Interim Results

Herald Investment Trust PLC 27 July 2006 PRELIMINARY STOCK EXCHANGE ANNOUNCEMENT HERALD INVESTMENT TRUST plc Results for the six months ended 30 June 2006 27 July 2006 CHAIRMAN'S STATEMENT Disappointingly and somewhat surprisingly the net assets declined 5.8% in the first half. Surprising because the trading performance has continued to be strong for most companies in the portfolio, and in general they have delivered the strong earnings growth that was expected. In aggregate the Trust's underlying earnings estimates for 2006 have declined by a similar percentage to the assets, but still represent a strong increase on 2005. In fact a 36% increase on the level of profits is estimated for 2005 for the portfolio at the start of the year. Arguably the market was discounting an even higher level of growth, but this argument seems difficult to accept when earnings growth exceeded share price growth in 2004 and 2005 by around 80%. In reality investor attention has continued to focus elsewhere, particularly oil, gas and other commodities. Herald's UK portfolio, which accounts for nearly two thirds of the portfolio, was the principal drag, returning -5.1%. In contrast the HGSC Index, which is 2/3rds of our benchmark, grew 6.1% in total return terms, albeit the weighted average of the most relevant sectors for our remit showed a decline of 6.6%. The software and computer services sector in the UK, which is important to Herald, was one of the worst performing sectors in the HGSC benchmark declining 12.5%. In contrast this sector within the Herald portfolio declined 7.8%. Most of this decline came from three holdings Alterian, Northgate and SDL, with very little justification in terms of their operational performance, albeit it was totally unforeseen that Northgate should find its head office and data centre demolished by the explosion of its neighbouring oil terminal in Hemel Hempstead, and management should be congratulated on delivering unaffected operational earnings. The three UK holdings that have had material earnings downgrades for 2005 and 2006 were Imagination, Plasmon and Screen FX. The latter two had material disappointments. The US return was adequate with the Russell 2000 Technology index up 5.3%, and the Trust's US portfolio up 7.0%, however the $ gains were obliterated in £ by the $ weakness. The European return was modestly positive, having been strongly up in Q1, but having a poor Q2. The Far East returns disappointingly gave back last year's gains. Total return by geography from 31 December 2005 to 30 June 2006 UK Equities -5.1% US Equities -0.7% (+7.0% in US$) European Equities +2.0% Far East Equities -17.6% The p/e based on consensus earnings estimates for 2006 for the profitable stocks in the portfolio, which account for 84% of the portfolio, has fallen from 14.6x at the start of the year (as in last year's accounts) to 14.1x reflecting declines in share prices, but minimal changes in earnings estimates. In contrast the p/e of the overall portfolio has risen slightly to 16x. This reflects a combination of downgrades in estimates for certain loss making holdings, who are delivering profits slower than previously envisaged, as well as the sale of certain profitable stocks and the acquisition of loss making stocks. In particular three long standing holdings have been sold - Informa and Taylor Nelson in the UK and RSA in the US. The original purchases were all made at least eight years ago and were sold for multiples of the original purchase price. None can now be described as small companies any more - Herald's definition being less than £750m market capitalisation at time of purchase. RSA was sold following the announcement of a cash bid from EMC. It demonstrates that the Manager's style is to invest in growing businesses for long term growth. These funds will be recycled into the plethora of emerging opportunities. Valuations in terms of p/es in the US are now lower than they have been for many years. On the basis of brokers' estimates for 2007, the p/e on the portfolio will decline to just over 12x from 16x. This reflects a further 18.7% growth in earnings for the consistently profitable companies, which account for 84% of the portfolio giving an average 2007 p/e of 11.9% on those holdings. The overall earnings growth will be faster than that reflecting the kicker from loss making companies reaching profitability. There are a number of macro clouds such as Middle East instability, rising commodity prices and the scale of interest rate rises, which seem to imply a forthcoming slowdown in economic growth. Much of the growth in the portfolio reflects structural shifts to new business models or new products, so most of the holdings are expected to make progress even if world GDP growth slows. One explanation for the poor UK performance in spite of continued excellent profits growth is the technical factor associated with the plethora of AIM issues. There have been 53 new issues in the period in the Herald