SSH COMMUNICATIONS SECURITY CORP STOCK EXCHANGE RELEASE February 9, 2006, at 1:30 p.m. CORRECTED ENGLISH LANGUAGE FINANCIAL STATEMENTS BULLETIN JANUARY 1-DECEMBER 31, 2005 Through a technical error, the Financial Statements Bulletin in English that SSH published yesterday on February 8, 2006, contained some superfluous and irrelevant text in the narrative. In the financial statements, 2004 opening balance in the Statement on Changes in Shareholder's Equity was affected. In consequence SSH issues below a new Financial Statements Bulletin in English that replaces the earlier release in its entirety. The Financial Statements Bulletin in Finnish remains unchanged. SSH regrets the occurrence. SSH COMMUNICATIONS SECURITY CORP Arto Vainio CEO Contact Information: Mika Peuranen, CFO, tel. +358 20 500 7419 SSH FINANCIAL STATEMENTS BULLETIN JANUARY 1-DECEMBER 31, 2005 - Net sales for January-December totaled EUR 9.3 million, up 13.0 percent year on year (EUR 8.2 million in 2004). - Fourth-quarter net sales came to EUR 4.1 million, up +74.6 percent on the previous quarter and +115.8 percent on a year earlier. - Operating loss for January-December amounted to EUR 2.6 million (a loss of EUR 6.4 million). Fourth-quarter operating profit was EUR 1.0 million, while net profit totaled EUR 1.0 million. - New data security regulations concerning large enterprises helped increase the sales of SSH Tectia products during the second half of 2005 and made the expected breakthrough to profitability. - Thanks to growth in tenders, new customers and new products, the year 2006 is expected to show a markedly better performance compared to 2005 Key figures 10-12/ 10-12/ 1-12/ 1-12/ 2005 2004 2005 2004 Net sales, EUR million 4.1 1.9 9.3 8.2 Net sales, change % 115.8 -33.1 13.0 -40.6 Operating profit/loss, EUR 1.0 -1.7 -2.6 -6.4 million % of net sales 25.3 -90.0 -28.5 -77.8 Operating profit/loss, 160.7 -118.4 58.6 -223.7 change % Profit/loss before 1.0 -1.7 -2.0 -5.9 extraordinary items and taxes, EUR million % of net sales 24.8 -88.0 -21.7 -71.2 Number of employees 75 105 75 105 at period-end Earnings per share, EUR -0.07 -0.21 Shareholders' 0.90 1.26 equity/share, EUR NET SALES Consolidated net sales for January-December totaled EUR 9.3 million (EUR 8.2 million), up by 13.0 percent, year on year. Fourth-quarter net sales were EUR 4.1 million, showing a year-on-year improvement of 115.8 percent. During the report period, SSH continued the systematic implementation of its strategy based on the SSH Tectia solution, primarily aimed at large enterprises, financial institutions, and government agencies, with almost all of its sales reported for the period stemming from these customer categories. Since the majority of SSH's invoicing is based on the U.S. dollar, the dollar's exchange rate has a fundamental effect on consolidated net sales. During 2005, the U.S. dollar's average exchange rate had no significant difference to the year 2004. RESULTS AND EXPENSES Operating loss for January-December amounted to EUR 2.6 million (2004: a loss of EUR 6.4 million), with net loss totaling EUR 2.0 million (a loss of EUR 5.9 million). Operating profit for the fourth quarter amounted to EUR 1.0 million (a loss of EUR 1.7 million), while net profit improved to EUR 1.0 million (a loss of EUR 1.7 million). SSH's fixed costs reported for the period continued their year-on-year decline, as evidenced by the reduction of approximately about EUR 2.7 million in fixed costs from the January-December 2004 level. About 30 percent of this overall reduction resulted from cuts in payroll costs and 70 percent from decreases in other operating expenses. The relocation of the company's headquarters from Helsinki city center to Pitäjänmäki reduced annual rental costs by EUR 0.3 million beginning in the third quarter. Research and development expenses for the report period totaled EUR 3.4 million (EUR 3.8 million), while sales and marketing expenses came to EUR 6.7 million (EUR 8.5 million) and administrative expenses EUR 1.9 million (EUR 2.4 million). Fourth-quarter research and development expenses totaled EUR 0.8 million, compared with EUR 0.9 million a year earlier. Sales and marketing expenses in Q4 came to EUR 1.9 million (EUR 2.2 million), and administrative expenses totaled EUR 0.4 million (EUR 0.6 million). Since January 1, 2005, SSH has applied IFRS 2 (Share-based Payment) to its stock options, which were granted after November 7, 2002, and had not vested prior to January 1, 2005. IFRS 2's effect on the 2004 comparatives is insignificant. The parent company has