets
Investment in associates
Intangible assets
Other assets
Excess of net market value of the interests of Challenger Life
No.2 Limited in its subsidiaries over their net assets
Total assets
Liabilities
Payables
Interest bearing liabilities
Provisions
Deferred tax liabilities
Life insurance policy liabilities
Total liabilities
Net assets
Shareholders Equity
Shares on issue
Reserves
Retained Profits
Total Shareholders Equity
3
Consolidated
2004
S000's
626,388
420,021
1,217,687
332
204,641
2,535,134
21,947
7,530
17,788
255,974
143,800
224,381
5,675,623
295,251
2,144,969
39,531
58,921
2,052,003
4,590,675
1,084,948
1,258,693
61,700
(235,445)
1,084,948
The above Pro-Forn:a Statement of Financial Position should be read in conjunction with the notes to
the Pro-Forma Financial Report .
CHALLENGER FINANCIAL SERVI CES GROUP LIMITED AND CONTROLLED ENTITIES
Pro-Forma Statement of Cash Flows
For the year ended 30 June 2004
Cash flows from operating activities
Receipts from customers (inclusive of GST)
Payments to suppliers and employees (inclusive of GST)
Dividends received
Interest received
Borrowing costs
Income taxes paid
Net cash inflow from operating activities
Notes
Consolidated
2004
$000's
1,166,170
(960,654)
22,807
93,288
(150,417)
(8,471)
162,723
Cash flows from investing activities
Purchase of investments
Advances of Loans
Repayment of advances of Loans
Payment for purchases of controlled entities, net of cash acquired
Purchase of fixed assets
Capitalised acquisition costs paid
Proceeds from sale of investments
Net cash outflow from investing activities
(348,686)
(3,729)
1,351
(122,960)
(15,530)
(11,662)
230,257
(270,959)
Cash flows from financing activities
Proceeds from borrowings
Repayment of borrowings
Net cash outflow from financing activities
193,254
(141,051)
52,203
Net decrease in cash held
Cash at the beginning of the period
Prior year reclassification of cash held by controlled Property Trusts
Effects of exchange rate changes on cash
Cash at the end of the financial period
(56,033)
660,421
19,334
2,666
626,388
The above Pro-Forma Statement of Cash Flows should be read in conjunction with the notes to the ProForrna Financial Report.
Notes to the Pro-Forma Year End Financial Report
Note 1 . Reconciliation to statutory net prorit
Rental income earned by property trusts controlled by Life Company subsidiaries
Management fee income
Interest income
Dividend income
Change in net market value of investments held by Life Company subsidiaries
- Properties (net of exchange fluctuations)
- Property valuation and foreign currency debt movements attributable to
exchange fluctuations
- Interest rate swaps and forward foreign exchange contracts
- Trading securities
Net realised gains on sale of investments and subsidiaries
Foreign exchange gains
Other income
1/7/2003 to 23/12/2003 to
21/12/2003* 30/06/2004**
$000's
$000's
Year ended
30/06/2004
$000's
116,240
81,728
44,590
14,862
129,654
147,250
49,501
11,789
245,894
228,978
94,091
26,651
(587)
23,180
22,593
(16,550)
102,330
1,528
8,642
288
18,715
23,877
(31,401)
20,143
17,267
36,006
19,209
7,327
70,929
21,671
25,909
36,294
37,924
371,786
446,475
818,261
(96,689)
(3,366)
(75,549)
(6,286)
-
(172,238)
(6,286)
(3,366)
(13,362)
(17,774)
(45,479)
(48,509)
(5,535)
(6,941)
(2,857)
(13,959)
(254,471)
(11,623)
(31,920)
(58,441)
(62,336)
(5,945)
(6,386)
(3,628)
(35,718)
(297,832)
(24,985)
(49,694)
(103,920)
(110,845)
(11,480)
(13,327)
(6,485)
(49,677)
(552,303)
(58,424)
(12,276)
(70,700)
(66,426)
(15,389)
(81,815)
(124,850)
(27,665)
(152,515)
(325,171)
(379,647)
(704,818)
2,405
1,452
3,857
49,020
68,280
117,300
-
(280,000)
(280,000)
Income tax expense
(16,413)
(23,725)
(40,138)
Net profit attributable to shareholders after tax from ordinary activities
32,607
(235,445)
(202,838)
(Increase)/decrease in Net Policy Liabilities
Provision for unrealised Loss on Investments
Responsible entity fee
Property management expenses incurred by Property Trusts controlled by Life
Company subsidiaries
Amortisation & depreciation
Employee expenses
Commission expense
Occupancy expense
Professional fees
Communications
Other expenses
Expenses from ordinary activities (excluding borrowing costs)
Borrowing costs
- incurred by Property Trusts controlled by Life Company subsidiaries
- incurred by other entities
Total expenses from ordinary activities
Share of net profits of associates accounted for using the equity method
Profit from ordinary activities before income tax expense
Write-down in goodwill (refer Note 3)
* Source: Challenger Financial Services Group Statutory Interim Financial Report for the period ended 21 December 2003 .
** Source : Challenger Financial Services Group Limited Statutory Annual Financial Report for the period ended 30 June 2004 . Note that the Statutory Annual
Financial Report was prepared for the period beginning 6 November 2003 (date of incorporation) to 30 June 2004 . However, no transactions were entered into by
Challenger until the acquisition of CFSG on 23 December 2003 .
4
Note 2.
Reconciliation of Pro-Forma Cash Flow Statement
Dividends received
Interest received
Borrowing costs
Income taxes paid
Net cash inflow / (outflow) from operating activities
Advances of Loans
Repayment of advances of Loans
Payment for purchases of controlled entities, net of cash acquired
Capitalised acquisition costs paid
Net cash inflow / (outflow) from investing activities
Net cash inflow outflow from financing activities
Net increase/(decrease) in cash held
Prior year reclassification of cash held by controlled Property Trusts
Effects of exchange rate changes on cash
Cash acquired upon corporatisation of CFSG
Cash at the end of the financial period
1/7/2003 to
21/12/2003*
23/12/2003 to
30/06/2004**
Year ended
30/06/2004
$000's
$000's
$000's
585,160
(510,030)
11,609
44,289
(75,265)
(6,712)
49,051
581,010
(450,624)
11,198
48,999
(75,152)
(1,759)
113,672
1,166,170
(960 654)
22,807
93,288
(150,417)
(8,471)
(319,809)
(856)
345
(122,960)
(1,547)
(11,551)
50,281
(406,097)
(28,878)
(2,873)
1,006
1
(13,983)
(111)
179,976
13 5,138
(348,687)
(3,729)
1,351
(122,959)
(15,530)
(11,662
230,257
(270,959)
73,608
(47,776)
25,832
119,646
(93,275)
26,371
193,254
(141,051)
52,203
(331,214)
660,421
19,344
(672)
275,181
3,328
347,879
626,388
(56,033)
660,421
19,334
2,666
626,388
347,879
162,723
* Source : Challenger Financial Services Group Statutory Interim Financial Report for the period ended 21 December 2003 . Please note that certain items have
been reclassified to conform to the disclosures made in the audited financial report for the period ended 30 June 2004 .
** Source : Challenger Financial Services Group Limited Statutory Annual Financial Report for the period ended 30 June 2004 . Note that the Statutory Annual
Financial Report was prepared for the period beginning 6 November 2003 (date of incorporation) to 30 June 2004. However, no transactions were entered into
by Challenger until the acquisition of CFSG on 23 December 2003 .
CHALLENGER FINANCIAL SERVICES GROUP LIMITED AN D CONTROLLED ENTITIES
Note 3 .
Write-down in Goodwill
In accordance with the Board resolution noted in the directors report the Board of directors of Challenger have
approved a write-down of $280,000,000 in the Parent Entity's investment in the Challenger Group subsidiaries .
The following outlines the impact of the write-down on the Consolidated Entity net profit and net assets as
reported in the Statement of Financial Performance and Statement of Financial Position, respectively.
Impact on net profit
Impact on net profit before tax
Tax expense benefit attributable to write-down
Impact on net profit after tax
Net profit after tax prior to goodwill write-off
Net profit after tax after goodwill write-off
Impact on Goodwill and net assets
Goodwill
Written down value of Goodwill prior to write-down
Goodwill write-off
Net assets
Net assets prior to goodwill write-off
Net assets after goodwill write-off
Consolidated
2004
$000's
(280,000)
(280,000)
77,162
(202,838)
2004
$000's
535,974
(280,000)
255,974
1,364,948
1,084,948
Impact on earnings per share
Basic earnings per share prior to write-off of goodwill
Basic earnings per share after write-off of goodwill
2.97 cents
(7.82) cents
Diluted earnings per share prior to write-off of goodwill
Diluted earnings per share after write-off of goodwill
2.66 cents
(7.00) cents
Note 4.
Segment information
The consolidated entity operates predominantly in one geographical area, being Australia.
The primary business segments of the Group have been identified as follows:
2004
Life
$000's
Total
Wholesale
Wealth
Finance Management ** Corporate * Consolidated
$000's
$000's
$000's
$000's
Total revenue
496,337
150,998
141,248
33,535
822,118
Expenses
(372,337)
(117,928)
(150,702)
(63,851)
(704,818)
Net profit before tax and goodwill write-down
124,000
33,070
(9,454)
(30,316)
117,300
Goodwill write-down
(280,000)
Net profit before tax
(156,000)
Segment assets prior to write-down in goodwill
Goodwill write-down
4,865,793
(280,000) -
33,070
(280,000)
(9,454)
(30,316)
569,059
316,851
203,920
-
-
-
(162,700)
5,955,623
(280,000)
Segment assets
4,585,793
569,059
316,851
203,920
5,675,623
Segment liabilities
(3,960,204)
(151,198)
(189,949)
(289,324)
(4,590,675)
* Corporate segment relates to non-core activities of the Group (including businesses to be restructured or sold as previously
announced to the Australian Stock Exchange) and other group/head office activities including goodwill amortisation and
corporate borrowings and associated borrowing costs.
** Represents Funds Management, Administration & Financial Planning .
challenger
and its controlled entities
ACN 106 842 371
Annual Report
For the Period from 6 November 2003 to 30 June 2004
(Incorporating the trading result for the period from 23 December 2003 to 30 June 2004)
DIRECTORY
Principal registered office in Australia
Level 41
Aurora Place
88 Phillip Street
SYDNEY NSW 2000
Tel (02) 9994 7500
Fax (02) 9994 7777
Directors
Peter Leith Polson (Chainnan)
Michael Tilley (Chief Executive Officer)
Graham Allan Crbbin
Russell Richard Roberts Hooper
Ashok Peter Jacob
James Douglas Packer
James Glen Service
Brenda Mary Shanahan
Secretary
Anne Gardiner
Share Register
Computershare Investor Services Pty Limited
Level 3, Carrington Street
SYDNEY NSW 2000
Tel (02) 8234 5000
Fax (02) 8234 5050
Website : www.computershare .com
Auditor
Emst Bs Young
321 Kent Street
SYDNEY NSW 2000
Internet Address
www.challen er.com.au
STATEMENT OF PRINCIPAL CORPORATE GOVERNANCE POLICIES OF THE COMPANY
Introduction
The Board of Challenger Financial Services Group Limited ("Challenger") actively participates in the evolution of corporate governance in
Australia . Throughout the reporting period, Challenger has undertaken a review of its compliance with the ASX Corporate Governance
Council's Principles of Good Corporate Governance and Best Practice Recommendations ("Guidelines") . This report provides details of
Challenger's compliance with those recommendations or, where appropriate, indicates a departure from the Guidelines and Challenger's
explanation as to why .
Governance Framework in Context
Challenger's corporate governance framework must be considered in the context of a period of significant structural change.
In July 2003 CPH Investment Corp merged with Challenger International Limited to create the Challenger Financial Services Group, a listed
trust. In December 2003 the business of the trust transferred to Challenger Financial Services Group Limited following approval by the
unitholders to corporatise. Challenger was listed on 23 December 2003 . Where appropriate, references to Challenger's Corporate
Governance practices include those practices in place since I July 2003 .
Throughout the reporting period and as a foundation of becoming a public company, the Board's review of Challenger's compliance with the
Guidelines has meant the progressive implementation of measures to ensure it meets its objectives of having in place a robust corporate
governance framework . Where it is indicated a policy is available on the Challenger web site, such availability has occurred since February
2004. This report applies to Challenger and its subsidiaries, however some subsidiaries have adopted their own policies and procedures to
deal with specific issues relevant to their business, for instance investment management compliance . Where such policies and procedures
have been adopted they have been developed in line with the standards referred to throughout this report.
The Board
Challenger's constitution provides for a minimum of 3 directors and a maximum of 12 directors . At the date of this report there are seven
non-executive directors, four of whom are independent, and one executive Director. The members of the Board, including their experience,
independent status and membership of committees is set out below . The Chairman is selected by non executive Directors of the Board .
Members of The Board
Peter Poison
Chairman (from 10 June 2004)
Independent
Peter Poison retired from Commonwealth Bank in October 2002, where he held the position of Group Executive, Investment and Insurance
Services, responsible for all investment and insurance services for the group, including the funds management, master funds, superannuation, insurance and third party support services for brokers, agents and financial advisers.
Mr Poison joined the Colonial group in 1994 . Previously, Mr Poison was Managing Director of the National Mutual Funds Management
(International) Limited .
Other Directorships
Mr Poison is also a director of AWE Limited, Australian Leisure and Hospitality Group Ltd, and Professional and Indemnity Company
Australia Limited
Committees
Mr Poison is Chairman of the Remuneration Committee and Chairman of the Nomination Committee.
Michael Tilley
Chief Executive Officer (from 2 August 2004)
(Mr Tilley was an independent director until his appointment as Chief Executive Officer on 2 August 2004)
Most recently, Michael Tilley was Vice-Chairman, Investment Banking Group, JP Morgan, a position he resigned from upon his
appointment as Chief Executive Officer (CEO) of Challenger. Until 31 March 2003, Mr Tilley was a Director of Incitec Limited . Prior to
that, Mr Tilley was employed with 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 is a member of the Australian Takeovers Panel .
CHALLENGER FINAN CIAL SERVICES GROUP LIMITED AND CONTROLLED ENTITIES
STATEMENT OF PRINCIPAL CORPORATE GOVERNANCE POLICIES OF THE COMPANY (Cont'd)
Other Directorships
Mr Tilley is also a non-executive director of Orica Limited .
Committees
Mr Tilley was a member of the Remuneration Committee and a member of the Nomination Committee. He has resigned both of these
positions upon becoming CEO.
Graham Cubbin
Non-Executive Director
Graham Cubbin has been the Finance Director of Consolidated Press Holdings Limited (CPH) since 1991 and is a director of Publishing and
Broadcasting Limited . Prior to joining CPH, Mr Cubbin held senior finance positions with a number of major companies including Capital
Finance Group and Ford Motor Company .
Committees
Mr Cubbin is a member of the Group Audit and Compliance Committee and the Nomination Committee.
Russell Hooper
Independent
of the
Russell Hooper was previously a director of and chaimran of the audit committee for Commonwealth Insurance Limited, a subsidiary
George
Bank
Limited
and
prior
to
Manager,
Funds
Management
at
St
also
previously
Chief
General
Bank.
Mr
Hooper
was
Commonwealth
that held various positions within the financial services group at St George Bank Limited and Advance Bank Limited for more than thirteen
years .
Accountants and the
Mr Hooper is a Fellow of the Australian Institute of Company Directors, the Australian Society of Certified Practicing
Australian Institute of Banking and Finance .
Committees
Nomination Committee .
Mr Hooper is a member of the Remuneration Committee, the Group Audit and Compliance Committee and the
AshokJacob
the managing
Ashok Jacob is joint Chief Executive Officer of Consolidated Press Holdings Limited (CPH) . Prior to joining CPH he was
of
companies
.
director of the investment amp of the Pratt group
Other Directorships
Mr Jacob is also a director of Publishing and Broadcasting Limited, Hoyts Cinemas Limited, Crown Limited and MRF Limited .
Committees
Compliance Committee.
Mr Jacob is a member of the Nomination Committee. Mr Jacob was formerly a member of the Group Audit and
James Packer
Limited . Prior to
James Packer is joint Chief Executive Officer of Consolidated Press Holdings Limited and Chairman of CPH Management
Limited
.
Officer
of
CPH
Management
was
Chief
Executive
that, Mr Packer
Other Directorships
Mr Packer is a
Mr Packer is also Executive Chairman of Publishing and Broadcasting Limited a position he has held since May 1998 .
Limited,
Regal
Pty
Limited,
Hoyts
Cinemas
Limited,
Foxtel
Management
director of various companies including Qantas Airways
Entertainment Group and Puma AG .
Committees
Mr Packer is a member of the Remuneration Committee and the Nomination Committee.
James Service, AM
Independent
James Service was a non-executive director of Challenger International Limited and joined the Board of CPH Management Limited
Service is
following the merger in July 2003 . Mr Service has extensive experience in the areas of the financial services and property . Mr
with St
Bank
Limited
prior
to
its
merger
Chairman
of
Advance
Council
of
Australia
and
was
National
President
of
the
Property
also a past
George Bank Limited .
Other Directorships
Mr Service is Executive Chairman of JG Service Pry Limited a specialist property consulting company and Deputy Chairman of Australand
Holdings Limited .
Committees
Mr Service is a member of the Nomination Committee and Mr Service is Chairman of the Property Investment Committee, which was
formerly a committee of the Board but became a committee of the Challenger Life Limited and Challenger Life No .2 Limited with effect
from 19 February 2004.
Brenda Shanahan
Non Executive Director
Independent
Brenda Shanahan was also a non-executive director of Challenger International Limited and joined the Board of CPH Management Limited
following the merger with Challenger International Limited 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.
Other Directorships
Ms Shanahan is a non-executive director of JM Financial Group Limited and chair of St Vincent's Health and St Vincent's Medical
Research Institute
Committees
Ms Shanahan is Chairman of the Group Audit and Compliance Committee and a member of the Nomination Committee.
Board Changes
All directors who were previously directors of CPH Management Limited, the responsible entity of the Challenger Financial Services Group
Trust, were appointed to the Board of Challenger upon corporatisation on 22 December 2003 with the exception of Mr Graham Cubbin who
was appointed to the Board on 6 January 2004.
On 10 June 2004, Mr Packer resigned as Chairman of Challenger as a result of other commitments and was replaced by Mr Pelson, an
independent director . Mr Packer remains a director of Challenger.
In late June 2004, Mr Cuffe announced his intention to resign as CEO of Challenger to concentrate on further developing Challenger's
wealth managementbusiness. Mr Cuffe resigned from the Board on 2 August 2004.
Role of the Board and Board Delegations
The Board is accountable to shareholders for the activities and performance of Challenger by overseeing the development of sustainable
shareholder value within an appropriate framework of risk and regard for all stakeholder interests .
The Board has identified the key functions which it has reserved for itself. These duties are outlined below and set out in the Board Charter,
a copy of which is available on Challenger's web site :
"
Establishment, promotion and maintenance of the strategic direction of Challenger;
Approval of business plans, budgets and financial policies;
Consideration of management recommendations on strategic business matters ;
"
Establishment, promotion and maintenance of proper processes and controls to maintain the integrity of accounting and financial
records and reporting;
Fairly and responsibly rewarding executives, having regard to the interests of shareholders, the performance of executives, market
conditions and the Challenger's performance ;
Adoption and oversight of implementation of appropriate corporate governance practices ;
Oversight of the establishment, promotion and maintenance of effective risk management policies and processes;
"
"
Determination and adoption of Challenger's dividend policy ;
"
Review of the board's composition and performance ;
e
Appointment, evaluation, duration and remuneration of the CEO and approval of the appointment of the Chief Financial Officer, the
General Counsel and the Company Secretary ;
Determination of the extent of the CEO's delegated authority.
