Posting of circular

Merchant House Group Plc ("Merchant House" or the "Company")

3 August 2010

Conversion of 2005 Loan Notes, Placing of New Ordinary Shares, Subscription for New Convertible Loan Notes, Debt Settlement through issue of New Ordinary Shares, Directors' Fees Settlement and issue of Senior Management Warrants, Shareholder Bonus Issue of 2 New Ordinary Shares for every 10 Ordinary Shares held, approval for issue of shares upon any conversion of Tixway Convertible Loan Notes and Notice of Annual General Meeting

On 30 June 2010, the Company announced its final results for the year ended 31 December 2009 (the "30 June Results Announcement") together with a number of proposals relating to the future financing of the Group. A circular has been sent to Shareholders today regarding the proposals set out in the 30 June Results Announcement (the "Proposals") and convening the annual general meeting of the Company to consider and vote on the Proposals.

Background to and reasons for the Proposals

In the 30 June Results Announcement, it was explained that Liberty Capital Limited ("Liberty") had undertaken to provide financial support for the Group for a period of at least 12 months from the date of that report, conditional upon Shareholder approval for:

a) a change to the conversion terms of convertible debt in the aggregate amount of £468,000 issued in 2005 ("2005 Loan Notes" or "2005 Convertible Debt") and further described below under "Conversion of 2005 Loan Notes";

b) a fundraising to raise up to £650,000 at a price of 0.05p per share ("The Placing and the Subscription" as described below will fulfil this condition); and

c) an issue of shares to settle certain liabilities of the Company, namely loans and other debts amounting to £175,000 ("Debts Settlement") and unpaid Directors' contractual remuneration totalling £168,750 ("Directors' Fees Settlement"), (proposals to meet this condition are set out below under "The Debts Settlement" and "Directors' Fees Settlement and issue of Senior Management Warrants".

A fundraising, comprising a placing of 400,000,000 new Ordinary Shares at a price of 0.05p per share (the "Placing") together with the issue of £417,000 of new convertible loan notes (convertible into new Ordinary Shares at an effective price of 0.05p per share) ("New Convertible Loan Notes"), has now been arranged with Liberty (the Placing and the Subscription together, the "Fundraising").

The Directors recognise that Placing Price of 0.05p is substantially lower than the prevailing market price. The Company considered trying to raise the necessary funds by way of a Shareholder entitlement issue (such as a rights issue or open offer to Shareholders) as this would allow all shareholders the opportunity of participating at the same price should they so wish. The Directors, having consulted the Company's advisers, concluded that the third-party costs associated with such an entitlement issue would likely exceed £220,000 and therefore decided not to pursue this alternative in light of the amount of money which was being raised. In lieu of such participation, however, the Directors are proposing that a bonus issue of shares be made to Shareholders (details of which are set out below under "Shareholder Bonus Issue").

Conversion of 2005 Loan Notes

In 2005 the Company issued the 2005 Loan Notes in the aggregate amount of £874,000. These loan notes are convertible into new Ordinary Shares of the Company at a price of 2p per new share. The unconverted balance as at the date of this document is £468,000 which, if not converted into new Ordinary Shares, is repayable on or before 25 August 2010. Full details of the secured loan notes forming part of the 2005 Loan Notes are set out in the circular to shareholders dated 1 August 2005, which is also available on the Company's website at www.merchanthousegroup.com.

In order to conserve the cash resources of the Company, agreement has been reached with some of the 2005 Loan Note Holders that they will convert their 2005 Loan Notes into new Ordinary Shares at a price of 0.5p per new Ordinary Share rather than seek to have those 2005 Loan Notes redeemed in cash. As a result, subject to Shareholder approval, 2005 Loan Note Holders representing £223,000 of the 2005 Loan Notes have agreed to convert their 2005 Loan Notes into 44,600,000 new Ordinary Shares at 0.5p per share. A condition of this agreement is that if the closing mid-market price of the Company's shares is less than 0.5p on 31 December 2010, then additional shares will be issued as if the loan had been settled at that lower price or, if higher, 0.05p per share. Further conditions are that outstanding interest (totalling approximately £20,000) will be settled in cash and that conversion by any of the relevant 2005 Loan Note Holders into shares representing more than 9.9% of the issued share capital of the Company is conditional upon FSA approval and that, further, there will be no obligation to convert notes held by any relevant 2005 Loan Note Holder if the shares converted would represent 29.9% of the issued share capital of the Company.

The Directors intend to seek agreements on the same terms with the holders of the balance of the 2005 Loan Notes prior to 25 August 2010. To the extent that holders of 2005 Loan Notes do not elect to convert their notes, they will be redeemed by the Company for cash.

