SCANSOFT INC, 10-Q, 2000-08-11

SCANSOFT INC
10-Q, 2000-08-11
COMPUTER PERIPHERAL EQUIPMENT, NEC

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<PAGE> 1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE PERIOD ENDED JUNE 30, 2000

[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO __________

COMMISSION FILE NUMBER 0-27038

SCANSOFT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 94-3156479
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

9 CENTENNIAL DRIVE
PEABODY, MA 01960
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

(978) 977-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No [ ]

45,947,444 shares of the registrant's Common Stock, $0.001 par value, were
outstanding as of July 31, 2000

<PAGE> 2
SCANSOFT, INC.

FORM 10-Q
SIX MONTHS ENDED JUNE 30, 2000

INDEX

<TABLE>
<CAPTION>
PAGE
PART I: FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
a) Consolidated Balance Sheets at June 30, 2000 and December 31, 1999......................................... 3
b) Consolidated Statements of Operations for the three and six months ended June 30, 2000 and June 30, 1999... 4
c) Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and June 30, 1999............. 5
d) Notes to Consolidated Financial Statements................................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 11

PART II: OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders........................................................... 19

Item 6. Exhibits and Reports on Form 8-K.............................................................................. 19

Signatures............................................................................................................. 20
</TABLE>

2
<PAGE> 3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SCANSOFT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
UNAUDITED

ASSETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ...................................................... $ 5,108 $ 5,162
Short-term investments ......................................................... 62 62
Accounts receivable, less allowances of $10,333 and $3,690, respectively ....... 4,917 7,713
Inventory ...................................................................... 914 780
Deferred tax assets ............................................................ 3,650 --
Prepaid expenses and other current assets ...................................... 1,713 1,372
--------- ---------
Total current assets ........................................................ 16,364 15,089

Goodwill and other intangible assets, net ........................................... 106,272 12,987
Property and equipment, net ......................................................... 4,017 1,546
Other assets ........................................................................ 1,127 360
--------- ---------
TOTAL ASSETS ........................................................................ $ 127,780 29,982
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term bank borrowings ..................................................... $ 4,750 $ --
Note payable ................................................................... -- 1,600
Accounts payable and accrued expenses .......................................... 8,669 2,226
Accrued sales and marketing expenses ........................................... 1,406 1,425
Deferred revenue ............................................................... 1,590 964
Other current liabilities ...................................................... 7,058 1,843
--------- ---------
Total current liabilities ................................................... 23,473 8,058
--------- ---------
Deferred tax liabilities ............................................................ 3,650 --
--------- ---------
Stockholders' equity:
Series B convertible preferred stock, 15,000,000 shares authorized;
3,562,238 issued and outstanding; liquidation value of $4,631 ................ 4,631 4,631
Common stock, $0.001 par value; 140,000,000 shares authorized; 45,946,343 and
26,690,027 shares issued and outstanding, respectively ....................... 46 27
Additional paid in capital ..................................................... 219,165 100,397
Accumulated deficit ............................................................ (123,096) (83,131)
Accumulated other comprehensive loss ........................................... (89) --
--------- ---------
Total stockholders' equity .................................................. 100,657 21,924
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................................... $ 127,780 $ 29,982
========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

3
<PAGE> 4

SCANSOFT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED

<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- ------- -------- --------

<S> <C> <C> <C> <C>
Revenue ............................................. $ 13,975 $10,268 $ 21,390 $ 14,776

Costs and expenses:
Cost of revenue ................................ 4,084 2,308 6,525 3,433
Research and development ....................... 4,820 2,168 8,054 3,423
Selling, general and administrative ............ 8,772 4,451 14,209 7,054
Amortization of intangible assets .............. 7,098 475 9,012 633
Restructuring and other charges ................ 4,956 -- 4,956 346
Gain on sale of hardware business, net ......... -- -- -- (882)
Acquired in-process research and development ... -- -- 18,291 3,944
-------- ------- -------- --------

Total costs and expenses ............................ 29,730 9,402 61,047 17,951
-------- ------- -------- --------

Income (loss) from operations ....................... (15,755) 866 (39,657) (3,175)

Other income (expense), net ......................... (35) 57 -- 74
-------- ------- -------- --------

Income (loss) before income taxes ................... (15,790) 923 (39,657) (3,101)

Provision for income taxes .......................... 238 100 308 100
-------- ------- -------- --------

Net income (loss) ................................... $(16,028) $ 823 $(39,965) $ (3,201)
======== ======= ======== ========

Net income (loss) per share: basic .................. $ (0.35) $ 0.03 $ (1.05) $ (0.13)
======== ======= ======== ========

Net income (loss) per share: diluted ................ $ (0.35) $ 0.03 $ (1.05) $ (0.13)
======== ======= ======== ========

Weighted average common shares: basic ............... 45,918 26,409 38,219 24,403
======== ======= ======== ========

Weighted average common and common equivalent shares:
diluted ........................................ 45,918 31,557 38,219 24,403
======== ======= ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

4
<PAGE> 5

SCANSOFT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................................... $(39,965) $(3,201)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................................................ 559 151
Provision for accounts receivable allowances ................................. 53 2,327
Amortization of goodwill and other intangible assets ......................... 9,012 633
Provision for impairment of intangibles ...................................... 3,490 --
Net gain on sale of hardware business ........................................ -- (882)
Write off of acquired in-process research and development .................... 18,291 3,944
Changes in assets and liabilities, net of effects from acquisitions of Caere,
ScanSoft, and sale of hardware assets:
Accounts receivable ...................................................... 4,181 (8,037)
Inventory ................................................................ 149 (122)
Prepaid expenses and other assets ........................................ (281) 73
Accounts payable and accrued expenses, accrued marketing, deferred revenue
and other current liabilities .......................................... (543) 1,883
-------- -------

