Refinancing Proposals

Character Group PLC
22 June 2001



Issued by Citigate Dewe Rogerson, Birmingham

Date: Friday, 22 June 2001     Embargoed: 1.00pm


                           The Character Group plc



      + The Group is pleased to announce Refinancing Proposals to raise in
        aggregate between £7.0 million and £8.8 million (net of expenses)



      + Proposed 1 for 1 Rights Issue at 20 pence per Ordinary Share to
        raise up to £4.23 million (net)



      + Issue of Convertible Loan Note to raise £4.6 million



      + Board strengthened



        'The Board believes that, should the Refinancing Proposals be approved
        by shareholders at the EGM on 16 July, the Group would be sufficiently
        capitalised to enable the Group, with its current product range, to
        return to its previous growth pattern.'

                                                        Richard King, Chairman



                           SUMMARY DETAILS ATTACHED


Enquiries:

Richard King, Chairman  Fiona Tooley, Director

Kiran Shah, Finance Director  Citigate Dewe Rogerson

The Character Group PLC Tel: [phone]

Tel: [phone]     Mobile: [phone]

Mobile:     [phone] (RK)

            07956 278522 (KS)


                                     -2-

                           The Character Group plc

           Proposed Rights Issue of up to 23,119,663 Rights Shares

           at 20 pence per share raising up to £4.23 million (net)

               and Proposed £4.6 million Convertible Loan Note




Introduction

Further to the announcement made by The Character Group ('Group' or 'Company')
on 29 May 2001, it is announced today that the Group is proposing to raise up
to approximately £4.23 million (net of expenses) by way of a 1 for 1 rights
issue of up to 23,119,663 new Ordinary Shares at 20p per share. The Rights
Price represents a discount of approximately 21.6 per cent. to yesterday's
closing middle-market price of 25.5p per Ordinary Share.


Richard King, Kiran Shah, Joe Kissane and Jon Diver, ('the Relevant Executive
Directors'), together with their families and associated interests, hold, in
aggregate, 8,456,684 Ordinary Shares representing approximately 36.6 per cent.
of the current issued Ordinary Share capital of the Company. The Relevant
Executive Directors, together with their family and associated interests, have
irrevocably undertaken to take up, or to procure to be taken up entitlements
to a total of 8,171,684 Rights Shares attributable to such holdings and
amounting to approximately £1.63 million at the Rights Price.


Toys Investments S.A. ('TISA'), who became a significant shareholder in August
2000, and holds a total of 3,467,949 Ordinary Shares representing
approximately 15 per cent. of the current issued Ordinary Share capital of the
Company, has irrevocably undertaken to take up its entitlements to a total of
3,467,949 Rights Shares.


In addition, TISA has undertaken to underwrite up to a maximum of 4,950,000
Rights Shares. However, in order to ensure that the Company satisfies the
relevant requirements of the Listing Rules, the number of Rights Shares for
which TISA shall subscribe pursuant to its underwriting obligations shall be
reduced by Collins Stewart to a minimum of 550,000 Rights Shares, were only
the minimum net proceeds of approximately £7.02 million ('minimum net
proceeds') to be raised pursuant to the Refinancing Proposals, as this would
ensure that there will be at least 25 per cent. of the Company's issued
Ordinary Share capital in public hands (as defined in the Listing Rules)
following the Rights Issue.


It was also announced on 29 May 2001 that the Group had been suffering from
cash constraints caused, in part, by a reduction in the Group's working
capital facilities and difficult trading conditions. In order to provide short
term working capital facilities it was stated in such announcement that TISA
had agreed to procure a short term loan facility for the Company, on normal
commercial terms, of £2.5 million.


It is proposed that the working capital facilities available to the Group will
be augmented by the issue of the Convertible Loan Note. This issue will raise
£4.6 million. It is intended that the short term loan facility referred to
above will be repaid out of these proceeds. Subject to approval of the
Resolutions at the EGM, it is anticipated that the Convertible Loan Note will
be issued immediately following the conclusion of the EGM and that the funds
will be received on that day by the Company. The terms for conversion of the
Convertible Loan Note provide for the issue of up to 11,500,000 new Ordinary
Shares upon full conversion, equating to a subscription price of 40p per
Ordinary Share. The terms of the Convertible Loan Note prohibit either TISA or
any party acting in concert with it from exercising the conversion rights or
for the conversion rights to be exercised by any party where, or to the extent
that, such exercise will leave less than 25 per cent. of the ordinary share
capital of the Company in public hands (within the meaning of the Listing
Rules).


