SSH COMMUNICATIONS SECURITY CORP Stock Exchange Release April 20, 2004, at 9:00 a.m. SSH'S INTERIM REPORT FOR JANUARY 1 - MARCH 31, 2004 - Net sales for January-March totaled EUR 1.7 million, down 53 percent year on year (EUR 3.6 million in Q1/2003). - Compared to the net sales of products belonging to the SSH Tectia(TM) solution net sales fell by 14 per cent year on year. - Due to the slower than expected progress of customer projects SSH lowers its revenue estimation for the whole year 2004 to be between EUR 10 million and EUR 12 million. - The merger of Applied Computing Research (ACR) Oy, the parent company, with SSH will streamline SSH's corporate structure. - Since the beginning of 2004, SSH has applied the International Financial Reporting Standards (IFRS), instead of the Finnish Accounting Standards. The adoption of IFRS has had no material effect on SSH Group's financial information. KEY FIGURES 1-3/ 1-3/ 1-12/ 2004 2003 2003 Net sales, EUR million 1.7 3.6 13.9 Net sales, change % -53.4 -18.2 -17.6 Operating profit/loss, 5.2 EUR million -2.1 -1.9 % of net sales -126.8 -54.7 37.5 Operating profit/loss, 136.9 change % -8.0 -30.4 Profit/loss before 5.5 extraordinary items and taxes, EUR million -2.0 -2.1 % of net sales -123.0 -59.7 40.0 Number of employees 104 at period-end 106 140 Earnings per share, EUR -0.07 -0.08 0.20 Equity per share, EUR 1.40 1.23 1.48 NET SALES Consolidated net sales for January-March totaled EUR 1.7 million (EUR 3.6 million). Compared to the net sales of products belonging to the SSH Tectia solution net sales fell by about 14 per cent year on year. This change in the first-quarter net sales was due to the slower than expected progress of large customer projects. Also customer deliveries of the new versions of the SSH Tectia Manager and SSH Tectia Connector products, integral to the SSH Tectia solution, did not take place until the end of February. A number of customers postponed their launch of product tests, which rescheduled the conclusion of agreements until a later date. RESULTS AND EXPENSES SSH reported an operating loss of EUR -2.1 (a loss of EUR 1.9 million) for the first quarter, which is more or less at the previous year's level, while showing a net loss of EUR -2.0 million (a loss of EUR 1.9 million). The company's first-quarter cost structure did not include any exceptional non-recurring expenses or any other changes due to seasonal fluctuations. SSH's reported fixed costs continued their decline year on year. The first-quarter results for 2003 were still burdened by the costs resulting from the Kuopio office and its closure, as well as those stemming from the OEM business. Year on year, fixed costs for the first quarter decreased by around EUR 1.2 million, half of this figure coming from payroll expenses and half from other operating expenses. Compared with Q4/2003, fixed costs dropped by around EUR 0.6 million. Research and development expenses for the period totaled EUR 1.0 million (EUR 1.7 million), while sales and marketing expenses came to EUR 2.0 million (EUR 2.5 million) and administrative expenses amounted to EUR 0.7 million (EUR 0.9 million). BALANCE SHEET AND FINANCIAL POSITION The consolidated balance sheet total on March 31, 2004 stood at EUR 41.6 million (EUR 38.0 million), of which liquid assets accounted for EUR 34.9 million (EUR 31.1 million), or 83.9 percent of the balance sheet total. The Group has no long-term liabilities other than the subordinated loan of EUR 0.2 million granted by the National Technology Agency (Tekes). Gearing, or the ratio of net liabilities to shareholders' equity, was -88.1 (-90.6) at the end of the first quarter. Equity ratio on March 31, 2004 stood at 96.0 percent (92.9 percent). Reported gross capital expenditure totaled EUR 0.1 million (EUR 0.2 million), consisting mainly of software