Net cash used in operating activities ............................................. (5,054) (3,231)
-------- -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in connection with Caere acquisition ........................... 1,419 --
Capital expenditures for property and equipment .............................. (165) (68)
Net sales of short-term investments .......................................... -- 397
Proceeds from sale of hardware business ...................................... -- 6,782
Cash acquired in connection with ScanSoft acquisition ........................ -- 1,211
Cash used for Metacreations acquisition ...................................... -- (1,000)
-------- -------

Net cash provided by investing activities ......................................... 1,254 7,322
-------- -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Short term bank borrowings, net .............................................. 4,750 (6,000)
Payment of note payable ...................................................... (1,600) --
Proceeds from the issuance of common stock, net .............................. 615 52
Repurchase of common stock ................................................... -- (684)
-------- -------

Net cash provided by (used in) financing activities ............................... 3,765 (6,632)
-------- -------

Effects of exchange rate changes on cash and cash equivalents ..................... (19) --
-------- -------

Net decrease in cash and cash equivalents ......................................... (54) (2,541)
Cash and cash equivalents at beginning of period .................................. 5,162 7,659
-------- -------
Cash and cash equivalents at end of period ........................................ $ 5,108 $ 5,118
======== =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

5
<PAGE> 6

SCANSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

BASIS OF PRESENTATION:

Prior to 1999, the results of the Company represented the activity of
Visioneer, Inc., which marketed and sold hardware and software. On January 6,
1999, the Company sold its hardware business to Primax Electronics, Ltd. On
March 2, 1999, the Company acquired Xerox Corporation's ScanSoft subsidiary and
subsequently renamed the Company ScanSoft, Inc. On March 13, 2000, the Company
acquired Caere Corporation ("Caere"). See "Caere Acquisition" note for specific
information on the Caere acquisition.

The accompanying unaudited consolidated financial statements of ScanSoft,
Inc. (the "Company" or "ScanSoft") have been prepared in accordance with
generally accepted accounting principles. In the opinion of management, these
interim consolidated financial statements reflect all adjustments, consisting of
normal recurring adjustments, except with respect to the adjustments made in
relation to the Caere acquisition, necessary to present fairly the financial
position, results of operations, and cash flows at June 30, 2000, and for the
three and six months ended June 30, 2000 and 1999. Although the Company believes
that the disclosures in these financial statements are adequate to make the
information presented not misleading, certain information normally included in
footnotes prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The accompanying financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999 and the unaudited pro forma financial statements of the Caere
acquisition included in the Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on February 9, 2000.

The results for the three and six months ended June 30, 2000, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000, or any future period.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities on the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

BALANCE SHEET COMPONENTS:

The following table summarizes key balance sheet components (in thousands):

JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
Inventory:
Raw Materials........................ $ 440 $ 524
Finished goods....................... 474 256
------ -------
$ 914 $ 780
====== =======
Other current liabilities:
Accrued compensation................. $2,161 $ 721
Accrued restructuring................ 2,720 --
Accrued royalties.................... 734 200
Accrued taxes payable................ 472 351
Other current liabilities............ 971 571
------ -------
$7,058 $ 1,843
====== =======

CAERE ACQUISITION:

On March 13, 2000, the Company acquired Caere Corporation, a company that
designs, develops and markets a range of optical character recognition software
tools, for approximately $48.5 million in cash, 19.0 million shares of Common
Stock of the Company, and the exchange of approximately 4.6 million employee
stock options to purchase Common Stock of the Company in exchange for
outstanding employee stock options of Caere. The common stock issued has been
valued using the average quoted price of common stock for the period a few days
preceding and the day of the consummation of the acquisition. The employee stock
options were fair valued using the Black Scholes option pricing model. In
addition, pursuant to a concurrent non-competition agreement and subject to
certain other conditions, the Company agreed to pay the former President and CEO
of Caere on the second anniversary of the merger

6
<PAGE> 7

the difference between $13.50 and the closing price of ScanSoft stock at that
time, multiplied by the number of beneficial shares owned by the former
executive. The value of this stock price guarantee at the date of acquisition
was approximately $4.0 million and has been included in the total purchase price
of the acquisition. Additionally, in conjunction with the acquisition, the
Company incurred approximately $1.7 million of acquisition related costs. The
purchase price of Caere, including acquisition costs, was $168.4 million, and
was allocated to the assets acquired and liabilities assumed based on the fair
value of Caere's current assets, property and equipment, and liabilities. The
excess of the purchase price over the fair value of tangible assets acquired has
been allocated to intangible assets (in-process research and development, core
technology, developed technology, patents, favorable building lease, non-compete
agreements and acquired workforce) acquired based on an independent appraisal.

This acquisition has been accounted for under the purchase method of
accounting. Accordingly, the results of operations of Caere and the fair market
value of acquired assets and assumed liabilities have been included in the
financial statements of the Company as of the date of acquisition. The Company
recorded a one-time write-off of $18.3 million in the quarter ended March 31,
2000 relating to the value of in-process research and development acquired as
part of the purchase.

The allocation of the purchase price was as follows (in thousands):

<TABLE>
<CAPTION>
<S> <C>
Property and equipment........................................ $ 2,865
Current and other assets...................................... 58,400
Liabilities assumed........................................... (16,985)
Goodwill...................................................... 61,095
Core technology............................................... 17,905
Developed technology.......................................... 16,340
Other identified intangible assets............................ 10,448
Acquired in-process research and development.................. 18,291
--------
$168,359
--------
</TABLE>

The amounts allocated to identifiable tangible and intangible assets,
including acquired in-process research and development, were based on the
results of an independent appraisal. Goodwill represents the amount by which the
cost of acquired net assets exceeded the fair values of those net assets on the
date of purchase. Acquired in-process research and development represented
development projects that had not yet reached technological feasibility and had
no alternative future use. Accordingly, the amount of $18.3 million was
immediately charged to expense in the consolidated statements of operations upon
consummation of the acquisition.