Under the Listing Rules, as a consequence of TISA's existing 15 per cent.
interest in the issued share capital of the Company, the proposed issue of the
Convertible Loan Note is classified as a related party transaction and is
therefore subject to the approval of Shareholders at the EGM (other than TISA
and its connected persons).




continued...


                                     -3-




Should the Rights Issue and the Convertible Loan Note not be approved by
Shareholders at the EGM, then, in the absence of alternative financing
arrangements being made available immediately, it is unlikely that the Group
would be able to meet its financial obligations and may therefore be unable to
continue to trade.


The Document containing details of the Rights Issue, Proposed Convertible Loan
Note and unaudited interim results for the six months ended 28 February 2001
will be posted to Shareholders today.


Summary


Background to and reasons for the Refinancing Proposals and use of proceeds

On 5 December 2000 it was stated, in the preliminary announcement of the
Group's results for the year ended 31 August 2000, that The Character Group
made losses of £13.82 million in what was an extremely difficult year for the
Group. In addition, on 24 January 2001, at the Company's Annual General
Meeting, Shareholders were informed that despite an encouraging start to the
current financial year, 'the Christmas trading period did not live up to
general expectations and the final five weeks of sales proved to be extremely
disappointing'.


The Company went on to say:


'The shortfall in December sales, together with the repayment and cancellation
of certain of the Group's borrowing facilities during 2000, has led to the
need for the Group to secure additional borrowing facilities in order to
finance current and projected sales.''


Pursuant to a loan agreement dated 5 March 2001, a loan totalling £690,000 was
provided to the Company by TISA. This loan is to be repaid by 31 December 2001
but will be repaid sooner either upon completion of the Rights Issue, when the
same will fall to be applied as part of the subscription monies payable by
TISA in respect of its proportion of Committed Shares, or, in whole or in
part, at any time at the election of the Company.


On 29 May 2001, it was announced that continuing difficult trading conditions
had contributed to a net loss before taxation for the six month period ended
28 February 2001 of £1.9 million on sales of £36.6 million. This compares to a
net loss of £5.96 million on sales of £45 million for the corresponding period
last year. As mentioned above, the Group had continued to suffer from cash
constraints and it was announced, in conjunction with the interim results,
that TISA had agreed to procure for the Company a £2.5 million short term loan
facility and, subject to Shareholders' approval and in substitution for the
said short term loan facility, to subscribe £4.6 million for the issue to it
of the Convertible Loan Note. It was also announced that TISA, along with the
Relevant Executive Directors, had shown its faith in the growth prospects of
the Group by undertaking to take up its entitlements in the Rights Issue and
also to underwrite certain of the remainder of the Rights Issue. To this end,
TISA has undertaken, in addition to taking up its entitlements, to underwrite
up to a maximum of 4,950,000 Rights Shares at the Rights Price (subject to the
requirement for TISA to reduce the number of Rights Shares it shall subscribe,
to a minimum of 550,000 Rights Shares, pursuant to its underwriting
commitments, in order to enable the Company to have sufficient shares in
public hands were the minimum net proceeds to be raised). Following the Rights
Issue, TISA's maximum holding in The Character Group will be approximately
29.9 per cent. of the Company's issued ordinary share capital.


In addition to the Refinancing Proposals, the Group has the following
borrowing facilities:


 1. the Company's subsidiary Downpace Limited has an ongoing £1.5 million bank
    facility with National Westminster Bank PLC which, as at 20 June 2001, was
    drawn down in the amount of approximately £451,000;


 2. the Group's factors, GMAC Commercial Credit Limited ('GMAC''), have agreed
    to continue to provide a secured 'over-advance'' facility under the
    factoring and invoice discounting facilities provided by it to the Group.
    The current level of this 'over-advance'' facility is £2.0 million; and


    continued...


                                       -4-




 3. the bank facility enjoyed by the Company's subsidiary Universal Concepts
    (UK) Limited, which ceased to trade at 31 December 2000, with its existing
    lender Brown, Shipley & Co. Limited, is currently drawn down in the amount
    of approximately £460,000.