investments. Reported financial income consisted of interest income. Financial income and expenses totaled EUR 0.1 million, whereas a year ago they amounted to EUR -0.2 million. Since SSH, under IAS 39, classifies financial assets and other similar assets as available-for-sale assets, it recognizes changes in their value under shareholders' equity. Only after the sale of an asset, the company recognizes interest income in the income statement. During the report period, the company recognized an increase of EUR 0.2 million in the value of its financial assets. Business operations for the period showed a negative cash flow of around EUR 1.9 million, resulting in a negative total cash flow of approximately EUR 1.8 million. Since cash flow from investments and financing has only a minor impact on total cash flow, cash flow from business operations must turn positive so that the company's total cash flow also turns positive. MARKET DEVELOPMENTS During the period, there were signs of a cautious recovery in IT investments, especially when it came to the number of projects pending. SSH's customers became more active in submitting tenders and launching SSH Tectia product tests, although the conclusion of actual contracts was a slow process. The SSH Tectia solution's customers include large enterprises, financial institutions, and government agencies. The sales process of a system-level product for major customers has lengthened as expected, while the average size of contracts has grown. The number of companies actively testing new data security solutions increased in North America, SSH's main market area, the demand being mainly focused on the solutions for secure remote management of network servers and various kinds of data communication equipment. Currently being tested by more than 30 customers, the new SSH Tectia Manager product, which enables centralized management, was well received in the market. First two customers have already signed the licensing agreements. European customers continued to show increasing interest in user authentication solutions, based on Public Key Infrastructure (PKI), during the first quarter. Government agencies, in particular, showed increasing interest in SSH Tectia during the report period. For SSH, the most interesting markets in Europe include Germany, Great Britain and the Nordic countries. SSH's Asian customers were primarily interested in the secure remote management of traditional network servers and various kinds of data communication equipment. Both in the US and Europe, markets for secure remote management solutions were occasionally characterized by bitter price competition. SSH is the world's leading supplier of Managed Security Middleware solutions and SSH's new, centrally managed SSH Tectia solution provides the company with a strong competitive position particularly among large enterprises, financial institutions, and government agencies. SALES PERFORMANCE NET SALES EUR million 1-3/ 10-12/ 7-9/ 4-6/ 1-3/ 1-12/ 2004 2003 2003 2003 2003 2003 BY SEGMENT * AMER 1.0 1.6 1.2 1.8 2.0 6.5 APAC 0.2 0.5 0.7 0.7 0.3 2.2 EROW 0.5 0.8 1.4 1.6 1.3 5.1 SSH Group total 1.7 2.9 3.3 4.1 3.6 13.9 SSH TECTIA BUSINESS Net sales** 1.7 2.3 1.6 2.5 1.9 8.3 * The figures for 2003 by segment are not fully comparable with those for 2004 because they also include the OEM business divested in Q4/2003. ** SSH Tectia solution was launched during the last quarter in 2003. The net sales figures of previous quarters includes the net sales of those products that were integrated as part of the SSH Tectia solution. Americas, Asia Pacific, and Europe and Rest of the World accounted for 59.1 percent (54.8 percent), 9.2 percent (8.7 percent) and 31.7 percent (36.5 percent) of reported net sales, respectively. The US continued to strengthen its position as SSH's main market area