The values of the core technology, developed technology and acquired
in-process technology were determined by a risk adjusted, discounted cash flow
approach. The value of in-process research and development, specifically, was
determined by estimating the costs to develop the in-process projects into
commercially viable products, estimating the resulting net cash flows from the
sale of such products, discounting net cash flows back to their present values,
and adjusting those results to reflect the projects' stages of completion. These
include projects (primarily major version upgrades) in each of Caere's major
products, including OmniPage, OmniForm, and PageKeeper. The discount rates used
were 14% for developed technology, 19% for core technology, and 24% for
in-process technology. The discount rate for in-process technology takes into
consideration the Company's weighted average cost of capital adjusted for the
inherent uncertainties surrounding the successful development of the in-process
research and development, the profitability levels of such technology and the
uncertainty of technological advances, which could potentially impact the
estimates described above.

The average percentage of completion of the projects ranged from 50% to 67%
at the date of the acquisition. Revenues were projected to be generated late in
fiscal 2000 for each of the product versions in development at the acquisition
date. If these projects are not successfully developed, future revenue and
profitability of ScanSoft may be adversely affected. Additionally, the value of
other intangible assets acquired may become impaired.

The following identifies the intangible assets acquired in connection with Caere
and respective lives (in thousands):

<TABLE>
<CAPTION>
Amount Life

<S> <C> <C>
Goodwill............................................. 61,095 6 Years
Core technology...................................... 17,905 5 Years
Developed technology................................. 16,340 2 Years
Other identified intangible assets................... 10,448 2-5 Years
--------
$105,788
</TABLE>

7
<PAGE> 8

Other identified intangible assets consist of a non-compete agreement, acquired
work force, a favorable building lease agreement, and patents on the Caere
technology. These assets are being amortized over a period of 2, 3, 4 and 5
years, respectively.

During the three month period ended June 30, 2000, the Company, as a result of
its restructuring wrote-off $1,074,000 of acquired work-force and $2,416,000 of
a favorable building lease established as part of the identifiable intangible
assets acquired from Caere. These assets were deemed to be impaired to the
extent employees are to be terminated and facility space is to be vacated in
connection with the June 2000 restructuring actions.

Pro forma Results (unaudited)

The following table reflects the unaudited pro forma results of operations of
the Company assuming that the acquisition of Caere had occurred at the beginning
of each fiscal period presented:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- --------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue.................... $ 13,975 $ 25,450 $ 27,437 $ 49,003
Net loss................... (16,028) (3,253) (38,610) (12,502)
Net loss per share......... (0.35) (0.07) (0.84) (0.29)
</TABLE>

These unaudited pro forma results of operations include the write-off of the
in-process research and development charge taken in the first quarter and
restructuring and other charges taken in the second quarter. The unaudited pro
forma results of operations are not necessarily indicative of the actual results
that would have occurred had the transaction actually taken place at the
beginning of the periods.

RESTRUCTURING AND OTHER CHARGES:

In connection with the acquisition of Caere, the Company identified
approximately 46 employees of Caere whose positions would be eliminated as part
of the acquisition. These positions include 22 in research and development, 14
in general and administrative functions, and 10 in sales and marketing.
Additionally, the former president and CEO position of Caere was eliminated. As
a result, the Company has established as part of the purchase, a restructuring
reserve in the amount of $487,000 for the severance payments to employees,
anticipated to be paid out over the next two quarters, and a restructuring
reserve of $1,065,000 for the former president and CEO of Caere, whose severance
and benefits will continue over the next 5 years.

The Company is obligated to pay retention bonuses amounting to approximately
$797,000 relating to key employees who will be used in the integration of the
companies. These retention bonuses will be expensed as incurred and have not
been included in the purchase price of the acquisition. Additionally,
approximately 24 employees of Caere have voluntarily terminated their positions.
The Company does not anticipate replacing those individuals.

In June 2000, the Company committed to a restructuring plan to strategically
refocus the Company and bring operating expenses in line with net revenues. The
process included a review of all potentially redundant functions and facilities.
As part of this process, the Company determined it would be more cost effective
to eliminate duplicative activities being performed in Los Gatos, California
through relocating certain of these efforts to Peabody, Massachusetts and
Budapest, Hungary. These activities consisted primarily of research and
development, marketing, customer support and general and administrative
functions. In light of this decision, the Company notified 71 employees that
their positions would be eliminated as of June 30, 2000, of the 71 employees
notified, 6 employees voluntarily terminated their employment and are not
entitled to receive their severance benefits and accordingly, these employees
were not included in the restructuring charge. The remaining 65 employee
positions include 29 in research and development, 13 in general and
administrative functions, and 23 in support and marketing. As a result, the
Company has established a restructuring reserve in the amount of $1,069,000 for
the severance payments to these employees, which is anticipated to be paid out
over the next two quarters, and a restructuring reserve of $397,000 for exit
costs to be incurred as a result of exiting the Los Gatos facility.
Additionally, the Company wrote-off $3,490,000 of net intangible assets acquired
as part of the Caere acquisition including the acquired work force amounting to
$1,074,000 and a favorable building lease amounting to $2,416,000, which were
impaired as a result of the restructuring.

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<PAGE> 9

The Company is obligated to pay in the third quarter 2000 retention bonuses
amounting to approximately $212,000 relating to key employees who will be used
in the consolidation of the companies. These retention bonuses will be expensed
as incurred and were not included in the restructuring charge.

The following table sets forth the 2000 restructuring reserve activity (in
thousands):

<TABLE>
<CAPTION>
EMPLOYEE EXIT INTANGIBLE
Restructuring and other charges reserve RELATED COSTS ASSETS TOTAL
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Restructuring reserve provided in March 2000 acquisition $ 1,552 $ 1,552
Restructuring and other charges 1,069 $ 397 $3,490 4,956
Non-cash disposals (3,490) (3,490)
Cash payments (298) (298)

--------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $ 2,323 $ 397 $ -- $ 2,720
--------------------------------------------------------------------------------------------------------
</TABLE>

Restructuring charges of $346,000 in the first six months of 1999 relate to the
acquisition of ScanSoft and the subsequent consolidation of research and
development operations and the move of the Company's headquarters to
Massachusetts, which resulted in the termination of 10 employees in California.
The major components of these costs were approximately $188,000 in severance
costs for the 10 employees and approximately $46,000 for disposed West Coast
equipment. Also included was $82,000 in non-refundable commitments associated
with the West Coast development team, as well as $30,000 in other exit costs.
All such costs have been fully paid as of June 30, 2000.