The Board has delegated to the CEO the authority and powers necessary to implement the strategies approved by the Board and to manage
the business affairs of Challenger within the policies and specific delegation limits specified by the Board from time to time . The CEO may
further delegate within those specific policies and delegations limits, but remains accountable for all authority delegated to management .
Independence
The Board does not have a specific policy in respect of independence and has not to date established specific materiality thresholds, but has
considered the independence of each director on a case by case basis using the criteria set out in Section 2 of the Guidelines. The Board
believes that those directors identified as independent are free from any interest and any business or other relationship which could, or could
reasonably be perceived to, materially interfere with the directors' ability to act in the best interests of Challenger or their ability to bring
independent judgment to bear in considering matters brought to the Board . Messrs Cubbin and Jacobs are not considered independent due to
their association with a major shareholder.
The Board recognised that, during his period as Chairman, Mr Packer did not meet the criteria for independence as set out in the Guidelines,
predominantly because he is directly associated with a substantial shareholder . Notwithstanding that Mr Packer was not independent the
Board believed it to be appropriate and in the best interests for all stakeholders that Mr Packer remained as Chairman after Corporatisation
in December 2003 .
As a result of the appointment of Mr Tilley as CEO from 2 August 2004, the Board no longer has a majority of independent directors as
recommended within guidelines . The Board, with the assistance of the Nomination Committee, has considered this departure from the
Guidelines and believes it is appropriate for Challenger in the immediate future. The Board believes that shareholder interests are best
served by a Board which is at optimal size for effective decision making and has identified its current configuration as meeting that criteria.
The Board will however, keep this issue under consideration to ensure it remains relevant.
Conflicts of Interest
In accordance with the Board Charter and the Corporations Act 2001 (Cth), any Director with a material personal interest in a matter being
considered by the Board must declare such an interest and may only be present when the matter is being considered at the Board's
discretion . Directors with a material interest may not vote on any matter in which they have declared a personal interest.
Meetings of the Board
During the year the Board met formally at least monthly. In addition, the Board may meet whenever necessary to deal with specific matters
needing attention between scheduled meetings. The CEO, in consultation with the Chairman establishes the meeting agenda's to ensure
adequate coverage of strategic, financial and material risk areas throughout the year. Senior executives are invited to attend Board meetings
and are available for contact by non-executive directors between meetings . The non-executive directors also meet without any executive
involvement from time to time at the end of meetings .
Succession Planning
In conjunction with the Nomination Committee, the Board considers the succession of its members, the CEO and the Chief Financial Officer
as required .
Review of Board and Senior Executive Performance
The Board Charter sets out the requirement for a formal review of the Board's performance at least every two years . Since the Board has not
been in place for this period, no formal review has taken place to date . However, the Board is currently reviewing the methodology for the
formal review and intends to undertake the review prior to the end of December 2005 . Senior management performance is assessed as part of
Challenger's annual formal Performance Reviews .
Nominations and Appointment of New Directors
Recommendations for nominations of new directors are made by the Nomination Committee and considered by the Board as a whole. If a
new director is appointed during the year, that person will stand for election by shareholders at the next annual general meeting.
Shareholders are provided with appropriate information to judge the adequacy of candidates. All new directors are provided with an
appropriate induction into Challenger's business.
Retirement and Re-election of Directors
Challenger's constitution requires that, excluding the CEO one third of the remaining directors must retire each year. In addition, any
director who is appointed during the year must retire at the next annual general meeting . Given this is the first year of operation for
Challenger, all directors, with the exception of the CEO, are required to retire and stand for re-election at the first annual general meeting .
Board Access to Information and Advice
All directors have unrestricted access to Challenger records and information . The Company Secretary provides directors with guidance on
corporate governance issues and developments and on all other matters reasonably requested by the directors and monitors compliance with
the Board Charter. The Board or each individual director has the right to seek independent professional advice at Challenger's expense to
assist them to discharge their duties. Whilst the Chairman's prior approval is required, it may not be unreasonably withheld or delayed.
Board Committees
To assist it in undertaking its duties, during the year the Board established the following committees :
The Audit and Compliance Committee
The Nomination Committee
The Remuneration Committee
The Property Investment Committee (on 19 February 2004 this Committee was transferred to become a committee of the Challenger Life
Limited and Challenger Life No.2 Limited .)
Each committee has its own charter, copies of which are available on Challenger's web site at www.Challenger .com .au. The Charters
specify the composition, responsibilities, duties, reporting obligations, meeting arrangements, authority and resources available to the
committees and the provisions for review of the charter. Details of directors' membership of each committee and their attendance at
meetings throughout the period is set out below.
Board
Director
P L Poison Chairman
M Tille
G A Cubbin
C E Cuffe
RRRHoo er
A P Jacob
J D Packer
J G Service
13 M Shanahan
Eligible to
attend
8
8
6
8
8
8
8
8
8
Audit & Compliance
Committee
Attended
7
7
6
8
7
7
8
7
7
Eligible to
attend
Attended
2
2
3
1
3
3
3
Remuneration
Committee
Eligible to
attend
7
7
Attended
7
6
6
7
The Nomination Committee held its inaugural meeting on 22 July 2004 .
Integrity of Challenger Financial Reporting
In accordance with its charter, Challenger's Audit and Compliance Committee must have at least 3 members and is comprised of all nonexecutive directors and a majority of independent members. A principal aim of the Audit and Compliance Committee is to assist the Board
in overseeing the integrity of Challenger's financial reporting . The committee makes recommendations to the Board in relation to the
appointment, review and removal of an external auditor, assessment of the external auditor's independence and the appropriateness of nonaudit services that the external auditor may provide. The CEO and CFO periodically provide formal assurance to the Board that :
"
"
Challenger's financial statements present a true and fair view of Challenger's financial condition and operational results; and
The risk management and internal compliance and control systems ar sound, appropriate and operating effectively.
Challenger requires its independent audits to:
"
provide stakeholders with true and fair financial reports; and
"
ensure accounting practices comply with applicable accounting rules and policies.
Challenger's independent external auditor is Emst & Young (E&Y) . E&Y were appointed upon constitution of the Company in November
2003 . Their appointment is due to be ratified by the shareholders at the first annual general meeting . E&Y will attend Challenger's first
annual general meeting in November 2004.
Risk Management and Compliance
The management of risks is fundamental to Challenger's business and to building shareholder value . The Board recognises the broad range
of risks which apply to a participant in the financial services industry, including, but not limited to, market risk, liquidity risk, credit risk,
legal risk, operational risk and reputational risk . The Board is responsible for Challenger's risk management strategy . Management is
responsible for implementing the Board's strategy and for developing policies and procedures to identify, manage and mitigate risks across
the whole of Challenger's operations .
In January 2004 the Board approved and adopted an Operational Risk Framework and formal policies in respect of Compliance and
Operational Risk Management which were developed, approved by management, reviewed and approved by the Audit and Compliance
Committee and made available to all staff of Challenger and its subsidiaries . Challenger has implemented an Operational Risk Management
function which has day to day responsibility for monitoring the implementation of the framework and policy and reporting regularly to the
Audit and Compliance Committee on the adequacy and effectiveness of management controls for risk. The Committee reports regularly to
the Board on compliance with the framework and policy.
Code of Conduct
Challenger's Code of Conduct was approved in May 2004 and applies to all Directors, executives, management and employees of
Challenger and its subsidiaries. The Code articulates the standards of honest, ethical and law-abiding behaviors expected by Challenger.
Employees are actively encouraged to bring any problems to the attention of management or the Board, including activities or behaviour
which may not comply with the Code of Conduct, other policies and procedures in place, or other regulatory requirements or laws.
Staff Trading Policy
Directors : and staff are subject to restrictions under the law relating to dealing in securities, including the securities issued by Challenger if
they are in possession of insider information . The Board approved Challenger's Staff Trading Policy in February 2004: A summary of the
policy is available on Challenger's web site . The policy applies to all Directors and staff and places restrictions and reporting requirements
on staff, including limiting trading in Challenger (or other listed entities within the Group) to specific trading windows and in a specified
manner. Those staff designated as potentially having access to insider information are required to seek prior approval to trades in other
securities .
Continuous Disclosure Policy and Shareholder Communication Processes
Challenger is committed to providing relevant information about its operations to all shareholders and to fulfill its duties to comply with its
continuous disclosure obligations to the market generally .
The Board approved and implemented its Continuous Disclosure Policy in January 2004 . The policy is designed to ensure compliance with
ASX Listing Rules continuous disclosure requirements . Challenger has a Continuous Disclosure Committee which is responsible for :
making decisions on what should be disclosed publicly under the Continuous Disclosure Policy;
maintaining a watching brief on information ; and
ensuring disclosure is made in a timely and efficient manner.
Challenger also publishes annual and half yearly reports, announcements, media releases and other relevant information on its web site at
www .challenger.com .au . Internet web-casting and teleconferencing facilities are provided for market briefings to encourage participation
from all stakeholders, regardless of their location . Challenger is also intending to encourage greater use of electronic media by providing
shareholders with greater access to the electronic receipt of reports and meeting notices and the facility to ask questions about Challenger
and have them answered directly or at general meeting .
CHALLENGER FINANCIAL SERVICES GROUP LIMITE D AND CONTROLLED ENTITIES
REMUNERATION REPORT
Non-Executive Director Remuneration
Challenger's remuneration policy for non-executive directors aims to ensure that the Company can attract and retain suitably skilled,
experienced and committed people to serve on the Board . Total remuneration for non-executive directors is required to be approved by
shareholders, and members approved a payment up to a maximum of $950,000 at corporatisation to non-executive directors .
The Remuneration Committee is responsible for determining and reviewing compensation arrangements for the non-executive directors
having regard to market trends and shareholder interests . Non-executive directors are not entitled to receive performance related
remuneration or to receive shares through participation in any Challenger incentive plan . There are no schemes for retirement benefits with
the exception of statutory superannuation for non-executive directors .
The nature and amount of remuneration paid to each non-executive director of Challenger for the period from 23 December 2003 to 30 June
2004 is set out below :
Specified Directors
Primary
Salary &
Fees
$
72,355
64,547
Post Employment
Retirement
Superannuation
Benefits
$
$
5,727
5,727
-
P L Poison (Chairman)
G A Cubbin*
77,561
5,727
R R R Hoo er
Jacob*
AP
J D Packer*
59,863
J G Service
72,535
5,727
B M Shanahan
346 861
22,908
Total remuneration
*
Act as a director in connection with discharging their duties as an executive of CPH.
Total
$
78,082
70,274
83,288
59,863
78,262
369,7691
Details of directors' and senior executives' holdings in Challenger shares and schemes are set out in Note 26 to the accounts .
Executive Remuneration
Chief Executive Officer
The Committee is responsible for reviewing the remuneration of the CEO, which must be approved by the full Board.
The employment contract with Mr Cuffe in his capacity as CEO was approved by the unit holders at the time of Corporatisation in
December 2003 . The principal elements of that package were:
Base salary of $675,000 ;
Participation in the Challenger short term incentive plan up to 150% of base salary package;
Allocation of 40,000,000 shares under the CEO Long Term Incentive Plan (LTIP) at an issue price of 53 cents, subject to a hurdle of
15% per annum compound total return to shareholders (including dividends) for releases of these shares after the initial release in April
2005 .
A non-recourse loan in respect of the purchase of the LTIP shares.
However upon transition to his role as Chief Executive, Wealth Management, Mr Caffe's contract was altered, the material details of which
are as follows :
Base salary of $600,000;
Participation in the Challenger Employee Incentive Plan up to 100% of base salary package;
Allocation of 18,000,000 shares under the LTIP at an issue price of 53 cents, subject to a hurdle of 15% per annum compound total
return to shareholders (including dividends) for releases of these shares after the initial release in April 2005 ;
A non-recourse loan in respect of the purchase of the LTIP shares.
New CEO Remuneration
Upon Mr Tilley's appointment as CEO, under the terms of his appointment Mr Tilley will be entitled to :
A base salary of $675,000 ;
A short-term incentive of up to 150% of the base salary package, subject to achieving qualitative and quantitative hurdles set by the
Board ;
A $500,000 interest free loan for the purpose of investing in Challenger investment products, other than Challenger shares;
A retention bonus of $250,000 after 3 years of employment as CEO and a further retention bonus of $250,000 at the end of year 5 .
REMUNERATION REPORT (Cont'd)
Mr Tilley will not be entitled to participate in the Challenger LTIP . However, subject to Challenger shareholder approval, Mr Tilley will be
allocated 5,000,000 restricted Challenger shares, funded via limited recourse loan and issued at 53 cents, at the time that shareholder
approval is granted. These shares will be issued substantially on the same terms as the long-term incentive plan limited recourse loan and
escrow conditions .
Mr Tilley may terminate his service agreement by giving 12 months notice to Challenger, in which event he will receive accrued statutory
and contractual entitlements, but he will not be entitled to any termination payment, short term incentive payments, unvested shares or
future retention payments . Challenger may terminate Mr Tilley's service agreement, in which event (other than in the case of termination
for cause, poor performance or incapacity), Mr Tilley will be entitled to a payment of $2 million, if termination is within the first 3 years ; a
$1 .75 million payment if termination is during years 3-5 or a $1 .5 million payment if termination is after year 5, in all cases, in addition to
accrued entitlements . These arrangements are subject to shareholder approval .
Where termination is for cause or poor performance, Mr Tilley will be entitled to accrued entitlements, but he will not be entitled to a
termination payment, except where termination is due to incapacity in which case he will be entitled to a termination payment of $750,000 .
Senior Executives
Executive remuneration and incentive policies and practices will be performance based and aligned with the Group's vision, values and
overall business objectives . Challenger's ability to attract and retain talented executives, and to align their interests with those of
shareholders, is critically important to Challenger's ability to deliver sustained shareholder value. At the same time, the Board recognises
that it has a responsibility to ensure that executive remuneration is fair and reasonable, and is effectively structured to produce superior
results for shareholders . Accordingly, the Board has adopted remuneration policies designed to achieve these important objectives .
Remuneration packages for senior executives typically comprise three components: a fixed pay component, a short-term bonus component
and a component related to longer-term performance and retention .
The fixed pay component is calculated on the basis of total cost, including employee benefits together with fringe benefits tax applicable to
those benefits . Short-term bonus incentives at Challenger are based on the achievement of specific annual goals and objectives related to the
performance of the Group as a whole and its operating divisions . Bonuses may take the form of cash or shares issued under the Group's
Long Term Equity Based Incentive Plan (LTIP).
Senior and other key executives have been granted long-term incentives designed to retain the loyalty of those executives over the medium to
long term . In general, the long temr variable element will take the form of a grant of shares under the LTIP described in more detail in the
section of this report titled Long Temr Equity Based Incentive Plan.
The nature and amount of each component of remuneration paid and accrued to the CEO and each of the five executive officers who have
the greatest authority for managing operations of Challenger in the period 23 December 2003 to 30 June 2004 is set out below:
Senior Executives
Prima
Salary & Cash Bonus* ann ation
Fees
LTIP**
Other***
Total
5,727
531,044
882,414
345,643
C E Cuffe Chief Executive Officer ^
5,727
254,526
514,800
254,547
R Adams Executive - Wealth Management)
5,727
238,813
747,032
202,492
300,000
B Benari Executive - Wholesale Finance
5,727
109,998
190,000
469176
163,451
T H Foster Chief Financial Officer
241,154
5,727
__20_5,046
602,364
150,437
R Howes (Executive Life)-5,727
375,325
635 599
254,547
D Stevens Executive - Capital, Risk & Strategy)
190,0001 3,851,3851
1,371 117
541,154
34,3621 1,714,7521
Total remuneration
*
In respect of Messrs Benari and Howes, cash bonus amounts represent guaranteed bonus amounts that were negotiated as part of their respective
executive remuneration packages.
** Represents accrued fair value during the period from 23 December 2003 to 30 June 2004 . Fair value has been determined in accordance with the
principles outlined in Note 28 to the financial statements.
*** Mr Foster's other payment represents a compensation payment made by a related party in respect of previously foregone employment retention rights .
^
LTIP amounts have been calculated on the original entitlement and have not been adjusted to reflect changes in entitlements subsequent to his change
in role as noted above in the section titled "Chief Executive Officer".
^^
Subsequent to year end, Messrs Howes stepped down as Executive -Life to accept the role of Chief Investment Officer Life . Accordingly there will
be a reduction to his respective LTIP entitlements subsequent to 30 June 2004 .
Prior to corporatisation, certain executives were entitled to incentive payments under a cash based shadow scheme. Following the approval
of the LTIP the executives continue to have an entitlement to receive cash payments capped at $0.53 share price. The amount of this
remuneration has been included under the heading "Equity LTIP" in the above table and represents the accrued fair value during the period
from 23 December 2003 to 30 June 2004 . Fair value has been determined in accordance with the same principles as the LTIP (as outlined in
Note 28 to the financial statements) .
REMUNERATION REPORT (Cont'd)
Executive director & Senior Executives' total holdings in Challenger Shares and managed investment schemes are set out in Note 26 to the
accounts .
Long Term Equity Based Incentive Plan (LTIP)
The Board considered it necessary and appropriate to establish the LTIP for senior Challenger executives to retain key players and
encourage behaviour in the long term best interests of Challenger . The Board considered that a reward strategy for senior executives with a
heavy weighting on long term incentives was essential in aligning executive and shareholders interests . The LTIP was approved at the time
of Corporatisation by unit holders.
The LTIP design principles seek to satisfy the following requirements :
"
to incentvee senior executives within Challenger Group and reward them in alignment with growing share prices over the long term ;
to attract and retain an outstanding executive team with a proven track record in a scarce skills labour market;
for Challenger 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 between Challenger Financial Services Group (Trust) and
Challenger International Limited .
Under the terms of the LTIP, eligible employees may acquire Challenger shares, with the cost being financed by a non-recourse, interest
bearing loan from Challenger which is repayable when the shares vest. Dividends paid on the shares issued under the plan are to be paid to
the Company as interest on the non-recourse loan .
There are two types of participants of Challenger's LTIP :
"
Participants ; and
"
Initial Participants .
The performance hurdles in respect of Participants are summarised as follows :
Subject to performance hurdles being met, 20% of the participating shares issued to participants 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 volume weighted average share price (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 (once vesting and performance hurdles have been met) participants may, but are not obliged to sell the
shares.
The Board has identified a number of Initial Participants for whom special conditions will apply, having regard to :
"
The improvement in the share price since the relevant senior executives were recruited ;
e
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 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 issue);
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; and
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 $0 .53 and the starting date for that
calculation being the second anniversary of the reference date.
Any unreleased participating LTIP shares will be sold by the Custodian to reduce any outstanding loan, bought back under the LTIP or
cancelled by Challenger, subject to compliance with the Law.
DIRECTORS'REPORT
Challenger Financial Services Group Limited (Challenger), presents its report, together with the financial statements of the
Company and its controlled entities (the Group) for the period from 6 November 2003 to 30 June 2004 ("the reporting
period") and the auditors report thereon .
The names of the directors of Challenger holding office during the period beginning 6 November 2003, the date of
incorporation, until the date of this report, and details of their attendance at Board and Committee Meetings are as set out in
the Corporate Governance Report .
