F-Secure Group Reports Strong Growth in 1999

Translation from Finnish
March 3, 2000, at 9.00

Financial results Jan. 1. to Dec.31, 1999

The revenues of the Group rose by 91 % during 1999 and were EUR 23.3 million (12.2 in the previous year). In spite of the Y2K issue, revenues during the fourth quarter rose by 88% compared to the previous year, to EUR 7.9 million (4.2). Operating result was EUR 4.0 million negative(0.0) for the year. The operating result for the fourth quarter of the year was EUR 1.9 million negative (-0.1).

The year in brief

During 1999 the group established an architectural leadership in next generation security solutions. A new architecture and new products were built with the following customer requirements in mind: employee mobility, seamless integration of various security applications, centralized policy-based management of security, and the ability to make security a service-like function. The goal is pervasive security covering all key corporate platforms, including traditional LANs and PCs and modern mobile devices.

The significant growth of the revenues was based on new, highly competitive products, integrated security applications enabled by the unique Policy Manager architecture, the launch of the F-Secure brand in the markets, on the continuing ramp-up of F-Secure's own sales and marketing organization and on the continuing strengthening of the Partner channel. F-Secure’s new, central business concept, Security as a Service™, started gaining mind share amongst service providers and corporate IT management.

Anti-Virus sales at the end of the year were stronger than expected as corporate customers rushed to update their Anti-Virus systems to face the Millennium challenge and alleged virus outbreaks. However, large IT systems projects or implementations of new technology (such as encryption) were put on hold.

The large projects remained on hold well into the first quarter of 2000. Also Anti-Virus sales recovered slowly after year-end, as many companies had invested in virus protection in advance at year-end in order to be ready for the Millennium shift. It appears that the views expressed by the group regarding sales around Y2K have been fairly accurate, although sales during December were better than expected and sales immediately after the end of the year were slower to ramp up than expected.

In addition to the reported revenues, The Group's Balance Sheet on December 31, 1999, includes EUR 8.0 million in maintenance revenues entered as future income.

Development of revenues and operating income

The revenues of the Group rose by 91 % during 1999 and were EUR 23.3 million (12.2 in the previous year). Revenues during the fourth quarter rose by 88% compared to the previous year, to EUR 7.9 million (4.2). A total of 60 % of the revenues (65 %) were from anti-virus products and 40 % (35 %) from cryptography products. Revenues from North America accounted for 33 %, Scandinavia for 33 %, the rest of Europe for 26 %, and the rest of the world for 8 %.

The revenues of the fourth quarter exceeded the analysts’ expectations (averaging at below 5 million Euros) significantly. This was a result of a very high demand of Anti-Virus products before the year-end, which more than balanced the loss of business resulting from the postponing of large encryption related projects. However, Anti-Virus sales is not expected to be as significant during the first months of year 2000. The encryption related projects are expected to restart the latest after the scrutiny and corrective actions related to the handling of the leap year problem have been finished.

Operating result was EUR –4.0 million (0.0) for the full year and EUR -1.9 million for the fourth quarter(-0,1). The downward trend of the operating income is a result of the Group's strategy of significant investments into product development and the growth of the sales and marketing organization. This investing begun toward the end of 1998 and continued strongly during the period under consideration.

Subsidiaries established at the end of 1998 in Germany, the UK and France increased their personnel during the period under consideration, and subsidiaries were also established in Tokyo, Japan, Hong Kong and Beijing, China and Stockholm, Sweden to support the local sales effort. F-Secure, Inc., in the USA, which concentrates on sales and sales support, also added to its personnel, and started new regional sales offices.

The costs of the Initial Public Offering, EUR 3.4 million, were booked as extraordinary items.

Providing incentives to employees in the form of stock options is a common practise in the Group’s industry. The Group’s option program is widely distributed and covers the whole personnel. As the market price of the Group’s share has risen significantly, the value of the warranty program has risen accordingly.

This will generate taxable income to the personnel when the options are executed.

In certain countries, including Finland, the employer has to pay social security charges based on the taxable income triggered by the execution of the stock options. The Group has booked a provision of 2.5 MEUR for this contingent liability to provide for the social security charges estimated to be paid in the future relating to all the granted stock options as of December 31, 1999. The warranties has been valued at the market price of 48.15 euros per share, prevailing on January 31, 2000. The market price of the Group’s share as of December 31, 1999 was 29.00 euros.

Establishing architectural leadership

The most significant step so far for the future of the Group was taken in August when the F-Secure Framework security management architecture was launched. The F-Secure Framework was the result of extensive development work in the Group. F-Secure Framework offers customers information security scalability, centralized management and seamless integration and scalability of applications.

The Group’s first comprehensive integrated security package, which seamlessly integrates the F-Secure Anti-Virus, F-Secure FileCrypto and F-Secure VPN+ products under a common policy-based management, was launched in July.

Security as a Service™ (SaaS) is a new, central business concept for F-Secure. For the user, SaaS means transparent, automatic and reliable security, which is policy-based and strictly controlled by the administrator. This service may be provided by the IT department of a company as an internal service with better tools than before, or by an outside service provider who, for a monthly fee, maintains his customers' information security. Sonera in Finland and Digital Island in the United States, among others, are SaaS partners.

The Group invests heavily into building a distribution channel suitable for selling security as a service. However, it should be kept in mind that both the technology used and the business model are still new. For this reason, the risks in this business are also significant.

The Group’s traditional partner channel also continued to evolve during 1999. The Group continued to recruit powerful systems integration and distribution partners such as Siemens in Germany, Newlink in France, and Bay Data Consulting in the United States. The number of countries with channel partners grew to 93.