The Directors intend to apply the net proceeds of the Refinancing Proposals to
the repayment of the loans procured and made by TISA referred to above, the
repayment of the over-advance facility from GMAC and the Brown Shipley
facility referred to above, with the remainder of the net proceeds to be
principally applied to fund the marketing and development of the Group's
current product range.


Board Changes

It was also announced on 29 May 2001, Enrico Preziosi, Chairman of the Italian
toy company Giochi Preziosi, who has been a Non-Executive Director of the
Company since August of last year, was appointed Chief Executive Officer and
Managing Director of The Character Group on 29 May 2001. In addition, Maurizio
Cellai, Managing Director of Giochi Preziosi, was appointed to the Board of
The Character Group as an additional Non-Executive Director on 29 May 2001.


Both Enrico Preziosi, who founded Giochi Preziosi, one of Italy's leading toy
companies, in 1984, and Maurizio Cellai have agreed to share more of their
valuable experience and time with the Company which, the Executive Directors
believe can only be beneficial to the long term prospects of The Character
Group.


Current trading and prospects

On 29 May 2001, the Company announced its unaudited interim results for the
six months ended 28 February 2001. The difficult trading conditions for the
Group have continued and have contributed to a net loss before taxation for
the interim period ended 28 February 2001 of £1.9 million on sales of £36.6
million. It is now expected that the Group will not make a profit for the full
year and that the Group will be loss-making for the six months ending 31
August 2001.


The Board believes that, should the Refinancing Proposals be approved by the
Shareholders at the EGM, the Group would be sufficiently capitalised to enable
the Group, with its current product range, to return to its previous growth
pattern.


The short-term loan facility

It was announced on 29 May 2001 that, in order to ensure that the Group has
sufficient working capital to meet its short term commitments, TISA agreed
that it would procure for the benefit of the Company a short term loan
facility of £2,500,000. TISA agreed to procure such a facility by no later
than the close of banking business on Friday 8 June 2001. This facility was
procured, in accordance with these terms, from 8 June 2001 and has been made
available for a period ending on the earlier of the issue of, and subscription
by TISA for, the Convertible Loan Note and 31 July 2001. To date, £727,000 of
this amount has been applied to repay a temporary overdraft facility provided
to the Group.


Richard King (Executive Chairman) Joe Kissane and Jon Diver (Executive
Directors) have pledged their respective direct holdings of Ordinary Shares
(amounting in total to 4,105,320 Ordinary Shares) as security for the
repayment by the Company of such loan. In addition, Kiran Shah (Group Finance
Director) (who does not have a direct holding of Ordinary Shares) has
convenanted to guarantee the repayment obligations of the Company in respect
of such loan up to a sum of £350,000.


It is proposed that this loan will be repaid from the proceeds of the
Convertible Loan Note receivable by the Company. Upon and subject to such
repayment, the pledges and guarantee referred to above will be released and
discharged.



continued...


                                     -5-




The Convertible Loan Note

The £4.6 million Convertible Loan Note is, subject to shareholder approval of
certain Resolutions at the EGM, to be issued to and subscribed by TISA. The
Convertible Loan Note is convertible at 40p per Ordinary Share, such
conversion resulting in the allotment and issue of a maximum of 11,500,000 new
Ordinary Shares. The right of conversion is not exercisable by TISA nor by any
other person deemed to be acting in concert with TISA within the meaning of
the City Code. It is currently expected that TISA will assign the Convertible
Loan Note to a third party provided that such third party would be deemed not
to be acting in concert with TISA (as defined under City Code).


Terms and Conditions of the Rights Issue

The Company proposes to raise up to £4.62 million (approximately £4.23 million
net of expenses) pursuant to the Rights Issue by offering up to 23,119,663 new
Ordinary Shares (representing 100 per cent. of the existing issued ordinary
share capital of the Company) at 20p per Rights Share payable in full in cash
on acceptance. The Rights Issue will be made on the following basis:


                  1 Rights Share for every 1 Ordinary Share


held by Qualifying Shareholders on the Record Date, and so in proportion for
any other number of Ordinary Shares then held. The Rights Shares will, when
issued and fully paid, be identical to and will rank pari passu in all
respects with existing issued Ordinary Shares, including the right to receive
in full all dividends hereafter declared.