during the report period. Asia Pacific and Europe and Rest of the World experienced a decrease in their share of net sales year on year, as a result of the divestment of the OEM business. SSH is currently taking measures to reshape and reinforce its sales organization for SSH Tectia in these market areas. Net sales generated by the products belonging to the SSH Tectia solution fell slightly from the levels reported for Q4/2003 and Q1/2003. During the first quarter, SSH concluded one customer agreement worth over EUR 100,000. SSH's ten largest customers accounted for 39.1 percent of reported net sales. The share of the largest customer was about 12 percent from the net sales, so the company does not depend on one single customer. PRODUCTS AND MARKETING In line with its long-term strategy, SSH continued to focus its sales and marketing efforts with regard to serving large enterprises, financial institutions, and government agencies in the US, Europe and Asia. Its first-quarter marketing focus was on special SSH Tectia workshops for potential customers in the USA, Great Britain and Finland, organized by SSH alone or together with its partners. In addition, the company exhibited at major trade fairs in both the US and Europe. The third consecutive data security workshop organized by SSH, F- Secure and Stonesoft in February, was attended by approximately 800 industry decision-makers and experts. This annual workshop has emerged as one of the largest data security events held in Finland, with this year's partners including Elisa, Finnet, Fujitsu, IBM, Microsoft, Netsol, Nixu, TeliaSonera and TietoEnator. In February, SSH announced that it had joined the Entrust TrustedPartner Program, launched by Entrust, Inc., a US company. Through this strategic relationship with Entrust, Inc., the SSH Tectia product family will be reviewed for compatibility and interoperability with the Entrust PKI-based solutions, paving the way for SSH Tectia's more effective sales and marketing using Entrust's broad customer base. From SSH's point of view the relevant data security markets can be roughly divided into three application areas - encryption of data communications, secure remote management, and public key infrastructure. According to SSH's estimation, the size of the market where SSH operates, is about EUR 250 million in 2004. The estimation is based on the reports of international market research agencies and SSH's own estimations. RESEARCH AND DEVELOPMENT January-March R&D expenses came to EUR 1.0 million (EUR 1.7 million), accounting for 62.8 percent of net sales (47.3 percent). The main reason for this substantial decline was due to the divestment of the OEM business in October 2003. The fact that the company closed its Kuopio office and concentrated its product development resources on its Helsinki site in Q1/2003 also had an effect on lower R&D expenses. In accordance with IAS, SSH capitalizes only product development expenses caused by the commercialization of new products at the end of R&D processes. Such R&D expenses incurred in Q1/2004 totaled EUR 0.05 million. These capitalized expenses related to the commercialization of the new SSH Tectia Manager solution. SSH will continue to charge the majority of its R&D as expenses. At the end of March, the company held nine patents while 18 were pending. HUMAN RESOURCES AND ORGANIZATION During the first quarter, SSH reinforced its sales organizations in the US west and east coasts, and Great Britain. At the end of March, the Group had 106 employees on its payroll. The number of employees decreased by 34 over the previous year (-24.3 percent). At the end of the period, 44.4 percent of the personnel worked in R&D, 37.8 percent in sales and marketing, and 17.8 percent in administration. SHARES, SHAREHOLDING AND CHANGES IN THE GROUP STRUCTURE The reported