The Company has accounted for these items using the guidance established in
SEC Staff Accounting Bulletin No. 100 "Restructuring and Impairment Charges" and
Emerging Issues Task Force EITF No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)", and EITF No. 95-3 "Recognition of
Liabilities in Connection with a Purchase Business Combination". Accordingly,
only those items meeting the requirements of these pronouncements have been
included in the restructuring and purchase price, respectively.

NET INCOME (LOSS) PER SHARE:

Net income (loss) per share is calculated in accordance with the provisions
of Statement of Financial Accounting Standards No. 128 - "Earnings per Share"
(SFAS No. 128). The following details the computation for basic and diluted
income (loss) per share:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2000 1999 2000 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) ........................... $(16,028) $ 823 $(39,965) $ (3,201)
Basic:
Weighted average common shares outstanding .. 45,918 26,409 38,219 24,403
======== ======= ======== ========
Net income (loss) per share ................. $ (0.35) $ 0.03 $ (1.05) $ (0.13)
======== ======= ======== ========
Diluted:
Weighted average common shares outstanding .. 45,918 26,409 38,219 24,403
Effect of diluted options and warrants ...... -- 5,148 -- --
-------- ------- -------- --------
Weighted average common shares outstanding .. 45,918 31,557 38,219 24,403
======== ======= ======== ========
Net income (loss) per share ................. $ (0.35) $ 0.03 $ (1.05) $ (0.13)
======== ======= ======== ========

</TABLE>

9
<PAGE> 10

BANK LINE OF CREDIT:

On March 14, 2000, the Company entered into a one year Credit Agreement (the
"Agreement") with a bank that consisted of a $10,000,000 revolving loan (the
"Revolver"). Borrowings under the Revolver bear interest at the rate of one
percent (1.0%) per annum above the Prime Rate. The maximum aggregate amount of
borrowings outstanding at any one time is limited to the lesser of (a) the
bank's total commitment and (b) the Borrowing Base. The Borrowing Base is equal
to fifty percent (50%) of eligible accounts receivables for which invoices have
been issued and are payable. As of June 12, 2000, the Agreement was amended to
modify the total commitment by the bank from $10,000,000 to $5,000,000 and the
Borrowing Base requirement was removed. At June 30, 2000, the Company had
$4,750,000 of bank borrowings outstanding.

Pursuant to the Agreement, the Company is required to maintain certain financial
and non-financial covenants, as defined, including certain earnings levels,
liquidity ratios, restrictions on dividends and capital expenditures. Borrowings
under the Agreement are secured by substantially all of the Company's assets.
For the quarter ended June 30, 2000, the Company failed to comply with certain
of its financial covenants and the bank has waived its requirement that the
Company comply thereunder. In the present form, the financial covenants
contained in the Agreement, may be difficult for the Company to meet going
forward. The Company is in discussions with its leading institution to review
the overall Agreement and make appropriate changes.

COMPREHENSIVE INCOME (LOSS)

Total comprehensive loss was $16.1 million and $40.0 million for the three and
six months ended June 30, 2000, respectively. Comprehensive loss consists of net
loss and the net changes in foreign currency translation adjustments. Total
comprehensive income (loss) for the three and six months ended June 30, 1999
equaled net income (loss).

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.

In December 1999, the United States Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 provides the SEC staff's views in applying
generally accepted accounting principles to selected revenue recognition issues,
as well as examples of how the staff applies revenue recognition guidance to
specific circumstances. SEC registrants may adopt a change in accounting
principle no later than the first quarter of the fiscal year beginning after
December 15, 1999 (January 1, 2000 for the Company). In June 2000, SAB 101B was
issued by the SEC delaying the implementation date of SAB 101 to the fourth
quarter of 2000. The Company is evaluating the impact of SAB 101 on its
financial position and results of operations and will report the impact, if any,
in the fourth quarter 2000.

10
<PAGE> 11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD LOOKING STATEMENTS

Certain statements made in this report, as well as oral statements made by
the Company from time to time, which are prefaced with words such as "expects",
"anticipates", "believes", "projects", "intends", "plans" and similar words and
other statements of similar sense, are forward looking statements. These
statements are based on the Company's current expectations and estimates as to
prospective events and circumstances, which may or may not be in the Company's
control and as to which there can be no firm assurance given.

These forward looking statements, like any other forward looking statement,
involve risks and uncertainties that could cause actual results to differ
materially from those projected or anticipated. Such risks and uncertainties are
outlined later in this document and should not be construed as exhaustive. The
Company disclaims any obligation to subsequently revise forward looking
statements or to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
Further discussions of risk factors are also available in the Company's
registration statements filed with the Securities and Exchange Commission. The
Company wishes to caution readers not to place undue reliance upon such
forward-looking statements, which speak only as of the date made.

OVERVIEW

On January 15, 2000, we entered into an agreement to acquire Caere
Corporation, a California based digital imaging software company. The
acquisition was completed on March 13, 2000 and Caere was merged into a
subsidiary of ScanSoft. As a result, ScanSoft has added the OmniPage and
OmniForm family of products to its own product line. The acquisition was
accounted for as a purchase and accordingly, the results of operations of Caere
are included in the Company's financial statements as of the acquisition date.
The Company's results of operations for the six-month period ended June 30,
2000, include a pre-tax charge of $18.3 million for the value of acquired in
process research and development and amortization of $7.7 million related to
intangible assets recorded as a result of the acquisition. On March 2, 1999, the
Company acquired Xerox's ScanSoft subsidiary and renamed the Company ScanSoft,
Inc. Many of the increases discussed below are related to the inclusion of
ScanSoft's results for the entire six months in 2000 versus just four months in
1999, and to the inclusion of Caere since March 13, 2000.