Financing

The Group's financing position was good throughout the period under consideration. Financing income for the Group was EUR 0.9 million (0.6). The liquid assets of the Group at December 31, 1999, were EUR 52.8 million (3.8).

In March the Group launched convertible capital loan in the amount of EUR 5.0 million. As a result of the listing on the Helsinki Exchanges in November, the capital of the Group rose by about EUR 47 million, considering the entire share issue, and the equity ratio increased to 84.2% (54.2%).

Investments

Investments during the period under consideration were EUR 3.0 million (1.3). The most significant investment was the SAP R/3 ERP (Enterprise Resource Planning) system which was implemented during the year.

Shareholders' equity, convertible loan and option programs

An extraordinary shareholders' meeting was held on Oct. 8, 1999, to decide on a scrip issue, where one new share was issued for two old ones. On Oct. 14, 1999, a total of 43,875 options were converted into shares in the Option Program 1999/USA. In November, the listing of the Group was carried out, together with an emission of 6,550,000 shares. After all the above actions, the number of shares registered on December 31, 1999, was 26,804,875 and the shareholders' equity a total of EUR 536,097.50.

The convertible capital loan issued in March 1999 makes it possible to raise the shareholders' equity by 480,800 shares and EUR 9,616. In addition, the Group has four option programs for its personnel, which make it possible to raise the shareholders' equity by a maximum of 5,224,125 shares and EUR 104,482.50. If the above mentioned convertible loan and the option programs are converted to shares in their entirety, the shareholders' equity may be raised by a maximum of 5,704,925 shares and EUR 114,098.50, which represented 21.3 % of the shareholders' equity on December 31, 1999.

The Board of Directors is authorized to issue a maximum of 1,096,000 new shares.

The Year 2000

The Year 2000 issue presented no disturbances in the functioning of the Group’s software nor in the Group’s overall activities

License disagreement concerning the SSH protocol

Referring to the license disagreement of October 13, 1999 between F-Secure Corporation and SSH Communication Security Oy concerning the licensing of the SSH protocol, the Group continues to be convinced that it has proceeded correctly and followed the licensing contract to the best of its ability.

The disagreement concerns the differing views on the calculation of royalties. According to the Group, the termination of the contract by SSH is unlawful regardless of which party's interpretation of the calculation of royalties is correct. The matter has been submitted to arbitration, and a ruling is expected in August 2000.

Personnel and organization

The personnel growth continued vigorously. At December 31, 1999, the personnel numbered 302 (140). Personnel growth was 116 %.

Chris Vargas was appointed President of the US subsidiary Data Fellows, Inc., as of Aug. 1, 1999. On the same date, Tanya Candia was appointed Vice President, Global Marketing. Tanya Candia is stationed in San Jose, CA.

At the same time, the Group was reorganized. Marketing is now managed globally from the San Jose office. This was done to make marketing as efficient as possible in the US market and, due to the worldwide character of the US information technology markets thereby promoting international awareness of the Group's information security solutions.

In November, the Group launched a "New Technologies" R&D team to focus fully on emerging handheld PDAs (Personal Digital Assistants) and wireless platforms.

The extraordinary meeting of shareholders on Nov. 4, 1999 and Dec. 16, 1999, elected two new members to the Board of Directors: Olli-Pekka Kallasvuo and Kaj-Erik Relander. Ari Hyppönen was elected deputy member.

Outlook for the year 2000

The revenues of the fourth quarter exceed the analysts’ expectations (averaging at below 5 million Euros) significantly. This was a result of high demand of Anti-Virus products before the year-end, which more than balanced the expected slower growth in encryption sales resulting from customers postponing large projects over the end of the year. It appears that the views expressed by the group regarding sales around Y2K have been fairly accurate, although sales during December were better than expected and sales immediately after the end of the year were slower to ramp up than expected.

The launch and distribution of the integrated and policy managed products as well as the expansion of the sales and marketing organization during the year is expected to strengthen the Group's market position worldwide. Based on positive customer and partner feedback for the Group’s strategy of focusing on Security as a Service™ and the security needs of the increasingly mobile workforce, the Group has actually intensified both its R&D and sales&marketing efforts to maximize the benefit of its pioneering position in this emerging market. As a result of these significant investments the operating income will be negative in the short term.

Proposal by the Board of Directors to the annual meeting of shareholders

1. Dividend proposal

The Board of Directors proposes not to issue dividend for year 1999.

2. Changes in the Articles of Association

The Board of Directors proposes to change the minimum and maximum share capital (Article 3).

The Board of Directors proposes to add Helsinki and Vantaa as possible venues of the shareholders’ meeting

3. Split of the counter-book value of the share

The Board of Directors proposes that the share capital will be increased by scrip issue from the share premium fund and after that the amount of shares will be multiplied by 5.

4. Authorization on increase of share capital

The Board of Directors proposes an Authorization of the Board of Directors to decide, within one year of the registration of the resolution of the General Meeting, on the increase of the Company's share capital in one or more issues of new shares or one or more issues of convertible loans warrants. The share capital can be increased by a subscription for or a conversion for up to 10% of the current share capital. At the same time the Board of Directors proposes to cancel the previous authorization.

The General Shareholders’ meeting will be held on April 12, 2000.

* The extraordinary items of the year 1998 are resulted from the change in revenue recognition policy.

Espoo March 3, 2000

F-Secure Corporation

Board of Directors

Additional information:

F-Secure Corporation

Risto Siilasmaa, President and CEO tel.358 9 2520 5510

Jukka Kotovirta, Director tel.358 9 2520 5542