trading volume of SSH Communications Security Corp shares for the period totaled 3,764,650 (valued at EUR 8,534,607.49), i.e. 13.4 percent of the shares changed hands. The highest quotation for the period was EUR 2.69 and the lowest EUR 1.69. The trade-weighted average price for the period amounted to EUR 2.27, and the share closed at EUR 1.90 (on March 31, 2004). There were no substantial changes in SSH Communications Security Corp's shareholding during the report period. Applied Computing Research (ACR) Oy holds 60.4 percent of the company's shares. In March, the company announced that the Board of Directors of SSH and Applied Computing Research (ACR) had signed a merger agreement whereby ACR would merge with SSH. With implementation of the merger, SSH shall issue for the current shareholders of ACR Mr. Tatu Ylönen and Mr. Tero Kivinen 16,942,487 new shares of SSH as a consideration of the merger. The amount of these shares equals to the amount of shares of SSH currently owned by ACR. The assets and liabilities of the company being acquired are transferred in the merger without liquidation procedure to the acquiring company. The Board of Directors of SSH has decided to propose to the Annual General Meeting of shareholders that these shares shall be nullified. The key objective of this merger is to streamline the corporate structure and enhance the transparency of SSH's shareholding. The plan is to implement the merger on October 31, 2004. SHARE CAPITAL AND BOARD AUTHORIZATIONS The company's registered share capital on March 31, 2004 came to EUR 841,974.30, consisting of 28,065,810 shares. The report period saw share capital increase, based on the subscription of the new shares under SSH's stock-option scheme. On the basis of the 1999 stock-option scheme, a total of 330,000 new SSH shares were subscribed, with the result that the company's share capital increased by EUR 9,900. SSH's Annual General Meeting of April 29, 2003 authorized the Board to decide by April 29, 2004 to increase share capital through a rights issue and/or grant stock options or issue bonds with warrants, or convertible bonds, in such a way that the resultant share capital may increase by a maximum of EUR 120,000. The authorization has not been used. The AGM approved SSH's new stock-option schemes. On the basis of the stock-option scheme I/2003, the company may offer its personnel a maximum of 625,000 stock options. Each stock option entitles the holder to subscribe for one SSH Communications Security Corp share, at a nominal value of 3 cents. Depending on the type of warrant, the subscription period will begin in several tranches, on May 1, 2004, May 1, 2005, May 1, 2006, and end on May 1, 2009, for all stock options. The share subscription price is the closing price of SSH shares, as quoted in continuous trading on the Helsinki Exchanges on May 6, 2003, plus 10 percent, and rounded upwards to the nearest cent (EUR 0.87). As a result of these subscriptions, the company's share capital may increase by a maximum of EUR 18,750. On the basis of the II/2003 stock-option scheme, SSH may offer its personnel in the USA a maximum total of 75,000 stock options. Each stock option entitles the holder to subscribe for one SSH Communications Security Corp share, at a nominal value of 3 cents. Depending on the type of warrant, the subscription period will begin in several tranches, on May 1, 2004, May 1, 2005, May 1, 2006 and May 1, 2007, and end on April 29, 2013, for all stock options. The share subscription price is the closing price of SSH shares, as quoted in continuous trading on the Helsinki Exchanges on May 6, 2003, plus 10 percent, and rounded upwards to the nearest cent. As a result of these subscriptions, the company's share capital may increase by a maximum of EUR 2,250. PROSPECTS During 2004, SSH will