Company Information
The Company was incorporated in New South Wales on 6 November 2003 and its shares were admitted to the Official List
for quotation on the Australian Stock Exchange on 23 December 2003 . The registered office of the Company is Level 41,
Aurora Place, 88 Phillip Street, Sydney, NSW 2000 .
Principal Activities
The principal activities of the Group are the provision of financial services, in particular:
Challenger Life (previously known as Challenger Annuities) ;
"
"
Challenger Wholesale Finance (previously known as Challenger Mortgage Finance);
"
Challenger Wealth Management (comprising Funds Management and Financial Planning).
Consolidated Results
The consolidated net loss after tax attributable to the members of Challenger after adjusting for a $280,000,000 write-down
in goodwill was ($235,445,067) . The net loss reported in the Statement of Financial Performance represents the net loss for
period from 23 December 2003 to 30 June 2004, which represents the period from the date Challenger commenced trading
and 30 June 2004.
The Board of Challenger has determined to write down the carrying value of goodwill as at 30 June 2004 by $280 million
(after goodwill amortisation in 2004 of $20 million) . This decision has been taken after giving consideration to the high
standard of corroborative evidence associated with the impairment test under the pending International Accounting
Standards, and reflects a conservative approach to the outlook for annuity sales post September 2004 following changes to
the Federal Government's retirement income policy. It also assumes a more conservative perspective of the Group's broad
business plans even through more favourable outcomes may eventually result .
No comparative results are provided as this is the first reporting period for the entity.
Dividends
No dividend has been paid during the reporting period and no final dividend has been proposed for the reporting period.
Review of Operations
A review of the operations and the results for the Group for the reporting period are contained in the Chairman's Report to
shareholders .
State of Affairs
Challenger was incorporated on 6 November 2003 . On 22 December 2003, the unitholders of Challenger Financial Services
Group (CFSG) approved a restructure of CFSG involving the corporatisation of CFSG .
Under the restructure, CFSG unitholders exchanged their units for Challenger shares (on a one for one basis) and
Challenger became the sole holder of CFSG units. Challenger was admitted to the official list of the ASX on 23 December
2003 .
As a result of the restructure of CFSG :
"
The Chief Executive Officer entered into an employment contract with Challenger, the material terms of which were
disclosed as part of the restructure information;
Challenger issued to Consolidated Press Holdings Limited 300 million non-transferable call options over unissued
"
shares with an exercise price of $0.65 and a 10-year tern ;
"
A Long Term Equity Based Incentive Plan for senior executives of Challenger was approved ;
"
The issue of 40,000,000 shares in Challenger to the CEO as part of the CEO Long Term Incentive Plan, as approved by
unit holders as part of the corporatisation ; and
"
During the period 184,400,000 shares in Challenger were issued under the Long Term Incentive Plan to satisfy the
senior executive incentive and retention program, as approved by unit holders as part of the corporatisation in
December 2003 .
DIRECTORS' REPORT (Coned)
Likely Developments
Further information on likely developments in the operations of the consolidated entity and the expected results of
operations have not been included in this report because the directors believe it would be likely to result in unreasonable
prejudice to Challenger.
Environmental Performance
The Challenger Group acts as responsible entity for a number of property trusts, which have major properties throughout the
country. These properties are subject to environmental regulations under both Commonwealth and state legislation . The
Directors are satisfied that adequate systems are in place for the management of its environmental responsibilities and
compliance with various legislative, regulatory and licence requirements . Further, the Directors are not aware of any
breaches to these requirements and to the best of their knowledge all activities have been undertaken in compliance with
environmental requirements .
Indemnification of Directors and Officers
In accordance with its Constitution, and where permitted under relevant legislation or regulation, Challenger indemnifies the
directors and officers of Challenger, against all liabilities to another person that may arise from their position as directors or
officers of Challenger and its subsidiaries, except where the liability arises out of conduct involving lack of good faith,
wilful misconduct, gross negligence, reckless misbehaviour or fraud. The indemnity provides for the full amount of any
claim, including costs and expenses .
Insurance of Directors and Officers
In accordance with the provisions of the Corporations Act 2001, Challenger has insured the directors and officers against
liabilities incurred in their role as directors and officers of the Challenger Group. The terms of the insurance policy,
including the premium are subject to confidentiality clauses and as such Challenger is prohibited from disclosing the nature
of the liabilities covered and the premium. Challenger has not given or agreed to give any indemnity to an auditor of the
Challenger Group and has not paid any premium for insurance against those auditors' liabilities for legal costs.
Subsequent events
The following significant events have occurred post 30 June 2004 :
Mr Chris Cuffe stepped down as Chief Executive Officer to accept the role as Executive, Wealth Management. On 2
August 2004 Mr Mike Tilley was appointed Chief Executive Officer of Challenger .
On 13 August 2004, Challenger Financial Services Group Limited acquired Associated Planners Limited and its
controlled entities for consideration in shares of $91 .3 million. The consideration was calculated on the 203,146,130
shares issued as outlined in the relevant 3B notice, by reference to Challenger's share price on 13 August 2004.
Under the scheme of arrangement, each ordinary and Z class Associated Planners shareholder received 5.69 Challenger
shares for each Associated Planners share they hold . Fifty percent of the Challenger shares issued to Associated
Planners shareholders are subject to a trading lock, which is similar to an escrow arrangement . These shares will be
released in two tranches, 18 months (30 per cent) and three years (70 per cent) after issue.
Challenger shares issued to Zurich Financial Services Australia Limited, which holds all Z class shares and accounts
for approximately 30 per cent of Associated Planners Group Limited, were fully vested on issue. The number of shares
issued under the schemes represented approximately seven per cent of the issued capital of Challenger .
Challenger intends to merge Associated Planners with its existing financial planning arm, Garrisons Financial Planning .
Since 30 June 2004, the company has entered into sale contracts in relation to the following properties that, while
unconditional, are subject to completion :
Property
Las Cimas I I and 111
Senator House
Minster Court
Hayes Park
Heathrow World
Country
USA
UK
UK
UK
UK
Date Signed
19 August 2004
27 August 2004
27 August 2004
27 August 2004
27 August 2004
The net proceeds of these proposed sales amounts to approximately $828 million, which is approximately
$52 million above the 30 June 2004 carrying value of the relevant properties, at current exchange rates.
The profit on these disposals has yet to be confirmed or recognised, due to uncertainty surrounding completion and
related interest rate and currency movements and break costs on debt .
DIRECTORS' REPORT (Cont'd)
No other matter or circumstance has arisen that has affected or may significantly affect :
(a) the consolidated entity's operations in future financial years; or
(b) the results of those operations in future financial years; or
(c) the consolidated entity's state of affairs in future financial years.
Shares Under Option
Un-issued ordinary shares of Challenger Financial Services Group Limited under option plans at 30 June 2004 are set out in
the following table:
Expiry
Exercise
Number
Date
Price
Series G Option Plan options
30/07/2004
$0 .813
16,627,500
31/01/2005
$0 .788
169,641
Garrisons GD12-1999
509,832
Garrisons GD 6 - 2000
31/01/2005
$0 .638
12-2000
31/01/2005
$0
.946
503,451
Garrisons GD
604,359
Garrisons GD6-2001
31/01/2005
$0 .782
Garrisons GD 12-2001
31/01/2005
$0 .720
629,402
22/12/2013
$0 .650
300,000,000
Consolidated Press Holdings Limited
The Series G Option Plan options were exercisable at any time on or before the expiry date (30 July 2004) . As at the date of
this report these options have expired.
The Garrisons Option Plan options are exercisable one third 31 December 2003 and one third on 31 December 2004 .
Options issued to Consolidated Press Holdings Limited are non-transferable call options and may be exercised at any time
within ten years from their grant date (22 December 2003).
No options were granted to employees of the Group during the year. No options were exercised during the period 1 July
2003 to 30 June 2004 .
Rounding
The amounts contained in this report and in the financial statements have been rounded off to the nearest $1,000 under the
option available to Challenger under ASIC Class Order 98/0100. Challenger is an entity to which the class order applies.
Signed in accordance with a resolution of the Directors of Challenger.
/L 14
-
e"?f ef-e~
Tilley
Director
G A Cubbin
Director
Sydney
27th August 2004
Sydney
27th August 2004
Financial Statements
30 June 2004
Contents
Page
Financial Report
Statement of financial performance
14
Statement of financial position
15
Statement of cash flows
16
Notes to the financial statements
18
Directors' Declaration
72
Independent audit report
This financial report covers both Challenger Financial Services Group Limited and its controlled entities "the Group" .
CHALLENGER FINANCIAL SERVIC ES GROUP LIMITED AND CONTROLLED ENTITIES
Statements of financial performance
For the period from 6 November 2003 to 30 June 2004
Notes
Consolidated
2004
$000's
Parent Entity
2004
$000's
2
446,475
3
297,832
1,620
Write-down in goodwill & investment in controlled
entities
3
81,815
-
4
280,000
280,000
32
1,452
-
Borrowing costs
Share of net profits of associates accounted for
using the equity method
(Loss) from ordinary activities before income
tax expense
Income tax expense
(211,720)
5
(Loss) attributable to shareholders after tax
from ordinary activities
(281,620)
23,725
(235,445)
(281,620)
(235,445)
(281,620)
Total revenues, expenses and valuation
adjustments attributable to shareholders
recognised directly in equity
Total changes in shareholders' funds from non
shareholder transactions
Basic earnings per share
23
(9 .08) cents
Diluted earnings per share
23
(8 .13) cents
The Group traded for the periodfrom 23 December 2003 to 30 June 2004.
The above statement of financial performance should be read in coijunction with
accompanying notes.
the
Statements of financial position
As at 30 June 2004
Notes
Assets
Cash assets
Receivables
Debt securities
Equity securities
Fixed assets
Deferred tax assets
Investment in controlled entities
Investment in associates
Intangible assets
Other assets
Excess of net market value of the interests of
Challenger Life No.2 Limited in its subsidiaries
over their net assets
Total assets
Liabilities
Payables
Provisions
Total liabilities
6
7
8
8
8
9
10
11
31
32
12
13
ParentEntity
2004
$000's
626,388
420,021
1,217,687
332
204,641
2,535,134
21,947
7,530
17,788
255,974
143,800
177,093
7,530
922,221
-
295,251
2,144,969
39,531
58,921
2,052,003
4,590,675
9,150
58,921
68,071
1,084,948
1,038,773
1,258,693
61,700
(235,445)
1,084,948
1,258,693
61,700
(281,620)
1,038,773
14
15
16
17
18
19
Net assets
Shareholders' equity
Contributed equity
Reserves
Retained (Loss)
Total shareholders' equity
Consolidated
2004
$000's
20
21
22
The above statement offinancial position should be read in conjunction with the accompanying notes.
Statements of Cash Flows
For the period from 6 November 2003 to 30 June 2004
Consolidated Parent Entity
Dividends received
Interest received
Borrowing costs
Income taxes paid
Net cash inflow/(outflow) from operating activities
Notes
29 (a)
2004
$000's
581,010
(450,624)
11,198
48,999
(75,152)
(1,759)
113,672
Advances of Loans
Repayments of Loan Advances
Capitalised costs of acquisition paid
Net cash inflow/(outflow) from investing activities
(28,877)
(2,873)
1,006
(13,983)
(111)
179,976
135,138
Net cash inflow/(outflow) from financing activities
119,646
(93,275)
26,371
Net increase/(decrease) in cash held
Effects of exchange rates on cash
Cash acquired upon corporatisation of CFSG
Cash at the end of the financial year
275,181
29 (b)
The above statement ofcash flows should be read in conjunction with the accompanying notes.
3,328
347,879
626,388
2004
$000's
-
NOTES TO THE FINANCIAL STATEMENTS
Contents
Page
Note
1
2
3
Summary of significant accounting policies
4
5
Income tax
6
_Assets
Cash assets
7
8
9
10
11
12
13
14
Receivables
Investment assets
Fixed assets
Deferred tax assets
Intangible assets
Other assets
Excess of net market value over net book value of life insurance subsidiaries
Liabilities
15
16
17
18
19
20
21
Payables
Provisions
18
27
27
28
29
30
31
31
32
35
36
36
36
37
38
38
39
Life insurance business
Total equity
40
41
Reserves
44
44
Contributed equity
43
22
23
Retained profits
Earnings per share
24
Segment information
Financial instruments
46
47
Employee entitlements
52
55
25
45
Related parties
Directors' and Executives' remuneration
50
Statement of cashflow
Remuneration of auditors
57
Investments in controlled entities
60
61
Investments in associates
Deed of cross guarantee
66
67
35
Contingent liabilities
36
Subsequent events
International Financial Reporting Standards
69
70
26
27
28
29
30
31
32
33
34
37
Commitments for expenditure
68
71
Note 1 . Summary of significant accounting policies
Challenger was incorporated on 6 November 2003, and the period ended 30 June 2004 is the first reporting period that
an annual financial report has been prepared for Challenger. This financial report covers the period from 6 November
2003 to 30 June 2004 . Accordingly comparative information is not available for Challenger . This general purpose
financial report has been prepared in accordance with the requirements of Accounting Standards, other authoritative
pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Consensus Views and the
Corporations Act 2001 .
The financial report is prepared in accordance with the historical cost convention except for all life insurance assets and
liabilities and certain other assets and liabilities which are stated at valuation as described in the summary of significant
accounting policies .
The statement of financial position is presented in order of liquidity.
(a)
Principles of consolidation
The consolidated financial statements incorporate the assets and liabilities of all entities controlled by Challenger
Financial Services Group Limited ("Parent Entity") as at 30 June 2004 and the results of all controlled entities for the
period then ended. Challenger Financial Services Group Limited and its controlled entities together are referred to in
this financial report as the Consolidated Entity. The effects of all transactions between entities in the Consolidated
Entity are eliminated in full .
Where control of an entity is obtained during a financial year, its results are included in the consolidated statement of
financial performance from the date on which control commences. Where control of an entity ceases during a financial
year its results are included for that part of the year during which control existed.
Life Insurance Controlled Entities
Both the shareholders' and policy owners' interests in the life insurance funds of the controlled entities are
consolidated .
Some aspects of generally accepted Australian accounting practices applicable to life insurers, in particular net market
value accounting, differ from generally accepted practices for non life insurers . Where a life insurer consolidates a
subsidiary, any differences between the values consolidated line by line and the market value of the controlled entity
recorded in the life insurer's financial statements is shown as "Excess of the net market values of its interests in its
subsidiaries over their net assets".
Non Life Insurance Controlled Entities
Where controlled entities of non-life insurance companies are consolidated the excess of the purchase price over the fair
value of net assets of controlled entities is goodwill and is amortised as described in 1(m).
Invesments in Associates
Investments in Associates are carried at the lower of equity accounted amount or recoverable amount in the
consolidated financial report.
Life Insurance financial reporting
Assets, liabilities, revenues and expenses are measured on the following basis.
(i)
Premiums are separated into their revenue and liability components. Premium amounts received which are akin
to deposits, are recognised as an increase in policy liabilities.
(ii)
Claims are separated into their expense and liability components. Claims expenses paid are akin to withdrawals
and are recognised as a decrease in policy liabilities .
Note 1. Summary of significant accounting policies (Contd)
(iii)
Investment assets within Challenger Life No .2 Limited relating to policy liabilities have been recorded at net
market value including an allowance for estimated realisation costs. Where no quoted market values exist,
various methods determined by the Directors have been adopted . They include the following:
"
Investments in unit trusts that are not controlled entities are recorded at their latest available market value.
"
Investments in controlled property trusts consist of income units (entitlements to rental income less financing
and hedging costs) and capital units (entitlements to residual net assets upon the maturity of the income
units) .
The values of investments in income and capital units are derived from net market valuations on the
underlying properties, undertaken periodically by independent accredited valuers, less the costs of related
debt and foreign exchange hedging contracts.
"
"
"
Revaluation gains and losses on property investments arise where the net market value differs to cost . Net
market value (fair value) is the most probable price reasonably obtainable in the market from a willing and
knowledgeable buyer. The cost of acquired properties includes its purchase price, and any directly
attributable expenditure including professional fees for legal services, property transfer taxes and other
related transaction costs.
Investments in controlled entities that do not have a market price are recorded at fair value as determined by
the Directors. For details refer to note 14.
Interest-bearing securities listed on exchanges are shown at quoted prices at balance date .
Loans are recorded at market value based on discounting the estimated recoverable amount using prevailing
interest rates.
Gains and losses arising from the revaluation of investments are included as part of investment income in the
statement of financial performance .
(iv)
Overview of Margin on Services (MoS) methodology
MoS is the financial reporting methodology for Australian life insurance companies as prescribed in the Life
Insurance Act 1995 ("the Act'). MoS is designed to recognise profits on life insurance as services are provided to
policyholders and income is received. Services used to determine profit recognition include the cost of the
expected claims, maintaining policies, and investment management . Policy liabilities are valued by the Life
Insurance Actuarial Standard 1 .03 "Valuation of Policy Liabilities" issued by the Life Insurance Actuarial
Standards Board under the Life Insurance Act 1995 .
Policy liabilities are amounts which, when taken together with future premiums and investment earnings :
"
"
are required to meet the payment of future benefits and expenses; and
incorporate profit margins on existing business to be released when earned in future periods.
Life insurance policy liabilities are not categorised as current or non-current which is consistent with the
presentation of investment assets backing those liabilities.
On the basis of an actuarial assessment under the MoS methodology the excess of net assets over policy liabilities
accrues to the benefit of Challenger Financial Services Group Limited.
MoS profit can be analysed in the following categories :
Planned margins of revenues and expenses .
"
At the time of writing a policy and at each balance date, best estimate assumptions are used to determine all
expected future payments and premiums . Where actual experience replicates best estimate assumptions, the
expected profit margins will be released to profit over the life of the policy.
The difference between actual and assumed experience.
Note 1. Summary of significant accounting policies (Cont'd)
Experience profits/(losses) are realised where actual experience differs from best estimate assumptions.
Instances giving rise to experience profits/(losses) include variations in claims, expenses, mortality,
discontinuance and investment returns. For example, an experience profit will emerge when the expenses of
maintaining all in-force business in a year are lower than the best estimate assumption in respect of those
expenses .
Changes to underlying assumptions .
Assumptions used for measuring policy liabilities are reviewed each period by the Appointed Actuary.
Where the review leads to a change in assumptions, the change is deemed to have occurred from the end of
the financial year .
The financial effect of changes to the assumptions underlying the measurement of policy liabilities made
during the reporting period are recognised in the statement of financial performance over the future reporting
periods during which services are provided to policyholders. However, if based on best estimate
assumptions, written business for a group of related products is expected to be unprofitable, the whole
expected loss for that related product group is recognised in the statement of financial performance
immediately. When loss making business becomes profitable, it is necessary to reverse previously recognised
losses .
(v)
Basis of expense apportionments
Direct expenses are allocated on the basis of statutory fund, class and category of business. Other expenses have
been apportioned between statutory funds, classes and categories of business in accordance with Division 2 of
Part 6 of the Life Insurance Act 1995, with general management expenses being apportioned on a similar basis.
Apportionment between policy acquisition, policy maintenance and investment management has been made in
line with principles set out in the Life Insurance Actuarial Standards Board (LIASB) Valuation Standard
(Actuarial Standard AS 1 .03) .
(vi)
Policy acquisition costs are the fixed and variable costs of acquiring new business and include the related
commission, policy issuing and underwriting costs, agency expenses and other sales costs . The actual acquisition
costs incurred in life business are recorded in the statement of financial performance .
