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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
  FORM 10-Q   þ
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005  o
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ 333-123664
(Commission File number)   UGS Corp.    Delaware
    
    75-2728894(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 5800 Granite Parkway, Suite 600
Plano, TX 75024
(Address of principal executive offices, including zip code) (972) 987-3000
(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 Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ On April 30, 2005, 100 shares of the Registrants Common Stock, $.01 par value, were
outstanding.




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UGS CORP.
INDEX TO FORM 10-Q PagePart I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 (Successor) and for the three months ended March 31, 2004 (Predecessor)
    
    
    1Condensed Consolidated Balance Sheets as of March 31, 2005 (Successor) and as of December 31, 2004 (Successor)
    
    
    2Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 (Successor) and for the three months ended March 31, 2004 (Predecessor)
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Qualitative and Quantitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34Part II. OTHER INFORMATIONItem 6. Exhibits
    
    
    34Signatures
    
    
    35Certification of President & CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of President & CEO Pursuant to Section 1350




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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands) Successor
    
    
    
    PredecessorUGS Corp.
    
    
    
    UGS PLMSolutions Inc.Three
    
    
    
    Threemonths ended
    
    
    
    months endedMarch 31, 2005
    
    
    
    March 31, 2004Revenue:Software
    
    $
    73,119
    
    
    
    $
    72,544Maintenance
    
    
    111,607
    
    
    
    
    102,030Services and other
    
    
    67,839
    
    
    
    
    60,069Total revenue
    
    
    252,565
    
    
    
    
    234,643Cost of revenue:Software
    
    
    4,456
    
    
    
    
    5,646Maintenance
    
    
    13,363
    
    
    
    
    14,401Services and other
    
    
    55,996
    
    
    
    
    49,050Amortization of capitalized software and
acquired intangible assets
    
    
    26,186
    
    
    
    
    13,972Total cost of revenue
    
    
    100,001
    
    
    
    
    83,069Gross profit
    
    
    152,564
    
    
    
    
    151,574Operating expenses:Selling, general and administrative
    
    
    95,169
    
    
    
    
    79,540Research and development
    
    
    35,981
    
    
    
    
    33,597Amortization of other intangible assets
    
    
    7,570
    
    
    
    
    1,500Total operating expenses
    
    
    138,720
    
    
    
    
    114,637Operating income
    
    
    13,844
    
    
    
    
    36,937Interest expense and amortization of deferred financing fees
    
    
    (21,163
    )
    
    
    
    (1,209
    )Other (expense) income, net
    
    
    (4,824
    )
    
    
    
    1,441(Loss) income before taxes
    
    
    (12,143
    )
    
    
    
    37,169Provision (benefit) for income taxes
    
    
    (3,974
    )
    
    
    
    11,708Net (loss) income
    
    $
    (8,169
    )
    
    
    $
    25,461
 See accompanying notes to unaudited condensed consolidated financial statements. 1




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UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts) SuccessorMarch 31,
    
    
    December 31,2005
    
    
    2004Assets:Current assetsCash and cash equivalents
    
    $
    86,030
    
    
    $
    58,400Accounts receivable, net
    
    
    239,377
    
    
    
    233,180Prepaids and other
    
    
    16,981
    
    
    
    23,869Deferred income taxes
    
    
    58,526
    
    
    
    62,890Total current assets
    
    
    400,914
    
    
    
    378,339Property and equipment, net
    
    
    32,428
    
    
    
    33,751Goodwill
    
    
    1,303,759
    
    
    
    1,317,948Capitalized and acquired software, net
    
    
    428,927
    
    
    
    435,816Customer accounts, net
    
    
    212,121
    
    
    
    217,961Other intangible assets, net
    
    
    112,190
    
    
    
    116,501Other assets
    
    
    40,999
    
    
    
    42,696Total assets
    
    $
    2,531,338
    
    
    $
    2,543,012Liabilities and Stockholders Equity:Current liabilitiesAccounts payable and accrued liabilities
    
    $
    133,523
    
    
    $
    150,290Deferred revenue
    
    
    145,114
    
    
    
    110,027Income taxes payable
    
    
    
    
    
    
    337Current portion of long-term debt
    
    
    5,000
    
    
    
    5,000Total current liabilities
    
    
    283,637
    
    
    
    265,654Other long-term liabilities
    
    
    34,155
    
    
    