place particular emphasis on expanding its SSH Tectia business and catering for the needs of the company's selected customer segments: large enterprises, financial institutions, and government agencies. It will reinforce its sales organizations in its key markets in the US east coast, Great Britain and Germany. It will also upgrade product development and customer service in Finland. The company will continue to develop new forms of cooperation with its current customers. Ready to strengthen its position in all of its markets, SSH is geared up for sharp competition. Despite the subtle signs of optimism, markets are still looking challenging for 2004. Customers will remain very careful with their investment decisions, and will tend to split their larger IT investments into smaller sub-projects. However, as markets continue to perk up and customer companies put their investments into action, SSH will retain a sound basis for increasing its net sales. Due to the slower than expected progress of customer projects SSH lowers its revenue estimation for the whole year 2004 to be between EUR 10 million and EUR 12 million (previous estimation was between EUR 14 million and EUR 16 million). The company's management expects that the SSH Tectia solution, including the new products SSH Tectia Manager and SSH Tectia Connector, which were well received by the markets, will make it possible to increase the average size of contracts while contributing to reaching the new revenue target. The amount that the net sales and operating results fell behind the estimations during Q1/2004 cannot be recovered during the remainder of the year. Thus the company's management estimates that the operating results for the full fiscal year 2004 will be negative. The predicted net sales and operating results depend on how well the SSH Tectia solution will sell and how SSH will succeed in reinforcing its sales organization. The company aims to be the leading supplier of Managed Security Middleware for large enterprises, financial institutions, and government agencies. ACCOUNTING PRINCIPLES This interim report is based on accounting principles and policies under IAS 34 (Interim Reports). 'Key accounting principles and their changes, and their effects on comparatives' later in this section will describe the effects of the adoption of IFRS. INCOME STATEMENT EUR million 1-3/ 1-3/ 1-12/ 2004 2003 2003 Net sales 1.7 3.6 13.9 Purchasing and production 0.0 -0.7 -2.5 costs Gross profit 1.6 2.9 11.3 Other operating income 0.0 0.2 11.3 Expenses Product development -1.0 -1.7 -5.2 Sales and -2.0 -2.5 -9.6 marketing Administration -0.7 -0.9 -2.6 Operating profit/loss -2.1 -1.9 5.2 Financial income and expenses 0.1 -0.2 0.4 Profit/loss before taxes -2.0 -2.1 5.5 a Taxes* 0.0 0.0 0.0 Net profit/loss for the 5.5 period -2.0 -2.1 * Taxes are proportionate to the net profit/loss for the period, and no deferred tax assets are recorded for the accrued loss during the period. 1-3/ 1-3/ 1-12/ 2004 2003 2003 Earnings per share, EUR -0.07 -0.08 0.20 Earnings per share (diluted), 0.20 EUR -0.07 -0.09 BALANCE SHEET EUR million 31.3. 31.3. 31.12. 2004 2003 2003 ASSETS Fixed and other non-current assets Intangible 1.2 0.6 1.2 assets Tangible 0.5 0.9 0.5 assets Deferred tax assets 0.2 0.2 0.2 Inventories 0.0 0.8 0.0 Current assets Accounts receivable 5.2 and other receivables 4.7 4.4 b Short-term investments 33.4 27.0 33.8 Cash and cash equivalents 1.5 4.1 2.9 Total assets 41.6 38.0 43.8 LIABILITIES AND SHAREHOLDERS' EQUITY Shareholders' equity 39.4 34.0 41.1 Long-term liabilities 0.3 0.2 0.2 Short-term liabilities 1.8 3.8 2.4 Deferred tax liability 0.1 0.0 0.0 Total liabilities and 43.8 shareholders' equity 41.6 38.0 STATEMENT ON CHANGES IN SHAREHOLDERS' EQUITY EUR million Share Issue Revalu Transl Retained Tot. capit premium ation ation