The Placing and the Subscription

As stated above, the Company has arranged, subject to Shareholder approval, to raise from Liberty £617,000 (before expenses which are estimated to be approximately £80,000) in aggregate for the Group. This fundraising will comprise:

- a placing of 400,000,000 new Ordinary Shares with Liberty at the Placing Price to raise £200,000 gross proceeds for the Company; and

- a subscription by Liberty for £417,000 of New Convertible Loan Notes. The New Convertible Loan Notes will be convertible in new Ordinary Shares on the basis of one new share per 0.05p of New Convertible Loan Note principal. The New Convertible Loan Notes will be unsecured, pay no interest and are repayable on the 5th anniversary following the date of issue.

The net proceeds of the Fundraising will be used to settle the 2005 Loan Notes to the extent they are not converted and for general working capital purposes. In addition, subject to completion of the Placing and Subscription, 468,000,000 Placing and Subscription warrants will be issued to Liberty. These warrants will be issued on the basis of 1 warrant for every 0.10p subscribed pursuant to the Placing and the Subscription and subject to a maximum of 468,000,000 warrants. These unlisted warrants will be exercisable at a price of 0.05p for 1 Ordinary Share and will be exercisable any time between 18 months from the date of grant and 10 years from the date of grant in tranches of 1,000,000 or multiples thereof and will be freely transferable.

Liberty Capital currently holds 14,223,174 shares equivalent to 5.06 per cent. of the current issued share capital of the Company. Liberty Capital is a 'related party' for the purposes of the AIM Rules. For this reason, the Placing and the Subscription are related party transactions under the AIM Rules. The Directors consider, having consulted with Shore Capital and Corporate Limited, the Company's Nominated Adviser, that the terms of these related party transactions are fair and reasonable insofar as the Company's Shareholders are concerned.

The Placing and Subscription Warrants and the conversion rights attaching to the New Convertible Loan Notes are not exercisable the extent that as a result of their exercise: (a) the person so exercising acquires interests in shares which (taken together with interests in which persons acting in concert (as defined in the City Code) with him are interested) carry 30 per cent. or more of the voting rights of the Company or (b) any person becomes a Controller in relation to Merchant Capital save, in the latter case, where the person so exercising has the prior approval of the FSA in writing.

Application will be made to the London Stock Exchange for the New Ordinary Shares to be admitted to trading on AIM. Admission is expected to take place, and dealings are expected to commence on, 1 September 2010. No application has been or will be made for the Placing and Subscription Warrants to be admitted to trading on AIM.

The Debts Settlement

During the 12 month period ended 31 December 2009, a number of short term loans were made to the Company that were due for settlement on or prior to 30 July 2010 (other than the loan from Peter Shakeshaft which is repayable on demand):

- IPM £50,000

- Penhale £55,000

- Alan O'Doherty £10,000

- Peter Shakeshaft £30,000

In order to conserve the cash resources of the Company, the Directors consider it in the best interests of the Company that these loans be settled by the issue of new shares before they become due for repayment. The Company has reached agreement, subject to Shareholder approval, with IPM, Penhale and Peter Shakeshaft to settle their loans through the issue by the Company of 270,000,000 new Ordinary Shares at an effective price of 0.05p per share.

The Company has reached agreement, subject to Shareholder approval, with Alan O'Doherty to settle his loan through the issue by the Company of 4,000,000 new Ordinary Shares at an effective price of 0.25p per share. A condition of this agreement is that if the closing mid-market price of the Company's shares is lower than 0.25p on 31 December 2010, then additional shares will be issued as if the loan had been settled at that lower price.

Additionally, IPM, Penhale and McGuireWoods London LLP, the solicitors to the Company, have agreed to accept settlement of other debts totalling £30,000 owed to them by the Company by the issue of 60,000,000 new Ordinary Shares at an effective price of 0.05p per share.

Directors' Fees Settlement and issue of Senior Management Warrants 

In the interests of managing the working capital resources of the Company during the restructuring of the Group's operations, the Directors have not been paid fees (totalling £168,750 in aggregate) to which each of them is contractually entitled by way of remuneration under their respective letters of appointment with the Company. The Directors have agreed to accept payment of the amounts due and owing to them in respect of those fees by the issue of shares in lieu of cash. As part of the agreement the Company will account for PAYE and employees' National Insurance contributions on the share payments, and issue shares to a value of £86,250to Martin Eberhardt and £82,500 to James Holmes, the shares to be issued at the closing mid-market price on the business day immediately preceding the date of issue of these shares. The Directors have agreed that for so long as they remain directors of the Company they will not dispose of these shares without the prior permission of the Remuneration Committee, such agreement not to be unreasonably withheld.