Our success in the future will depend on our ability to maintain software
gross margins and increase sales of our software products. This will depend in
part on our ability and the ability of our distributors, resellers and OEM
partners to convince end-users to adopt paper and image input systems for the
desktop and to educate end-users about the benefits of our products. There can
be no assurance that the market for our products will develop or that we will
achieve market acceptance of our products. Despite experiencing several quarters
of minor levels of profitability throughout our history, we have incurred annual
net losses since inception. There can be no assurance that we will be able to
reach quarterly profitability or attain annual profitability in the near future.
As of June 30, 2000, we had an accumulated deficit of $123 million.

11
<PAGE> 12

RESULTS OF OPERATIONS

The following table presents, as a percentage of total revenue, certain
selected financial data for the three and six months ended June 30, 2000 and
June 30, 1999:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2000 1999 2000 1999
------ ----- ------ -----
<S> <C> <C> <C> <C>
Revenue: 100.0% 100.0% 100.0% 100.0%

Costs and expenses:
Cost of revenue 29.2% 22.5% 30.5% 23.2%
Research and development 34.5% 21.1% 37.7% 23.2%
Selling, general and admin 62.8% 43.4% 66.4% 47.7%
Restructuring and other charges 35.5% 0.0% 23.2% 2.3%
Gain on sale of hardware business, net 0.0% 0.0% 0.0% (5.9)%
Amortization of goodwill and other intangible
Assets 50.8% 4.6% 42.1% 4.3%
Acquired in-process research and development 0.0% 0.0% 85.5% 26.7%
------ ----- ------ -----
Total costs and expenses 212.7% 91.6% 285.4% 121.5%
------ ----- ------ -----

Income (loss) from operations (112.7)% 8.4% (185.4)% (21.5)%

Other income/(expense), net (0.3)% (0.6)% 0.0% (0.5)%
------ ----- ------ -----
Income (loss) before income taxes (113.0)% 9.0% (185.4)% (21.0)%

Provision for income taxes (1.7)% (1.0)% (1.4)% (0.7)%
------ ----- ------ -----
Net income (loss) (114.7)% 8.0% (186.8)% (21.7)%
------ ----- ------ -----
</TABLE>

REVENUE

Net revenue of $14.0 million for the three months ended June 30, 2000
increased by $3.7 million or 36%, from the comparable period in 1999. The
primary increase in revenue was due to the acquisition of Caere Corporation on
March 13, 2000. Although the growth in revenue occurred uniformly throughout the
Company's channels of distribution, the most immediate impact was in the
shrink-wrap distributor software sales, offset by a decline in OEM revenue. OEM
and multi-user license revenue is anticipated to grow in future quarters as
existing relationships are strengthened and new partnerships are formed.

Revenue for the six months ended June 30, 2000 increased $6.6 million or 45%
from the comparable period of 1999. During the first six months of 2000, the
Company took several steps to take full advantage of a growing scanner and
digital imaging market. The first was the previously mentioned acquisition of
Caere and its product lines. In addition, PaperPort 7.0 was released in the
latter half of the second quarter and TextBridge Pro Millenium Business Edition
and the Developer's Kit2000 version 10.0 were also released during the second
quarter. Lastly, the Company changed its method of estimating revenue reserves
to more closely align reported revenues with end user purchases, resulting in a
reduction of revenue of $3.7 million for the six months ended June 30, 2000.

Net revenue by channel in the three months ended June 30, 2000 was 56%
retail, 21% direct, and 23% OEM and multi-user licenses compared to 48%, 24% and
28%, respectively for the same period ended June 30, 1999. The net revenue
breakdown for the six months ended June 30, 2000, was 46% retail, 22% direct,
and 32% OEM and multi-user licenses, unchanged from the six months ended June
30, 1999.

COST OF REVENUE

Cost of revenue consists primarily of material costs, third party royalties,
fulfillment, and salaries for product support personnel. Cost of revenue for the
three months ended June 30, 2000 was $4.1 million or 29.2% of revenue, compared
to $2.3 million or 22.5% of revenue in the comparable period of 1999. The
increase in cost of revenue of 76.9% is related to the increased revenue volume
experienced by the Company subsequent to the acquisition of Caere, incremental
support costs associated with duplicative support organizations and higher costs
associated with redundant contracts of the combined organization. Cost of
revenue for the six months ended June 30, 2000 was $6.5 million or 30.5% of
revenue, compared to $3.4 million or 23.2% in the comparable period of 1999. The
increase in cost of revenue of 90.0% is related to the increased revenue volume
experienced by the Company subsequent to the

12
<PAGE> 13

acquisition of Caere, incremental support costs associated with duplicative
support organizations and higher costs associated with redundant contracts of
the combined organization.

The Company anticipates that as a result of the restructuring actions taken
during the second quarter, it will achieve approximately $1.3 million of
annualized cost savings associated with a reduced support organization and
consolidation of redundant operating contracts of the two organizations. The
result of these cost savings initiatives should be realized starting in the
third quarter 2000.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses consist primarily of salary and benefit
costs of engineers. Research and development costs were $4.8 million or 34.5% of
revenue in the three months ended June 30, 2000, compared to $2.2 million or
21.1% of revenue for the same three months in 1999. Research and development
costs for the six months ended June 30, 2000 were $8.0 million or 37.7% of
revenue, compared to $3.4 million or 23.2% for the same period in 1999. The
increase in research and development spending for both the three and six month
periods is due to the added software engineering headcount from the acquisition
of Caere on March 13, 2000.

The Company anticipates that as a result of the restructuring actions taken
during the second quarter, it will achieve approximately $3.1 million of
annualized cost savings, net of incremental head count being added in Budapest
Hungary and Peabody Massachusetts, starting in the fourth quarter 2000.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling expenses include salaries, commissions, advertising, direct mail,
public relations, trade shows, travel and other related sales and marketing
expenses. General and administrative expenses include personnel costs for
administration, finance, human resources, information systems, and general
management in addition to legal and accounting expenses and other professional
services.