earnings al fund fund differ ence Shareholders' 0.8 53.0 0.0 -0.3 -17.5 36.0 equity Jan. 1, 2003 Change 0.0 0.0 0.2 0.0 -2.1 Shareholders' 0.8 53.0 0.2 -0.3 -19.6 34.0 equity March 31, 2003 Change 0.0 -13.6* 0.0 -0.1 21.0* Shareholders' 0.8 39.4 0.0 -0.4 1.4 41.2 equity Dec. 31, 2003 Change 0.0 0.0 0.2 0.0 0.0 Net profit -2.0 Shareholders' 0.8 39.4 0.2 -0.4 -0.6 39.4 equity March 31, 2004 * Share premium fund has been lowered by the transfer to the retained loss. CASH FLOW STATEMENT EUR million 1-3/ 1-3/ 1-12/ 2004 2003 2003 Cash flow from business operations -1.9 -3.7 3.2 Cash flow from investments 0.0 -0.2 -1.1 Cash flow from financing 0.1 0.0 0.0 Change/increase(+), decrease (-) -1.8 -3.8 2.2 in liquid assets Liquid assets at period-start 36.7 34.7 34.7 c Liquid assets at period-end 34.9 31.0 36.7 c) Liquid assets consist of cash and cash equivalents, as well as other marketable securities. NET SALES BY SEGMENT EUR million 1-3/ 1-3/ 1-12/ 2004 2003 2003 AMER 1.0 2.0 6.5 APAC 0.2 0.3 2.2 EROW 0.5 1.3 5.1 SSH Group total 1.7 3.6 13.9 OPERATING PROFIT/LOSS BY SEGMENT EUR million 1-3/ 1-3/ 1-12/ 2004 2003 2003 AMER 0.1 0.3 1.0 APAC 0.1 -0.1 0.7 EROW -0.2 0.4 11.3 Common Group expenses* -2.1 -2.5 -7.8 SSH Group total -2.1 -1.9 5.2 * Common Group expenses include the Group's administration expenses (e.g. Management, Finance) and the headquarters' Product Management and R&D expenses. The profit from the sale of the OEM business has been divided into the segments. KEY FIGURES AND RATIOS 1-3/ 1-3/ 1-12/ 2004 2003 2003 Net sales, MEUR 1.7 3.6 13.9 Operating profit/loss, MEUR -2.1 -1.9 5.2 Operating profit/loss, % of net -126.8 -54.7 37.5 sales Profit/loss before extraordinary -2.0 -2.1 5.5 items and taxes, MEUR Profit before extraordinary -123.0 -59.7 40.0 items and taxes, % of net sales Profit/loss before taxes, MEUR -2.0 -2.1 5.5 Profit/loss before taxes, -123.0 -59.7 40.0 % of net sales Return on investment, % 15.0 Return on equity, % 14.4 Interest-bearing net -34.7 -30.6 -36.5 liabilities, MEUR Equity ratio, % 96.0 92.9 94.7 Gearing, % -88.1 -90.6 -88.7 Gross capital expenditure, MEUR 0.1 0.2 0.8 % of net sales 4.0 4.5 6.2 R&D expenses, MEUR 1.0 1.7 5.2 % of net sales 62.8 47.3 37.4 Personnel, on average 106 144 131 Personnel, period-end 106 140 104 PER-SHARE DATA 1-3/ 1-3/ 1-12/ 2004 2003 2003 Earnings per share -0.07 -0.08 0.20 EUR (undiluted) Earnings per share, EUR -0.07 -0.09 0.19 (diluted) Equity/share, EUR 1.40 1.23 1.48 No. of shares at period-end, 28 066 27 726 27 736 1,000 Share performance, EUR Average price 2.27 0.74 1.31 Low 1.69 0.61 0.61 High 2.69 0.93 2.36 Share price at period-end 1.90 0.69 1.70 Market capitalization at period- 53.3 19.1 47.2 end, MEUR Volume of shares traded, 3.8 1.3 7.6 million Volume of shares traded, 13.4 4.7 27.5 % of total Value of shares traded, MEUR 8.5 1.0 10.0 Price-earnings ratio (P/E) 8.35 CONTINGENT LIABILITIES EUR million 31.3./ 31.3./ 31.12./ 2004 2003 2003 Rental liabilities 0.2 0.8 0.2 Leasing liabilities 0.2 0.3 0.2 Other contingent liabilities 2.4 2.4 Currency derivatives (not 2.0 2.0 included in the hedging calculations) The data are based on unaudited figures. KEY ACCOUNTING PRINCIPLES AND THEIR CHANGES, AND THEIR EFFECTS ON COMPARATIVES (FINNISH ACCOUNTINGS STANDARDS VS. IFRS) 1. RECONCILIATION OF NET PROFIT/LOSS EUR million FAS CHANG IFRS FAS CHANG IFRS 1-3/ E 1-3/ 1-12/ E 1-12/ 2003 2003 2003 2003 Net sales 3.6 3.6 13.9 13.9 Purchasing and -0.7 -0.7 -2.5 -2.5 production costs Gross profit 2.9 2.9 11.3 11.3 Other operating income 0.2 0.2 11.3 11.3 Operating expenses -5.0 -5.0 -17.3 -0.1 -17.4 Operating profit/loss -1.9 -1.9 5.3 -0.1 5.2 Financial income and -0.2 -0.2 0.3 0.3 expenses total Net profit for the -2.1 -2.1 5.6 -0.1 5.5 period Earnings per share, -0.08 -0.08 0.20 0.20 EUR Earnings per share -0.08 -0.01 -0.09 0.20 -0.01 0.19 (diluted), EUR 2. DATA BY SEGMENT The adoption of IFRS did not change the Group's market division by segment. SSH has defined these market segments - North and South America, Europe and Rest of World, and Asia Pacific - as the primary segments to be applied in IFRS. SSH Group currently operates through one business segment - data security solutions. Net sales reported for the periods in 2003, based on the Finnish Accounting Standards, correspond to net sales by segment based on IFRS. Similarly, the transition to IFRS has had no material effect on operating profit/loss by segment. 3. RECONCILIATION OF BALANCE SHEET EUR million FAS CHAN IFRS FAS CHAN IFRS 31.3. GE 31.3. 31.12. GE 31.12. 2003 2003 2003 2003 Long-term assets a Intangible assets 1.1 -0.5 0.6 1.6 -0.4 1.2 a Tangible assets 0.4 0.5 0.9 0.2 0.3 0.5 b Deferred tax assets 0.2 0.2 0.2 0.2 Long-term assets total 1.5 0.2 1.8 1.8 0.1 1.9 Sort-term assets b Deferred tax assets 0.2 -0.2 0.2 -0.2 Inventories 0.8 0.8 0.0 0.0 Accounts receivable 4.4 4.4 5.2 5.2 and other receivables c Available-for-sale 0.0 0.0 32.2 32.2 assets c Trading assets 26.8 0.2 27.0 1.6 1.6 Cash and cash 4.1 4.1 3.0 3.0 equivalents Short-term assets 36.3 36.3 42.2 -0.2 42.0 total Assets total 37.8 0.2 38.0 44.0 -0.1 43.9 Share capital 0.8 0.8 0.8 0.8 d Issue premium fund 54.6 -1.6 53.0 41.0 -1.6 39.4 Fair value reserve 0.2 0.0 d Retained earnings/loss -21.7 1.7 -20.0 -0.6 1.5 0.9 c Subordinated loan 0.2 -0.2 0.2 -0.2 Shareholders' equity 34.0 34.0 41.4 -0.3 41.1 total c Interest-bearing 0.2 0.2 0.2 0.2 liabilities Long-term liabilities 34.0 0.2 34.2 41.4 0.2 0.2 total e Pensions 0.1 0.1 Accounts payable and 3.8 3.8 2.5 2.5 other payables Short-term liabilities 3.8 3.8 2.6 2.6 total Liabilities total 37.8 0.2 38.0 44.0 -0.1 43.9 The Stock Exchange Release of March 18, 2004 presents the reconciliation of equity between the Finnish Accounting Standards and IFRS for the date of transition to IFRS on January 1, 2003 (IFRS opening balance sheet). a) Intangible and tangible assets (IAS 38 and IAS 16) Capitalized expenses resulting from the leasehold improvements on rented premises in the USA were transferred from intangible assets to tangible assets, in accordance with IAS 16 (Property, Plant and Equipment). Regarding the intangible assets, the items that have not fulfilled the recognition criteria of IAS 38 (Intangible Assets), are recognized as expenses. b) Income taxes (IAS 12) In accordance with the Finnish Accounting Standards, deferred tax assets, based on confirmed losses for taxation, were recognized in 2003 only to the amount of payable taxes, complying with special prudence. Based on IAS 12 (Income Taxes) criteria, SSH considers that this amount, recognized in the balance sheet in accordance with the Finnish Accounting Standards and by exercising special prudence, currently corresponds to the amount, for which there is convincing evidence required by the standard that the tax assets can be utilized. Deferred tax assets are presented under non-current assets, in accordance with IAS 12. c) Financial instruments (IAS 39) IAS 39 classifies financial instruments into trading assets, held-to- maturity investments, available-for-sale assets, and originated loans and receivables. Group investments in financial instruments are classified as available-for-sale assets and measured at fair value. Changes in their fair value are recognized in revaluation reserve under shareholders' equity until they are sold or otherwise disposed of, in which case gains and losses arising from the changes in fair value are included in the income statement. Any resulting impairment loss will be included in the income statement. Instead of applying hedge accounting under IAS 39, the Group recognizes currency derivatives at fair value in the income statement. Subordinated