In determining life insurance policy liabilities, the Appointed Actuary takes account of the deferral and the future
recovery of acquisition costs. The acquisition costs deferred are determined as the greater of actual costs incurred
and any explicit policy charges for the recovery of those costs, subject to an overall limit that the value of future
profits at inception cannot be negative. Acquisition losses are recognised at inception to the extent the latter
situation arises .
(vii) Consolidated payables include all of Challenger Life's creditors, other liabilities and borrowings.
The non-current borrowings and "other liabilities" relating to life insurance operations are measured at net
present values, and changes to those net present values, as well as borrowing costs, are recognised as expenses
(and, in some cases, revenues) of the period .
The borrowings and other liabilities relating to the retail operations are measured at their face values with only
borrowing costs recognised as expenses of the period .
Note 1 . Summary of significant accounting policies (Cont'd)
(c)
Income tax
Tax effect accounting is applied using the balance sheet liability method, which focuses on the tax effect of transactions
and other events that affect amounts recognised in either the statement of financial position or tax based balance sheet.
The income tax expense or revenue for the period is the tax payable on the current period's taxable income adjusted by
changes in deferred tax assets and liabilities attributable to amounts recognised as assets or liabilities, and to unused tax
losses .
Deferred tax assets and liabilities are recognised for temporary differences between the carrying amount of assets and
liabilities for accounting purposes and the tax bases of those assets and liabilities, and for unused tax losses. The tax
rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are
enacted or substantively enacted for each jurisdiction, are applied to the cumulative amounts of deductible and
assessable temporary differences to measure the deferred tax asset or liability.
A deferred tax asset is recognised for the carry forward of unused tax losses and temporary differences id respect of
unrealised capital losses to the extent, and only to the extent, that it is probable that future taxable amounts within the
company or consolidated entity will be available against which the unused losses can be utlised .
(d)
Foreign currency translation
(i)
Transactions
Foreign currency transactions are initially translated into Australian currency at the rate of exchange at the date
of the transaction . At balance date amounts payable and receivable in foreign currencies are translated to
Australian currency at rates of exchange current at that date . Resulting exchange differences are brought to
account in determining the profit or loss for the year.
(ii)
Foreign controlled entities
As the foreign controlled entities are integrated, their assets and liabilities are translated into Australian currency
at rates of exchange current at balance date, while their revenues and expenses are translated at the average of
rates ruling during the year . Resulting exchange differences arising on translation are brought to account in
determining the profit or the loss for the year.
Acquisitions of assets
The purchase method of accounting is used for all acquisitions of assets, except for those assets held by Challenger
Life, regardless of whether shares or other assets are acquired . 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 of 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 .
Goodwill is brought to account on the basis described in note 1(m).
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.
(~
Revenue
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue
can be reliably measured. Revenue and expenses are generally recognised on an accruals basis.
Revenue from fees and commissions is income derived from the provision of investment management services to
Challenger's managed investment products and fee and distribution income from managed loan securitisation trusts .
Revenue is recognised when the services are provided, or when the fee or commission in respect of services provided is
receivable .
Interest income is recognised as it accrues taking into account the effective yield of the financial asset.
Dividends are recognised as income on the date the share is quoted ex-dividend . Dividends from unlisted companies are
recognised when the dividend is received .
Rents are shown net of outgoings. Imputed rent is calculated for owner-occupied premises at commercial rates and is
recognised as investment income and charged as a management cost . Imputed rent is eliminated in preparing the
financial statements except for required specific disclosures.
(g)
Receivables
All trade debtors are recognised at the amounts receivable . Trade debtors are due for settlement no more than 120 days
from the date of recognition, and other debtors no more than 30 days from the date of recognition .
The recoverability of trade debtors is reviewed on an ongoing basis. Debtors which are known to be uncollectable are
written off. A provision for doubtful debts is raised where it is probable the debt will not be fully recoverable.
Bills of exchange have been purchased in the market at a discount to face value. The bills are carried at an amount
representing cost and a portion of the discount recognised as income on an effective yield basis. The discount brought to
account each period is accounted for as interest income .
(h)
Recoverable amount of non-current assets
The recoverable amount of an asset is the net amount expected to be recovered through the net cash inflows arising
from its continued use and subsequent disposal .
Where the carrying amount of a non-current asset is greater than its recoverable amount, the asset is written down to its
recoverable amount . Where net cash inflows are derived from a group of assets working together, recoverable amount is
determined on the basis of the relevant group of assets .
(i)
Investments
Investments held outside Challenger Life in listed and unlisted securities, other than investments in controlled entities
and associates, are brought to account at the lower of cost or net realisable value. Controlled entities and associates are
accounted for in the consolidated financial statements as set out in note 1(a) .
Depreciation of fixed assets
Depreciation is calculated on a straight line basis to write off the net cost or revalued amount of each item of property,
plant and equipment (excluding land) over its expected useful life to the consolidated entity. Estimates of remaining
useful lives are made on a regular basis for all assets, with annual reassessments for major items. The expected useful
lives are as follows:
Plant and equipment - 3 to 5 years
Core operating software - 5 years
(k)
Leaselrold improvements
The cost of improvements to or on leasehold properties is amortised over the unexpired period of the lease or the
estimated useful life of the improvement to the consolidated entity, whichever is the shorter. Leasehold improvements
held at the reporting date are being amortised over 5 years.
(1)
Leased assets
Leases are classified as either operating leases or finance leases at the date of inception of the lease.
A distinction is made between finance leases which effectively transfer from the lessor to the lessee substantially all of
the risks and benefits incident to ownership of leased non-current assets, and operating leases under which the lessor
effectively retains substantially all such risks and benefits .
Finance leases are capitalised. A lease asset and liability are established at the present value of minimum lease
payments . Lease payments are allocated between the principal component of the lease liability and the interest expense.
The lease asset is amortised on a straight line basis over the term of the lease, or where it is likely that the consolidated
entity will obtain ownership of the asset, the life of the asset. Lease assets held at the reporting date are being amortised
over periods ranging from 3 to 5 years .
Incentives received on entering into operating leases are recognised as liabilities and amortised over the life of the
lease.
Other operating lease payments are charged to the statement of financial performance in the periods in which they are
incurred, as this represents the pattern of benefits derived from the leased assets.
Surplus lease space
The present value of future payments for surplus leased space under non-cancellable operating leases is recognised as a
liability, net of sub-leasing revenue, in the period in which it is determined that the leased space will be of no future
benefit to the consolidated entity.
(m)
(n)
Intangible assets
On acquisition of some, or all, of the assets of another entity or, in the case of an investment in a controlled entity, on
acquisition of some, or all, of the equity of that controlled entity, the identifiable net assets acquired are measured at
fair value . 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 during which the benefits are expected to arise, being no more than twenty years.
Deferred portfolio and origination costs
Deferred portfolio costs
Portfolio costs represent the costs associated with establishing securitised mortgage backed pools of funds which are
funded via the issue of residential mortgage backed securities (RMBS) to investors .
The amortisation policy is to match the portfolio costs with the expected repayment profile of each securitised pool so
that the amortisation charge as a proportion of the outstanding securitisation pool is consistent over the life of the
securitisation, creating an effective yield. The amortisation rate is determined based on the forecast prepayment rate of
the loans underlying the RMBS. This is calculated on a trust by trust basis, thereby matching each pool of relevant costs
with the forecast prepayment rate of the'issue' they relate to.
Deferred origination costs
Deferred origination costs are costs associated with origination of loans including commissions paid to mortgage
originators and Lenders Mortgage Insurance (LMI) premiums.
The amortisation policy is to match the amortisation of the origination costs with the average repayment profile of a
loan so that the amortisation charge as a proportion of the outstanding loan balance is consistent over the average life of
a loan, creating an effective yield . The basis of amortisation is determined by the amortisation of the loan book or
Cumulative Prepayment Rates (CPR) curve (excluding discharges) . Any origination costs (remaining written down
value) associated with a loan which has discharged during the period is written off immediately.
(o)
Payables
These amounts represent unsecured liabilities for goods and services provided to the consolidated entity prior to the end
of the financial year and short term financing of deferred origination costs by managed warehouse trusts.
Loans are carried at their principal amounts which represent the present value of future cash flows associated with
servicing the debt. Interest is accrued over the period it becomes due and is recorded as part payables.
Derivative financial instruments
The consolidated entity is exposed to changes in interest rates and foreign exchange rates and may use interest rate
swaps and forward foreign exchange contracts to hedge these risks . Derivative financial instruments are held for risk
management purposes and not for the purpose of speculation . The Group does not hold a derivative trading portfolio .
Other than in the life insurance company, costs arising at the time of entering into hedge transactions are brought to
account in the statement of financial performance over the lives of the hedge contracts . For the life insurance company
or controlled entities of the life insurance company, costs arising at the time of entering into hedge transactions are
recognised in the statement of financial performance in the period in which the costs are incurred.
Derivative financial instruments designated as hedges are accounted for on the same basis as the underlying exposure.
Derivatives not meeting the definition of a hedge, or held within the life insurance group, are accounted for on a fair
value basis and changes in value are recorded in the statement of financial performance in the period in which they
arise.
Goods and services tax
Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the
amount of the GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is
recognised as part of the cost of the acquisition of the asset or as part of the expense.
Receivables and payables are stated with the amount of GST included .
The net amount of GST recoverable from, or payable to, the ATO is included as an asset or liability in the statement of
financial position .
Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising
from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating
cash flows .
(s)
(i)
Wages and salaries, and annual leave
Liabilities for wages and salaries and annual leave expecting to be settled within 12 months of the reporting date
are recognised in provisions in respect of employees' services up to the reporting date and are measured at the
amounts expected to be paid when the liabilities are settled.
(ii)
Long service leave
(ili)
Termination benefits
A liability for long service leave is recognised, and is measured as the present value of expected future payments
to be made in respect of services provided by employees up to the reporting date. Consideration is given to
expected future wage and salary levels, experience of employee departures and periods of service . Expected
future payments are discounted using interest rates on national government guaranteed securities with terms to
maturity that match, as closely as possible, the estimated future cash outflows.
Liabilities for termination benefits relating to an acquired entity or operation that arise as a consequence of
acquisition are recognised as at the date of acquisition ii; at or before the acquisition date, the main features of
the termination were planned. These liabilities are disclosed in aggregate with other restructuring costs as a
consequence of the acquisition.
Liabilities for termination benefits expected to be settled within 12 months are measured at the amounts expected
to be paid when they are settled.
(t)
Restructuring costs
Liabilities for the cost of restructuring entities or operations acquired are recognised as at the date of acquisition of an
entity, or part thereof, if the main features of the restructuring were planned and there was a demonstrable commitment
to the restructuring at the acquisition date.
The cost of restructurings provided for, other than related employee termination benefits, is the estimated cash flows,
having regard to the risks of the restructuring activities .
Liabilities for employee termination benefits associated with restructurings are brought to account on the basis
described in the accounting policy note for employee entitlements (note 1 (s)) . Liabilities for costs of restructurings and
related employee termination benefits are disclosed in aggregate where the restructuring occurs as a consequence of an
acquisition .
Restatement of part or all of a provision for restructuring relating to an acquisition due to changes in the costs
associated with the restructuring activity are adjusted against goodwill on acquisition .
(u)
Borrowing costs
Borrowing costs are recognised as expenses in the period in which they are incurred .
Borrowing costs include:
"
interest on bank overdrafts and short-term and long-term borrowings
amortisation of ancillary costs incurred in connection with the arrangement of borrowings
finance lease charges.
"
(v)
Cash
For purposes of the statement of cash flows, cash includes deposits at call which are readily convertible to cash on hand
and are subject to an insignificant risk of changes in value, net of outstanding bank overdrafts.
(w)
Earnings per share
(i)
Basic earnings per share is determined by dividing net profit after income tax attributable to members of the
Company by the weighted average number of shares outstanding during the financial period .
(it)
(x)
Diluted earningspershare
Diluted earnings per share adjusts the figures used in the determination of basic earnings per share by taking into
account amounts unpaid on shares and any reduction to earnings per share that will probably arise from the
exercise of options outstanding during the financial year.
Funds under management
Within the economic entity certain controlled entities act as the single responsible entity/manager for a number of
registered schemes and property syndicates.
Registered schemes and property syndicates have not been consolidated in the financial statements, as individual
entities within the economic entity do not have control of the schemes and syndicates as defined by AASB 1024
"Consolidated Accounts".
(y)
Restrictions on assets
Investments held in Challenger Life No .2 Limited can only be used within the restrictions imposed under the Life
Insurance Act 1995 . The main restrictions are that the assets in a Fund can only be used to meet the liabilities and
expenses of that Fund, to acquire investments to further the business of the Fund or as distributions when solvency and
capital adequacy requirements are met. Participating policyholders can receive a distribution when solvency
requirements are met, whilst shareholders can only receive a distribution when the higher level of capital adequacy
requirements are met.
(z)
Dividends
Provision is made for the amount of any dividend declared, determined or publicly recommended by the directors of the
Company on or before the end of the financial year but not paid at balance date.
(aa)
Long Term Equity Based Incentive Plan
Shares issued to employees under Challenger's Long Term Equity Based Incentive Plan that have not yet vested have
been recognised in equity as "Long Term Equity Based Incentive Plan" and have been included in "Shares on Issue" .
Non-recourse loans issued to employees to finance the purchase of shares, that have vested in accordance with the terms
of the Long Term Equity Based Incentive Plan (LTIP), have been recognised as an asset in the Statement of Financial
Position . Non-recourse loans are not carried at an amount above their recoverable amount . The recoverable amount of
non-recourse loans is assessed at each balance date by reference to the fair value of the underlying unvested shares
issued under the LTIP . Fair value has been determined in accordance with the principles outlined in Note 28 .
(bb)
Contributed equity
Issued and paid up capital is recognised at the fair value of the consideration received by the Company. Shares issued
in respect of LTIP are recognised at the amount receivable under the terms of the LTIP . Any transaction costs arising on
the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds .
(cc)
Rounding of amounts
The entity is of a kind referred to in Class Order 98/0100, issued by the Australian Securities & Investment
Commission, relating to the "rounding off' of amounts in the financial report . Amounts in the financial report have been
rounded off in accordance with the class order to the nearest thousand dollars, or in certain cases, to the nearest dollar.
Note 2.
Rental income
Management fee income
Change in net market value of investments held by Life Company subsidiaries
- Properties (net of exchange fluctuations)
- Property valuation movement attributable to exchange fluctuations
- Interest rate swaps and forward foreign exchange contracts
- Trading securities
Net realised gains on sale of investments and subsidiaries
Net realised foreign exchange gains
Dividend income
Interest income
Other income
Note 3.
Borrowing costs
Interest expense
- Controlled Property Trusts
- Other entities
Expenses from ordinary activities, excluding borrowing costs
Increase in net policy liabilities
Provision for unrealised loss on investments
Property management expenses incurred by Property Trusts controlled by
Challenger Life No.2 Limited
Goodwill amortisation
Amortisation of deferred portfolio and origination costs
Depreciation
Employee expenses
Commission expense
Occupancy expense- operating lease
Professional fees
Communications
Other expenses
Total expenses from ordinary activities
Consolidated
Period from
6 November 2003
to 30 June 2004
$000's
129,654
147,250
Parent
Period from
6 November 2003
to 30 June 2004
$000's
23,180
23,877
(31,401)
20,143
17,267
36,006
11,789
49,501
19,209
446,475
Consolidated
Period from
6 November 2003
to 30 June 2004
$000's
Parent
Period from
6 November 2003
to 30 June 2004
$000's
66,426
15,389
81,815
75,549
6,286
11,623
11,297
18,690
1,933
58,441
62,336
5,945
6,386
3,628
35,718
297,832
379,647
1,620
1,620
1,620
27
Note 4.
As reported in the directors report in the section titled "consolidated results" the Board of directors of Challenger have
approved a write-down of $280,000,000 in the Parent Entity's investment in the Challenger Group subsidiaries . The
following outlines the impact of the write-down on the Parent Entity and Consolidated Entity net profit and net assets
as reported in the Statement of Financial Performance and Statement of Financial Position, respectively.
Impact on net profit
Impact on net profit before tax
Tax expenselbenefit attributable to write-down
Impact on net profit after tax
Net profit/(loss) after tax prior to goodwill/investment write-down
Net (loss) after tax after goodwill/investment write-down
Impact on net assets
Consolidated entity
Written down value of Goodwill prior to write-down
Goodwill write-off
Parent entity
Written down value of investment in controlled entities prior to write-down
Write-down in investment
Impact on earnings per share
Basic earnings per share prior to write-off of goodwill
Basic earnings per share after write-off of goodwill
Diluted earnings per share prior to write-off of goodwill
Diluted earnings per share after write-off of goodwill
Consolidated
Period from
6 November 2003
to 30 June 2004
$000's
(280,000)
Parent Entity
Period from
6 November 2003
to 30 June 2004
$000's
(280,000)
(280,000)
(280,000)
44,555
(235,445)
(1,620)
(281,620)
2004
$000's
535,974
280,000
255,974
1,364,948
1,084,948
1,202,221
(280,000
922,221
1,318,773
1,038,773
Consolidated
Period from
6 November 2003
to 30 June 2004
1 .72 cents
(9.08) cents
1 .54 cents
(8.13) cents
Note 5.
Income tax
The income tax expense for the financial year differs from the amount calculated
on the profit/(loss) . The differences are reconciled as follows:
Profit/(Loss) from ordinary activities before income tax expense
Income tax calculated @ 30%
Tax effect of amounts that are not deductible/(assessable) in calculating the
taxable amount :
Non-allowable expenses
- Write-down in goodwill
- Write-down in investment in controlled entities
- Other
Non-assessable items
Other items
Income tax expense
Income tax expense comprises:
Deferred income tax (revenue) / expense
Tax losses
Potential deferred tax asset at 30 June 2004 in respect of tax losses not brought to
account estimated by the directors
Consolidated
Period from
6 November 2003
to 30 June 2004
$000's
Parent Entity
Period from
6 November 2003
to 30 June 2004
$000's
(211,720)
(281,620)
(63,516)
(84,486)
84,000
6,564
(3,827)
504
23,725
84,000
486
23,725
23,725
69,739
This benefit for tax losses will only be obtained if:
(i) the consolidated entity derives future assessable income of a nature and of an amount sufficient to enable the
benefit from the deductions for the losses to be realised; and
(ii) the consolidated entity continues to comply with the conditions for deductibility imposed by tax legislation ; and
(iii) no changes in tax legislation adversely affect the consolidated entity in realising the benefit from the deductions
for the losses .
69,739
Note 5 . Income tax (cont'd)
Deferred tax liabilities have not been recognised for amounts relating to investments in subsidiaries where the Company controls
the timing of distributions and dividends, and it is probable that temporary differences will not reverse in the foreseeable future .
Tax consolidation legislation
Effective 1 July 2002, for the proposes of income taxation, Challenger Financial Services Group and its 100% owned eligible
subsidiaries have formed a tax consolidated group. Members of the group will enter into a tax sharing agreement in order to
allocate income tax expense to the wholly-owned subsidiaries on a pro-rata basis. In addition, the agreement will provide for the
allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations . At balance
date, the possibility of default is remote. The head entity of the tax consolidated group is Challenger Financial Services Group
Limited.
Challenger Financial Services Group Limited, as the head entity of the tax consolidated group, has recognised current and
deferred tax amounts relating to transactions, events and balances of the wholly-owned Australian subsidiaries in the group as if
those transactions, events and balances were its own, in addition to the current and deferred tax balances arising in relation to its
own transactions, events and balances. Amounts receivable or payable under the proposed tax sharing agreement have been
recognised separately by Challenger Financial Services Group Limited as tax-related amounts receivable or payable .
