Knowledge Support

Final Results

Knowledge Support Systems Group Plc
11 March 2002



KSS is a leading supplier of price management and optimisation systems and
services for the petroleum, mass and convenience retail and telecommunications
industries. Organisations use KSS' solutions to enhance the efficiency and
consistency of their pricing processes and to optimise retail prices, leading to
significantly increased revenue and profits. KSS software is available as an
on-site, integrated system or as a managed service, utilising the experience of
the company's pricing consultants. A range of services including opportunity
assessment, implementation, training, consulting and ongoing support are
available from operations in Florham Park, New Jersey, US and Manchester, UK.

Financial Highlights

                                                              31 December 2001           31 December 2000
                                                                            £m                         £m
Turnover                                                                   1.0                        2.8
Operating Expenses excluding exceptionals                                 10.9                        6.6
Exceptional operating costs                                                1.6                          -
Operating loss                                                          (11.3)                      (3.7)
Net interest income                                                        1.7                        1.6
Loss before tax                                                          (9.8)                      (2.1)
Loss after tax                                                           (9.0)                      (2.1)

Basic loss per share                                                  (12.17p)                       (3p)

Net funds                                                                 24.8                       32.5

Operational Highlights

  • New CEO, David Mushin, appointed September 2001 and new management team
    now in place

  • Business review completed H2 2001 resulting in an increased focus on
    petroleum and general retailing sectors

  • Telecommunication business development effort to be conducted through the
    existing distributor, Alcatel

  • Re-structuring and cost reduction program in H2 2001 resulted in
    restructuring charge of £1.6m and reduction in the monthly cash burn rate to
    below the targeted £550,000

  • Major upgrade of Petroleum pricing product following the development and
    release of PriceNet (v3)

  • One major new licence concluded for PriceNet at the end of 2001

  • Three existing Petroleum customers in process of upgrading to PriceNet v3

  • Increasing focus on US market, especially in the Retail market

  • First US licence deal for PriceNet signed post year end

  • US Advisory Board put in place subsequent to year end

  • Development work continues to enhance Retail product, PriceStrat and
    extend functionality to promotions management



David Mushin, Chief Executive Officer Tel: 0161 228 0040

Iain Cockburn, Finance Director

Chairman's statement


The Group achieved a turnover of £1.0m in the 12 months to 31 December 2001
compared to a turnover of £2.8m for the prior year. The loss before tax was
£9.8m compared to £2.1m for the prior year. The Group ended the year with £24.8m
of cash resource down from £32.5m at the beginning of the year.

Board Changes

2001 has seen a significant change in the make up of the Board. As we reported
in our Interim Statement, a number of Board changes took place on 10 September.
The first and most significant was the appointment of David Mushin as Chief
Executive Officer.

On David's appointment I assumed the role of Executive Chairman and John King
retired from the Board after four years of service. Philip Crawford also stepped
down from the Board on 10 September following his appointment to a full-time
executive role elsewhere. On behalf of the Board, I would like to thank both
John and Philip for their valued contribution to the Group.

To strengthen the non-executive team, Jean-Yves Leclerc and Trevor Goul-Wheeker
were appointed to the Board, also on 10 September. Subsequent to the year end,
on 14 January 2002, Trevor Goul-Wheeker was appointed as Deputy Non-executive


Despite the financial disappointments of 2001, I remain encouraged by everything
I am seeing and have confidence in the new management team being led by David
Mushin. David expands on the outlook for the business and associated plans in
his statement.

Chief Executive Officer's statement

2001 has been a disappointing year for the Group from the standpoint of revenue.
However, the information and intelligence that the Group has developed during
the year has strengthened our belief in the business potential for the Group.

In the six months since I joined the Group we have made solid progress in
driving the business forward. I will outline in this statement some of the
initiatives that we have taken and try to convey the reasons for the optimism
that the management team, the staff and I share for the future prospects of the

Fundamentally, we believe that retailers increasingly recognise the need for
intelligence and decision support systems for pricing and revenue management and
are prepared to pay for the right product. We believe that our software products
are able to satisfy this need and will therefore provide the basis for
developing a successful and sustainable business.