recognized an impairment loss at EUR 4.5 million of its receivables from SSH Inc, a wholly owned subsidiary. The entry has no effect in the consolidated financial statements. BALANCE SHEET AND FINANCIAL POSITION The financial position of SSH remained at a healthy level during the report period. The consolidated balance sheet total on December 31, 2005 stood at EUR 29.1 million (EUR 38 million), of which liquid assets accounted for EUR 22.5 million (EUR 33.9 million), or 77 percent of the balance sheet total. The group has no long-term liabilities. In May 2005, SSH paid out EUR 8.1 million in dividends. On December 31, 2005, gearing, or the ratio of net liabilities to shareholders' equity, was -88.4 (-94.8) and the equity ratio stood at 92.8 percent (94.8 percent). The reported gross capital expenditure for the period totaled EUR 0.1 million (EUR 0.5 million), consisting mainly of equipment purchases. Reported financial income came mainly from capital gains on fund shares. Financial income and expenses totaled EUR 0.6 million, compared with EUR 0.5 million a year ago. During January-December, SSH reported a negative cash flow of EUR 3.2 million from business operations, whereas investments showed a positive cash flow of EUR 10.3 million. Cash flow from operations, financing, and the EUR -8.2 million comprised dividends paid in May, resulted in the company showing a negative total cash flow of EUR 1.0 million during the period. MARKET DEVELOPMENTS The number of invitations to tender from, and projects pending among, SSH's customers - large enterprises, financial institutions and government agencies - continued significant growth in the report period. Legislative reforms concerning data confidentiality and secure data communication are occurring in the United States, Japan and Europe. Customers are facing an ever greater challenge in terms of information security management due to deperimeterization, or the gradual disappearance of boundaries between companies' internal and external information networks. Recent surveys conclude that large enterprises are finding it more difficult to protect their networks and businesses from sophisticated worms and backdoor-based network attacks, while at the same time, new regulations and audit requirements increase significantly companies' and their officers' responsibilities for data security and risk management. SSH Tectia's features and management capabilities align well with these trends and resulting requirements. SSH is confident that both customers' own internal data security programs and legislative reforms will continue driving the growth of demand for all SSH Tectia products. We have noticed that the data security models and policies of our largest customers in the USA will start spreading in phases to Europe and Asia, expanding in this way the demand for our products in all markets. Secure remote management of the IT infrastructure, secure file transfers and protection of critical business applications will continue demanding significant new investments in 2006 and coming years all over the world. The IETF (Internet Engineering Task Force), the body that governs the Internet standardization, recently announced that Secure Shell protocol specifications have reached Proposed Standard status. SSH is the original developer of the Secure Shell technology. This is a significant milestone for us, as SSH Tectia is based on the Secure Shell technology, and the standardization promotes much wider use for all product based on Secure Shell. In SSH's main market area, North America, demand focused primarily on solutions for secure remote management of network servers and various kinds of data communication equipment. SSH Tectia Manager is now included in practically all new major SSH Tectia installations and upgrades of earlier installations. In addition, rules in Section 404 of the Sarbanes-Oxley Act in the U.S. have begun to increase SSH's target customers' data security plans and the related investment plans and budgets. From SSH's viewpoint, the European customers continue to pursue a very cautious investment policy, although the pressures of the new data security regulations and risks became visible in the growing active sales case base during the second half of 2005. Product launches made by SSH in early 2005 have attracted growing interest in the SSH Tectia solution in Europe, with Germany, the U.K., and the Nordic countries continuing to be the most promising market areas for SSH. In Japan, a new law on the distribution and storage of personal data is expected to