Under the revised AASB 1020 Income Taxes, the balances of deferred tax assets and deferred tax liabilities have been adjusted
as a consequence of resetting tax values of the assets and liabilities of wholly owned subsidiaries .
Challenger Financial Services Group has formally notified the Australian Tax Office of its adoption of the tax consolidation
regime.
Franking credits
Franking credits available for subsequent financial years based on a tax rate of 30%
Consolidated
2004
000's
35,136
Parent Entity
2004
000's
35,136
The above amount represents the balance of the franking account as at the end of the financial year, adjusted for:
(a)
(b)
(c)
(d)
franking credits that will arise from the payment of the current tax liability
franking debits that will arise from the payment of dividends recognised as a liability at the reporting date
franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date, and
franking credits that maybe prevented from being distributed in the subsequent year.
Note 6.
Cash assets
Cash at bank and on hand
Deposits at call
Consolidated
Parent Entity
2004
$000's
144,796
481,592
626,388
2004
$000's
-
Note 7.
Receivables
Secured loans *
Trade debtors
Bills of exchange
Non-recourse LTIP loans to employees**
Amounts recoverable from managed trusts
Dividends receivable
Interest receivable
Other debtors
Amount receivable from related parties
-controlled entities
Consolidated
2004
$000's
190,304
10,817
9,570
118,172
12,512
2,540
7,085
69,021
Parent Entity
2004
$000's
118,172
-
420,021
58,921
177,093
* Includes margin lending receivables amounting to $155,375,581
**Refer Note 28 for further information in respect of the terms and conditions attaching to the non-recourse LTIP loans to
employees.
Bills of exchange
The Bills of exchange have a face value of $9,635,000 and mature at various dates over the 3 months following balance date.
The average interest rate is 5.51 %.
Note 8.
Investment Assets
Debt Securities
Fixed Interest Notes
Preference Shares
Bonds
Other
Other Financial Assets
Equity Securities
Shares in listed corporations
Unit trusts and managed funds
Shares in listed corporations held in relation to endowment warrants*
Other equity investments
Consolidated
2004
$000's
Parent Entity
2004
$000's
628,117
191,824
221,226
176,520
1,217,687
332
332
70,380
46,180
75,031
13,050
204,641
*Benefits derived from this asset have been assigned to a third party and accordingly do not accrue to the benefit of
Challenger, refer Note 3I(b) for further information.
Note 9.
Investment Properties
Unit trusts at fair value
Land & buildings at fair value
Reconciliation
Carrying amount at 6 November 2003
Additions through acquisition of entity
Capital Expenditure
Sale of properties
Net revaluation
Closing balance at 30 June 2004
Consolidated
2004
S000's
11,441
2,523,693
2,535,134
2,558,902
15,345
(134,212)
95,099
2,535,134
Parent Entity
2004
$000's
-
Note 9.
Investment Properties (Cont'd)
Consolidated Entity
Acquisition
Date
CinemalRetail
Century City Walk, VIC
Innaloo Cinema Centre, WA
Jam Factory, VIC
Rivoli, VIC
George Street Cinemas, NSW
Sub-sector CinennalRetail Total
Retail
Chapel Street Air rights, VIC
Kings Langley,NSW
$000's
Carrying
Value*
30/06/2004
$000's
4-Jul-00
17-Dec-01
4-Jul-00
4-Jul-00
4-Jul-00
24,100
20,300
74,900
12,700
68,500
200,500
22,503
23,024
90,036
13,675
71,067
220,305
23,884
25,900
106,653
20,000
79,177
255,614
M3
M3
M3
M3
M3
Dec-03
Jun-04
Dec-03
Dec-03
Jun-04
15-May-01
29-Jul-01
6,000
14,100
20,100
6,014
14,639
20,653
13,250
15,933
29,183
M3
M3
Jun-04
Jun-04
30-Jun-00
153,725
186,401
230,000
M3
Jun-04
27-Jun-01
13-Nov-02
23-Feb-01
7-Jan-00
28-Jun-02
18-Dec-99
136,989
17,260
35,200
12,845
24,140
15,120
241,554
150,722
18,488
35,416
13,601
25,742
16,242
260,211
145,000
18,500
41,754
14,462
25,850
18,216
263,782
FPD Savills
M3
DTZ
DTZ
M3
FPD Savills
Dec-03
Jun-04
Dec-03
Dec-03
Jun-04
Dec-03
31-Jan-01
29-Dec-99
17-Feb-99
11-May-00
15-May-02
29-Dec-99
29-Dec-99
18,900
10,500
15,600
12,100
17,400
6,435
4,467
85,402
20,047
11,044
16,678
12,862
18,539
6,438
4,525
90,133
21,850
11,000
20,252
14,350
18,711
6,536
4,905
97,604
M3
CBRE
FPD Savills
M3
FPD Savills
M3
Urbis
Jun-04
Jun-04
Dec-03
Jun-04
Dec-03
Jun-04
Jun-04
1-Jan-00
1-Dec-01
28-Apr-98
21-Jun-02
30-Mar-01
14-Dec-00
27-Jun-02
16-May-01
5-Jan-01
5-Jan-01
35,200
43,400
30,550
40,200
20,650
38,000
73,000
35,000
96,000
61,000
473,000
78,490
87,851
32,938
42,748
21,575
40,339
74,090
37,303
101,411
65,800
582,545
119,151
84,745
35,084
44,000
24,500
44,000
70,000
39,393
102,737
65,027
628,637
Colliers
Colliers
Colliers
JLL
M3
CBRE
M3
M3
FPD Savills
FPD Savills
Dec-03
Jun-04
Dec-03
Jun-04
Jun-04
Jun-04
Jun-04
Jun-04
Dec-03
Dec-03
1,174,281
1,360,248
1,504,820
Sub-sector Retail Total
Social Infrastructure
County Court, VIC
Industrial Hi-Tech
CSIRO, NSW
Globe, Port Melbourne, VIC
Goodman Fielder, North Ryde, NSW
Heidelberg, Waterloo, NSW
Kraft, Port Melbourne, VIC
Rexel, North Ryde, NSW
Sub-sector Industrial Hi-Tech Total
Industrial Distribution Centre
Toll Drive, Altona North, VIC
API, Richlands, QLD
Auto Group, Enfield, NSW
Spotlight, Laverton North, VIC
Tetra Pak, Fairfield, NSW
CPI Braeside, VIC (JV)
CPI Wetherill Park, NSW (JV)
Sub-sector Industrial Distribution Centre Total
Office
ABS Building, ACT
DIMIA Building, ACT
Discovery House, ACT
Elders House, SA
Executive Building, Hobart, TAS
Makerston, QLD
417 St Kilda Rd, Melbourne, VIC
TaylorsInstitute, Waterloo, NSW
The Forum, Cisco, NSW
The Forum, UUNet, NSW
Sub-sector Office Total
Total Australia
_
Date of
Latest
Valuation
Total Cost
Including
Additions
$000's
Australian Properties
Acquisition
Price
Valuer
33
Note 9.
Investment Properties (Cont'd)
Consolidated Entity
Acquisition
Date
Acquisition
Price
$000'5
Total Cost
Including
Additions
$000'5
Carrying
Value*
30/06/2004
$000'5
Valuer
Date of
Latest
Valuation
United Kingdom-Office
3 World Business Centre, Heathrow
Hayes Park
Minster Court
Senator House
Sub-sector UK Office Total
22-Mar-02
8-Oct-01
7-Jul-01
3-May-01
63,724
192,791
224,228
218,074
698,817
65,331
196,070
227,672
222,872
711,945
67,726
182,339
225,918
223,170
699,153
Knight Frank
Knight Frank
CBRE
CBRE
Dec-03
Dec-03
Sun-04
Jun-04
United States- Office
Las Cimas 11 & 111, USA
50 Milk Street, Boston, USA
Invesco, Denver, USA
Sub-sector US Office Total
15-1ul-02
15-Oct-02
31-Dec-02
86,619
154,472
83,069
324 ,160
92,568
160,018
83,638
336,224_ .
91,631
155,630
83,900
331,161
C& W
CBRE
CBRE
Jun-04
Dec-03
Dec-03
Grand Total
2,197,258
2,408,417
2,535,134
* The carrying value of all properties reflects their latest independent valuation with the exception of the following properties :
Capitalised
Provision
Carrying
costs
Costs to
complete
for Exit Tax on
Independent
subsequent
Value
disposal
Valuation
to valuation
development
30/06/2004
$000'5
$000'5
$000'5
$000's
$000'5
George St Cinema's, NSW
Century City Walk, VIC
Jam Factory, VIC
Kings Largely, NSW
Goodman Fielder, North Ryde, NSW
Heidelberg,Waterloo, NSW
Rexel, North Ryde, NSW
Auto Group, Enfield, NSW
Tetra Pak, Fairfield, NSW
ABS Building, ACT
DIMIA Building, ACT
Discovery House, ACT
Taylors Institute, Waterloo, NSW
The Forum, Cisco, NSW
The Forum, UUNet, NSW
81,000
23,750
105,500
16,300
42,600
14,570
18,400
20,600
18,700
118,800
89,000
35,000
40,300
102,700
65,000
792,220
(1,823)
134
1,153
112
56
230
116
11
351
84
37
27
2,311
(367)
(958)
(164)
(414)
(464)
(4,255)
(907)
(4,255)
(5,097)
.
79,177
23,884
106,653
15,933
41,754
14,462
18,216
20,252
18,711
119,151
84,745
35,084
39,393
102,737
65,027
785,179
Qualifications of Valuers
The Valuer or Valuation Practice are authorised to practice as a Valuer under the law of the relevant jurisdiction where the valuation takes place. The
Valuer performing the valuation has at least five years of continuous experience in the valuation of property of a similar type to the property being
valued. Neither the Valuer or Valuation Practice has a pecuniary interest that could conflict with the valuation of the property. The Valuer and
Valuation Practice comply with the Australian Property Institute (API) Code of Ethics and Rules of Conduct.
Methodology
Valuations are prepared on the basis of Market Value as defined by The International Assets Valuation Standards Committee (T1AVSC) and
endorsed by the API, being:
Market value is the estimated amount for which an asset could exchange on the date of valuation between a willing buyer and willing seller in an
arms length transaction after property marketing costs wherein the parties had each acted knowledgeably, prudently and without compulsion .
In determining Market Value, Values have examined available market evidence and applied this analysis to both the traditional capitalisation
approach and discounted cash-flow approach .
Note 10.
Fixed Assets
2004
2004
$000's
$000's
Plant & equipment - at cast
Less: Accumulated depreciation
12,589
(7,291)
5,298
Software - at cost
Less: Accumulated depreciation
16,561
(648)
15,913
Fixed assets under finance lease
Less: Accumulated amortisation
4,869
(4,133)
736
Total fixed assets
21,947
Reconciliations
Reconciliations of the consolidated entity carrying amounts of each class of property, plant and equipment at the beginning
and end of the current financial period are set out below.
Consolidated
Opening balance
Additions through acquisition of entity
Additions
Disposals
Depreciation / amortisation expense
Carrying amount at 30 June 2004
Plant &
equipment
Software
Leased fixed
assets
Total
$'000
$'000
$'000
$'000
3,700
3,261
(893)
(770)
5,298
5,860
10,722
(22)
(647)
15,913
1,252
(516)
736
10,812
13,983
(915)
(1,933)
21,947
Note 11 .
Deferred tax assets
The balance arises as a result of temporary differences attributable
to:
Surplus lease space
Restructure provision
Provision for doubtful debts
Note 12.
Intangible assets
Goodwill
Goodwill on corporatisation
Re-appraisal of fair value of net assets acquired
Transfer from EMVONA*
Accumulated amortisation
Written down value prior to write-down
Write-down (refer Note 4)
2004
2004
$Goo's
$000's
3,946
1,042
1,135
1,407
7,530
3,946
1,042
1,135
1,407
7,530
Consolidated ParentEntity
2004
2004
$000's
$000's
401,953
(5,482)
150,800
(11,297)
535,974
(280,000)
255,974
*In respect of Part 9 merger of Challenger Life Limited and Challenger Life No.2 Limited .
Note 13.
Other assets
Deferred portfolio & origination costs
Prepayments
Other
2004
2004
$000's
$000's
125,204
14,665
3,931
143,800
Note 14 .
Excess of net market values over the net book
value of life insurance subsidiaries (EMVONA)
Controlled entities
Management rights Howard Mortgage Trust
(a)
Management rights Garrisons & Synergy
(a)
Other controlled entities
(a)
2004
2004
$000's
$000's
175,000
38,881
10,500
224,381
(a) The net market value of management rights and other controlled entities is at Directors' valuation.
In making their assessment of the valuation of management rights the Directors have considered
independent valuations performed as at 30 June 2004 .
Note 15.
Payables
Consolidated
Parent Entity
2004
$000's
Trade creditors and accruals
Unsettled trades payable
Warrant liability*
Swaps and forwards at fair value
Funded expenses **
Other creditors
Amounts payable to related parties
-controlled entities
2004
$Goo's
145,954
84,515
34,011
10,824
18,282
1,665
1,620
295,251
7,530
9,150
* Does not represent an in substance liability of Challenger, refer Note 31(b) for additional information .
** Funded expenses represent origination costs initially funded by trusts managed by Challenger. The liabilities are non interest bearing,
and repayable on terms as agreed between parties .
Note 16.
Outstanding
$000's
Bank Loans
Corporate
Interstar
Controlled property trusts
Securitised trust borrowings
Warrants facility*
Total bank loans
Non-Bank Loans
Controlled property trusts
Share finance
Total non-bank loans
Lease liabilities
Total interest bearing liabilities
Facility
$000's
Unused
$000's
85,000
149,994
1,187,445
37,171
41,647
1,501,257
100,000
150,000
1,195,086
100,000
41,647
1,586,733
15,000
6
7,641
62,829
85,476
502,000
138,800
640,800
502,000
180,000
682,000
41,200
41,200
2,912
2,912
2,144,969
2,271,645
126,676
Security for borrowings
The corporate facility has a maturity date of February 2006 . The corporate banking and Interstar facility amounting to $100,000,000 and
$150,000,000 respectively are secured by fixed and floating charges granted by Challenger and Iroka Pty Limited and an Equitable
Group
Mortgage of Shares over the shares in Challenger Howard Mortgage Management Limited granted in favour of ANZ Banking
certain
Group
companies
.
Limited . In addition, there are cross guarantees in place between
The Interstar facility matures on 28 September 2004 and subsequent to balance date has been refinanced via the issue of a Net Interest
the
Margin Bond issued by a special purpose vehicle, which on lends the funds to Interstar . The facility is limited in its recourse to
and
has
an
initial
that
Interstar
manages
securitised
and
warehouse
trusts
residual
income
from
the
various
manager and service fees and
term of 1 year.
Bank loans and non-bank loans in the controlled property trusts are secured solely by first mortgages over properties .
The remaining non-bank loans, $138,800,000, in relation to the share finance business are secured over shares .
Lease liabilities are effectively secured as the rights to the leased asset revert to the lessor in the event of default .
Securitised trust borrowings are limited in recourse to assets of the trust.
Interest on bank loan facilities accrues at a floating interest rate based on market index rates plus a margin of between 0 .5% and 1 .65%
per annum .
Interest on non-bank loan facilities accrues at a floating interest rate based on market index rates plus a margin of between 0 .1% and 1
perannum .
* Does not represent an in substance liability of Challenger, refer Note 31 (b) for additional information .
Note 17.
Provisions
Restructuring on acquisition
Deferred acquisition consideration
Employee entitlements (Note 28)
Movements in provisions
Restructuring on acquisition:
Opening balance
Provisions acquired at 23 December 2003
Amounts utilised
Additional provisions
Consolidated
2004
$000's
19,254
15,500
4,777
39,531
Parent Entity
2004
$000's
-
Consolidated
2004
$000's
25,345
(8,015)
1,924
19,254
Parent Entity
2004
$000's
-
Restructuring provision on acquisition includes provisions for corporate entity restructuring, surplus lease space and employee
termination benefits . Employee entitlements excludes termination benefits .
2004
2004
:
$000's
$000's
Deferred acquisition consideration
Opening balance
12,707
Provisions acquired at 23 December 2003
2,793
Restatement in provision
15,500
Provision for deferred acquisition consideration is in respect of the acquisition of Interstar Securities Holdings Pty Limited and
its controlled entities ("Interstar") which was acquired as part of the acquisition of Zed Capital Markets Australia Structured
Finance Pty Limited and its controlled entities on 29 September 2003 .
The consideration payable in respect of this acquisition is contingent upon the future performance of Interstar . The contingent
consideration payable in respect of this acquisition is outlined as follows :
A one off performance payment which is calculated by reference to the excess of the loan portfolio over $4.9 billion, the
EBIT margin being achieved by the business and the average duration of the loan book as at 30 June 2006 ; and
trailer based payment of 3.5 basis points per annum of the outstanding value of all new loans settled between 30 June 2006
and 31 December 2011 .
This consideration is revised annually by reference to the above noted variables. Restatements in this provision are adjusted
against goodwill on acquisition .
Note 18.
Deferred Tax Liabilities
The balance arises as a result of temporary differences attributable to:
Revaluation of properties
Other
Consolidated
2004
$000's
28,488
30,433
58,921
Parent Entity
2004
$000's
28,488
30,433
58,921
Note 19.
Life insurance business
(a) Actuarial policies and methods
The amount of policy liabilities has been determined in accordance with methods and assumptions disclosed in this financial
report and with the standards of the Life Insurance Actuarial Standards Board (LIASB) under section 114 of the Life
Insurance Act 1995 .
Policy liabilities
These amounts, together with future premiums and investment earnings, are required to :
(i)
meet the payment of future benefits and expenses ; and
provide for future profits .
(ii)
The policy liabilities have been calculated using the Margin on Services ("MoS") method in accordance with the requirements
of Actuarial Standard 1 .03 "Valuation of Policy Liabilities" under section 114 of the Life Insurance Act 1995 . The Actuarial
Standard requires the policy liabilities to be calculated in a manner that allows for the systematic release of planned margins
as services are provided to policyholders and premiums are received .
The methods and profit carriers for particular policy types are as follows:
Business Type
Individual
Investment linked
Investment account
Annuity
Allocated Pension
Method (projection or other)
Profit Carrier
Accumulation
Projection and accumulation
Projection
Projection
Account balance
Annuity payments
Account balance
Investment earnings/discount rate
The expected future earnings rate is used as the discount rate . The assumption is based on the proportion of the fund that each
asset sector represents. Expected earnings rates for each sector are then applied to these proportions with an appropriate
allowance for tax dependent on the class of the business being valued . The expected earnings rates are reviewed annually for
changes in the market environment . Where the products being valued are matched by a fixed interest portfolio, the earnings
rate is determined with reference to the actual yield to maturity of those assets .
Maintenance expenses
The assumption is based on budgeted maintenance expenses for the year ended 30 June 2005 . These expenses are converted
to a per policy unit cost based on an expense analysis for each fund .
Inflation
The assumption is based on long term expectations of inflation and is reviewed annually for changes in the market
environment . The current assumption is 2.5% pa.
Voluntary discontinuances
The assumption is based on an investigation of recent experience . The current assumption range is 0.5% to 5.0%.
Note 19.
Life insurance business (Contd)
Surrender values
Current and future surrender values have been calculated using the surrender bases under the products . Where appropriate,
surrender values have taken into account the requirements of AS4 .02 "Minimum Surrender Values and Paid Up Values"
standard issued by the Life Insurance Actuarial Standards Board.
