Offering Circular Offering Challenger Bank Endowment Warrants Fully covered Endowment Warrants are offered over shares in: Australia and New Zealand Banking Group Limited Commonwealth Bank of Australia Limited National Australia Bank Limited Westpac Banking Corporation Issuer: Challenger Equities Limited (ABN 45 009 568 503) Issue Date: 16 September 2002. Expiry 15 October 2003. Funds Management Contents Introducing Challenger Bank Endowment Warrants 2 Notice to Investors 9 1 – General Features 11 2 – Description of the Endowment Warrants 12 3 – Risk Factors Relating to the Endowment Warrants 17 4 – Description of the Underlying Financial Instrument: The Companies 21 5 – Tax Considerations 22 6 – Terms of Issue 26 7 – Description of the Issuer 43 8 – Interpretation 45 Application Forms 49 The Offer Challenger Bank Endowment Warrants are being offered in a series over shares in: Underlying Share ASX Code Australia and New Zealand Banking Group (ANZ) ANZEEA Commonwealth Bank of Australia (CBA) CBAEEA National Australia Bank (NAB) NABEEA Westpac Banking Corporation (WBC) WBCEEA Timetable Date of Offering Circular 16 September 2002 Offer Period Opens 16 September 2002 Offer Period Closes 15 October 2003 Maturity Date 15 February 2012 Dear Investor Challenger launched the award winning Endowment Warrant concept in 1996 – including, amongst others, Endowment Warrants over the ‘Top 4’ banks. Those Bank Endowment Warrants have performed exceptionally well over the past six years, on average returning 580%*. We are delighted to offer you the opportunity to participate in this outstanding investment potential through a series of Bank Endowment Warrants over ANZ, CBA, NAB and WBC shares expiring in 2012. These shares have been chosen based on their historical performance record and suit investors seeking long-term leveraged exposure to the banking sector. Historically, Australia’s big four banks have rewarded investors with capital growth and solid dividend yields, both of which are captured in the endowment warrant structure. Challenger Bank Endowment Warrants give you long term leveraged exposure to the performance of the top 4 banks and provide the additional benefits of no obligation to make additional payments, no income tax implications, and no administrative demands during the warrant term. I am delighted to invite you to read the Offering Circular and join other investors in this outstanding investment opportunity. Yours sincerely WEB Ireland *Average return of ANZ, CBA, NAB and WBC Endowment Warrants over the six year periods 5 July 1996 to 30 June 2002. Past performance is not a guarantee of future performance. Overview of Challenger Bank Endowment Warrants A cost effective way to buy shares in Australia’s ‘Top 4’ Banks Increased exposure to share price movements and dividend earnings (gearing levels of approximately 50-60%), without the risk of margin calls Dividends reduce the Final Payment ‘Set and forget’ strategy – no administration, no further payment obligations and no income tax implications An eligible investment for self managed superannuation funds A suitable investment and savings vehicle for children Conversion to underlying shares at any time prior to the maturity of the warrant Up to 10 year term A minimum investment in Challenger Bank Endowment Warrants of A$1,000 Bank Endowment Warrants Challenger 2 How Do Challenger Bank Endowment Warrants Work? Challenger Bank Endowment Warrants provide an exciting investment opportunity with long-term leveraged exposure into Australia’s leading bank shares. They give you the right, but not the obligation, to purchase the underlying shares in two steps, through an initial payment now and a Final Payment at any time prior to maturity on 15 February 2012. Two Simple Steps Step 1 You make an initial payment to buy the Challenger Bank Step 2 Endowment Warrant, which is equal to about 50% of the You make a Final Payment if you market value of the underlying wish to acquire the underlying shares at the time of purchase. shares, on or at any date you choose prior to maturity. Your Final Payment is a floating amount and varies during the life of the Endowment Warrant. This loan amount is set at the time of issue. It is reduced by the cash amount of dividends and other distributions on the shares, and increases with interest. Bank Endowment Warrants Challenger 3 Exposure to a Greater Number of Bank Shares When you invest in Challenger Bank Endowment Warrants, you only pay approximately 50% of the underlying share price. This results in gearing or leverage that gives you exposure to a greater number of shares in the underlying company, than if you had invested the same amount directly in the shares. Hence, your investment power is magnified because capital growth and any dividend earnings are generated on a greater number of shares than if you had purchased the shares directly. You