Group Strategy

In October, immediately following my appointment, we carried out a review of the
Group's strategy and operations with two primary objectives. The first objective
was to increase our focus on the sectors most likely to produce both short-term
revenue opportunities and longer term market potential. The second objective was
to immediately reduce the Group's monthly cash burn rate to less than £550,000.

The strategic review identified the petroleum and general retail sectors as the
key sectors on which we should focus our business development activities and
resources, with a view to developing and exploring a more comprehensive product
offering over time in these two sectors. I will discuss our activities in these
markets in more detail below.

As a result of this strategic review, we discontinued our direct selling and
marketing activities in the Telecom sector and will instead leverage our
existing distribution arrangement with Alcatel. The headcount reduction arising
from this change, together with aggressive cost reduction in all other areas of
the business, allowed us to successfully reduce our cash burn rate by the end of
2001 to below the targeted £550,000. We believe that while this level is more
aligned to the current activity levels, we can continue to invest in research
and development and customer support efforts in our targeted sectors and

Business Model

In addition to reviewing the strategy and cost base of the Group we have also
made substantive progress in the last six months with improvements to our
business model and general business practices.

Our core strategy in both petroleum and general retail remains a direct sales
model. In addition we continue to engage with, and look for, potential partners
in relevant consulting and technology sectors. We are making an increasing
number of joint sales calls with partners. In addition we exhibited jointly with
SAP at a major US tradeshow and have received leads from two large global
consulting houses.

The sales cycles undertaken during 2001 have confirmed that the typical duration
was considerably longer than had been previously forecast. We continue actively
to manage this cycle time and have recently successfully enhanced our sales
processes and sales management.

With regard to sales cycle times, we are finding that customers are increasingly
willing to recognise that the previous approach of comparative pilot studies do
not provide the optimal way to evaluate our software. We are now focusing on
understanding customers' specific business issues and structuring broader
evaluation studies that are targeted at these issues. The feedback we are
getting from customers confirms that well focused simulations and trial
implementations add more value, use less customer resource and provide greater
opportunity for us to demonstrate ease of use and implementation.

The new sales approach is starting to produce results and indeed has already
yielded success in the form of a recent US deal, signed in February 2002.

At the end of 2001 we began to put in place a US Advisory Board to allow us to
bring strategic, market and technical expertise to bear on our US Retail and
Petroleum operations. We have been successful in attracting very experienced and
respected US executives to help us guide and build our US business. We achieved
the creation of the US Advisory Board in February 2002. I look forward to the
input and direction we will obtain from this group going forward.

We are also having success in establishing a software licensing model which is
scalable and will have a significant element of renewable revenue. We continue
to offer term licences as well as perpetual licences and we link our pricing to
the value received by customers by using numbers and complexity of store sites
as a metric for value. Licence revenue is supplemented by service revenue for
support and maintenance of our software, implementation consulting and other
value-added pricing services.

General Retail

We have identified our primary focus as grocery, convenience retailing
(including c-store operations of petroleum retailers), DIY and drug stores.

Since joining KSS I have spent a considerable amount of time visiting customers
and potential partners in both the UK and the US. Having gained insight first
hand, I am convinced that price and revenue management for retail operators will
be increasingly seen as a critical business application and an important lever
for increasing profits, gaining market share and building customer loyalty in
all segments of retail.

I have also had the opportunity to review our own capabilities and am convinced
that the combination of market need, our experience to date, and our ability to
produce leading solutions to address these needs makes retail a primary focus
for the Group.

In geographic terms we continue to see the US market place as a key market for
KSS due to its size and technological maturity, closely followed by the UK and
the rest of Europe.

As interest in revenue management solutions grows in the retail space,
competition is also emerging. The majority of competitors offer a pricing
service as opposed to a software product. We remain committed to the delivery of
quality on-site solutions that can be efficiently integrated with both
customers' IT systems and pricing business processes.

I have confidence that the experience we have already accumulated and continue
to build on, together with the advanced technology we have developed, provide us
with an effective platform that represents a leading market position.

Review of Operations in the Year

During this past twelve months we have been involved in a small number of
extensive evaluation projects with major grocery operators in both the US and
the UK. This has afforded the opportunity to work closely with world class
retail companies. We have been able to develop important relationships and
validate business requirements to drive our short and long term product
development in a highly customer focused manner.