Mortality- annuity products
The mortality assumption is based on IM/11790 (mortality tables developed by the Institute of Actuaries and the Faculty of
Actuaries based on United Kingdom annuitant lives experience from 1990 to 1992) and adjusted for future mortality
improvements .
Shareholder tax
Tax has been projected in a manner consistent with the tax environment applying from 30 June 2000 . The corporate tax rate
of 30% has been used.
Solvency position of the life insurers
These are amounts required to meet the prudential standards specified by the Life Insurance Act 1995 to provide protection
against the impact of fluctuations and unexpected adverse circumstances on the Company.
The methodology and bases for determining Solvency Requirements are in accordance with the requirements of Actuarial
Standard 2.03 "Solvency Standard" and 6 .02 "Management Capital Standard" under section 65 of the Life Insurance Act
1995 .
As at 30 June 2004, the statutory funds of Challenger Life No . 2 Limited satisfied the requirements of the solvency standard .
(b) Policy bolder liabilities
2004
2004
$000's
$000's
Policy liabilities
Made up of:
Value of future policy benefits
Value of future expenses
Value of future premiums
Planned margins of revenues over expenses
2,052,003
1,908,509
114,449
29,045
2,052,003
Note 20 .
(a)
Contributed Equity
Shares on issue
Ordinary shares
Long Term Equity Based Incentive Plan *
Consolidated and
Parent Entity
2004
Shares
2,439,035,735
224,400,000
2,663,435,735
Consolidated
and Parent
Entity
2004
$000's
1,140,521
118,172
1,258,693
* The cost of shares issued under the Long Term Equity Based Incentive Plan ("LTIP") have been financed by a nonrecourse loan from Challenger which is due and payable upon vesting of the shares . Dividends received on LTIP shares
that have been issued under the LTIP are required to be paid to the Company as interest on the respective non-recourse
loans. Refer Note 28 for further information in respect of the LTIP.
Consolidated and
Consolidated
Parent Entity
and Parent
Entity
( )
Movement in shares on issue
2004
Shares
2004
$000's
Ordinary shares
1
Issue of share on incorporation **
2,439,035,734
1,140,521
Issue of shares as part of corporatisation equity restructure ***
2,439,035,735
1,140,521
Closing Balance
** Issued at consideration of$1 .
*** Represents shares issued in respect of the corporatisation equity restructure which was approved by unitholders on 22
December 2003 . Refer Note 29(b) for additional information .
Consolidated and
Consolidated
Parent Entity
and Parent
Entity
2004
2004
Shares
$000's
Long Term Equity Based Incentive Plan
Opening balance
224,400,000
118,172
Shares issued and held on trust
224,400,000
118,172
Closing balance
(c)
Terms and conditions of shares
Ordinary shares
A holder of a share is entitled to certain rights, including rights :
(a) to receive dividends as declared ;
(b) to be provided with copies of annual reports and other information in respect of the company;
(c) to receive notice of, and vote at, meetings of holders of shares, either in person or by proxy;
(d) after liquidation of the company, to receive the distribution of the net proceeds of company assets according to the
number of shares registered at termination; and
(e) to transfer shares and on death, to pass the shares to a surviving joint holder, or by will or otherwise to the holder's
estate .
A holder of a share is entitled to one vote on a show of hands and on a poll, each shareholder will have one vote for each
dollar of the total value of shares, determined from the sale of such shares on the ASX on the trading day immediately before
the day on which the poll is taken.
Shares issued under LTIP
The terms and conditions of shares issued under the LTIP are disclosed in Note 28 of the financial report .
Note 21 .
Reserves
Equity option premium reserve
Movements in reserves
Opening balance
Issue of options to previous option holders of CFSG
Issue of options to related party as part of corporatisation equity restructure*
Closing balance
Consolidated
2004
$000's
61,700
61,700
1,700
60,000
61,700
Parent Entity
2004
$000's
61,700
61,700
1,700
60,000
61,700
* Represents the fair value at grant date (as determined by an Independent Expert) of 300,000,000 non-transferable
call options over ordinary shares of Challenger that have been issued to Consolidated Press Holdings Limited .
These options have an exercise price of $0.65, a ten year term and may be exercised at any time within ten years
from their grant date (22 December 2003). The options were issued as part of the consideration in respect of the
equity restructure of CFSG (refer Note 29(b) for additional information) .
Nature and purpose of reserves
Represents the valuation assigned to options that were issued to previous option holders of CFSG and
Consolidated Press Holdings Limited as a result of the equity restructure of the parent entity .
Note 22 .
Retained Profits
Opening balance
Net profit / (loss)
Balance at the end of the year
Consolidated
2004
$000's
(235,445)
(235,445)
Parent Entity
2004
$000's
(281,620)
(281,620)
Note 23 .
Earnings per share
Diluted earnings per share
Consolidated
Period from
6 November 2003
to 30 June 2004
Cents
(9.08)
(8 .13)
Consolidated
Period from
6 November 2003
to 30 June 2004
Number
Weighted average number of ordinary shares used in calculating basic earnings per share
Effect of dilutive securities :
Share options
Adjusted weighted average number of ordinary shares used in calculating diluted earnings per share
Reconciliations of earnings used in calculating earnings per share
Earnings per share
Earnings used in calculating basic earnings per share
Earnings used in calculating diluted earnings per share
2,593,772,384
302,416,685
2,896,189,069
Consolidated
Period from
6 November 2003
to 30 June 2004
$000's
(235,445)
(235,445)
Note 24 .
Segment information
The primary business segments of the Group as at 30 June 2004 have been identified as follows:
Life
$000's
Wholesale
Finance
$000's
Wealth
Management **
$000's
Corporate *
$000's
Total
Consolidated
$000's
255,120
93,689
86,081
13,037
447,927
113
1,358
462
11,297
13,230
Expenses-excluding depreciation and amortisation
189,690
71,309
88,520
16,898
366,417
Net profitt(loss) before tax and goodwill write-down
65,317
21,022
(2,901)
(15,158)
68,280
280,000
-
-
-
280,000
Netprofit/(loss)before tax
(214,683)
21,022
(2,901)
(15,158)
(211,720)
Segment assets prior to write-down in goodwill
4,865,793
569,059
316,851
203,920
5,955,623
280,000
-
-
-
280,000
4,585,793
569,059
316,851
203,920
5,675,623
(3,960,204)
(151,198)
(189,949)
(289,324)
(4,590,675)
286
8,562
5,135
-
13,983
2004
Total revenue
Depreciation & amortisation
Goodwill write-down
Goodwill write-down
Segment assets
Segment liabilities
Acquisition of non-current assets
* Corporate segment relates to non-core activities of the Group (including businesses to be restructured or sold as previously announced to the
Australian Stock Exchange) and other group/head office activities including goodwill amortisation, corporate borrowings and associated
borrowing costs.
** Represents Funds Management, Administration & Financial Planning .
The consolidated entity operates predominantly in one geographical area, being Australia.
Note 25 .
(a)
Financial instruments
Derivative instruments
Certain controlled entities of Challenger Financial Services Group Limited are parties to derivative financial instruments
in the normal course of business in order to hedge exposure to fluctuations in interest rates and foreign currencies .
Interest rate derivatives
The consolidated entity has entered into interest rate derivatives as part of its policy to protect part of the borrowings
from exposure to movements in interest rates.
The contracts require settlement of net interest receivable or payable between 60 - 120 days . The settlement dates
coincide with the dates on which interest is payable on the underlying debt.
Interest rate derivatives currently in place cover approximately 91% of the loan principal outstanding and are timed to
expire as each loan repayment falls due. The fixed interest rates range between 2.6% and 7.6%. The 180 day bank bill
rate at balance date was 5.5% .
At 30 June 2004, the notional principal amounts and periods of expiry of the interest rate deriviatives were as follows:
Less than 1 year
1 - 2 years
2 - 3 years
3 - 4 years
4- 5 years
Greater than 5 years
Consolidated
2004
$000's
183,124
109,444
160,091
212,233
111,505
1,445,871
2,222,268
Interest rate derivatives are accounted for on a fair value basis. The loss on the Interest rate derivatives outstanding at 30
June 2004 amounted to $30.7 million.
Forward foreign exchange contracts
Challenger Life No . 2 Limited owns property in the United Kingdom and the United States . In order to protect against
exchange rate movements Challenger Life has entered into forward foreign exchange contracts. The contracts are timed
to mature when major cashflows from the investment properties (held in controlled property trusts) are scheduled to be
paid .
Forward foreign exchange contracts are accounted for on a fair value basis. The net gain for the period ended 30 June
2004 on the forward exchange contracts outstanding at 30 June 2004 amounted to $39.8 million.
At balance date, the details of the outstanding contracts are:
Sell GBP Sterling
Less than 1 year
1 - 2 years
2-3 years
3 - 4 years
4 - 5 years
Consolidated
Buy Australian
Dollars
2004
$000's
57,820
10,095
9,379
8,950
9,645
123,600
219,489
Average
Exchange
Rate
0.3751
0.3571
0 .3544
0.3513
0.3482
0.3281
47
Note 25.
Financial instruments (Cont'd)
Sell US Dollars
Less than 1 year
1 - 2 years
2 - 3 years
3 - 4 years
4 - 5 years
(b)
Consolidated
Buy Australian
Dollars
2004
$000's
15,985
19,264
16,221
14,695
17,708
116,030
199,903
Average
Exchange
Rate
0.4805
0.5240
0.5218
0.5104
0.5060
0.5071
Credit risk exposures
The credit risk on financial assets of the consolidated entity which have been recognised on the statements of financial
position, other than investments in shares, is generally the carrying amount, net of any provisions for doubtful debts.
Bills of exchange which have been purchased at a discount to face value, are carried on the statements of financial
position at an amount less than the amount realisable at maturity . The total credit risk exposure of the consolidated
entity could also be considered to include the difference between the carrying amount and the realisable amount .
(c)
Interest rate risk exposures
The consolidated entity's exposure to interest rate risk and the effective weighted average interest rate by maturity period
is set out in the following table. For interest rates applicable to each class of asset or liability refer to individual notes to
the financial statements .
Exposures arise predominantly from assets and liabilities bearing variable interest rates as the consolidated entity intends
to hold fixed rate assets and liabilities to maturity .
Note 25 .
Financial instruments (Cont'd)
Consolidated
2004
$000's
Financial assets
Cash and deposits
Receivables
Debt securities
Other
Financial liabilities
Payables
Interest bearing liabilities**
Interest rate deriviatives*
Net financial assets
Weighted
Average
Floating
Interest interest rate
Note, Rate
6
7
15
16
4.8%
7.6%
6.4%
6 .8%
Fixed interest maturing in :
1 year
or less
Over 1
to 5 years
More than
5 years
Noninterest
bearing
Total
618,642
207,607
8,194
834,443
20,864
418,116
438,980
4,147
643,625
647,772
146,087
146,087
7,746
187,403
1,665
2,757,895
2,954,709
626,388
420,021
1,217,687
2,757,895
5,021,991
225,818
(1,964,854)
(1,739,036)
784,007
183,124
967,131
865,612
593,273
1,458,885
266,538
1,188,457
1,454,995
295,251
2,994
298,245
295,251
2,144,969
2,440,220
2,573,479
(528,151)
(811,113)
(1,308,908)
2,656,464
2,581,771
*Notional principal amounts (excludes forward dated swaps).
**Interest bearing liabilities includes accrued interest of $2,994,000
The entity has financial assets and liabilities that are subject to a right of set off. The interest rate for both counterparties financial
assets and liabilities are matched and fixed for the term of the deals. Accordingly, they do not give rise to interest rate risk.
Reconciliation of net financial assets to net assets per statement of
financial position
Net financial assets as above
Non-financial assets and liabilities:
Plant and equipment
Intangibles
Deferred tax assets
EMVONA
Other assets
Provisions
Policy liabilities
Net assets per statement of financial position
Consolidated
2004
$000's
2,581,771
21,947
255,974
7,530
224,381
143,800
(58,921)
(39,531)
(2,052,003)
1,084,948
Net fair value of financial assets and liabilities
The net fair value of cash and cash equivalents and non-interest bearing monetary financial assets and financial liabilities of the
consolidated entity approximates their carrying amounts.
The net fair value of financial assets or financial liabilities arising from interest rate swap agreements and forward exchange
contracts have been determined as the carrying amount, which represents the amount currently receivable or payable at the reporting
date, and the present value of the estimated future cash flows .
Net fair value of financial assets, excluding investments relating to Challenger Life No.2 Limited, is exclusive of costs which would
be incurred on realisation of an asset, and inclusive of costs which would be incurred on settlement of a liability.
49
Note 26.
Related parties
Directors
The directors of Challenger Financial Services Group Limited at any time during the financial year are as follows :
Peter Leith Polson (Chairman)
Christopher Edgar Cuffe (Chief Executive Officer)
Michael Tilley (Vice-Chairman)
Graham Allan Cubbin
Russell Richard Roberts Hooper
Ashok Peter Jacob
James Douglas Packer
James Glen Service
Brenda Mary Shanahan
Transactions with related parties in the wholly owned group :
Transactions with related parties (except otherwise disclosed) are conducted on an arms length basis under normal commercial terms and
conditions . Amounts payable and receivable in respect of transactions between entities in the consolidated group are disclosed in Notes 7 and
15 .
Ultimate parent entity
Challenger Financial Services Group Limited is the ultimate parent entity .
Shareholdings in Challenger Financial Services Group Limited of directors and senior executives
Details of the Directors and Senior Executives sbareholdings in the Company as at 30 June 2004 and their affiliates are set out below:
Granted as
remuneration
Vested
Net change
other
Balance
30 June 2004
Units in
registered
schemes
Balance
30 June 2004
#
#
#
#
#
Shareholdings
Shares held in Challenger Financial Services Group
Limited
Directors
P L Polson Chairman
C E Cuffe Chief Executive Officer
M Tille Vice-Chairman
G A Cubbin
R R R Hoo er
A P Jacob
J D Packer
J G Service
B M Shanahan
40,000,000
110,000
1,000,000
114,994
888,506
300,000
100,000
110,000
41,000 000
114,994
888,506
300,000
100,000
182,714,
5,754,267
182,714
5,754,267
Senior Executives
15,000,000
15 000,000
R Adams Executive - Wealth Management)
15,000,000
B Benari (Executive- Wholesale Finance
159 000,000
6,000,000
6000,000
T H Poster Chief Financial Officer
15,000,000
15000,000
R Howes (Executive-Life
27,500,000
27,500 000
118,500,000
8,450,481
126,950,481
Total
Shares acquired by the directors were at arms length prices . Dividends paid/payable to the directors and their affiliates were $nil .
-
38,255
38,255
Loans to directors and senior executives
The following table outlines total loans made to directors and specified executives as at 30 June 2004 .
Total Directors
Total Specified Executives
Balance
6 November
2003
$
Balance
30 June 2004
-
$
21,200,000
-
41,605,000
Total
62,805,000
*represents the difference between market interest rates and interest paid/payable on loans .
Interest paid/
payable
$
-
Market
Number in
Interest
Group 30 June
Differential*
2004
$
965,616
21,200,000
1,895,022
41,605,0001
2,860,638
62,805,000
Loans made to specified executives were advanced in accordance with the terms of the LTIP which have been disclosed in Note 28 to the
financial statements . They are non-recourse in nature and interest payable is detern ined in line with the dividends paid on shares issued under
the LTIP .
50
Note 26.
Related parties (Cont'd)
Loans in excess of $100,000 that were outstanding as at 30 June 2004, were issued to the following directors and specified executives:
Directors
C E Cuffe (Chief Executive Officer)
Balance
6 November
2003
$
Balance
30 June 2004
Interest paid/
payable
$
$
21,200,000
Senior Executives
7,950,000
R Adams Lxecutive- Wealth Mana " ement
7,950,000
BBenari (Executive- Wholesale Finance
3,180,000
TH Foster (Chief Financial Officer)
7,950,000
RHowes Executive-Life
14,571 00(
D Stevens (Executive - Calaital, Risk & Strate(" v
*represents the difference between market interest rates and interest paid/payable on loans .
-
-
Market
Interest
Differential*
$
Maximum
balance during
the period
$
965,616
21,200,000
362,106
362,106
144,842
362,106
663,862
7,950,000
7,950,000
3,180,000
7,950,000
14,575,000
,
Note 27. Directors' and Executives' remuneration
Non-Executive Directors' Remuneration
Challenger's remuneration policy for non-executive directors aims to ensure that the Company can attract and retain
suitably skilled, experienced and committed people to serve on the Board. Total remuneration for non-executive directors is
required to be approved by shareholders, and members approved a payment up to a maximum of $950,000 at
corporatisation to non-executive directors
The Remuneration Committee is responsible for determining and reviewing compensation arrangements for the nonexecutive directors having regard to market trends and shareholder interests. Non-executive directors are not entitled to
receive performance related remuneration or to receive shares through participation in any Challenger incentive plan .
The nature and amount of remuneration paid to each non-executive director of Challenger in the period from 23 December
2003 to 30 June 2004 is set out below:
Specified Directors
Prima
Salary & Fees Cash Bonus
$
72,355
64,547
$
-
Post Em to ment
SuperRetirement
annuation
Benefits
$
$
5,727
5,727
P L Polson (Chairman)
M Tille Vice-Chairman
G A Cubbin*
77,561
5,727,
R R R Hoo er
A P Jacob*
J D Packer*
59,863
J G Service
72,535
5,727
B M Shanahan
346,8611
22,908
Total remuneration
*
Act as a director in connection with discharging their duties as an executive of CPH.
-
Total
$
78,082
70,274
83,288
59,863
78,29
369,7691
Details of directors' and senior executives' holdings in Challenger shares and managed investment schemes are set out in
Note 26 to the financial statements .
Executive Remuneration
Chief Executive Officer
The Committee is responsible for reviewing the remuneration of the CEO, which must be approved by the full Board.
The employment contract with Mr Cuffe in his capacity as CEO was approved by the unit holders at the time of
Corporatisation in December 2003 . The principal elements of that package were :
" Base salary of $675,000 ;
" Participation in the Challenger short term incentive plan up to 150% of base salary package;
" Allocation of 40,000,000 shares under the CEO Long Term Incentive Plan (LTIP) at an issue price of 53 cents, subject
to a hurdle of 15% per annum compound total return to shareholders (including dividends) for releases of these shares
after the initial release in April 2005 .
" A non-recourse loan in respect of the purchase of the LTIP shares .
However upon transition to his role as Chief Executive, Wealth Management, Mr Cuffe's contract was altered, the material
details of which are as follows:
" Base salary of $600,000 ;
" Participation in the Challenger Employee Incentive Plan up to 100% of base salary package;
" Allocation of 18,000,000 shares under the LTIP at an issue price of 53 cents, subject to a hurdle of 15% per annum
compound total return to shareholders (including dividends) for releases of these shares after the initial release in April
" A non-recourse loan in respect of the purchase of the LTIP shares .
Note 27. Directors' and Executives' remuneration (cont'd)
Upon Mr Tilley's appointment as CEO, under the terms of his appointment Mr Tilley will be entitled to :
" A base salary of $675,000;
" A short-term incentive of up to 150% of the base salary package, subject to achieving qualitative and quantitative
hurdles set by the Board;
" A $500,000 interest free loan for the purpose of investing in Challenger investment products, other than Challenger
shares;
" A retention bonus of $250,000 after 3 years of employment as CEO and a further retention bonus of $250,000 at the
end of year 5 .