The Rights Issue has been underwritten by TISA up to a maximum of 4,950,000
Rights Shares over and above its proportion of its Committed Shares. This
underwriting commitment is subject to reduction to a minimum of 550,000 Rights
Shares, in order to ensure that the requirement of the Listing Rules, that not
less than 25 per cent. of the issued Ordinary Shares are in public hands, is
satisfied following completion of the Rights Issue. The balance of the Rights
Issue, being 6,530,030 Rights Shares, (if the number of Underwritten Shares is
not reduced) has not been underwritten.


The Rights Issue is conditional upon:

(1)     the passing of certain Resolutions at the EGM;

(2)     the posting of the Provisional Allotment Letters on 16 July 2001;


(3)     the Rights Issue Agreement having become unconditional in
        accordance with its terms and not having been terminated prior to
        Admission;

(4)     TISA subscribing and making payment for the Convertible Loan
        Note by 3.00p.m. on 16 July 2001; and

(5)     Admission being granted and having become effective by 8.00a.m. on 17
        July 2001.


Application has been made for the Rights Shares to be admitted to the Official
List and to trading on the London Stock Exchange. It is expected that
Admission will take place and that dealings will commence in the Rights
Shares, nil-paid, on 17 July 2001.


The latest time for acceptance and payment in full for the Rights Shares is
expected to be 3.00p.m. on 7 August 2001.


Provisional Allotment Letters

It is intended that if the Resolutions are passed at the Extraordinary General
Meeting, Provisional Allotment Letters in respect of the Rights Shares will be
posted to Qualifying Shareholders (other than certain Overseas Shareholders)
on 16 July 2001 and that Admission will become effective and dealings in
Rights Shares will commence, nil-paid, on 17 July 2001.



continued...


                                     -6-




Share Schemes

The rules of the Shares Schemes currently enable the Board, through a
committee of the Directors comprised wholly or mainly of Non-Executive
Directors, to administer such schemes. This function is carried out by the
remuneration committee of the Board (the 'Remuneration Committee ').
Currently, the Remuneration Committee is authorised by the rules of the Share
Schemes to grant options over, inter alia, unissued Ordinary Shares up to a
maximum of 5 per cent. of the Company's issued Ordinary Share capital on the
day preceding the relevant date of grant. Given the number of options
outstanding and the Company's current market capitalisation, the Board does
not consider this to be sufficient to attract, motivate and retain key staff
over the remaining life of the Share Schemes. It is therefore proposed to
increase the limit placed on the number of Ordinary Shares over which options
may be granted under the Share Schemes to 10 per cent. of the Company 's
issued Ordinary Share capital on the day preceding the relevant date of grant.
The guidelines of the institutional investors, in particular those of the
Association of British Insurers (the 'ABI'), generally permit companies to use
up to 10 per cent. of their share capital for share schemes. Whilst this could
include shares issued under share schemes for all employees, the Board has no
plans to introduce an all-employee scheme at this time. The Board has
discussed the proposal with the ABI, which has confirmed that it finds the
proposal acceptable. A Resolution set out in the notice convening the
Extraordinary General Meeting will authorise the Board to make the amendments
necessary to effect this increase in the said limits under the Share Schemes.


Extraordinary General Meeting

An Extraordinary General Meeting of the Company will be held at 11.00a.m. on
16 July 2001 at the offices of Citigate Dewe Rogerson, 26 Finsbury Square,
London EC2A 1DS.


At the Extraordinary General Meeting, the Resolutions will be proposed to:


        1.     increase the authorised share capital of the Company to £
        5,500,000 (in order, inter alia, to provide sufficient share capital
        to allow for the allotment of the Rights Shares) and to authorise the
        Directors to allot relevant securities pursuant to section 80 of the
        Act up to an aggregate nominal value of £2,700,000. This authority
        will be in substitution for the existing authority granted to the
        Directors at the Company 's annual general meeting held on 24 January
        2001;



 2. approve the terms of the Rights Issue Agreement;