The Remuneration Committee has determined that, in order to incentivise and align the interests of the Directors and other members of the senior management of the Company with shareholders, warrants should be granted to the Directors and certain senior management of the business ("Senior Management Warrants"). Accordingly, 90,173,995 warrants are to be issued to James Holmes, 45,086,998 to Martin Eberhardt, 10,000,000 to Chris Day, 18,869,587 to Hugh Fleming and 5,000,000 to a former employee of the Group who is a future introducer of business to Merchant House.

The Senior Management Warrants will be exercisable at a price of 0.05p per Ordinary Share and will be exercisable any time for 5 years from the date of grant in tranches of 1,000,000 or multiples thereof and will be fully transferable.

Shareholder Bonus Issue

As stated above, the Directors examined fundraising alternatives which would have given Shareholders the opportunity to participate in the Fundraising. Having taken professional advice, the Board has concluded that the cost to the Company of doing so would be prohibitive. Accordingly, the Directors are proposing that the Company issue to Qualifying Shareholders 2 Bonus Shares for every 10 Ordinary Shares held on the Record Date, which would result in the issue of 70,476,517 Bonus Shares on the basis of the number of Ordinary Shares in issue at the date of this document. The Shareholder Bonus Issue will be achieved by capitalising the sum of up to £10,000 from the share premium account of the Company based on the number of shares in issue at the date of this document The Bonus Shares will be issued at nil consideration per new share and will rank pari passu with Existing Ordinary Shares. Where a Shareholder's total entitlement includes an entitlement to a fraction of a share, that entitlement will be rounded down to the nearest whole number of shares.

No Qualifying Shareholder will be entitled to receive Bonus Shares to the extent that as a result of their issue he becomes a Controller in relation to Merchant Capital save where the Qualifying Shareholder has the prior approval of the FSA in writing.

Approval for issue shares upon any conversion of the Tixway Convertible Loan Notes

On 30 December 2009, Liberty transferred £500,000 of 10% preference shares in Tixway (the "Tixway Preference Shares"), a wholly owned subsidiary of Liberty to Merchant Capital Ltd, a wholly-owned subsidiary of the Company. This investment holding of the Tixway Preference Shares strengthens the subsidiary's balance sheet and capital position, which allow Merchant Capital to continue to comply with the continuing capital adequacy requirements of the Irish Financial Services Regulatory Authority for the establishment of a Dublin-based UCITS fund platform. In consideration of the transfer by Liberty of the Tixway Preference Shares, the Company has issued to Liberty an unsecured convertible loan note of £500,000 carrying no interest and which shall mature in 2015 (the "Tixway Convertible Loan Notes").

The Tixway Convertible Loan Notes may be converted into new Ordinary Shares at 0.5p each at any time. Shareholder approval for the issue of up to 100,000,000 New Ordinary Shares will be required for this loan note to convert. In the event that Shareholders do not approve the Resolution to enable the issue of these shares, the Tixway Preference Shares will need to be returned to Liberty, and Merchant Capital will need to seek alternative arrangements to satisfy its capital adequacy requirements.

Liberty Capital currently holds 14,223,174 shares equivalent to 5.06 per cent. of the current issued share capital of the Company. Liberty Capital is a 'related party' for the purposes of the AIM Rules. For this reason, the issue of the Tixway Convertible Loan Notes is related party transactions under the AIM Rules. The Directors consider, having consulted with Shore Capital and Corporate Limited, the Company's Nominated Adviser, that the terms of this related party transaction are fair and reasonable insofar as the Company's Shareholders are concerned.

Effect of the Proposals on the issued share capital of the Company

If the Proposals are approved and fully implemented there will be 2,935,964,684 Ordinary Shares in issue following the exercise in full of all then outstanding warrants and conversion rights on the assumption that:

(a) the closing mid-market price of the Ordinary Shares on the day before the issue of the shares to complete the Directors' Fees Settlement is 0.2p per share; and

(b) the closing mid-market price of the Ordinary Shares on the 31 December 2010 is not less than 0.5p per share.

Martin Eberhardt, Chairman of Merchant House stated: "This Company is now at an exciting point in its development which the board, as strengthened following the AGM, will be ideally placed to exploit for the benefit of all stakeholders

Ends.

Enquiries:

Merchant House Group Plc

James Holmes

Tel: 020 7332 2200

Shore Capital and Corporate Limited

Pascal Keane

Tel: 020 7408 4090