    41,011Deferred income taxes
    
    
    207,061
    
    
    
    217,122Long-term debt
    
    
    1,052,260
    
    
    
    1,049,623Stockholders equityCommon stock, $.01 par value; 3,000 shares authorized; 100 issued
and outstanding at March 31, 2005 and December 31, 2004
    
    
    
    
    
    
    Additional paid-in capital
    
    
    1,005,690
    
    
    
    1,005,479Retained deficit
    
    
    (49,305
    )
    
    
    (41,136
    )Accumulated other comprehensive (loss) income, net of tax
    
    
    (2,160
    )
    
    
    5,259Total stockholders equity
    
    
    954,225
    
    
    
    969,602Total liabilities and stockholders equity
    
    $
    2,531,338
    
    
    $
    2,543,012
 See accompanying notes to unaudited condensed consolidated financial statements. 2




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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Successor
    
    
    
    PredecessorUGS Corp.
    
    
    
    UGS PLMSolutions Inc.Three months ended
    
    
    
    Three months endedMarch 31, 2005
    
    
    
    March 31, 2004Cash flows from operating activitiesNet (loss) income
    
    $
    (8,169
    )
    
    
    $
    25,461Adjustments to reconcile net (loss) income to net cash provided
by operating activities:Benefit for deferred income taxes
    
    
    (11,432
    )
    
    
    
    (52,531
    )Depreciation and amortization
    
    
    37,534
    
    
    
    
    20,209Amortization of deferred financing fees
    
    
    1,452
    
    
    
    
    Equity compensation through retention plan
    
    
    222
    
    
    
    
    Other
    
    
    740
    
    
    
    
    2,195Unrealized loss (gain) on revaluation of foreign denominated assets
and liabilities
    
    
    11,000
    
    
    
    
    (600
    )Unrealized gain on foreign currency revaluation of derivative instruments
    
    
    (7,606
    )
    
    
    
    Changes in operating assets and liabilities, net of effect of acquisitions:Accounts receivable
    
    
    (10,616
    )
    
    
    
    882Prepaids and other
    
    
    7,624
    
    
    
    
    (3,695
    )Accounts payable and accrued liabilities
    
    
    (14,569
    )
    
    
    
    (9,089
    )Deferred revenue
    
    
    34,517
    
    
    
    
    23,386Income taxes payable
    
    
    (337
    )
    
    
    
    41,688Other long-term liabilities
    
    
    (1,092
    )
    
    
    
    1,039Total adjustments
    
    
    47,437
    
    
    
    
    23,484Net cash provided by operating activities
    
    
    39,268
    
    
    
    
    48,945Cash flows from investing activitiesCash received from prior parent for acquisition related tax matters
    
    
    4,475
    
    
    
    
    Purchases of property and equipment
    
    
    (2,028
    )
    
    
    
    (1,363
    )Capitalized software costs
    
    
    (17,389
    )
    
    
    
    (14,378
    )Purchase of long-term investments
    
    
    

    
    
    
    
    (411
    )Other
    
    
    942
    
    
    
    
    (546
    )Net cash used in investing activities
    
    
    (14,000
    )
    
    
    
    (16,698
    )Cash flows from financing activitiesPayments under intercompany credit agreement, net
    
    
    
    
    
    
    
    (23,775
    )Proceeds from revolver credit line
    
    
    29,300
    
    
    
    
    Payments on revolver credit line
    
    
    (35,300
    )
    
    
    
    Proceeds from notes payable
    
    
    6,439
    
    
    
    
    Proceeds from bank notes and bonds
    
    
    2,500
    
    
    
    
    Capital contributed by parent
    
    
    229
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    3,168
    
    
    
    
    (23,775
    )Effect of exchange rate on cash and cash equivalents
    
    
    (806
    )
    
    
    
    86Net increase in cash and cash equivalents
    
    
    27,630
    
    
    
    
    8,558Cash and cash equivalents at beginning of period
    
    
    58,400
    
    
    
    
    40,314Cash and cash equivalents at end of period
    
    $
    86,030
    
    
    
    $
    48,872
 See accompanying notes to unaudited condensed consolidated financial statements. 3




