Lernout & Hauspie Finalizes Acquisition of Dragon Systems

Business Wire, June 7, 2000

Business/Technology Editors

IEPER, BELGIUM & BURLINGTON, Mass.--(BUSINESS WIRE)--June 7, 2000

Acquisition Gives L&H Additional Resources to Broaden Consumer Market Speech and Language Offerings, To Accelerate the Development of Solutions for Telephony and Healthcare, and to Pursue Emerging Market

Opportunities

Lernout & Hauspie (NASDAQ: LHSP, EASDAQ: LHSP) (L&H(TM)) announced today the completion of its acquisition of Dragon Systems, Inc. of Newton, Mass., a privately held leader in speech and language technology. The acquisition gives L&H additional speech and language expertise and resources, helping it to expand its leadership and its offerings for mainstream and vertical markets -- such as telephony, automotive and healthcare -- and to address worldwide opportunities in emerging markets, such as wireless-Internet and speech portals.

The acquisition of Dragon complements L&H's existing strengths and provides it with a variety of assets that are integral to helping L&H implement its strategy for key markets. For example, L&H expects to combine the best of both companies' technologies and expertise to create improved next generation speech engines and to speed delivery of mainstream market solutions such as NAK (code name), its prototype wireless communications concept currently demonstrated on a handheld device. The assets from the acquisition will also be deployed to enhance L&H's offerings in key vertical markets such as legal, where Dragon has a successful product, and in telephony, healthcare and automotive. L&H also expects to leverage the Dragon resources to accelerate the use of speech and language in emerging markets such as speech portals, mobile devices, audio mining, smart phones, e-commerce and wireless communications for the Internet.

Under the terms of the agreement, L&H acquired all of the outstanding stock of Dragon Systems for approximately 11.7 million shares of L&H Common Stock (including options assumed and adjusted for the 2-for-1 split) or a value of approximately $460 million. L&H will use the purchase accounting method for this acquisition. Dragon's revenue contribution in the second and third quarters of this year is expected to be impaired due to L&H's requirement that Dragon adopt L&H's more conservative revenue recognition policy. L&H policy records revenue for the North American retail channel upon sell-through to the end user. L&H expects that Dragon's adoption of this policy will have an initial negative impact on Dragon's revenues and earnings for the second and third quarters. L&H expects that Dragon's earnings before goodwill amortization will be non-dilutive to L&H's earnings for the fourth quarter of 2000 and will have a positive impact beginning in 2001. Dragon Systems had revenues of approximately $60 million and a net loss of approximately $22 million for its fiscal year 1999.

"I'm very excited that this transaction now enables all of us to pursue our passion in fulfilling our vision of making speech and language technology ever more useful to people everywhere. The unparalleled resources, talents, and knowledge pooled by this acquisition create a new entity that gives us the opportunity to make the speech user interface truly ubiquitous," said Dr. Janet M. Baker, Chairman of the Board and Co-Founder of Dragon Systems. "I'm also honored to serve as chairman of L&H's Technology Advisory Board, collaborating with industry luminaries and focusing on helping this new corporate entity realize its remarkable potential on the promising road ahead."

"We have steadfastly pursued a strategy based on our vision that speech will play an integral role in telephony and enterprise solutions, globalization and Internet translation and in healthcare solutions, among other industries," said Gaston Bastiaens, president and CEO of L&H. "I'm convinced that with the resources we have gained from our acquisition of Dragon and Dictaphone, and with our new structure in place, we are ready to take leadership positions in these key growth areas and drive the market in areas of emerging technology."

The acquisition of Dragon Systems also provides L&H with access to Dragon's large global customer base, which includes companies such as Bank of America, Boeing, Citibank, Compaq, Dell, Deutsche Bank, Fujitsu, Kaiser Permanente, Peugeot, Seiko, Sony, Toshiba, Wells Fargo and many others. L&H intends to continue to market and support Dragon NaturallySpeaking(R) as well as other products in the Dragon Systems family and the L&H Voice Xpress family of products, providing continuity and support for Dragon Systems customers and strategic partnerships.

Dragon's strong brand recognition in the United States and its strength in vertical markets should complement L&H's strengths. L&H emphasis on international markets will be further enhanced by Dragon's strength in speech products for Chinese, Japanese and other national languages, such as Italian.

Organizational Structure

L&H also announced today the roles that Dragon's key executives will hold at L&H. Dr. Janet M. Baker, Dragon Systems' chairman and co-founder, will serve as Chairman of L&H's Technology Advisory Board. John Shagoury, formerly Dragon Systems' president, will become president of the newly formed L&H Applications Solution's Group that includes what were previously the L&H PC Applications group and the majority of Dragon's organization.