        3.     approve the waiver of the obligations under Rule 9 of the City
        Code that could otherwise require the Relevant Executive Directors and
        persons acting in concert with them to make a general offer for the
        remaining Ordinary Shares of the Company as a result of any increase
        in their proportionate holdings consequent upon the Rights Issue;


4.     to approve the creation of the Convertible Loan Note and the issue
thereof to TISA;


        5.      amend the rules of the Share Schemes to increase the limit on
        the number of unissued Ordinary Shares over which options may be
        granted under the Share Schemes to 10 per cent. of the Ordinary Shares
        in issue on the day preceding the relevant date of grant; and



 6. disapply the pre-emption rights conferred on all Shareholders by the Act in
    connection with:


                (i)     the allotment of the Rights Shares (and to enable the
                Directors to deal with fractional entitlements and Overseas
                Shareholders);


                (ii)     the allotment of up to 11,500,000 new Ordinary Shares
                arising upon an exercise of the rights of conversion attaching
                to the Convertible Loan Note;


                (iii)     future offers by way of rights by the Company to
                Shareholders;


                (iv)     the allotment of equity securities as an alternative
                to a cash dividend payment; and




continued...


                                     -7-





                (v)     otherwise in respect of the allotment of equity
                securities up to a maximum aggregate nominal value of £144,000
                (representing approximately 5 per cent. of the Company 's
                issued share capital as enlarged by the issue of the maximum
                number of Ordinary Shares to be issued under the Refinancing
                Proposals).


Resolutions 1, 2, 3, 4 and 5 are being proposed as ordinary resolutions
requiring approval by more than 50 per cent. of votes cast. Resolution 6 is
being proposed as a special resolution requiring approval by at least 75 per
cent. of votes cast. A poll will be taken of Independent Shareholders, in
accordance with the provisions of the City Code, on Resolution 3 and the
Relevant Executive Directors and persons acting in concert with them other
than TISA, representing, in aggregate, approximately 36.6 per cent. of the
Company's existing issued share capital, will not be able to vote on this
Resolution. In accordance with the provisions of the Listing Rules and of the
City Code, TISA will not be able to vote on Resolutions 3 and 4 and has
undertaken to abstain and to take all reasonable steps to ensure than its
associates will abstain from voting on Resolutions 3 and 4. The Refinancing
Proposals will not proceed unless all the Resolutions (other than Resolution
5) are duly passed.


Relevant Executive Directors' intentions

The Relevant Executive Directors, together with their families and associated
interests, hold, in aggregate, 8,456,684 Ordinary Shares representing
approximately 36.6 per cent. of the existing issued share capital of the
Company. The Relevant Executive Directors, together with their family and
associated interests, have irrevocably undertaken to take up entitlements, to
a total of 8,171,684 Rights Shares, amounting to approximately £1.63 million
at the Rights Price.


Following completion of the Rights Issue and the related proposals, it is
expected that the combined holdings of the Relevant Executive Directors,
together with their family and associated interests, will amount to 16,628,368
Ordinary Shares, representing a maximum interest of approximately 44.7 per
cent. of the enlarged issued Ordinary Share capital (on the basis that only
the minimum net proceeds are raised pursuant to the Refinancing Proposals).


TISA's intentions

TISA (in which Enrico Preziosi is interested) holds, in aggregate, 3,467,949
Ordinary Shares representing approximately 15.0 per cent. of the current
issued Ordinary Share capital of the Company. TISA has irrevocably undertaken
to take up its entitlements, amounting in total to a maximum of 3,467,949
Rights Shares. In addition, TISA has undertaken to underwrite up to a maximum
of 4,950,000 Rights Shares (subject to a possible reduction to a minimum of
550,000 Rights Shares as referred to above and as set out in the Rights Issue
Agreement).


Following completion of the Rights Issue, and the related proposals, the
combined holdings of TISA will amount to a maximum of 11,885,898 Ordinary
Shares, representing a maximum interest of approximately 29.9 per cent. of the
enlarged issued Ordinary Share capital (were TISA to subscribe for the maximum
number of the Underwritten Shares).


The Takeover Panel

Rule 9 of the City Code ('Rule 9'') requires that any person who acquires
shares which, taken together with any shares already held by him or held or
acquired by persons acting in concert with him, carry 30 per cent. or more of
the voting rights of a company to which the City Code applies (which includes
the Company) is normally required by The Takeover Panel to make a general
offer to the shareholders of that company.


continued...