increase both public and private sector investments in data security. During 2005 development of the competition in the markets developed favorably for SSH Tectia. The new tighter data security regulations caused many customers to re-assess the risk and hidden costs of their OpenSSH -based deployments. This gave reasons to many customers to start phase-by-phase migration programs to deploy fully commercially supported products, such as SSH Tectia. SALES PERFORMANCE SSH'S NET SALES EUR million 10-12/ 7-9/ 4-6/ 1-12/ 10-12/ 1-12/ 2005 2005 2005 2005 2004 2004 BY SEGMENT AMER 3.3 1.8 0.8 6.8 1.4 5.7 APAC 0.1 0.2 0.1 0.7 0.2 0.6 EROW 0.7 0.3 0.3 1.8 0.3 2.0 SSH Group 4.1 2.4 1.2 9.3 1.9 8.2 total SSH TECTIA BUSINESS Net sales / 3.5 1.7 0.8 6.8 1.4 6.2 license Sales Net sales / 0.6 0.7 0.5 2.5 0.5 2.0 maintenance SSH Tectia total 4.1 2.4 1.2 9.3 1.9 8.2 The sales process for a system-level product for major customers is a long one. In line with its strategy, SSH aims at a major increase in the average size of contracts. Due to sales processes with major customers being particularly slow and substantial growth occurring in the size of future contracts, the future is likely to see major fluctuations in sales from quarter to quarter. The Americas, the Asia Pacific region, and the 'Europe and Rest of the World' market area accounted for 73 percent (70 percent), 8 percent (7 percent) and 19 percent (23 percent) of reported net sales, respectively. During the report period, SSH concluded a number of new customer agreements, ten of which were each worth more than EUR 100,000, with three completed in the fourth quarter. The ten largest customers accounted for 41 percent of reported net sales, with the largest single customer accounting for approximately 22 percent. PRODUCTS AND MARKETING During the report period, SSH focused its sales and marketing efforts on large enterprises, financial institutions, and government agencies in the U.S., Europe, and Asia, in line with its long-term strategy. The company strengthened its sales organization by reinforcing its partner network complementing the SSH Tectia solution. During the year 2005, as several new regulations began to solidify our customers' plans and requirements, SSH was able to execute several specific marketing and product programs to satisfy the needs of the growing demand. Successfully validated new product deployments by our largest US customers have also generated good responses from target customers in Germany and the U.K. SSH started to deliver the new-generation Secure Shell products launched early in 2005. The company's new Tectia Secure Shell product for the IBM mainframe environment made SSH Tectia the most extensive integrated Secure Shell-based solution on the market. In September, SSH secured the first major deal comprising the new IBM mainframe products, and by the end of the year received additional orders from four different customers for the IBM mainframe products. 2005 marked the 10th anniversary of the Secure Shell technology developed by SSH - Tatu Ylönen launched the first version of the Secure Shell protocol on July 12, 1995. The Secure Shell protocol is the basis of the SSH Tectia solution. RESEARCH AND DEVELOPMENT Research and development expenses for January-December totaled EUR 3.4 million (EUR 3.8 million), the equivalent of 36.8 percent of net sales (46.4 percent). R&D expenses capitalized during the report period totaled EUR 0.09 million. These expenses related to the commercialization of the SSH Tectia Server (M) solution. At the end of September, the company held 11 patents and 12 were pending. HUMAN RESOURCES AND ORGANIZATION At the end of December, the Group had 75 employees on its payroll, down by 30 from the previous year's number, a decrease of 28.6 percent. At the end of the period, 44.0 percent of the employees worked in R&D, 41.3 percent in sales and marketing, and 14.7 percent in corporate administration. BOARD AND AUDITORS The Annual General Meeting (AGM) on April 26, 2005, re-elected Tapio Kallioja, Tomi Laamanen, Timo Ritakallio and Tatu Ylönen to SSH Communications Security Corp.'s Board of Directors, with Laamanen re- elected as chairman. The AGM again elected to have PricewaterhouseCoopers Oy, authorized public accountants, as the company's auditor, with Henrik Sormunen, authorized public accountant, acting as the principal auditor. SHARES, SHAREHOLDING AND CHANGES IN GROUP STRUCTURE The reported trading volume of SSH Communications Security Corp. shares totaled 11,446,877 (valued at EUR 14,006,051.89); i.e. 40.49 