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UGS Corp. 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1: Basis of Presentation On May 27, 2004, UGS Corp. (the Company), a newly formed Delaware corporation, acquired all
of the stock of UGS PLM Solutions Inc. from Electronic Data Systems Corporation (EDS).
Immediately following the acquisition from EDS, UGS Corp. merged with and into UGS PLM Solutions
Inc., with UGS PLM Solutions Inc. continuing as the surviving corporation. In connection with that
merger, UGS PLM Solutions Inc. changed its name to UGS Corp. The condensed consolidated statement of operations and condensed consolidated statement of
cash flows are presented in two periods: Predecessor and Successor, which relate to the period
preceding the acquisition of UGS PLM Solutions Inc. and the period succeeding the acquisition,
respectively. During 2004, the Predecessor period is from January 1, 2004 through March 31, 2004.
During 2005, the Successor period is from January 1, 2005 through March 31, 2005. The Company is a wholly owned subsidiary of UGS Holdings, Inc., which is a wholly owned
subsidiary of UGS Capital Corp. II, which is a wholly owned subsidiary of UGS Capital Corp. UGS
Capital Corp., UGS Capital Corp. II and UGS Holdings, Inc., which are collectively referred to as
the parent companies, were formed in March 2004 for the purpose of acquiring and holding the stock
of the Company. The accompanying unaudited condensed consolidated financial statements include the accounts of
the Company and its subsidiaries and, in the opinion of management, reflect all adjustments
(consisting only of normal recurring adjustments) necessary to fairly state the Companys
consolidated financial position, results of operations, and cash flows as of and for the dates and
periods presented. The results for such periods are not necessarily indicative of the results to be
expected for the entire fiscal year or for any future period. The condensed consolidated balance
sheet at December 31, 2004 has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. These condensed
consolidated financial statements are meant to be, and should be, read in conjunction with the
December 31, 2004 consolidated financial statements and the notes thereto included in the Companys
Registration Statement on Form S-4 (File No. 333-123664) as filed with the Securities and Exchange
Commission on April 21, 2005. The unaudited condensed consolidated financial statements were prepared in conformity with
accounting principles generally accepted in the United States of America which require management
to make assumptions and estimates that affect the amounts reported in these statements. Those items
requiring assumptions and estimates include capitalized software development costs, revenue
recognition, business combinations, income taxes and recoverability of goodwill, acquired
intangible assets and long-lived assets. Actual results may differ from these estimates. Certain prior year amounts in the condensed consolidated financial statements have been
reclassified to conform to the current period presentation. Note 2: Stock-Based Compensation The Company recognizes compensation cost associated with its stock-based awards to employees
in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees and its related interpretations. The Company records stock-based compensation over
the vesting period for the difference between the fair market value of an award at the date of
grant and the purchase or exercise price of the share. No compensation expense has been recognized
in connection with the Companys participation in its parents stock-based incentive plans except
for options granted under the Retention Incentive Plan, which is described further in Note 12 to
the consolidated financial statements included in the Companys Registration Statement on Form S-4
(File No. 333-123664). Stock options under the Retention Incentive Plan were granted upon the
separation from EDS with the estimated fair 4




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UGS Corp. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) value of vested shares accounted for as part of the purchase price allocation. For shares that
continue to vest, compensation expense is recognized over the vesting period based on the estimated
fair value at the date of grant. The following pro forma net income (loss) disclosure is computed as if the Company recorded
compensation expense based on the fair value method required by Statement of Financial Accounting
Standard (SFAS) No. 123, Accounting for Stock-Based Compensation. All Predecessor period stock
options remained with EDS resulting in no impact to the Successor period compensation expense
reflected in the pro forma presentation below (in thousands): Successor
    
    
    
    PredecessorThree months
    
    
    
    Three monthsended
    
    
    
    endedMarch 31, 2005
    
    
    
    March 31, 2004Net income (loss)As reported
    
    $
    (8,169
    )
    
    
    $
    25,461Total stock-based employee
compensation expense determined
under fair-value method for all
awards, net of related tax effects
    
    
    (73
    )
    
    
    
    (1,420
    )Pro forma
    
    $
    (8,242
    )
    
    
    $
    24,041
 The following weighted average assumptions were used in the estimated grant date fair value
calculations for stock option and stock purchase awards: Successor
    
    
    
    PredecessorThree months
    
    
    
    Three monthsended
    
    
    
    endedMarch 31, 2005
    
    
    
    March 31, 2004Expected term (in years)
    
    
    5.5
    
    
    