                                     -8-




The Takeover Panel has indicated that it regards the Relevant Executive
Directors (and their connected persons) as a concert party for the purposes of
Rule 9. For the avoidance of doubt this concert party excludes TISA. As at 21
June 2001 (the latest practicable date prior to the publication of this
announcement), these parties held, in aggregate, approximately 36.6 per cent.
of the issued share capital of the Company. Immediately following the Rights
Issue, in respect of which they have committed to take up 8,171,684 Rights
Shares, such persons could hold in aggregate a maximum of approximately 44.7
per cent. of the then issued share capital of the Company (on the basis that
only the minimum net proceeds are raised pursuant to the Refinancing
Proposals). To the extent that other Shareholders, who have not committed to
take up Rights Shares, subscribe for Rights Shares under the Rights Issue,
this proportion will reduce and in the event that all the Shareholders take up
their entitlements (or full take-up is achieved by virtue of the underwriting
by TISA) then the percentage interests of the Relevant Executive Directors
(and their connected persons) will not increase. Because the interests of the
Relevant Executive Directors (and their connected persons) could increase to
44.7 per cent. as a result of the Rights Issue, approval of Independent
Shareholders, as required by the City Code, is being sought for a waiver by
the Takeover Panel of any obligation of the Relevant Executive Directors to
make a general offer that might otherwise arise under Rule 9 at the
Extraordinary General Meeting (Resolution 3). The Takeover Panel has agreed,
subject to such approval being obtained, to grant such waiver. None of the
Relevant Executive Directors (or their connected persons) or TISA will vote on
this Resolution.


The Takeover Panel has further indicated that it regards the Relevant
Executive Directors (and their connected persons) and TISA as a separate
concert party for the purposes of Rule 9. As at 21 June 2001 (the latest
practicable date prior to the publication of this announcement) these parties
held, in aggregate, approximately 51.6 per cent. of the issued share capital
of the Company. Following the Rights Issue and assuming full subscription of
the Committed Shares and the maximum underwriting by TISA, such persons could
hold in aggregate a maximum of approximately 71.8 per cent. of the then issued
Ordinary Share capital of the Company. This percentage will reduce dependent
upon the level of subscriptions by other Shareholders pursuant to the Rights
Issue.


Shareholders should note that a person or group of persons acting in concert
holding shares in excess of 50 per cent. of a company is normally free to
purchase any number of shares without triggering the requirement to make a
general offer to the shareholders of that company pursuant to Rule 9.
Therefore Shareholders should note that the Relevant Executive Directors (and
their connected persons) and TISA will collectively be able to increase their
shareholding without incurring any obligation under Rule 9 to make a general
offer to shareholders. However, the holdings of the members of the concert
party individually or of any other group of shareholders deemed to be acting
in concert, may not be increased above 29.9 per cent. of the issued share
capital of a company at the relevant time without incurring further
obligations under Rule 9 to make a general offer to shareholders and a like
obligation can arise if such person or group holds between 30 per cent. and
49.9 per cent. and increase their holding.


Working Capital

The Company is of the opinion that, taking into account existing bank
facilities available to the Group and the minimum net proceeds of the
Refinancing Proposals, the Group has sufficient working capital for its
present requirements, that is for at least the 12 months from the date of this
announcement.


                                     -9-




Expected timetable of principal events

2001


Record Date for the Rights Issue                       11 July


Latest time and date for receipt of Forms of Proxy     11.00 a.m. 14 July


Extraordinary General Meeting                          11.00 a.m. 16 July


Despatch of Provisional Allotment Letters              16 July


Admission and commencement of dealings in Rights Shares, nil paid 8.00a.m. 
17 July


Latest time and date for splitting Provisional Allotment Letters, nil paid
3.00 p.m. 3 August


Latest time and date for acceptance and payment in full and
for registration of renunciation                       3.00 p.m. 7 August


Dealings in Rights Shares commence, fully paid         8.00 a.m. 8 August


Crediting of CREST accounts for Rights Shares in uncertificated form     10
August


Definitive share certificates in respect of Rights Shares in certificated form
despatched by 15 August


22 June 2001