percent of the shares changed hands. The highest quotation was EUR 1.78 and the lowest EUR 0.91. The trade-weighted average share price for the period was EUR 1.23, and the share closed at EUR 1.23 (December 30, 2005). There were no substantial changes in SSH Communications Security Corp.'s shareholding information during the report period. Tatu Ylönen and Tero Kivinen are the largest shareholders. The former holds, directly and through his company, Tatu Ylönen Oy, 53.5 percent of the company's shares, and Kivinen holds 6.8 percent. Further information on the shares and shareholding can be found at www.ssh.com. There were no changes in the group structure during the period. SHARE CAPITAL AND BOARD AUTHORIZATIONS The company's registered share capital on December 31, 2005 was EUR 848,064.39, consisting of 28,268,813 shares. During the report period, SSH increased its share capital five times, based on subscription to the new shares under SSH's stock-option plan. In total, 126,750 new SSH shares were subscribed to under the I/1999 stock-option plan, 39,521 shares under the I/2003 stock-option plan, and 1,000 shares under the II/2003 stock-option plan, respectively. With these subscriptions the company's share capital was increased by EUR 5,018.13. The SSH Annual General Meeting of April 26, 2005 authorized the Board of Directors to decide by April 26, 2006, to increase the share capital through a rights issue and/or convertible bonds, in such a way that the resultant share capital may increase by a maximum of EUR 165,000. The Board did not exercise this authorization. CORPORATE GOVERNANCE The company complies with the corporate governance recommendations for listed companies issued by HEX Ltd., the Central Chamber of Commerce of Finland, and the Confederation of Finnish Industry and Employers. More information on corporate governance is available on the company's Web site (www.ssh.com). PROSPECTS Thanks to growth in tenders, new customers and new products, the year 2006 is expected to show a markedly better performance compared to 2005. SSH aims to be a profitable company in 2006. The execution of our new SSH Tectia strategy has now a good start. The recent large orders in the US and Europe mark the validation of the SSH Tectia breakthrough to profitability and verify the suitability of the solution for the most demanding large target customers. Our backlog of active large sales cases is now remarkably larger than year ago and continues to grow. Accordingly, good growth prospects are available to us in 2006 and beyond. As the new regulations and risks continue driving our customers to increase their investments for better data security, we expect to see continued growth of the demand in all markets. We also believe that the trends driving the need for increasing internal data security in large enterprises will continue to grow, and will spread in phases to all our target customers in USA, Germany, the U.K. and Japan. Due to the large size of individual orders and uncertainty of timing, the actual quarterly revenue may vary substantially, although the management of the active sales prospect base will help compensate for the impact of single large orders within a quarter. BOARD PROPOSALS FOR PROFIT/LOSS AND DISTRIBUTION OF CAPITAL TO SHAREHOLDERS The board of directors proposes to the annual general meeting that no dividend be distributed. It is proposed that the loss of the financial year shall be entered to the shareholders' equity. The board will also give a proposal to decrease the share premium fund and distribute the funds partly to the shareholders. The entire proposals of the board of directors will be issued as a separate announcement. INCOME STATEMENT EUR million 10-12/ 10-12/ 1-12/ 1-12/ 2005 2004 2005 2004 Net sales 4.1 1.9 9.3 8.2 Purchasing and production 0.0 -0.1 -0.1 -0.1 costs Gross profit 4.1 1.9 9.2 8.1 Other operating income 0.1 0.1 0.2 0.3 Expenses Product development -0.8 -0.9 -3.4 -3.8 Sales and -1.9 -2.2 -6.7 -8.5 marketing Administration -0.4 -0.6 -1.9 -2.4 Operating profit/loss 1.0 -1.7 -2.6 -6.4 Financial income and 0.0 0.0 0.6 0.5 expenses Profit/loss before taxes 1.0 -1.7 -2.0 -5.9 a Taxes 0.0 0.0 0.0 0.0 Net profit/loss for the 1.0 -1.7 -2.0 -5.9 period a) Taxes are proportionate to the net profit for the period, and no deferred tax assets are recorded for the accrued loss. 1-12/ 1-12/ 2005 2004 Earnings per share (EUR) -0.07 -0.21 Earnings per share, diluted -0.07 -0.21 (EUR) BALANCE SHEET EUR million 12/31/ 12/31/ 2005 2004 ASSETS Fixed and other non-current assets Tangible assets 