We continued, most actively in the US, to create and raise awareness of KSS in
this sector that is attracting more and more interest from customers, industry
analysts and other solution and service providers.

Product Development

The experience of the last twelve months has been critical to our understanding
of the market requirements and has been the key driver for extending the focus
of our solution from the optimisation led Market Adaptive Pricing approach to a
broader enterprise-wide Pricing and Revenue Management solution.

As a result, we have made solid progress in broadening the application to
provide analytical support, competitor benchmarking, strategy evaluation and
codification and, importantly, underlying pricing process improvement and

We are currently nearing completion of the next major release of our PriceStrat
product that promises a significant advance in scalability and ease of use as
well as more efficient implementation and systems integration. We are also
progressing well with additional modules to address important functionality such
as promotions pricing management .

This version is taking advantage of Microsoft's new .NET environment to provide
a very efficient platform for the development of large scale, multi-tier and
multi-user applications.


Further success and expansion of the Group's business in petroleum pricing have
highlighted the market opportunities in this sector and improved the
capabilities of our product. We have a leading solution and an increasing
reference base.

The competitive and operational pressures facing petroleum retailers continue to
grow. As margins erode due to competition from sources such as supermarkets and
hypermarkets the need for intelligent pricing solutions to leverage the
particular attributes of a site or an entire network is increasing.
Consolidation of petroleum retailers is leading to larger and more complex
networks, often containing multiple brands.

Experience from both the US and other global markets stresses the need for fast,
flexible and highly automated pricing solutions - leaving pricing personnel free
to analyse the markets and activities of competition, as opposed to manipulating
large quantities of data in order to reach a pricing decision.

We find increasing interest for our PriceNet solution in many sectors of
retailers, from large multi-national oil companies to smaller national retail
chains. This interest is fairly consistent across all geographic markets,
especially where petroleum pricing is not highly regulated. Our key areas of
geographic focus continue to be Europe, the US and Australia.

Competition in the petroleum sector for our petroleum pricing solution continues
to be limited and comes mainly from customers' in-house developed solutions. The
majority of these solutions feature price administration and management but few
have strong optimisation or analytical capabilities and, in our opinion, none
has optimisation features that are as effective as PriceNet. The existence of
in-house solutions has been one of the drivers to expand the price
administration and management footprint of PriceNet in order to provide
customers with a viable and complete 'off-the-shelf' alternative to their
in-house systems.

Review of Operations in the Year

Following the release of PriceNet Version 3 in the second half of 2001, we have
seen a significant increase in interest in our product.

At the end of 2001 we signed a licence contract with the fourth subsidiary of
the multi-national fuels retailer with whom we signed a global purchasing
agreement in March 2000. The implementation of PriceNet at that subsidiary
commenced in the first quarter of 2002.

In addition, we are in the process of upgrading PriceNet to Version 3 in several
existing licensees, a move that will strengthen our references within the
respective groups.

Subsequent to the end of the year we were able to announce the signature of our
first breakthrough US deal and can report that we are in serious discussions
with a number of other US operators.

Product Development

The major product development milestone for 2001 was the release of PriceNet
Version 3. This provides a step change in the operability and scalability of our
product as well as the promise of more efficient implementation and systems

We have expanded the price management, administration and management reporting
features of the product in response to requests from customers and potential
customers. Whilst PriceNet still provides the same powerful optimisation
capabilities, with the new functionality and architecture we are able to provide
a more flexible and well-rounded pricing solution. We will continue to expand
this functionality and by doing so be able to offer a modular pricing solution
that can, if required, be used as a total pricing solution.

The new levels of automation, brought about by using the very latest Microsoft
software architectures, have already proven themselves in one of the most
volatile markets in the world where a customer will be using PriceNet to support
up to four price cycles per day, seven days per week.


2001 has been a very difficult year for the telecommunications sector. The
pricing issues and challenges faced by this sector have been undergoing
significant change. As a result we have elected to focus our telecommunications
efforts on the development of product in line with requirements being generated
from existing licences and being channelled to KSS though our exclusive
distribution agent, Alcatel.

We will review our opportunities within the telecommunications sector again at
an appropriate time.

Management & Staff

The Group has a strategy to attract, retain and motivate high quality staff. All
employees have an interest in shares through shareholdings or options. The Board
believes in the importance of employee share ownership and is reviewing the
share schemes to support this policy.