Mr Tilley will not be entitled to participate in the Challenger LTIP . However, subject to Challenger shareholder approval,
Mr Tilley will be allocated 5,000,000 restricted Challenger shares, funded via limited recourse loan and issued at 53 cents,
at the time that shareholder approval is granted . These shares will be issued substantially on the same terms as the longterm incentive plan limited recourse loan and escrow conditions.
Mr Tilley may terminate his service agreement by giving 12 months notice to Challenger, in which event he will receive
accrued statutory and contractual entitlements, but he will not be entitled to any termination payment, short term incentive
payments, unvested shares or future retention payments . Challenger may terminate Mr Tilley's service agreement, in which
event (other than in the case of termination for cause, poor performance or incapacity), Mr Tilley will be entitled to a
payment of $2 million, if termination is within the first 3 years; a $1 .75 million payment if termination is during years 3-5
or a $1 .5 million payment if termination is after year 5, in all cases, in addition to accrued entitlements .
Where termination is for cause or poor performance, Mr Tilley will only be entitled to accrued entitlements, but he will not
be entitled to a termination payment, except where termination is due to incapacity in which case he will be entitled to a
termination payment of $750,000 .
Senior Executives
Executive remuneration and incentive policies and practices will be performance based and aligned with the Group's vision,
values and overall business objectives . Challenger's ability to attract and retain talented executives, and to align their
interests with those of shareholders, is critically important to Challenger's ability to deliver sustained shareholder value. At
the same time, the Board recognises that it has a responsibility to ensure that executive remuneration is fair and reasonable,
and is effectively structured to produce superior results for shareholders . Accordingly, the Board has adopted remuneration
policies designed to achieve these important objectives .
Remuneration packages for senior executives typically comprise three components : a fixed pay component, a short-term
bonus component and a component related to longer-term performance and retention .
The fixed pay component is calculated on the basis of total cost, including employee benefits such as motor vehicles,
superannuation, car parking and any other form of compensation, together with fringe benefits tax applicable to those
benefits . Short-term bonus incentives at Challenger are based on the achievement of specific annual goals and objectives
related to the performance of the Group as a whole and its operating divisions. Bonuses may take the form of cash or shares
issued under the Group's Long Term Equity Based Incentive Plan (LTIP) .
Senior and other key executives have been granted long-term incentives designed to retain the loyalty of those executives
over the medium to long term . In general, the long term variable element will take the form of a grant of shares under the
LTIP described in Note 28 of this report .
Note 27. Directors' and Executives' remuneration (cont'd)
The nature and amount of each component of remuneration paid and accrued to the CEO and each of the five executive officers who have
the greatest authority for managing operations of Challenger in the period 23 December 2003 to 30 June 2004 is set out below:
Senior Executives
C E Cuffe Chief Executive Officer)^
R Adams Executive- Wealth Management)
B Benari Executive - Wholesale Finance
R Howes Executive - Life ^^
To tal remuneration
Prima
Salary & Fees
345,643
254,547
202,492
163,451
150,437
254,547
1,371,117
Superannuation
Cash
Bonus *
300,000
241,154
541,154
5,727
5,727
5,727
5,727
5,727
5,727
34,362
Equity
LTIP**
531,044
254,526
238,813
109,998
205,046
375_,325
1,714,7521 -
Total
Other***
190,000
190,0001
882,414 '
514,800
747,032
469,176'
602 364
635,599
3,851,385
In respect of Messrs Benari and Howes, cash bonus amounts represent guaranteed bonus amounts that were negotiated as part of their respective
executive remuneration packages .
Represents accrued fair value of LTIP and cash based shadow scheme during the period from 23 December 2003 to 30 June 2004 (refer remuneration
report for additional information in respect of cash based shadow scheme). Fair value has been determined in accordance with the principles outlined
in Note 28 .
*** Mr Foster's other payment represents a compensation payment made by a related party in respect of previously foregone employment retention
rights.
LTIP amounts have been calculated on the original entitlement and have not been adjusted to reflect changes in entitlements subsequent to his change .
in role as noted above in the section titled "Chief Executive Officer" .
Subsequent to year end, Mr Howes stepped down as Executive - Life to accept the role of Chief Investment Officer Life . Accordingly there will be a
reduction to his respective LTIP entitlements subsequent to 30 June 2004 .
During the financial year shares were granted as part of the Challenger LTIP to Senior Executives as disclosed in the below table.
Senior Executives
C E Cuffe Chief Executive Officer ^
R Adams (Executive - Wealth Management)
B Benari Executive- Wholesale Finance
RHowes (Executive -Life^
D Stevens (Executive - Capital, Risk & Strategy)
Total
^
Granted
40,000,000
15,000,000
15,000,000
6,000,000,
15,000,000
27,500,000
118,500,000
Terms & conditions
Grant date
First Vest
Last Vest
Date
Date
Vested
-
22/01/2004
23/02/2004
23/02/2004
23/02/2004
23/02/2004
23/02/2004
10/04/2005
1/08/2005
10/04/2005
10/04/2005
1/08/2005
1/08/2005
10/04/2008
1/08/2008
10/04/2008
10/04/2008
1/08/2008
1/08/2008
-
As noted above LTIP shares granted have been calculated on the original entitlement and have not been adjusted to reflect changes in
entitlements subsequent to their respective changes in role subsequent to 30 June 2004 .
LTIP shares issued during the period represent the total shares issued to Senior Executives as remuneration during the period ended 30
June 2004 .
As at 30 June 2004 no LTIP shares had vested during the period ended 30 June 2004.
The terms and conditions in respect of the shares issued under the LTIP are outlined in Note 28 to the financial statements .
Directors & Senior Executives total holdings in Challenger Shares and Managed Investment Schemes are set out in Note 26 to the
accounts .
Note 28 .
Employee Entitlements
Consolidated
30 June
2004
$000's
- - 4,777
Parent entity
30 June
2004
$000's
-
Employees of the Group totalled 904 at balance date.
Long Term Equity Based Incentive Plan (LTIP)
The LTIP was approved by unitholders as part of the equity restructure resolutions of Challenger as part of the corporatisation of
Challenger . These resolutions were approved at a meeting of unitholders of CFSG on 22 December 2003.
Under the terms of the LTIP, eligible employees may acquire Challenger shares, with the cost being financed by a non-recourse, interest
bearing loan from Challenger which is repayable on the earlier of the sixth anniversary of the reference date and the date when the
participating shares are sold. The reference date is the date of issue of the participating shares, a date determined by the Board not being
earlier than 10 April 2003.
Dividends received on shares that have been issued under the LTIP must be paid to the Company as interest on the associated nonrecourse loans. All grants of shares during the period were issued and placed on Trust on behalf of the employee .
There are two types of participants of Challenger's Long Term Equity Based Incentive Plan:
. Participants ; and
Initial Participants .
The performance hurdles in respect of Participants are summarised as follows:
Subject to performance hurdles being met, 20% of the participating shares issued to participants 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 volume weighted average share price (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. Thus 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 (once vesting and performance hurdles have been met) participants may, but are not obliged to
sell the shares .
The performance hurdles in respect of Initial Participants are summarised 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 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 issue) ;
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; and
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 $0.53 and the starting date for that
calculation being the second anniversary of the reference date.
55
Note 28.
Employee Entitlements (Conttd)
Under the terms of the LTIP, Participants and Initial Participants are not entitled to voting rights until the shares have vested and the
associated loan has been repaid to the Company.
Any unreleased participating LTIP shares will be sold by the Custodian to reduce any outstanding loan, bought back under the LTIP or
cancelled by Challenger, subject to compliance with the Law.
Details of the movement and fair value of employee shares under the LTIP are detailed in the following table:
Opening
balance
Balance at
6 November
Issue
2003
Granted
Price*
Vested
Forfeited
30 June 2004
Grant Date
Initial Participants
22 January 2004
23 February 2004
1 April 2004
Participants
3 March 2004
1 April 2004
Total
Grant fair
value**
-
40,000,000
155,400,000
2,000,000
0.53
0.53
0.53
-
-
40,000,000
155,400,000
2,000,000
3,434,759
12,794,970
150,321
-
22,750,000
4,250,000
0.50
0.50
-
-
22,750,000
4,250,000
1,505,664
272,336
-
224,400,000
-
-
224,400,000
18,158,050
The issue price of grants in respect of Participating shares is the VWAP of the shares over the five trading days up to and including the date of
issue of that Participating share.
** Grant fair value represents the fair value of the shares issued at grant date calculated after taking into account all relevant factors including vesting
timeframes, performance hurdles, share price volatility, dividend rates and interest rates.
Employee Option Plans
Prior to the merger between CPH Management Pty Limited and Challenger International Limited, employees were granted options based
upon performance and subject to the approval of shareholders at general meetings.
Options were granted under plans for no consideration. Options did not carry dividend or voting rights and vested options are not
conditional on the employee's future employment .
Unissued shares of the Company under option at the date of this report are as follows:
Series G Option Plan options
Expiry
Date
30/07/2004
Vested
%
100
Exercise
Price
$0.813
Number
16,627,500
The Series G options are exercisable at any time on or before the expiry date .
No options were granted to employees of the Group during the period 6 November 2003 to 30 June 2004 . No options were exercised
during the period 1 July 2003 to 30 June 2004 .
Note 29.
Statement of Cashflows
a) Reconciliation of operating profit after income tax to net cash inflow from operating activities
Consolidated
Parent
Period from
Period from
6November 2003 6 November 2003
to 30 June 2004
to 30 June 2004
$000's
$000's
Operating profit/(loss) after income tax
(Profit) / loss on sale of investments
Write-down in goodwill
Net unrealised losses on investments
Equity accounted profits
Amortisation and depreciation
Other
Change in operating assets and liabilities, net of effects from purchase of controlled entity:
Decrease / (increase) in receivables
Decrease / (increase) in other assets
Increase / (decrease) in trade creditors
Increase / (decrease) in deferred tax
Net cash inflow from operating activities
(235,445)
(53,273)
280,000
(29,513)
(1,452)
31,920
80,264
(281,620)
64,259
(10,589)
(5,080)
(7,419)
113,672
(58,921)
280,000
1,620
7,530
51,391
b) Acquisition of controlled entities
Services Group
Challenger was incorporated on 6 November 2003 . On 22 December 2003, the unitholders of Challenger Financial
corporatisation
of
CFSG
.
of
CFSG
involving
the
("CFSG") approved a restructure
became the
Under the . restructure, CFSG unitholders exchanged their units for Challenger shares (on a one for one basis) and Challenger
on
23
December
2003
.
Stock
Exchange
sole holder of CFSG units. Challenger was admitted to the official list of the Australian
As a result of the restructure of CFSG :
which were disclosed as part
"
the Chief Executive Officer entered into an employment contract with Challenger, the material terms of
restructure
information;
of the
Challenger issued to Consolidated Press Holdings Limited 300 million non-transferable call options over unissued shares with an
"
exercise price of $0 .65 and a ten year term ;
"
a Long Term Equity Based Incentive Plan for senior executives of Challenger was approved ; and
Executive Officer
"
40 million Challenger shares (under the terms of the Long Term Equity Based Incentive Plan) issued to the Chief
were approved and were disclosed as part of the restructure information.
Note 29.
Statement of Cashflows (Cont'd)
b) Acquisition of controlled entities (continued)
Details of the corporatisation are as follows:
Fair value of identifiable net assets of Challenger Financial Services Group
Cash
Receivables
Equity securities
Debt securities
Fixed assets
Land and plantation timber
Deferred tax assets
Intangible assets
Excess of net market value of the interests of Challenger Life Limited in its subsidiaries over their
recognised net amounts
Other assets
Payables
Current tax liabilities
Provisions
Net assets
Non-cash consideration
Cash consideration
Discount on corporatisation
The components of the acquisition cost were:
Fair value of shares issued net of acquisition costs
Acquisition costs
Cost of pre-existing options in Challenger Financial Services Group
Consolidated
2004
$,000s
347,879
254,962
213,956
1,158,397
25,080
2,558,902
10,812
54,000
54,890
427,289
375,453
153,431
(265,733)
(7,429)
(2,111,577)
(44,437)
(106,271)
(1,926,222)
1,173,382
(1,148,047)
25,335
1,140,521
5,826
1,700
1,148,047
c) Disposals of controlled entities
On 30 June 2004 Challenger disposed of all of the ordinary shares of Challenger Superannuation Services Pry Limited. Details of the
disposal are as follows:
Consolidated
2004
$000's
2,097
Cash consideration
2,097
Carrying amount of net assets disposed
Profit on disposal
Net assets disposed were comprised of
Cash
Receivables
Other assets
Trade creditors & provisions
173
1,353
1,107
(536)
2,097
The operating result of Challenger Superannuation Services Pty Limited up to the date of disposal has been included in the consolidated
operating profit.
Note 29.
Statement of Cashflows (Cont'd)
d) Non-cash financing and investing activities
Acquisition of Challenger Financial Services Group :
Acquisition of shares in Challenger Financial Services Group
Issuance of Challenger shares (net of acquisition costs) to shareholders of Challenger
Issuance of non-transferable call options over ordinary shares
Issuance of options to previous option holders in Challenger Financial Services Group
Note 30.
Remuneration of auditors
Amounts received or due and receivable by Emst & Young for:
Audit or review of the financial report of the consolidated entity
Consolidated
Parent Entity
Period from
Period from
6 November
6 November
to 30 June 2004 to 30 June 2004
$
$
782,000
-
Other services in relation to the consolidated entity and its controlled entities :
Taxation services
Due Diligence services
Actuarial
Other assurance services
Amounts received or due and receivable by auditors other than Emst & Young
for:
Audit or review of the financial report of subsidiary entities
490,000
311,000
733,000
104,000
2,420,000
8,028
8,028
Auditors' remuneration for the consolidated entity is paid by Challenger Group Services Limited, a wholly owned subsidiary
of Challenger Financial Services Group Limited.
Note 31 .
Investments in controlled entities
Name of entity
Equity
holding
30 June
2004
Country of
incorporation
Class of
shares
Directly controlled by Challenger Financial Services Group
Challenger Financial Services Group
CFSG Holdings No.2 Victoria Pty Limited
Australia
Australia
Ordinary
Ordinary
100
100
Directly controlled by Challenger Financial Services Group :
CFSG Holdings No. 1 Victoria Pty Limited
Australia
Ordinary
100
Directly controlled by FXF Holdings Pty Limited :
FXF Investments Pty Limited
FXF Finance Pty Limited
CPH 13213 Co . Pty Limited
Australia
Australia
Australia
Ordinary
Ordinary
Ordinary
50
100
100
Directly controlled by FXF Finance Pty Limited :
FXF Investments Pty Limited
Australia
Ordinary
50
Directly controlled by CPH B2B Co. Pty Limited :
CPH B2B Investments Pty Limited
Australia
Ordinary
100
Directly controlled by CFSG Holdings No.2 Victoria Pty Limited :
Challenger Group Holdings Limited
FXF Holdings Pty Limited
Australia
Australia
Ordinary
Ordinary
100
100
Australia
Australia
Australia
Australia
Australia
Australia
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
Australia
Australia
Ordinary
Ordinary
100
100
UK
USA
Ordinary
Ordinary
100
100
Australia
Australia
Australia
Australia
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
Directly controlled by Challenger Group Holdings Limited :
Challenger Group Services Pty Ltd
Challenger Property Capital Ltd
Challenger International Nominees Ltd (i)
Venture Link Australia Ltd (i)
Challenger Equity Lending Ltd
Challenger Treasury Ltd
Challenger Mortgage Finance Pty Ltd
Challenger Group Pty Ltd (i)
Iroka Pty Ltd
Directly controlled by Challenger Group Services Pty Ltd :
Challenger Group Services (UK) Ltd
Challenger America Inc (US)
Directly controlled by Challenger Group Pty Ltd :
Challenger Securities Ltd
Challenger Freeholds Ltd (i)
Challenger Hedging Ltd
School Family Program Management Pty Ltd
These controlled entities have been granted relief from the necessity to prepare financial reports in accordance
with Class Order 98/1418 issued by the Australian Securities & Investments Commission. For further information see
Note 33 .
(i)
Note 31 .
Investments in controlled entities (Cont'd)
Equity
holding
30 June
2004
Country of
incorporatio n
Class of
shares
Australia
Ordinary
100
Directly controlled by Challenger Property Capital Limited :
Joncele Investments Pty Limited (sold 30/6/04)
Australia
Ordinary
51
Directly controlled by Challenger Treasury Limited :
Challenger Property Finance Limited
Australia
Ordinary
100
ZCM Australia Asset Holdings Ltd
SEIZA Asset Management (Bermuda) Ltd
The Mortgage Alternative Holdings Pty Ltd
Bermuda
Bermuda
Australia
Ordinary
Ordinary
Ordinary
100
100
100
Directly controlled by ZCM Australia Asset Holdings Ltd:
Interstar Securities Holdings Pty Ltd
Australia
Ordinary
100
Australia
Australia
Australia
Ordinary
Ordinary
Ordinary
100
100
100
Australia
Ordinary
100
Australia
Ordinary
100
New Zealand
New Zealand
Australia
Ordinary
Ordinary
Ordinary
100
100
100
Australia
Australia
Australia
Ordinary
Ordinary
Ordinary
100
100
100
Name of entity
Directly controlled by Challenger Hedging Ltd:
Challenger Lending No. 1 Pty Ltd
Directly controlled by Challenger Mortgage Finance Pty Ltd:
Directly
Interstar
Interstar
Interstar
controlled by Interstar Securities Holdings Pty Ltd:
Securities (Australia) Pty Ltd
Securities (International) Pty Ltd
Securities (NZ) Pty Ltd
Directly controlled by Interstar Securities (Australia) Pty Ltd:
Interstar Home Loan Corporation Pty Ltd
Directly controlled by Interstar Securities (International) Pty Ltd :
Interstar Securitisation Management Pty Ltd
Directly controlled by Interstar Securities (NZ) Pty Ltd :
Interstar Home Loan Corporation NZ Ltd
Interstar Securities NZ Ltd
Interstar Mortgage Management Pty Limited
Directly controlled by The Mortgage Alternative Holdings Pty
Ltd :
The Mortgage Alternative Pty Ltd
TMA Special Servicing Pty Ltd
TMA Management Pty Ltd
Note 31.
Name of entity
Equity
holding
30 June
2004
Country of
incorporation
Class of shares
Directly controlled by Iroka Pty Ltd :
Challenger Life Ltd
Australia
Ordinary
100
Directly controlled by Challenger Life Limited :
Challenger Life No. 2. Ltd
Australia
Ordinary
100
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
United Kingdom
Australia
Australia
Australia
Australia
Australia
Australia
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Australia
Australia
Ordinary
Ordinary
100
100
Directly controlled by Challenger Portfolio Management
Challenger International (New Zealand) Limited
New Zealand
Ordinary
100
Directly controlled by Challenger International (New Zealand)
Challenger Securities (New Zealand) Limited
Challenger Group Services (New Zealand) Limited
New Zealand
New Zealand
Ordinary
Ordinary
100
100
Directly controlled by Challenger Mortgage Management
Challenger Managed Investments Ltd
Howard Pacific Ltd
HFH Staff Pty Ltd
Australia
Australia
Australia
Ordinary
Ordinary
Ordinary
100
100
100
Directly controlled by Challenger Managed Investments Limited :
BIuePeak Institutional Private Equity Pooled Fund Ltd
BIuePeak Private Equity Pooled Fund Ltd
BIuePeak VC Technology Pooled Fund Limited
Australia
Australia
Australia
Ordinary
Ordinary
Ordinary
100
100
100
Directly controlled by Challenger Life No.2 Limited :
Challenger Beston Limited
Challenger Corporate Superannuation Pty Ltd
Challenger Portfolio Management Ltd
Integrated Equity Pty Ltd
Challenger Superannuation Pty Ltd
Challenger Commercial Lending Limited
Challenger Property Asset Management Pty Limited
Challenger Property Funds Management Ltd
Challenger Capital Fund Ltd
e-Financial Capital Ltd
Challenger E-Commerce Ltd
Challenger BioTech Management Limited
Challenger Wealthlink Management Ltd
Challenger Equities Ltd (i)
Challenger Margin Lending Limited
Challenger Property Nominees Pty Ltd
Challenger Capital Markets Ltd
Challenger Life (UK) Ltd
Challenger Superannuation Services Pty Ltd (sold 30/6/04)
CPHIC Investments Pty Limited
Garrisons Pty Ltd
Allfine Holdings Pty Ltd
Bluezen Pty Ltd
Talaverra Herring Pty Limited
Directly controlled by Challenger Beston Limited :
Beston Pacific Vineyard Management Ltd
Beston Financial Management Pty Limited
Note 31 .