0.2 0.4 Intangible assets 0.6 0.9 Deferred tax assets 0.2 0.2 Total fixed and other 1.0 1.6 non-current assets Inventories and current assets Short-term receivables 5.6 2.6 Short-term investments 21.1 32.3 Cash and cash equivalents 1.4 1.5 Total inventories and current assets 28.1 36.4 Total assets 29.1 38.0 LIABILITIES AND SHAREHOLDERS' EQUITY Shareholders' equity 25.4 35.4 Long-term liabilities Provisions 0.1 0.2 Long-term financial 0.0 0.3 liabilities Total long-term liabilities 0.2 0.6 Short-term liabilities 3.5 2.0 Total liabilities and shareholders' equity 29.1 38.0 STATEMENT ON CHANGES IN SHAREHOLDERS' EQUITY EUR million Share Issue Fair Transl Retained Total capital premium value ation earnings fund* and differ other ence reserves Shareholders' 0.8 39.3 0.0 -0.7 1.7 41.1 equity Jan. 1, 2004 Change 0.0 -14.9 15.1 -0.1 -5.9 Shareholders' 0.8 24.4 15.1 -0.8 -4.2 35.4 equity Dec. 31, 2004 Shareholders' 0.8 24.4 15.1 -0.8 -4.2 35.4 equity Jan. 1, 2005 Change 0.0 0.0 0.1 0.1 -8.1 Net loss -2.0 Shareholders' 0.8 24.4 15.2 -0.8 -14.4 25.4 equity Dec. 31, 2005 * Transfer to the retained loss account has resulted in a reduction in the issue premium fund. CASH FLOW STATEMENT EUR million 1-12/ 1-12/ 2005 2004 Cash flow from business operations -3.2 -2.6 Cash flow from investments 10.3 -2.6 Cash flow from financing -8.2 0.1 Increase(+) / decrease (-) in -1.0 -5.1 liquid assets Liquid assets at period start 2.4 7.6 Adjustment for translation 0.1 0.0 difference b Liquid assets at period end 1.5 2.4 b)bbbb) Classifications in the cash flow statement have been changed in such a way that investment in interest-bearing funds is no longer reported in liquid assets. Comparatives have been amended accordingly. NET SALES BY SEGMENT EUR million 10-12/ 10-12/ 1-12/ 1-12/ 2005 2004 2005 2004 AMER 3.3 1.4 6.8 5.7 APAC 0.1 0.2 0.7 0.6 EROW 0.7 0.3 1.8 2.0 SSH Group total 4.1 1.9 9.3 8.2 OPERATING PROFIT/LOSS BY SEGMENT EUR million 10-12/ 10-12/ 1-12/ 1-12/ 2005 2004 2005 2004 AMER 2.2 0.7 3.5 2.1 APAC 0.1 0.1 0.2 0.2 EROW -0.1 -1.5 -0.8 -1.6 Common Group expenses* -1.2 -1.0 -5.5 -7.1 SSH Group total 1.0 -1.7 -2.6 -6.4 * Common Group expenses include group administration, and product management and R&D expenses at the corporate headquarters. KEY FIGURES AND RATIOS 1-12/ 1-12/ 2005 2004 Net sales (MEUR) 9.3 8.2 Operating profit/loss (MEUR) -2.6 -6.4 Operating profit/loss, as % of -28.5 -77.8 net sales Profit/loss before extraordinary -2.0 -5.9 items and taxes (MEUR) Profit/loss before extraordinary -21.7 -71.2 items and taxes, as % of net sales Profit/loss before taxes (MEUR) -2.0 -5.9 Profit/loss before taxes, as -21.7 -71.2 % of net sales Return on investment (%) -6.4 -13.6 Return on equity (%) -6.6 -15.4 Interest-bearing net liabilities -22.5 -33.5 (MEUR) Equity ratio (%) 92.8 94.8 Gearing (%) -88.4 -94.8 Gross capital expenditure (MEUR) 0.1 0.5 % of net sales 1.0 5.6 R&D expenses (MEUR) 3.4 3.8 % of net sales 37.0 46.7 Personnel, period average 83 105 Personnel, period end 75 105 PER-SHARE DATA 1-12/ 1-12/ 2005 2004 Earnings per share, undiluted -0.07 -0.21 (EUR) Earnings per share, diluted -0.07 -0.21 (EUR) Equity per share (EUR) 0.90 1.26 No. of shares at period end 28 269 28 102 (thousands) Share performance (EUR) Average price 1.23 1.69 Low 0.91 1.18 High 1.78 2.69 Share price, period end 1.23 1.28 Market capitalization, period 34.8 36.0 end (MEUR) Volume of shares traded 11.4 9.3 (in millions) Volume of shares traded, as 40.5 33.3 % of total Value of shares traded, in 14.0 15.8 millions of euros Price-to-earnings ratio (P/E) -17.2 -6.1 CONTINGENT LIABILITIES EUR million 12/31/ 12/31/ 2005 2004 Rental liabilities 0.2 0.1 Leasing liabilities 0.1 0.1 Other contingent liabilities 0.7 0.6 Currency derivatives (not included in hedge accounting) Fair value 0.0 0.0 Nominal value 6.0 2.2 FINANCIAL REPORTING The company will hold a briefing on its financial statements for analysts and the media today starting at 11:00 am, in Hotel Scandic Marski, meeting room Filip 1, 2nd floor, address Mannerheimintie 10, 00100 Helsinki. SSH Communications Security Corp will release its next interim report for January 1-March 31, 2006 on April 19, 2006. Further information on the company's financial reporting is available on the company's website (http://www.ssh.com). Helsinki, on February 8th, 2006 SSH COMMUNICATIONS SECURITY CORP Board of Directors Arto Vainio CEO For further information, please contact: Arto Vainio, CEO tel. +358 (0)20 500 7400 Mika Peuranen, CFO tel. +358 (0)20 500 7419 Distribution: Helsinki Stock Exchange Major media