I would like to take this opportunity to thank all employees for their
commitment and considerable effort in what has been a very challenging year.


I am confident that 2002 will provide the opportunity to demonstrate solid
progress for the Group and am committed to making significant strides towards
building shareholder value. The market need and opportunity for the Group's
revenue management solutions is developing and growing. The Group's products and
product vision continue to evolve to meet the developing market requirements.
The Group is well funded, ensuring confidence on the part of potential customers
and partners as well as providing the opportunity to make strategic investments
should they be required. I anticipate that we will continue to win new customers
as well as gain additional business with existing customers and that we will
enter 2003 well positioned to reach a break-even run rate by the end of that

Finance Director's Review

Profit & Loss Account

Operating expenses increased to £12.5m for the year compared to £6.6m for the
prior year. Included in the operating expenses for the year was an exceptional
charge of £1.6m relating to the restructuring exercise that took place in
October 2001 following the strategic review.

The £1.6m restructuring charge included redundancy costs, including National
Insurance and other related costs of £0.4m, provisions against surplus assets
and losses on disposal of assets of £0.7m and a provision of £0.5m for rent,
rates and service charges in respect of office space vacated in the Manchester
offices. Efforts are underway to sub-lease this space.

After adjusting the total operating expenses for the year to reflect the
exceptional charge, the increase in operating expenses, excluding exceptionals,
from £6.6m in 2000 to £10.9m in 2001, can be attributed to an increase in
headcount during the second half of 2000 and the first quarter of 2001.

Interest income for the year was £1.5m compared to £1.6m for the previous year.
The income was derived from the investment of surplus funds in various money
market funds and cash deposits at annual rates varying between 3.8% and 6.2%.
The average rate of return on invested cash was 5.3% compared to 6.0% in the
previous year.

The Group incurred no charge to UK taxation due to trading losses. The tax
credit of £0.8m represents claims for tax repayments on qualifying spend in
relation to research and development.

The loss of 12.17p per share is calculated using an average of 73.9m shares
(2000: 69.6m shares).

Cash Flow and Net Funds

The decrease in net funds in the year was £7.7m. The net cash outflow from
operating activities was £8.6m compared to £4.2m in the prior year, primarily
reflecting the higher operating expenses.

Capital expenditure for the year was £0.8m compared to £1.9m in the prior year.
The majority of capital expenditure in 2001 related to the establishment of the
US office in Florham Park, New Jersey.

The net funds at the end of the year were £24.8m compared to £32.5m at the start
of the year. This balance is more than sufficient to meet the Group's operating
requirements and provides us with flexibility should the need to make
acquisitions or other strategic investments arise.

Treasury function

The Group's treasury function is primarily charged with managing the exchange
rate and interest rate exposures of the Group whist ensuring that surplus funds
are invested to best support the Group's cash needs. The treasury policies are
regularly discussed at Board Meetings and decisions are implemented by the
Finance Director. The Group's treasury function is not permitted to enter into
any transactions of a speculative nature.

The Group's policy is to limit its exposure to interest rate fluctuations by
placing the surplus cash on the money markets with investment maturities varying
to reflect working capital needs and market conditions.

The Group uses forward foreign exchange contracts to manage currency risk on
known and committed third party trade receivables and payables. Further details
of the year end position are given in Note 27.

The Group transfers money to fund its US Operations on a weekly basis. As the
investment in the US operations increases and the cash flow profile changes, it
will be necessary to review the impact of movements in the US Dollar/Sterling

Iain Cockburn

Finance Director

Consolidated profit and loss account

for the year ended 31 December 2001
                                                        2001                             2000
                                               £              £                  £              £

Turnover from continuing operations                           1,020,520                         2,803,736
Cost of sales                                                 (163,521)                         -
                                                              _______                           _______
Gross profit                                                  856,999                           2,803,736

Administrative expenses:
Exceptional costs                              (1,552,693)                       -
Other costs                                    (10,897,357)                      (6,553,077)
                                               ________                          ________
                                                              (12,450,050)                      (6,553,077)
Other operating income                                        330,783                           21,167

Operating loss from continuing operations                     (11,262,268)                      (3,728,174)

Interest receivable                                           1,493,712                         1,617,325
Interest payable                                              -                                 (5,731)

Loss on ordinary activities before taxation                   (9,768,556)                       (2,116,580)

Taxation on loss on ordinary activities                       772,189                           -

Loss for the year transferred to reserves                     (8,996,367)                       (2,116,580)

Loss per ordinary share - basic                               (12.17)p                          (3.0)p

Loss per ordinary share - diluted                             (12.17)p                          (3.0)p

There were no material differences between the reported profits and historical
cost profits on ordinary activities before taxation in either of the above
financial years.