    
    3.4Dividend yields
    
    
    0
    %
    
    
    
    1.73
    %Expected volatility
    
    
    0
    %
    
    
    
    39.84
    %Risk-free interest rate
    
    
    3.68
    %
    
    
    
    3.8
    %
 Note 3: Property and Equipment Property and equipment is stated net of accumulated depreciation of $11.2 million at March 31,
2005 (Successor) and $8.4 million at December 31, 2004 (Successor). Depreciation expense was $3.0
million for three months ended March 31, 2005 (Successor) and $3.9 million for three months ended
March 31, 2004 (Predecessor). Note 4: Goodwill The following summarizes the changes in goodwill by segment for the three months ended March
31, 2005 (in thousands): Americas
    
    
    Europe
    
    
    Asia Pacific
    
    
    TotalBalance as of December 31, 2004
(Successor)
    
    $
    492,115
    
    
    $
    447,282
    
    
    $
    378,551
    
    
    $
    1,317,948UGS PLM Solutions Inc. purchase price
allocation adjustments
    
    
    2,031
    
    
    
    1,614
    
    
    
    1,563
    
    
    
    5,208D-Cubed, Ltd. purchase price allocation
adjustments
    
    
    
    
    
    
    (1,050
    )
    
    
    
    
    
    
    (1,050
    )Impact of foreign currency translation
    
    
    
    
    
    
    (18,347
    )
    
    
    
    
    
    
    (18,347
    )Balance as of March 31, 2005 (Successor)
    
    $
    494,146
    
    
    $
    429,499
    
    
    $
    380,114
    
    
    $
    1,303,759
 The purchase price allocation adjustments for the acquisition of UGS PLM Solutions Inc. are
primarily comprised of acquisition related tax matters. 5




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UGS Corp. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) Note 5: Other Intangible Assets Other intangible assets with definite useful lives are amortized over their respective
estimated useful lives to their estimated residual values. As of March 31, 2005, the Company had no
intangible assets with indefinite useful lives. The following is a summary of other intangible
assets (dollars in thousands, life in years): March 31, 2005 (Successor)Weighted-
    
    
    GrossAverage Useful
    
    
    Carrying
    
    
    AccumulatedLife
    
    
    Amount
    
    
    Amortization
    
    
    TotalDefinite Useful LivesCapitalized software
    
    
    3.0
    
    
    $
    52,703
    
    
    $
    1,937
    
    
    $
    50,766Acquired software
    
    
    5.0
    
    
    
    456,650
    
    
    
    78,489
    
    
    
    378,161Customer accounts
    
    
    10.0
    
    
    
    231,873
    
    
    
    19,752
    
    
    
    212,121Maintenance agreements
    
    
    10.0
    
    
    
    76,639
    
    
    
    6,490
    
    
    
    70,149Noncompete agreements
    
    
    2.0
    
    
    
    6,860
    
    
    
    2,869
    
    
    
    3,991Trademarks/tradenames
    
    
    7.0
    
    
    
    43,286
    
    
    
    5,236
    
    
    
    38,050Total other intangible assets
    
    
    
    
    
    $
    868,011
    
    
    $
    114,773
    
    
    $
    753,238
 December 31, 2004 (Successor)Weighted-
    
    
    GrossAverage Useful
    
    
    Carrying
    
    
    AccumulatedLife
    
    
    Amount
    
    
    Amortization
    
    
    TotalDefinite Useful LivesCapitalized software
    
    
    3.0
    
    
    $
    35,314
    
    
    $
    828
    
    
    $
    34,486Acquired software
    
    
    5.0
    
    
    
    456,614
    
    
    
    55,284
    
    
    
    401,330Customer accounts
    
    
    10.0
    
    
    
    231,873
    
    
    
    13,912
    
    
    
    217,961Maintenance agreements
    
    
    10.0
    
    
    
    76,639
    
    
    
    4,574
    
    
    
    72,065Noncompete agreements
    
    
    2.0
    
    
    
    6,860
    
    
    
    2,021
    
    
    
    4,839Trademarks/tradenames
    
    
    7.0
    
    
    
    43,286
    
    
    
    3,689
    
    
    
    39,597Total other intangible assets
    
    
    
    
    
    $
    850,586
    
    
    $
    80,308
    
    
    $
    770,278
 Amortization of software and maintenance agreements is included in cost of revenue.
Amortization of customer accounts, noncompete agreements and trademarks/tradenames is included in
operating expenses. The following is a summary of amortization expense (in thousands): Successor
    