Equity
holding
30 June
2004
Country of
incorporation
Class of shares
Directly controlled by CPHIC Investments Pty Ltd :
CPHIC Financial Services Pty Limited
Australia
Ordinary
100
Directly controlled by Challenger Margin Lending Limited :
Challenger ML Nominees Pty Limited
Australia
Ordinary
100
Directly controlled by Challenger Property Nominees Pty
Sabrand Limited
Mawbury Pty Limited
TLG Services Pty Limited
TLGH Pty Limited
Cyprus
Australia
Australia
Australia
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
Directly controlled by TLGH Pty Limited :
The Liberty Group Consortium Pty Limited
Australia
Ordinary
100
Directly controlled by Mawbury Pty Limited :
Cescade Pty Limited
Australia
Ordinary
100
Hungary
Ordinary
100
Directly controlled by Challenger Hungary International Capital
Investment & Management Limited :
Challenger REIT Number 1 Limited
USA
Ordinary
100
Directly controlled by Challenger REIT Number 1 Limited :
Challenger Las Cimas LLC (US)
Challenger Las Cimas LP (US)
Challenger Milk Street LLC (US)
Challenger South Monaco LP (US)
Challenger South Monaco LLC (US)
USA
USA
USA
USA
USA
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
Directly controlled by Garrisons Pty Limited :
Synergy Capital Management Ltd
Northstar Pty Limited
Garrisons (Rosny) Pty Limited
Challenger IT Pty Limited
Australia
Australia
Australia
Australia
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
Directly controlled by Synergy Capital Management Limited :
Galaxy Investment Wrap Pty Limited
Australia
Ordinary
100
Name of entity
Directly controlled by Sabrand Limited :
Challenger Hungary International Capital Investment & Management
Limited
Additionally, Challenger Life No. 2 Limited owns 100% of the units in 48 property trusts.
Note 31 .
b) Assignment of Warrants Business
In an agreement dated 30 April 2004 Challenger entered into a Deed of Assignment with Westpac Banking
Corporation ("WBC") whereby, all legal and beneficial rights, title and interests in respect of the following assets and
liabilities were assigned to WBC.
Note
Shares in listed corporations held in relation to
endowment warrants
Consolidated
2004
$'000
8
75,031
Dividends receivable*
7
627
Warrant liability
15
(34,011)
Warrants facility
16
(41,647)
* Included in other debtors
Note 32.
Investments in associates
Name of Company
Principal
Activity
AVC Holdings Ltd
PVC Resin Manufacturer
Garrisons (Toowong) Pty Ltd
Carter Bax
Barbacan Benefits
Garrisons (Burnie) Pty Ltd
Central Coast
DVG Pty Limited
EPIC Asset Management Limited
Financial Planning
Financial Planning
Financial Planning
Financial Planning
Financial Planning
Financial Planning
Distribution
Less: Provision for diminution in value
Ownership
2004
%
Consolidated
2004
$000's
50
15,585
40
40
25
49
40
49.6
33
272
485
141
466
1,350
800
(1,311)
17,788
Movements in carrying amount of investments in associates
Carrying amount at the beginning of the financial year
Investment in associates acquired on acquisition/corporatisation of
CFSG
Sale of interest in associates
Increase in provision for diminution
Share of associates net profit
Investment in associates share buy back
Carrying amount at the end of the financial year
20,123
(52)
(235)
1,452
(3,500)
17,788
Results attributable to associate
Profits from ordinary activities before related income tax
Income tax /(expense)
Profits from ordinary activities after related income tax
2,022
(570)
1,452
Retained profits attributable to associates at the beginning of the
financial year
Retained profits attributable to associates at the end of the financial
year
1,452
Summary of the share of associate's financial position
Assets
Liabilities
Net assets
52,327
(26,478
25,849
Note 33 .
Deed of cross guarantee
The following wholly owned companies are parties to a Deed of Cross Guarantee under which each company
guarantees the debts of the others. By entering in the deed, the wholly owned companies have been relieved from the
requirement to prepare a financial report and director's report under Class Order 98/1418 (as amended by Class Order
98/2017 and 00/0321) issued by the Australian Securities & Investment Commission.
"
"
"
Venture Link Australia Limited
Challenger Group Pty Limited
Challenger International Nominees Limited
Challenger Equities Limited
Challenger Freeholds Limited
The above companies represent a 'Closed Group' for the purposes of the Class Order, and as there are no other parties
to the Deed of Cross Guarantee that are controlled by the Company, they also represent the 'Extended Closed Group'.
Set out below is a consolidated statement of financial performance of the Closed Group for the period from 23
December 2003 to 30 June 2004.
2004
$ , 000s
1,716
407
Other expenses from ordinary activities
1,309
Loss from ordinary activities before income tax benefit
186
Income tax expense
1,123
Total changes in equity other than these resulting from transactions with owners as owners
Set out below is a summary of the movements in consolidated retained profits for the period from 23 December 2003 to
30 June 2004 .
2004
s , 000s
(19,025)
Retained losses at the beginning of the financial period
1,123
Profit from ordinary activities after income tax expense
(17,902)
Retained losses at the end of the financial period
Set out below is a consolidated statement of financial position as at 30 June 2004 of the Closed Group.
2004
$'0008
Assets
Cash assets
Receivables
Equity securities
Total assets
280
3,546
75,204
79,030
Liabilities
Payables
Provisions
Total Liabilities
50,374
41,647
280
92,301
Net assets
(13,271)
Equity
Contributed equity
Retained losses
Total equity
4,631
(17,902)
(13,271)
Note 34.
Commitments for expenditure
Consolidated Parent entity
2004
2004
$000's
$000's
Lease commitments
Commitments in relation to leases contracted for at the reporting date but not recognised as
liabilities, payable :
Not later than one year
Later than one year but not later than 2 years
Later than 2 years but not later than 5 years
Later than 5 years
Representing :
Non-cancellable operating leases
Future finance charges on finance leases
8,684
6,520
15,656
23,864
54,724
54,384
340
54,724
Operating leases
Commitments for minimum lease payments in relation to non-cancellable operating leases are
payable as follows :
Later than 2 years but not later than 5 years
Later than 5 years
Less: Liability recognised for surplus lease space and estimate of sub lease liabilities on
relocation
Commitments not recognised in the financial statements
9,828
7,663
19,087
30,959
(13,153)
54,384
Finance leases
Commitments in relation to finance leases are payable as follows :
Later than 5 years
Minimum lease payments
Less : Future finance charges
Total lease liabilities
1,165
2,087
3,252
340
2,912
Capital expenditure commitments :
Commitments in relation to capital expenditure commitments contracted for at the reporting
date but not recognised as liabilities, payable :
Later than 5 years
3,452
3,452
68
Note 35.
Contingent liabilities
A controlled entity, Challenger Property Nominees Pty Limited has received an assessment of stamp duty in connection with
the acquisition of an interest in a property at 417 St Kilda Road, Melbourne of $5,362,002 . Based on legal advice received, the
directors do not consider that any stamp duty is payable on the transaction and have commenced litigation in respect of the
assessment.
A controlled entity, Challenger Group Holdings Limited (formerly Challenger International Limited), has under the terms of a
deed of cross guarantee entered into in accordance with the ASIC Class Order dated 19 December 1991, undertaken to meet
any shortfall which might arise on the winding up of controlled companies which are party to the deed. The controlled
companies are not in liquidation nor is there any indication that the controlled companies will be wound up (Refer note 31).
A controlled entity, Challenger Securities Limited, as manager of a number of unit trusts, has under the terms of the relevant
Trust Deeds covenanted to repurchase units in the Trusts at the request of any unit holder at the redemption price prevailing at
the date of the request . In complying with this covenant, the manager may, at its discretion, request the Trustee to redeem any
units repurchased out of the relevant Trust Funds. At 30 June 2004, the carrying values of units on issue in the relevant Trusts
and the underlying assets of the Trust amounted to $10 (2003: $10) .
The ATO released GST Ruling 2004/4 on the Assignment of Payment Streams including under a Securitisation Arrangement.
The ruling describes the ATO's view of how a securitisation works and the application of GST in relation to a number of areas
specifically affecting the securitisation, which could impact on Challenger Wholesale Finance subsidiary Interstar Securities
(Australia) Pty Limited. In particular the ruling now prescribes that taxpayers are not able to claim a reduced input tax credit
(RITC) for servicing fees, contrary to previous draft rulings . Previous accepted practice has been to claim a RITC for servicing
fees . The ruling applies from I July 2000 for all taxpayers.
In response to the release of GSTR 2004/4, there has been significant lobbying by the securitisation industry and as a result the
ATO has agreed to consult further with industry on GSTR 2004/4 before taking steps to implement the approach adopted by the
ATO ruling. At the date of this report significant uncertainty surrounds the applicability of the treatments described in the ATO
ruling due to :
- Interstar's method of arranging financing of mortgages via securitisation differing from that described in the ruling ;
- Uncertainty over whether the courts would allow the ruling to have retrospective effect given certain contrary draft rulings;
- The ATO being on record as not prosecuting matters arising from the implementation of the GST; and
- Potential aspects of the ruling being amended as a result of continued industry interaction with the ATO and Treasury.
Note 36.
Subsequent events
Acquisition of Associated Planners
On 13 August 2004, Challenger Financial Services Group Limited acquired Associated Planners Limited and its controlled entities
for consideration in shares of $91 .3 million.
Under the scheme of arrangement, each ordinary and Z class Associated Planners shareholder received 5.69 Challenger shares for
each Associated Planners share they hold. 50 per cent of the Challenger shares issued to Associated Planners shareholders are
subject to a trading lock, which is similar to an escrow arrangement . These shares will be released in two tranches, 18 months (30
per cent) and three years (70 per cent) after issue.
Challenger shares that have been issued to Zurich Financial Services Australia Limited, which holds all Z class shares and accounts
for approximately 30 per cent of Associated Planners Group Limited, were fully vested on issue. The number of shares issued
under the schemes represented approximately seven per cent of the issued capital of Challenger.
Challenger intends to merge Associated Planners with its existing financial planning arm, Garrisons Financial Planning .
The consideration was calculated on the 203,146,130 shares issued as outlined in the relevant 3B notice, by reference to
Challenger's share price on 13 August 2004.
Sale of Foreign Properties
Since 30 June 2004, the company has entered into sale contracts in relation to the following properties that, while unconditional,
are subject to completion:
Property
Las Cimas 11 and 111
Senator House
Minster Court
Hayes Park
Heathrow World Business Centre
Country
USA
UK
UK
UK
UK
Date Signed
19 August 2004
27 August 2004
27 August 2004
27 August 2004
27 August 2004
The net proceeds of these proposed sales amounts to approximately $828 million, which is approximately $52 million above the 30
June 2004 carrying value of the relevant properties, at current exchange rates.
The profit on these disposals has yet to be confirmed or recognised, due to uncertainty surrounding completion and related interest
rate and currency movements and break costs on debt.
No
(a)
(b)
(c)
other matter or circumstance has arisen that has affected or may significantly affect :
the consolidated entity's operations in future financial years; or
the results of those operations in future financial years; or
the consolidated entity's state of affairs in future financial years .
Note 37.
International Financial Reporting Standards
Challenger is required to comply with the Australian equivalents of International Financial Reporting Standards (IFRS) issued by the
Australian Accounting Standards Board for the year ending 30 June 2006.
AASBI "First Time Adoption of Australian Financial Reporting Pronouncements" require that entities presenting first time financial
reports in accordance with Australian Equivalents of IFRS must also restate their comparative financial statements using all Australian
Equivalents of IFRS, except for AASB 132 Financial Instruments: Disclosure and Presentation, AASB 139 Financial Instruments :
Recognition and Measurement and AASB 4 Insurance Contracts.
In accordance with AASB 1047 "Disclosing the Impacts of Adopting the Australian Equivalents to International Financial Reporting
Standards", Challenger is required to disclose the transitional impact of adopting the Australian Equivalents of MRS on its reported
financial position as at 1 July 2004 . Most adjustments required on transition to the Australian Equivalents of IFRS will be made,
retrospectively, against opening retained earnings on 1 July 2004 ; however transitional adjustments relating to those standards where
comparatives are not required will only be made at 1 July 2005 .
Challenger has established a separate project (sponsored by the Group Audit & Compliance Committee) to assess the impact of the
IFRS .
Whilst this project is currently in progress, the following areas have been identified as having a significant impact on the accounting
policies of Challenger :
Recognition of share based payments;
Securitisation ;
Goodwill/EMVONA ;
Measurement and recognition of insurance contracts; and
Recognition of financial instruments transacted outside the Life Company.
At this stage Challenger has not been able to reliably measure the impacts on the financial report. The impact of the above noted
significant areas are summarised as follows :
Share based payments will be required to be recognised as an expense over the relevant vesting periods.
In respect of transactions utilising Special Purpose Entities, the adoption of UIG 112 "Consolidation - Special Purpose Entities" in
Australia will necessitate the review of existing securitisation arrangements to determine whether they will be required to be
recognised on balance sheet. Our assessment of the impact of this IFRS is required to be finalised by 1 July 2005 .
Goodwill is not required to be amortised under AASB 3 "Business Combinations", however it is required to be tested annually for
impairment . The elimination of this amortisation charge from the statement of financial performance will increase reported profits,
subject to any impairment charge that may be required .
The results of our initial assessment of the impact of IFRS on the measurement and recognition of insurance contracts issued by the
Challenger Life No .2 Limited business are that contracts issued by Challenger Life No .2 Limited will be governed by AASB 139. Our
assessment of the impact of AASB 139 on investment contracts issued by Challenger Life No .2 Limited is required to be finalised by 1
July 2005 .
In respect of financial instruments issued outside the Life Company, Challenger is in the preliminary stages of assessing the impact of
AASB 139 and AASB 132. Currently, all financial instruments transacted outside the Life Company are recognised at cost . It is
expected that these instruments will now be required to be measured at fair value .
Challenger is also assessing the impact of the hedge accounting rules prescribed by AASB 139 on Challenger's reported financial
position . Whilst our review is in its preliminary stages it is expected the hedging rules outlined in AASB 139 will impact the way the
Group accounts for hedge transactions conducted outside the Life Company. Our assessment of the impact of AASB 139 on
Challenger's recognition of financial instruments and hedging activities is required to be finalised by 1 July 2005 .
71
DIRECTORS' DECLARATION
In the opinion of the Directors of the Company of Challenger Financial Services Group Limited:
(a) The financial statements and notes of the Company and of the consolidated entity are in accordance with the
Corporations Act 2001, including;
(i) giving a true and fair view of the Company and consolidated entity's financial position as at 30 June 2004
and of their performance as represented by the results of their operations and their cashflows for the period
ended on that date ; and
(ii) complying with Accounting Standards and Corporations Regulations 2001 .
(b) There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become
due and payable; and
(c) At the date of this declaration, there are reasonable grounds to believe that the members of the Extended Closed
Group identified in Note 33 will be able to meet any obligations or liabilities to which they are, or may become
liable, subject by virtue of the deed of cross guarantee described in Note 35 .
This declaration is made in accordance with a resolution of the Directors of Challenger Financial Services Group Limited.
0Y e.M/-X~
G A Clrbbin
M Tilley
Director
Sydney27th August 2004
Director
-
Sydney
27th August 2004
e
RNST
DUNG
® The Ernst & Young Building
321 Kent Street
Sydney NSW 2000
Australia
® Tel
Fax
DX
61 2 9248 5555
61 2 9262 6565
Sydney Stock
Exchange 10172
GPO Box 2646
Sydney NSW 2001
Independent audit report to members of Challenger Financial Services Group
Limited
Scope
The financial report and directors' responsibility
The financial report comprises the statement of financial position, statement of financial
performance, statement of cash flows, accompanying notes to the financial statements, and the
directors' declaration for Challenger Financial Services Group Limited (the company) and the
consolidated entity, for the period ended 30 June 2004. The consolidated entity comprises both the
company and the entities it controlled during that period .
The directors of the company are responsible for preparing a financial report that gives a true and
fair view of the financial position and performance of the company and the consolidated entity, and
that complies with Accounting Standards in Australia, in accordance with the Corporations Act
2001 . This includes responsibility for the maintenance of adequate accounting records and internal
controls that are designed to prevent and detect fraud and error, and for the accounting policies and
accounting estimates inherent in the financial report .
Audit approach
We conducted an independent audit of the financial report in order to express an opinion on it to the
members of the company. Our audit was conducted in accordance with Australian Auditing
Standards in order to provide reasonable assurance as to whether the financial report is free of
material misstatement . The nature of an audit is influenced by factors such as the use of
professional judgement, selective testing, the inherent limitations of internal control, and the
availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that
all material misstatements have been detected .
We performed procedures to assess whether in all material respects the financial report presents
fairly, in accordance with the Corporations Act 2001, including compliance with Accounting
Standards in Australia, and other mandatory financial reporting requirements in Australia, a view
which is consistent with our understanding of the company's and the consolidated entity's financial
position, and of their performance as represented by the results of their operations and cash flows.
We formed our audit opinion on the basis of these procedures, which included:
"
"
examining, on a test basis, information to provide evidence supporting the amounts and
disclosures in the financial report, and
assessing the appropriateness of the accounting policies and disclosures used and the
reasonableness of significant accounting estimates made by the directors.
While we considered the effectiveness of management's internal controls over financial reporting
when determining the nature and extent of our procedures, our audit was not designed to provide
assurance on internal controls .
Liability limited by the Accountants Scheme, approved
under the Professional Standards Act 1994 (NSW)
ERNsr&YOUNG
We performed procedures to assess whether the substance of business transactions was accurately
reflected in the financial report. These and our other procedures did not include consideration or
judgement of the appropriateness or reasonableness of the business plans or strategies adopted by
the directors and management of the company .
Independence
We are independent of the company, and have met the independence requirements of Australian
professional ethical pronouncements and the Corporations Act 2001 . In addition to our audit of the
financial report, we were engaged to undertake the services disclosed in the notes to the financial
statements. The provision of these services has not impaired our independence .
Audit opinion
In our opinion, the financial report of Challenger Financial Services Group Limited is in accordance
with:
(a)
the Corporations Act 2001, including:
giving a true and fair view of the financial position of Challenger Financial Services
Group Limited and the consolidated entity at 30 June 2004 and of their performance
for the period ended on that date; and
(ii)
complying with Accounting Standards in Australia and the Corporations Regulations
2001 ; and
other mandatory financial reporting requirements in Australia.
Ernst & Young
B J Long
Partner
Sydney
27 August 2004

market release

Transcription

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