Consolidated balance sheet

at 31 December 2001
                                                          2001                               2000
                                           £                  £               £                 £
Fixed assets
Intangible asset                                              4                                 4
Tangible assets                                               1,020,865                         1,864,674

                                                              1,020,869                         1,864,678
Current assets
Debtors                                    1,889,474                          2,000,172
Investments                                23,706,582                         32,114,215
Cash at bank and in hand                   1,161,262                          419,513

                                           26,757,318                         34,533,900
Creditors: amounts falling                 (1,260,697)                        (1,383,209)

due within one year                                                           

Net current assets                                            25,496,621                        33,150,691

Total assets less current liabilities                         26,517,490                        35,015,369

Creditors: amounts falling due after
more than one year                                            (48,835)                          (83,747)

Provisions for liabilities and charges                        (547,363)                         -

Net assets                                                    25,921,292                        34,931,622

Capital and reserves
Called up share capital                                       148,014                           147,698
Share premium account                                         37,370,135                        37,350,013
Profit and loss account                                       (11,596,857)                      (2,566,089)

Equity shareholders' funds                                    25,921,292                        34,931,622

Consolidated cash flow statement

for the year ended 31 December 2001

                                                                           2001              2000
                                                                              £                 £
Net cash outflow from continuing operating activities               (8,631,206)       (4,164,678)

Returns on investments and servicing of finance
Interest received                                                     1,690,235         1,374,688
Interest paid                                                                 -           (5,731)

Net cash inflow from returns on investments and servicing of
finance                                                               1,690,235         1,368,957

Taxation paid                                                          (10,357)                 -

Capital expenditure
Purchase of tangible fixed assets                                     (778,121)       (1,863,603)
Proceeds from sale of tangible fixed assets                              21,439             1,026

Net cash outflow from capital expenditure                             (756,682)       (1,862,577)

Cash outflow before management of liquid resources and
financing                                                           (7,708,010)       (4,658,298)

Management of liquid resources
Decrease/(increase) in short-term deposits                            1,907,433      (23,379,524)
Purchase of shares held in money market                             (3,000,000)      (12,484,811)
Sale of shares held in money market                                   9,500,200         3,750,120

                                                                      8,407,633      (32,114,215)

Cash inflow/(outflow) before financing                                  699,623      (36,772,513)

Proceeds from issue of ordinary share capital                            20,438        40,000,000
Share issue costs charged to share premium account                            -       (3,190,836)

Repayment of loan                                                             -          (73,097)
Net cash inflow from financing                                           20,438        36,736,067

Increase/(decrease) in cash in the year                                 720,061          (36,446)

Consolidated statement of total recognised gains and losses

for the year ended 31 December 2001

                                                                            2001              2000
                                                                               £                 £

Loss attributable to members of the company                          (8,996,367)       (2,116,580)
Exchange translation differences                                        (34,401)          (12,375)

Total recognised gains and losses for the year                       (9,030,768)       (2,128,955)

Reconciliation of movements in shareholders' funds

for the year ended 31 December 2001

                                                Group                                    Company
                                    2001                 2000                 2001                 2000
                                    £                    £                    £                    £

(Loss)/profit for the financial     (8,996,367)          (2,116,580)          3,206,138            -
Net proceeds from issue of shares   20,438               36,809,163           20,438               36,809,163

                                    (8,975,929)          34,692,583           3,226,576            36,809,163
Exchange translation difference     (34,401)             (12,375)             -                    -

Net (reduction in)/addition to
shareholders' funds                 (9,010,330)          34,680,208           3,226,576            36,809,163
Opening shareholders' funds         34,931,622           251,414              37,500,511           691,348

Closing shareholders' funds         25,921,292           34,931,622           40,727,087           37,500,511

Notes to the preliminary results for the year ended 31 December 2001

1 Basis of reporting

        This preliminary statement of annual results which covers the year to 31
        December 2001 has been agreed by the Group's auditors and is consistent
        with the full financial statements.