    
    
    PredecessorThree months
    
    
    
    Three monthsended
    
    
    
    endedMarch 31, 2005
    
    
    
    March 31, 2004Capitalized software
    
    $
    1,111
    
    
    
    $
    8,215Acquired software
    
    
    22,477
    
    
    
    
    5,757Acquired and other intangible assets
    
    
    10,920
    
    
    
    
    2,350Total amortization expense
    
    $
    34,508
    
    
    
    $
    16,322
 Amortization of certain acquired software that is allocated to operating expenses was $0.7
million for the three months ended March 31, 2005 and $0.8 million for the three months ended March
31, 2004. Estimated amortization expense related to intangible assets at March 31, 2005, for the
remainder of 2005 and for each of the years in the five year period ending December 31, 2010 and
thereafter is: remainder of 2005$109.7 million; 2006$147.7 million; 2007$144.4 million;
2008$134.3 million; 2009$73.3 million, 2010$36.9 million and all remaining years$106.9 million. 6




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UGS Corp. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) Note 6: Restructuring Activities The following table summarizes activity in the restructuring accruals for the three months
ended March 31, 2005 (in thousands): Stock
    
    
    ExitRelated
    
    
    Costs
    
    
    TotalBalance at December 31, 2004 (Successor)
    
    $
    40
    
    
    $
    11,869
    
    
    $
    11,909Cash payments
    
    
    
    
    
    
    (502
    )
    
    
    (502
    )Balance at March 31, 2005 (Successor)
    
    $
    40
    
    
    $
    11,367
    
    
    $
    11,407
 The March 31, 2005 balance for stock-related costs resulted from restructuring activities
associated with the 2001 EDS acquisition of the minority interest held in the Company. Those
activities provided for workforce reductions of approximately 400 employees, consisting of
individuals employed throughout the company in managerial, professional, clerical, consulting and
technical positions. The compensation charge related to the purchase of certain stock options held
by employees of the Company. The March 31, 2005 balance for exit costs resulted from restructuring activities done in
conjunction with the acquisition of Engineering Animation Incorporated (EAI) in 2000 and the
acquisition of Structural Dynamics Research Corporation (SDRC) in 2001. The Company also added to
the restructuring accrual in 2002 for activities associated with SDRC. The majority of these
balances were included in the fair value of assets and liabilities as of the respective purchase
date. As such, the charges were not recognized in the statement of operations. Note 7: Debt Debt as of March 31, 2005 consists of the following (in thousands): Note payable, due December 31, 2014 (780.6 million yen)
    
    $
    7,260Senior unsecured subordinated notes, due June 1, 2012, 10.0%
    
    
    550,000Secured term loan, due March 31, 2012, LIBOR plus 2.0%
    
    
    500,000Total long-term debt
    
    
    1,057,260Less current portion
    
    
    (5,000
    )Total long-term debt, less current portion
    
    $
    1,052,260
 Senior Secured Credit Facility Refinancing In February 2005, the Company completed a refinancing of its term loan that extended the
maturity date to March 31, 2012 and reduced the margin the Company pays on the term loan in the
first quarter of 2005 from 2.25% to 2.00%. Beginning in the second quarter of 2005, the margin will
be calculated based on the Companys leverage ratio, as defined in the amended credit facility
agreement. In addition, the Companys annual limit for capital expenditures was increased $10.0
million per annum through the maturity of the term loan. The refinancing also provided for an
additional $225.0 million of principal, which was drawn upon the closing of the acquisition of
Tecnomatix Technologies, Ltd. (Tecnomatix) in April 2005. Debt Covenants The subordinated notes and the credit facility contain various covenants including limitations
on additional indebtedness, capital expenditures, restricted payments, the incurrence of liens,
transactions with
affiliates and sales of assets. In addition, the credit facility requires the Company to
comply with certain financial covenants, including leverage and interest coverage ratios and
capital expenditure limitations. The Company was in compliance with all of the covenants of the
subordinated notes and the credit facility as of March 31, 2005. 7




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UGS Corp. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) Note 8: Income Taxes Income taxes related to the Company for the Predecessor period are allocated as if they were
calculated on a separate return basis. The provision (benefit) for income taxes is summarized as
follows (in thousands): Successor
    