Selling, general and administrative expenses in the three months ended June
30, 2000 were $8.8 million or 62.8% of revenue, as compared to $4.5 million or
43.4% of revenue for the same period in 1999. Selling, general and
administrative expenses for the six months ended June 30, 2000 were $14.2
million or 66.4% of revenue, as compared to $7.0 million or 47.7% for the six
months ended June 30, 1999. The increase in expenses is due in part from the
acquisition of Caere, including costs associated with the acquisition, as well
as growth in spending to support higher revenue.

The Company anticipates that as a result of the restructuring actions taken
during the second quarter, it will achieve approximately $5.3 million of
annualized cost savings, net of incremental head count being added in Budapest
Hungary and Peabody Massachusetts, starting in the fourth quarter 2000.
Additionally, the Company anticipates annual facility related savings of
approximately $1.0 million starting in the fourth quarter.

OTHER COSTS AND EXPENSES

RESTRUCTURING AND OTHER CHARGES:

In connection with the acquisition of Caere, the Company identified
approximately 46 employees of Caere whose positions would be eliminated as part
of the acquisition. These positions include 22 in research and development, 14
in general and administrative functions, and 10 in sales and marketing.
Additionally, the former president and CEO position of Caere was eliminated. As
a result, the Company has established as part of the purchase price a
restructuring reserve in the amount of $487,000, for the severance payments to
employees, anticipated to be paid out over the next two quarters, and a
restructuring reserve of $1,065,000 for the president and CEO of Caere, whose
severance and benefits will continue over the next 5 years.

The Company is obligated to pay retention bonuses amounting to approximately
$797,000 relating to key employees that will be used in the integration of the
companies. These retention bonuses will be expensed as incurred and have not
been included in the purchase price of the acquisition.

13
<PAGE> 14

As of June 30, 2000, the Company had paid approximately $298,000 relating to
the acquisition related severance actions and had accrued approximately $763,000
for retention bonuses of which the Company paid $495,000.

During the quarter ending June 30, 2000, the Company committed to a
restructuring plan to strategically refocus the Company and bring operating
expenses in line with net revenues. The process included a review of all
potentially redundant functions and facilities. As part of this process, the
Company determined it would be more cost effective to eliminate duplicative
activities being performed in Los Gatos, California through relocating certain
efforts to Peabody, Massachusetts and Budapest, Hungary. These activities
consisted primarily of research and development, marketing, customer support and
general and administrative functions. In light of this decision, the Company
notified 71 employees that their positions would be eliminated as of June 30,
2000, of the 71 employees notified, 6 employees voluntarily terminated their
employment and will not be entitled to receive their severance benefits;
accordingly, these employees were not included in the restructuring charge. The
remaining 65 employee positions include 29 in research and development, 13 in
general and administrative functions, and 23 in support and marketing. As a
result, the Company has established a restructuring reserve in the amount of
$1,069,000 for the severance payments to these employees, which is anticipated
to be paid out over the next two quarters, and a restructuring reserve of
$397,000 for exit costs to be incurred as a result of exiting the Los Gatos
facility. As of June 30, 2000, no cash payments had been made relating to this
restructuring. Additionally, the Company wrote-off $3,490,000 of net intangible
assets acquired as part of the Caere acquisition, including the acquired work
force amounting to $1,074,000 and a favorable building lease amounting to
$2,416,000, which were impaired as a result of the restructuring. These
restructuring actions should further reduce future operating expenses by
approximately $10-$12 million on an annualized basis.

Restructuring charges of $346,000 in the first six months of 1999 relate to
the acquisition of ScanSoft, and the subsequent consolidation of research and
development operations and the move of the Company's headquarters to
Massachusetts, which resulted in the termination of 10 employees in California.
The major components of these costs were approximately $188,000 in severance
costs for the 10 employees and approximately $46,000 for disposed West Coast
equipment. Also included was $82,000 in non-refundable commitments associated
with the West Coast development team, as well as $30,000 in other exit costs.
All such costs have been fully paid as of June 30, 2000.

AMORTIZATION OF INTANGIBLE ASSETS AND IN-PROCESS RESEARCH AND DEVELOPEMENT

Goodwill and other intangible assets, and related amortization expense,
primarily represent assets acquired in connection with the Caere acquisition.
The amounts allocated to identifiable tangible and intangible assets associated
with the Caere acquisition, including acquired in-process research and
development, were based on the results of an independent appraisal. Goodwill
represents the amount by which the cost of acquired net assets exceeded the fair
values of those net assets on the date of purchase. Acquired in-process research
and development represented development projects that had not yet reached
technological feasibility and had no alternative future use. Accordingly, the
amount of $18.3 million was immediately charged to expense in the consolidated
statements of operations upon consummation of the acquisition.

The values of core technology, developed technology and acquired in-process
technology were determined by a risk adjusted, discounted cash flow approach.
The value of in-process research and development, specifically, was determined
by estimating the costs to develop the in-process projects into commercially
viable products, estimating the resulting net cash flows from such projects,
discounting net cash flows back to their present values, and adjusting those
results to reflect the projects stages of completion. These include projects
(primarily major version upgrades) in each of Caere's major products, including
OmniPage, OmniForm, and PageKeeper. The discount rates used were 14% for
developed technology, 19% for core technology and 24% for in-process technology.
This discount rate takes into consideration the inherent uncertainties
surrounding the successful development of the in-process research and
development, the profitability levels of such technology and the uncertainty of
technological advances, which could potentially impact the estimates described
above.

14
<PAGE> 15

As a result of the second quarter 2000 restructuring actions, certain
intangible assets associated with the Caere acquisition were impaired.
Accordingly, the Company wrote-off $3,490,000, of net intangible assets
including the acquired workforce amounting to $1,074,000 and a favorable
building lease amounting to $2,416,000. After consideration of these write-offs,
the Company expects amortization of goodwill and other intangible assets to be
reduced by $0.3 million to equal approximately $6.8 million on a quarterly
basis.