        The abridged preliminary Group accounts for the year ended 31 December
        2001 are not statutory accounts and have been extracted from the full
        statutory accounts for the year ended 31 December 2001. The full
        statutory accounts for the year on which the auditors report is
        unqualified will be delivered to the Registrar of Companies in due

2 Analysis of turnover and loss on ordinary activities before taxation

        All turnover and results are derived from the Group's principal

        Analyses of operations by geographical origin, customer location and
        type of activity are shown below:

        Turnover by geographical origin

                              2001                                          2000
           Turnover      (Loss)/profit     Net assets      Turnover      Loss before    Net assets
                          before tax                                         tax
               £               £                £              £              £              £

UK           1,012,744      (10,572,994)      25,351,946     2,803,736     (1,634,519)    34,704,160
US               7,776           804,438         569,346             -       (482,061)       227,462

Total        1,020,520       (9,768,556)      25,921,292     2,803,736     (2,116,580)    34,931,622

        Turnover by customer location

                                             2001                2000
                                             £                   £

United Kingdom                               84,152              794,080
Rest of Europe                               454,856             1,383,185
Other                                        481,512             626,471

                                             1,020,520           2,803,736

2 Analysis of turnover and loss on ordinary activities before taxation

        Turnover by activity

                                             2001                2000
                                             £                   £

Marketing rights                             -                   800,000
Licences                                     618,866             1,049,919
Royalties                                    -                   179,000
Maintenance income                           158,412             99,920
Professional services                        243,242             674,897

                                             1,020,520           2,803,736

3 Earnings per share

        Losses and number of shares used in the calculations of loss per
        ordinary share are set out below:

                                                                       2001              2000
                                                                          £                 £

Loss after tax                                                  (8,996,367)       (2,116,580)

                                                              No. of shares     No. of shares
Weighted average number of shares                                73,942,679        69,565,033

Loss per share                                                     (12.17)p            (3.0)p
                                                                       2001              2000
                                                                          £                 £

Loss after tax                                                  (8,996,367)       (2,116,580)

                                                              No. of shares     No. of shares
Weighted average number of shares - basic                        73,942,679        69,565,033
Weighted average effect of share options*                                 -         1,513,577

Weighted average effect of shares - diluted                      73,942,679        71,078,610

Loss per share                                                     (12.17)p            (3.0)p

4 Reconciliation of operating loss to net cash flow from operating activities

                                                                   2001              2000
                                                                      £                 £
Operating loss                                             (11,262,268)       (3,728,174)
Depreciation                                                    848,973           375,325
Loss/(profit) on sale and impairment of fixed assets            655,019             (554)
Decrease /(increase) in debtors                                 796,231       (1,399,956)
Increase in creditors                                           330,839           588,681

Net cash outflow from operating activities                  (8,631,206)       (4,164,678)

5 Reconciliation of net cash flow to movement in net funds

                                                                       2001             2000
                                                                          £                £
Increase/(decrease) in cash in the year                             720,061         (36,446)
Cash flow from decrease in debt                                           -           73,097
Cash inflow from decrease/(increase) in liquid resources        (8,407,633)       32,114,215

Change in net funds resulting from cash flows                   (7,687,572)       32,150,866

Movement in net funds / (debt) in the year                      (7,687,572)       32,150,866
Net funds at the start of the year                               32,512,560          361,694

Net funds at the end of the year                                 24,824,988       32,512,560

6 Analysis of net funds

                                 At 31 December      Cash flows    At 31 December
                                           2000                              2001
                                              £               £                 £

Cash                                    419,513         741,749         1,161,262
Overdrafts                             (21,168)        (21,688)          (42,856)


Current asset investments            32,114,215     (8,407,633)        23,706,582

                                     32,512,560     (7,687,572)        24,824,988

7 Taxation

                                          2001                2000
                                          £                   £

Current year:
Foreign taxation                          (43,062)            -
Research & development tax credit         490,618             -

Prior years:
Foreign taxation                          (10,357)            -
Research & development tax credit         334,990             -


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