remit, raising some £530m. There have also been a number of very poor share price performances masked by a few stronger returns from companies with a larger weighting. On balance selection is very important, and the flood of issues must abate if there is to be any secondary market performance or liquidity even in the worthwhile companies. Offsetting this there have been a few exits from corporate acquirers at significant premiums e.g. TRL, WILink, ADIC, RSA and since the end of June ADVO. This will accelerate if valuations remain at these levels. On balance it is fulfilling to see a number of companies blossoming from an investment made at a much riskier stage, albeit frustrating that it has not been reflected in valuations. In the long term we remain optimistic that that will benefit Herald Investment Trust shareholders too. Martin Boase Chairman 26 July 2006 Statistics and Performance Report At inception At At Performance since Performance 16 February 1994 31 December 2005 30 June 2006 31 December 2005 since inception NAV per share 98.7p 409.2p 385.4p (5.8%) 290.5% Share price ++ 90.9p 379.8p 345.8p (9.0%) 280.4% FTSE 100 Index 3,417.7 5,618.8 5,833.4 3.8% 70.7% HGSC Index plus AIM 1,750.0 3,218.7+ 3,370.0+ 4.7% 92.6% (capital gains ex. investment companies) Russell 2000 (small cap) 83.2* 71.0 69.3 (2.4%) (16.7%) Technology Index (in sterling terms) ++ Mid market price. + From 1 January 2006 the benchmark was changed from 2/3 Hoare Govett Smaller Companies Index (extended capital gains ex. investment companies) and 1/3 Russell 2000 (small cap) Technology Index (in sterling terms) to 2/3 Hoare Govett Smaller Companies Index plus AIM (capital gains ex. investment companies) and 1 /3 Russell 2000 (small cap) Technology Index (in sterling terms). * At 9 April 1996 being the date funds were first available for international investment. Past performance is no guarantee of future performance. - ends - For further information please contact: Ms Katie Potts, Manager Herald Investment Trust plc 020 7553 6300 Baillie Gifford & Co Secretaries 0131 275 2000 HERALD INVESTMENT TRUST plc The following is the interim statement for the six months ended 30 June 2006 which has been neither reviewed nor audited by the auditors. This statement is being printed and will be sent to all shareholders on 7 August 2006. Copies will be available for inspection at the Registered Office of the Company or may be obtained on request from the Manager or Secretary after that date. INCOME STATEMENT* (unaudited) For the six months ended For the six months ended For the year ended 30 June 2006 30 June 2005 31 December 2005 Revenue Capital Total* Revenue Capital Total* Revenue Capital Total* £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 (Losses)/gains on investments - (20,134)(20,134) - (9,946) (9,946) - 27,708 27,708 Losses on loans - - - - (1,753) (1,753) - (1,989) (1,989) Currency (losses)/gains - (181) (181) - (7) (7) - 70 70 Income 2,128 - 2,128 2,839 - 2,839 5,368 - 5,368 Investment management fee (1,985) - (1,985) (1,828) - (1,828) (3,741) - (3,741) Other administrative expenses (127) - (127) (118) - (118) (275) - (275) Net return before finance costs and taxation 16 (20,315) (20,299) 893 (11,706)(10,813) 1,352 25,789 27,141 Finance costs of borrowings - - - (392) - (392) (724) - (724) Return on ordinary activities before taxation 16 (20,315) (20,299) 501 (11,706)(11,205) 628 25,789 26,417 Tax on ordinary activities (31) - (31) (40) - (40) (72) - (72) Return on ordinary activities after taxation (15) (20,315) (20,330) 461 (11,706)(11,245) 556 25,789 26,345 Return per ordinary share (0.02p) (23.20p) (23.22p) 0.53p (13.37p)(12.84p) 0.64p 29.45p 30.09p (note 2) Weighted average number of ordinary shares in issue during each period 87,556,010 87,556,010 87,556,010 * The total column of this statement is the profit and loss account of the Company. All revenue and capital items in this statement derive from continuing operations. A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement. HERALD INVESTMENT TRUST plc SUMMARISED BALANCE SHEET (unaudited) At 30 June At 30 June At 31 December 2006 2005 2005 £'000 £'000 £'000 Fixed assets Investments 313,620 317,723 348,774 Current assets Debtors 13,059 1,225 786 Cash and short term deposits 11,859 29,887 9,089 24,918 31,112 9,875 Creditors: Amounts falling due within 1 year (excluding short-term borrowings) (1,100) (1,716) (356) Total assets (before deduction of bank 337,438 347,119 358,293 loans) Bank loans (note 3) - (26,416) - Total net assets 337,438 320,703 358,293 Capital and Reserves Called-up share capital 21,889 21,889 21,889 Share premium 73,738 73,738 73,738 Capital redemption reserve 63 63 63 Capital reserve - realised 226,923 209,754 209,639 Capital reserve - unrealised 12,710 12,699 50,309 Revenue reserve 2,115 2,560 2,655 Equity Shareholders' Funds 337,438 320,703 358,293 Net asset value per ordinary share 385.40p 366.28p 409.22p Ordinary shares in issue (note 4) 87,556,010 87,556,010 87,556,010 SUMMARISED RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS (unaudited) Six months to Six months to Year 30 June 2006 30 June to £'000 2005 31 December 2005 £'000 £'000 Shareholders' funds at 1 January 358,293 332,211 332,211 Return on ordinary activities after taxation (20,330) (11,245) 26,345 Dividends paid during the period (note 5) (525) (263) (263) Shareholders' funds at 30 June/31 December 337,438 320,703 358,293 HERALD INVESTMENT TRUST plc SUMMARISED CASH FLOW STATEMENT (unaudited) For six For six For year months ended months ended ended 31 December 30 June 2006 30 June 2005 2005 £'000 £'000 £'000 NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES (136) 828 1,322 NET CASH OUTFLOW FROM SERVICING OF FINANCE - (328) (841) FINANCIAL INVESTMENT Purchase of investments (47,141) (31,889) (75,037) Sale of investments 50,572 26,632 75,653 NET CASH INFLOW/(OUTFLOW) FROM FINANCIAL INVESTMENT 3,431 (5,257) 616 EQUITY DIVIDEND PAID (525) (263) (263) NET CASH INFLOW/(OUTFLOW) BEFORE FINANCING 2,770 (5,020) 834 FINANCING Loans drawn down - 24,771 24,771 Loans repaid - (24,771) (51,423) NET CASH OUTFLOW FROM FINANCING - - (26,652) INCREASE/(DECREASE) IN CASH 2,770 (5,020) (25,818) RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS Increase/(decrease) in cash in period 2,770 (5,020) (25,818) Decrease in bank loans - - 26,652 Exchange movement on loans - (1,753) (1,989) MOVEMENT IN NET FUNDS IN PERIOD 2,770 (6,773) (1,155) NET FUNDS AT 1 JANUARY 9,089 10,244 10,244 NET FUNDS AT 30 JUNE/31 DECEMBER 11,859 3,471 9,089 RECONCILLIATION OF NET REVENUE BEFORE FINANCE COSTS AND TAXATION TO NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES Net return on ordinary activities before finance costs and taxation (20,299) (10,813) 27,141 Losses/(gains) on investments 20,314 11,706 (25,789) Changes in debtors and creditors 61 (14) (53) Income tax (suffered)/repaid - (4) 25 Overseas tax suffered (31) (40) (72) Realised currency (loss)/profit (181) (7) 70 NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES (136) 828 1,322 HERALD INVESTMENT TRUST plc DISTRIBUTION OF ASSETS (unaudited) At 31 At 30 June At 30 June December 2006 2005 2005 % % % Equities: United Kingdom 60.1 61.3 63.9 Continental Europe 7.1 6.2 7.0 Americas 16.0 15.7 15.6 Japan - - - Asia Pacific 9.7 8.3 10.8 92.9 91.5 97.3 Net liquid assets 7.1 8.5 2.7 Total assets (before deduction of bank loans) 100.0 100.00 100.0 HERALD INVESTMENT TRUST plc NOTES 1. The financial statements for the six months to 30 June 2006 have been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements at 31 December 2005. 2. Return per ordinary share Six months ended Six months ended Year ended 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000 Revenue return (15) 461 556 Capital return (20,315) (11,706) 25,789 The return per ordinary share is based on the above totals of revenue and capital and on 87,556,010 ordinary shares being the weighted average number of ordinary shares in issue during each period. 3. The Company had no outstanding bank loans at 30 June 2006 and 31 December 2005. At 30 June 2005 the Company had a 364 day £30 million multi-currency loan facility with ING Bank N.V. which expired on 25 October 2005, there were outstanding drawings of US$47.35 million at that date. 4. At the AGM held on 12 April 2006 the Company's authority to buy back shares was renewed in respect of 13,124,645 Ordinary shares (equivalent to 14.99% of its issued share capital at that date). No shares have been bought back during the period and therefore at 30 June 2006 the Company's authority to buy back shares remains unchanged at 13,124,645. 5. The amount recognised as a distribution in the six months to 30 June 2006 was the final dividend for the year ended 2005 of 0.60p (£525,000) which was paid on 19 April 2006 (six months to 30 June 2005 and year to 31 December 2005 was the final dividend for the year ended 2004 of 0.30p (£263,000) which was paid on 19 April 2005). No interim dividend will be declared. 6. Transaction costs incurred on the purchase and sale of investments are added to the purchase cost or deducted from the sale proceeds, as appropriate. During the period transaction costs on purchases amounted to £251,000 (30 June 2005 - £143,000; 31 December 2005 - £241,000) and transaction costs on sales amounted to £267,000 (30 June 2005 - £62,000; 31 December 2005 - £153,000). 7. The financial information contained within this interim report does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The financial information for the year ended 31 December 2005 has been extracted from the statutory accounts which have been filed with the Registrar of Companies and which contain an unqualified Auditors' Report and do not contain a statement under sections 237 (2) or (3) of the Companies Act 1985. 8. The Interim Report was approved by the Board on 26 July 2006. This information is provided by RNS The company news service from the London Stock Exchange

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