GAIN ON SALE OF THE HARDWARE BUSINESS

In the quarter ended March 31, 1999, the Company sold its hardware business
to Primax Electronics, Ltd., for approximately $6.8 million and reported an
operating gain of approximately $882,000.

OTHER INCOME (EXPENSE), NET

Other income (expense), net consists primarily of interest earned on cash,
cash equivalents and short-term investments offset by interest incurred for
borrowings under credit facilities and short-term notes and exchange gains and
losses.

Other expense, net was $35,000 for the three months ended June 30, 2000,
compared with other income, net of $57,000 for the same period in 1999. The
decrease was attributable to higher interest expense on larger bank borrowings.
Other income (expense), net for the six months ended June 30, 2000 was zero,
compared to $74,000 for the same period in 1999. This was the result of higher
interest expense of $222,000, which was offset by interest income and foreign
exchange gains for the six months ended June 30, 2000.

TAXATION

Tax provisions of $238,000 and $308,000 for the three and six months ended
June 30, 2000 respectively represent taxes for foreign and state jurisdictions
in which the Company does business and no net operating loss carryforwards were
available. For the same periods in 1999, we had a tax provision of $100,000,
representing alternative minimum taxes due to our recorded losses.

As part of the acquisition, the Company acquired deferred tax assets
amounting to approximately $5,919,000, for which a full valuation allowance was
initially recorded due to the uncertainty of their realization. In accordance
with Financial Accounting Standards Board No. 109 "Accounting for Income Taxes"
("FAS 109"), the Company established a deferred tax liability associated with
the non-deductible acquired intangibles assets excluding goodwill. As a result,
the valuation allowance on the acquired Caere net deferred tax asset as well as
a portion of the Company's valuation allowance on its existing net deferred tax
assets was released. Also in accordance with FAS 109, this reduction in
valuation allowance was accounted for in the purchase accounting and not the
statement of operations during the period ended March 31, 2000.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2000, we had cash, cash equivalents and short-term
investments of $5.2 million and a working capital deficit of $7.1 million, as
compared to $5.2 million in cash, cash equivalents and short-term investments
and $7.0 million of working capital at December 31, 1999.

During the six months ended June 30, 2000, we used $5.1 million of cash for
our operating activities, as compared to $3.2 million for the same period in
1999. The cash was used to fund payment of salary and personnel costs, and other
normal operating costs.

During the six month period ended June 30, 2000, cash provided by investing
activities was $1.3 million as compared to $7.3 million for the same period in
1999. The decline is due primarily to $6.8 million that was received for the
sale of the hardware business in 1999 and $1.2 million of cash received with the
acquisition of ScanSoft, also in 1999. The Company also received $1.4 million of
cash related to the acquisition of Caere in 2000.

During the six months ended June 30, 2000, cash provided by financing
activities was $3.8 million as compared to $6.6 million used for the same period
in 1999. During the quarter ending June 30, 2000, the Company made an additional
$1.8 million draw on our line of credit bringing the balance to $4.8 million at
June 30, 2000. Additionally, during the six month period ended June 30, 2000, we
made a $1.6 million payment of the note payable.

Our principal sources of liquidity as of June 30, 2000 consisted of
approximately $5.2 million of cash, cash equivalents and short-term investments.
On March 13, 2000, we acquired Caere Corporation for approximately $168 million.
The acquisition consideration

15
<PAGE> 16

consisted of $49 million in cash, $95 million in ScanSoft common stock and $24
million in stock compensation and other transaction costs. The cash
consideration was paid out of Caere's cash balance of approximately $50 million.
In addition, we have arranged a secured credit facility, as amended, for $5.0
million, subject to various borrowing constraints, which has been substantially
utilized. Pursuant to the credit facility, the Company is required to maintain
certain financial and non-financial covenants, as defined, including certain
earnings levels, liquidity ratios, restrictions on dividends and capital
expenditures. Borrowings under the facility are secured by substantially all of
the Company's assets. For the quarter ended June 30, 2000, the Company failed to
comply with certain of its financial covenants and the bank has waived its
requirement that the Company comply thereunder. In the present form, the
financial covenants contained in the facility, may be difficult for the Company
to meet going forward. The Company is in discussions with its lending
institution to review the overall facility and make appropriate changes.

As a result of the restructuring events undertaken in the second quarter
2000, we anticipate achieving sufficient cost savings and expect to generate
cash from operations during the fourth quarter 2000. Based upon these events and
existing cash balances, we believe that our existing sources of liquidity will
provide adequate cash to fund our operations for at least the next twelve
months. However there can be no assurance that cash generated by operations will
be sufficient to satisfy our liquidity requirements, and we may be required to
sell additional equity or debt securities, or increase or obtain additional
lines of credit. The sale of additional equity or convertible debt securities
may result in additional dilution to our stockholders. It may be difficult to
sell additional equity or obtain debt financing, and this could result in
significant constraints on the Company's ongoing investments to grow revenue and
develop new products.

FOREIGN OPERATIONS:

As a result of the Caere acquisition, in March 2000, the Company significantly
increased its presence in Europe. The Company conducts certain business
transactions in the euro, and will change its functional currencies for the
affected countries to the euro by the end of the three-year transition period.
The conversion to the euro has not and is not expected to have a significant
operational impact or a material financial impact on the results of operations,
financial position, or the liquidity of the Company's European businesses.
Changes in the value of the euro or other foreign currencies relative to the
value of the U.S. dollar could adversely affect future revenues and operating
results. Currently, the Company does not hedge any of its foreign-currency
denominated transactions.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

16
<PAGE> 17

FACTORS THAT MAY AFFECT FUTURE RESULTS

The anticipated benefits from merging with Caere will depend in part on
whether we can integrate our operations and technologies in an efficient and
effective manner. We cannot guarantee that this will occur. Successful
integration will require integration of each company's products and coordination
of each company's operating procedures, financial controls, development efforts
and sales and marketing efforts. This integration may be difficult to accomplish
smoothly or successfully, and may take longer than we expect. If serious
difficulties are encountered during integration, management will have to divert
its attention from normal business operations to address these issues, which
could have an adverse effect on the surviving corporation's business. In
addition, the merger may cause potential customers to cancel or delay orders as
the result of uncertainty over the successful integration of the two companies.
Furthermore, there could be an adverse effect on employee morale and on the
ability of the surviving corporation to retain key personnel. Failure to
effectively accomplish the integration of the two companies' operations could
have a material adverse effect on the surviving corporation's business,
operating results and financial condition.