loan, as provided by the Finnish Companies Act, was transferred to long-term liabilities, in accordance with IAS 39 criteria. d) Adjustments to retained earnings Retained earnings adjustments on December 31, 2003 totaled EUR 1.5 million, resulting from the transfer of the company's private- placement and listing expenses to the issue premium fund (EUR 1.6 million), in accordance with the interpretation of SIC 17, and adjustments of EUR -0.1 million affecting the 2003 results. e) Employee benefits (IAS 19) The Group applies both defined benefit and defined contribution pension plans, as classified under IAS 19 (Employee Benefits). Contributions under the defined contribution plan are recognized as pension expenses for the accounting period to which such contributions relate. Disability pension obligation under the Finnish Employees' Pension Act (TEL) is interpreted as a defined benefit according to IAS 19, i.e. pension expenses under the defined benefit plan are recognized as expenses for the period of employment, based on calculations performed by authorized actuaries. The application of defined benefit accounting has not had any material effect on the previously recorded pension liability or expense under the Finnish Accounting Standards. 4. OTHER MAJOR IFRS PRINCIPLES Impairment (IAS 36) Non-financial assets' carrying amounts are tested for impairment whenever there is an indication of impairment. Where an indicator of impairment exists, the asset must be tested for impairment in such a way that its carrying value is compared with its recoverable amount. An asset's recoverable amount is the higher of the asset's net selling price and its value in use. Where the asset's carrying amount exceeds its recoverable amount, it is impaired. The Group has not detected any indicators of impairment. Lease liabilities (IAS 17) IAS 17 classifies lease liabilities into finance leases and operating leases. This classification is based on the idea that a substantial share of risks and rewards incident to ownership is transferred to the lessee. Assets under finance leases are capitalized in the balance sheet and depreciated according to the depreciation plan applied to tangible assets. The Group holds exclusively lease liabilities classified as financing leases. Share-based compensation (IFRS 2) The Group must apply the new IFRS 2 as of early 2005. Stock options, under the scope of the said standard, must be charged as expenses at fair value. 5. REPORT ON MAJOR ADJUSTMENTS IN CASH FLOW STATEMENT There are no major differences between the IFRS-compliant cash flow statement (cash flow from business operations, investments, financing) and the cash flow statement based on the Finnish Accounting Standards. SHAREHOLDERS On March 31, 2004, the company's 10 largest shareholders, excluding nominee-registered shares, were as follows: Applied Computing Research (ACR) Oy 60.4% Assetman Oy 3.6% Tatu Ylönen Oy 2.3% Ilmarinen Mutual Pension Insurance Company 1.7% Promotion Capital I Ky 1.7% Nixu Oy 1.7% Grahn Juha 1.6% Ylönen Tatu 1.3% Kaukonen Kalle 1.2% Adams George 1.2% Total 76.7% FINANCIAL REPORTING A briefing on SSH's financial performance for Q1/2004 for analysts and the media will be held in the auditorium on the 1st floor of SSH's head office at Fredrikinkatu 42, Helsinki, Tuesday, on April 20, 2004, starting at 11:00 a.m. The entrance is on the corner of Fredrikinkatu and Malminkatu. SSH Communications Security Corp will release its next interim report for H1/2004 on July 21, 2004. Helsinki, April 20, 2004 SSH COMMUNICATIONS SECURITY CORP Board of Directors Arto Vainio CEO For further information, please contact: Arto Vainio, CEO tel. +358 (0)20 500 7400 Johanna Lamminen, CFO tel. +358 (0)20 500 7419 Kare Laukkanen, Director, IR tel. +358 (0)20 500 7433 Distribution: Helsinki Exchanges Major media