Interim report january - september 2001

10/25/2001 8:46 AM EST

Interim report January - September 2001

Improved operating margin during the third quarter. Two acquisitions in
Canada - the first step into North America

· The group's operating revenue rose to SEK 954.8 million
(824.8). Organic growth in local currency was 9 percent (21).

· Operating profit before goodwill amortization and items
affecting comparability amounted to SEK 160.6 million (195.6). In the
corresponding period of 2000 operating profit, excluding divested units,
was SEK 186.5 million. The operating margin was 16.8 percent (23.7).

· Despite the effects of the terrorist attacks in the U.S., the
operating margin improved during the third quarter, to 16.2 percent,
compared with 15.3 percent in the previous quarter. Immediately after
September 11, the news was completely dominated by the occurrences in
the U.S.A. The effect on Observer's operating profit is estimated at SEK
10-15 million. Media content has since become more diverse, and the
negative effect has gradually subsided.

· The previously announced program to adapt capacity to a lower
growth rate has been carried out. The measures will take full effect at
year-end and are expected to reduce costs by SEK 80 million on an annual
basis.

· Profit per share after tax and full dilution, excluding
goodwill amortization and items affecting comparability, amounted to SEK
1.68 (2.08).

· In August, Observer acquired Canada's two leading companies in
media and market monitoring. The acquisitions are strategically
important and serve as a platform for further expansion in North
America. Portugal and Ireland's leaders in media and market monitoring
were acquired during the spring. In the Communication Tools division,
News Online group, with operations in Sweden and Norway, was acquired.
·
Comment by Observer CEO Robert Lundberg
"Despite the terrorist attacks in the U.S., we have seen a trend toward
improved operating margins during the third quarter compared with the
previous quarter. We have carried out a program to reduce the group's
expenses. The measures will have achieve their full effect by year-end.
Most of the negative effects from September 11 are gradually subsiding.
When news flows return to normal,Observer will be well-positioned."
Highlights during the period
· A special marketing unit for multinational clients was
established in London.
· Observer divested its interest in the jointly owned associated
company SMG Consulting.
· Observer's former principal shareholder, Bure Equity AB,
distributed its entire holding in Observer to its shareholders. Observer
added around 20,000 new shareholders and now has 30,000 in all.
· Since June, Waymaker is the joint trademark for the operations
in the division Communication Tools.
· As of August 13, Observer's shares on Stockholmsbörsen are
traded in a single class.

[REMOVED GRAPHICS]
Market
Long-term prospects for Observer's services are good. Globalization,
growing information flows and rapid technological developments are
giving businesses and organizations more reason than ever to monitor
industry and social developments. At the same time, there is a growing
need to further improve PR and IR communication and evaluate
communication results.

Media Intelligence
The market's development in 2001 has been affected by three factors:
media reports on foot and mouth disease, which limited coverage of news
relevant to Observer's clients; the economic slowdown, which has
resulted in a weaker news flow and made clients more cost conscious; and
the terrorist attacks in the U.S. on September 11, which initially
completely dominated the media. Most of the negative effects of the
events in the U.S. are gradually subsiding and media content is again
becoming more diverse.

Under current conditions, it is essential to have strong market
positions, significant economies of scale, a broad range of services and
an international market presence in order to maintain strong organic
growth. The market for value-added services, particularly analytical
services, remains good.

Communication Tools
In the Communication Tools division, market growth was lower than the
corresponding period last year, but remains good. In 2001, IR and PR
activity among our clients has declined. The early part of 2000 was
notable for its high communication level, particularly among technology
and Internet businesses.

Immediately following the U.S. attacks, clients reduced their IR and PR
activity, and the number of projects declined. As client activity
returns to the level prior to September 11, the negative effects will
subside.

Revenue
Operating revenue amounted to SEK 954.8 million (824.8), of which Media
Intelligence accounted for SEK 763.1 million and Communication Tools for
SEK 203.6 million. Organic growth in local currency was 9 percent. The
Nordic countries achieved growth of 12 percent, while the UK and Germany
together reached 6 percent. During the third quarter, organic growth in
local currency was 6 percent.

In the Nordic countries, value-added services accounted for 38 percent
(35) of Media Intelligence's revenue, while in the UK and Germany the
share was 5 percent (3).

In the UK, the Communication Tools division's selection and database
building services achieved higher growth than the corresponding period
of 2000, while growth in business information distribution was lower.

Profit
The group's operating profit before goodwill amortization and items
affecting comparability amounted to SEK 160.6 million (195.6). The
corresponding result in 2000, excluding divested units, was SEK 186.5
million. The operating margin amounted to 16.8 percent (23.7). The Media
Intelligence division reached an operating margin of 15.4 percent (22.5)
and Communication Tools 24.8 percent (33.7).

Operating profit for the third quarter amounted to SEK 52.3 million. The
corresponding year-earlier result, excluding divested units, was SEK
63.9 million. Despite an estimated earnings loss of SEK 10-15 million
due to the terrorist attacks in the U.S., the operating margin improved
during the third quarter, to 16.2 percent, compared with 15.3 percent in
the previous quarter. Following the attacks, media content has gradually
become more diverse, and the negative effect for Observer is subsiding.

In the UK, the Media Intelligence division is implementing a number of
planned integration and development projects to raise the growth rate.
As expected, the extensive changes have affected productivity and
operating margins. At the end of the second quarter, productivity
gradually improved and operating margins rose. This trend was reinforced
during the third quarter.