The Company's business operates in an intensely competitive environment and
operations are subject to risks and uncertainties. Such risks and uncertainties
include, but are not limited to (1) the loss of, or a significant curtailment
of, purchases by any one or more principal customers; (2) the cyclicality of the
retail software industry; (3) inability to protect the Company's proprietary
technology and intellectual property; (4) the inability to attract or retain
skilled employees; (5) technological obsolescence of current products and the
inability to develop new products; (6) the inability to respond to competitive
technology and competitive pricing pressures; (7) quarterly operating results
that fluctuate and differ materially from one quarter to the next which could
have an impact on the Company's stock price.

There can be no assurance that cash generated by operations will be
sufficient to satisfy our liquidity requirements, and we may be required to sell
additional equity or debt securities, or increase or obtain additional lines of
credit. The sale of additional equity or convertible debt securities may result
in additional dilution to our stockholders. It may be difficult to sell
additional equity or obtain debt financing, and this could result in significant
constraints on the Company's ongoing investments to grow revenue and develop new
products.

For further discussion regarding these and other risks, refer to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999 and the
Company's Prospectus/Proxy Statement dated February 9, 2000.

17
<PAGE> 18

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

18
<PAGE> 19

PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 4, 2000, the Company held its Annual Meeting of Stockholders. At such
meeting the following actions were voted upon:

(a) To elect a Board of eight (8) directors to hold office until the next annual
meeting of stockholders or until their respective successors have been elected
and qualified:

<TABLE>
<CAPTION>
DIRECTOR VOTES FOR WITHHELD
-------- --------- --------
<S> <C> <C>
Michael K. Tivnan 25,286,606 123,742
Katharine A. Martin 25,284,006 126,342
Paul A. Ricci 25,286,906 123,442
Robert G. Teresi 25,286,906 123,442
J. Larry Smart 25,286,906 123,442
Robert J. Frankenberg 25,286,906 123,442
Mark B. Myers 25,286,906 123,442
Anne M. Mulcahy 25,315,856 94,492
</TABLE>

(b) To approve the Company's Amended and Restated Certificate of Incorporation:

VOTES FOR VOTES AGAINST ABSTAINED BROKER NON-VOTES
--------- ------------- --------- ----------------
14,913,493 50,679 25,938 10,420,238

VOTES FOR VOTES AGAINST ABSTAINED BROKER NON-VOTES
--------- ------------- --------- ----------------
14,591,615 223,607 174,888 10,420,238

(d) To ratify the appointment of PricewaterhouseCoopers LLP as independent
public accountants for the period ending December 31, 2000:

VOTES FOR VOTES AGAINST ABSTAINED
--------- ------------- ---------
25,354,529 36,969 18,850

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

The exhibits listed on the Exhibit Index hereto are filed or incorporated by
reference (as stated therein) as part of this report on Form 10-Q.

(b) Reports on Form 8-K

None

19
<PAGE> 20

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this Report on Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Peabody, State of
Massachusetts, on August 11, 2000.

SCANSOFT, INC.

By: /s/ GERALD C. KENT JR.
---------------------------------
Gerald C. Kent, Jr.
Chief Accounting Officer
And Corporate Controller

20
<PAGE> 21

EXHIBIT INDEX

Exhibits (numbered in accordance with Item 601 of Regulation S-K)

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------

<S> <C>
2.1(1) Agreement and Plan of Merger dated December 2, 1998, between
Visioneer, Inc., a Delaware corporation, and ScanSoft, Inc., a
Delaware Corporation.

3.1(2) Bylaws of Registrant.

3.2(3) Amended and Restated Certificate of Incorporation of Registrant.

4.1(3) Specimen Common Stock Certificate.

4.2(4) Preferred Shares Rights Agreement, dated as of October 23, 1996,
between the Registrant and U.S. Stock Transfer Corporation, including
the Certificate of Designation of Rights, Preferences and Privileges
of Series A Participating Preferred Stock, the form of Rights
Certificate and Summary of Rights attached thereto as Exhibits A, B
and C, respectively.

4.3(5) Voting Agreement dated March 2, 1999 between Xerox, Xerox Imaging
Systems, Inc., Visioneer, Inc. and several holders of Visioneer
common stock.

27.1 Financial Data Schedule.
</TABLE>

(1) Incorporated by reference from the Registrant's Registration
Statement on From S-4 (No. 333-70603) filed with the Commission on
January 14, 1999.

(2) Incorporated by reference from the Registrant's Registration
Statement on Form S-1 (No. 333-98356) filed with the Commission on
October 19, 1995.

(3) Incorporated by reference from the Registrant's Registration
Statement on Form S-8 (No. 333-74343) filed with the Commission on
March 12, 1999.

(4) Incorporated by reference from the Registrant's Registration
Statement on Form S-4 (No. 333-96487) filed with the Commission on
February 9, 2000.

(5) Incorporated by reference from the Registrant's current Report on
Form 8-K dated October 30, 1996.

(6) Incorporated by reference from the Registrant's Annual Report on Form
10-K for the fiscal year ended January 3, 1999.

THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT OF OPERATIONS AND STATEMENT OF CASH FLOWS INCLUDED IN THE
COMPANY'S FORM 10-Q FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE
NOTES THERETO.