should, however, be aware that leverage also has the effect of magnifying any losses in the underlying share price. Value of $10,000 Invested Over 6 Years CBA Endowment Warrant Return CBA Dividend Adjusted Share return $80,000 $76,716 $70,000 $60,000 $50,000 $40,000 $38,640 $30,000 $20,000 $10,000 $0 an 97 an 98 an 99 an 00 an 01 an 02 Ju 96 l Ju 97 l Ju 98 l Ju 99 l Ju 00 l Ju 01 l J Apr 97 J Apr 98 J Apr 99 J Apr 00 J Apr 01 J Apr 02 Oct 96 Oct 97 Oct 98 Oct 99 Oct 00 Oct 01 The graph above shows returns on both Commonwealth Bank shares and Commonwealth Bank Endowment Warrants, over a six year period. The positive and negative impact of leveraging is apparent at specific time periods. This is highlighted by the magnified gain made by the Bank Endowment Warrant in April 1999, and the magnified loss in September 2001. The benefits of leveraging are illustrated by the long-term investment outcome. A $10,000 investment on 5 July 1996 in Commonwealth Bank shares is now worth $38,640 while an investment on the same day in CBA Endowment Warrants is now worth $76,716. Bank Endowment Warrants Challenger 4 The Benefits of Long-Term Leveraged Investing Shares in Australia’s four major banks have been chosen for these endowment warrants because they have historically delivered strong capital growth and solid dividend yields. Australia’s major banks have created significant wealth for investors over the past six years. On average, the four major banks have returned more than triple the annual return of the broader market. (44% p.a. vs 13%p.a.) Over the same time period, investors who used Bank Endowment Warrants to leverage their exposure to these underlying shares achieved even greater investment outcomes. The historical performance of Bank Endowment Warrants compared with the performance of the underlying bank shares has been outstanding, as shown in the graph below. Comparative Returns of Bank Shares vs Bank Endowment Warrants 150 Bank Endowment Warrants Dividend Adjusted Shares 120 90 60 Return % p.a. 30 0 ANZ CBA NAB WBC All performance figures on page 4 and 5. Data Source: IRESS Returns are for the six year period from 5 July 1996 to 30 June 2002. The returns for four major banks (ANZ, CBA, NAB & WBC) assume that dividends are reinvested. No allowance has been made for transaction costs or tax. The S&P ASX 300 Accumulation Index is a widely used measure of the performance of the broader Australian share market. An investor cannot invest directly in an index. Returns from indices do not include the costs of buying or selling securities or other ongoing expenses incurred when investments are actually made. The returns for the Bank Endowment Warrants are for ANZECE, CBAECE, NABECE, WBCWME which are a Challenger product originally issued through CSFB and MBL. Dividend payments were not included in this performance calculation. No allowance has been made for transaction costs or tax. Please note that past performance is not a guarantee of future performance. Bank Endowment Warrants Challenger 5 Special Features of Challenger Bank Endowment Warrants Challenger Bank Endowment Warrants have a number of special features that make them a simple, set-and-forget investment. Your investment power is magnified When you invest in Challenger Bank Endowment Warrants, you pay only approximately 50% of the underlying share price and the ‘loan’ is ‘built in’ to the Warrant. This leveraged investment magnifies your investment power (whether positive or negative), because the capital growth and any dividend earnings are generated on a greater number of shares. Dividends reduce the Final Payment Challenger Bank Endowment Warrants are unique because there is no fixed Final Payment. This is because the Final Payment reduces over time with any dividends and other distributions from the underlying share. It is possible that you could receive your shares without the need for any Final Payment. No further payment obligations Challenger Bank Endowment Warrants are a non recourse leveraged investment, with no margin calls. They give you the right but not the obligation to purchase shares in the underlying company, which means you do not have to make any additional payments once the Warrants have been purchased. No income tax implications You do not receive dividends with Challenger Bank Endowment Warrants, as any earnings from the shares are being used to reduce the level of the Final Payment, nor do you make interest payments. Therefore, if you hold Challenger Bank Endowment Warrants, there will be no annual income tax implications or paperwork to be submitted in relation to your investment. Bank Endowment Warrants Challenger 6 Challenger Bank Endowment Warrants May be Suitable for a Variety of People People wanting to invest in bank shares Generally, people wanting to invest in the underlying bank share should consider Challenger Bank Endowment Warrants.