After being affected by the media focus on foot and mouth disease at the
start of the year, growth and profit in Germany improved during the
third quarter. Print media monitoring is developing well for the German
operations, while the area of broadcast media remains relatively weak.

The Nordic countries are reporting continued good operating margins,
although the economic slowdown and weaker news flow have led to a
slightly lower growth rate.

For the Communication Tools division, the lower growth rate during the
period, together with expansion costs, has reduced operating margins.
Among other things, the division started operations in Denmark and
Germany.

The Group's investments to develop IT solutions, new services and new
markets have remained significant. The aim of the development projects
is to ensure high organic growth, add value to client offerings and
facilitate a continued international expansion.

Net financial income and expenses was adversely affected by SEK 5.0
million by the writedown of the shareholding in Jupiter Media Metrix to
its current market value. Net financial income and expenses also
includes exchange rate effects of SEK 0.7 million and a net interest
expense of SEK 20.9 million.

Profit after tax for the period amounted to SEK 21.9 million (435.3).
The figure for 2000 included capital gains on the divestments of the
Sifo Research & Consulting division and Sifo Interactive Media as well
as pension refunds totaling SEK 398.6 million.

Profit per share after tax and full dilution, excluding goodwill
amortization and items affecting comparability, amounted to SEK 1.68
(2.08).

Cost reductions
The previously announced program to adapt the Group's costs to a lower
growth has been carried out. Cost cuts and a priority on development
projects will reduce costs by the equivalent of SEK 80 million on an
annual basis. The measures will take full effect at year-end.

Growth and profit objective
Observer's long-term financial objective remains unchanged. The
objective is to maintain annual organic growth of at least 10-15
percent. In addition, expansion will be achieved through acquisitions.

The group will achieve a long-term operating margin before goodwill
amortization and items affecting comparability of 22 percent.
Acquisitions of companies with low margins and special investments may
temporarily result in a lower operating margin, however.

Option program
In February, a decision was made to introduce a stock option program for
all employees of the Observer group. In several countries, social
security contributions are payable on the appreciation in the value of
the options when they are exercised. During the period, no provisions
were necessary.

Financial position
In addition to high organic growth, Observer's growth strategy is based
on acquisitions in new geographic markets. Acquisitions of companies
with strong market positions lead to substantial goodwill. The total
goodwill item on the balance sheet amounts to SEK 2,112.0 million.
Goodwill has increased by SEK 507 million during the year, of which SEK
161 million is due to exchange rate effects. Shareholders' equity
amounted to SEK 1,700.9 million (1,527.4) at the end of the period, or
SEK 30.64 per share (27.52). The debt/equity ratio was 37 percent (6).
Observer's financial position is very good, facilitating a continued
expansion through acquisitions.

Accounting principles
The accounting and valuation methods used to prepare the interim report
are the same as those applied in the annual report 2000. The interim
report has been prepared in compliance with the Swedish Financial
Accounting Standards Council's recommendation RR 20 on Interim Financial
Reporting.

Acquisitions/divestments
In August, Observer acquired two of Canada's leading companies in media
and market monitoring. The acquisitions are Observer's first in North
America. The Canadian operations, which generate a turnover of
approximately SEK 165 million, are consolidated as of September 1.

During the period, Observer also acquired Ireland's leader in the
industry. With the acquisition of News Extracts, Observer now covers all
of English-speaking Europe and can take advantage of synergies within
the British part of the group. News Extracts had a turnover of
approximately SEK 17 million in 2000 and is consolidated as of March 31,
2001.

In early March, Observer acquired Portugal's leader in media and market
monitoring, Memorandum SA. Memorandum is a sophisticated, modern company
with an extensive network of partners in Latin America and Spain. It
reported a turnover of approximately SEK 20 million in 2000 and is
consolidated as of March 2001.

In May, Observer acquired the News Online group, the market leader in
Sweden and Norway in Nordic media data. Its information is available in
the form of online databases, CD-ROM's and printed publications. The
group reported a turnover of approximately SEK 22 million in 2000. The
News Online companies were integrated into the Communication Tools
division in May.

Observer has sold its interest in the jointly owned management and
strategic consultant SMG Consulting. The change in ownership took effect
on March 31.

Outlook
Long-term development potential for Observer's services are good.
Expectations are that Observer will continue to grow faster than the
underlying market and maintain long-term organic growth of 10-15 percent
a year. Efforts to also expand geographically are continuing.

If global political unease continues to increase, Observer's short-term
market prospects will worsen. Furthermore, even greater uncertainty now
prevails regarding the time when a financial upturn can be expected.
Development in the months prior to September 11 and the recovery since
provide some basis for cautious optimism regarding Observer's
development.

With the help of cost cuts, Observer hopes to return as quickly as
possible to a profit level that meets its objective of an operating
margin before goodwill amortization and items affecting comparability of
22 percent.

Stockholm, October 25 2001

Robert Lundberg
President and CEO

Observer AB
Observer's operations are divided into two divisions. The Media
Intelligence division is active in Business and Communication
Intelligence and offers market monitoring and communication evaluations.
It currently operates in the UK, Sweden, Canada, Germany, Norway,
Finland, Denmark, Portugal, Ireland, Estonia, Latvia and Lithuania. A
special marketing unit for multinational clients has been established in
London

The Communication Tools division offers communication tools for clients
primarily in IR and PR. The division builds databases with information
on strategically important target groups in the media and financial
world. Clients are also offered tools and channels for distributing and
publishing business information and evaluating communication activities.
Operations are conducted in the UK, Sweden, Canada, Finland, Denmark,
Germany and Norway.