    
    
    PredecessorThree months
    
    
    
    Three monthsended
    
    
    
    endedMarch 31, 2005
    
    
    
    March 31, 2004Current
    
    $
    7,458
    
    
    
    $
    64,239Deferred
    
    
    (11,432
    )
    
    
    
    (52,531
    )Total
    
    $
    (3,974
    )
    
    
    $
    11,708
 (Loss) income before income taxes includes the following components (in thousands): Successor
    
    
    
    PredecessorThree months
    
    
    
    Three monthsended
    
    
    
    endedMarch 31, 2005
    
    
    
    March 31, 2004U.S. (loss) income
    
    $
    (21,950
    )
    
    
    $
    11,243Non-U.S. income
    
    
    9,807
    
    
    
    
    25,926Total
    
    $
    (12,143
    )
    
    
    $
    37,169
 In the first quarter of 2004, the Company amended its existing royalty agreement with most of
its foreign subsidiaries. Under this agreement, certain of the foreign subsidiaries prepaid a
portion of the estimated royalties that would have otherwise been due for the period of July 1,
2004 through December 31, 2005 in exchange for certain negotiated discounts to otherwise payable
royalty amounts. The tax effects of these transactions have been reflected as current tax expense
and a deferred tax benefit for the Predecessor period. The Company is not contractually obligated to pay EDS for its share of any consolidated income
tax liabilities while it was a member of the EDS consolidated tax return group. Any consolidated
income tax liabilities calculated on a separate return basis as due and payable by the Company were
treated as non-cash capital contributions from EDS to the Company. Furthermore, pursuant to the
stock purchase agreement between EDS and the Company, all income tax liabilities for all tax
periods up to, and including, the period ending May 26, 2004 are the financial responsibility of
EDS. Note 9: Pension Benefits of Certain Foreign Subsidiaries Successor Period Several of the Companys foreign subsidiaries have defined benefit pension or termination
indemnity plans covering substantially all of their eligible employees that are in place as a
result of the applicable local statutes. Benefits under these plans are generally based on years of
service and final average compensation levels. These plans are managed in accordance with
applicable local statutes and practices.
The Company deposits funds for these plans with insurance companies, pension trustees,
government-managed accounts, and/or accrues the expense for the unfunded portion of the benefit
obligation on its consolidated financial statements. The Companys practice is to fund the various
pension or termination indemnity plans in amounts sufficient to meet the minimum requirements as
established by applicable local governmental oversight and taxing authorities. Depending on the
design of the plan, local custom and market circumstances, the liabilities of a plan may exceed
qualified plan assets. The following table provides the components of net periodic benefit cost recognized in the
statement of operations for the three months ended March 31, 2005 (in thousands): 8




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UGS Corp. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) Service cost
    
    $
    686Interest cost
    
    
    212Expected return on plan assets
    
    
    (57
    )Amortization of net actuarial loss
    
    
    15Net periodic benefit cost
    
    $
    856
 Predecessor Period During the three months ended March 31, 2004, the Companys worldwide employees participated
in a number of qualified and non-qualified pension plans of EDS (the EDS Plans). In conjunction
with separation from EDS, only certain foreign plans remained with the Company with all other plans
remaining as part of EDS. Any future activity on the EDS Plans will have no impact on the financial
position, operating results or cash flows of the Company. Information on net periodic benefit cost
is not available for three months ended March 31, 2004. Note 10: Segment Information The Company aggregates its operations by geographic location for management reporting
purposes. Reportable segments consist of the Americas, Europe and Asia Pacific. The Companys
business involves operations in principally one industry segment: providing product lifecycle
management (PLM) software and services to various industries. Management uses several metrics to measure the performance of each segment, including revenue
and operating income. These results are used, in part, to evaluate the performance of, and allocate
resources to, each of the segments. Certain operating expenses, which are separately managed at the
corporate level, are not allocated to the reportable segments. Unallocated costs include research
and development costs, amortization of capitalized software and intangible assets, and corporate
general and administrative costs. Accounts receivable is the only significant asset managed at a
segment level. All other assets are managed on a consolidated basis. Financial information for each
reportable segment is as follows (in thousands): Revenue
    
    Americas
    
    
    Europe
    
    
    Asia Pacific
    
    
    TotalThree months ended March 31, 2005 (Successor)Software
    
    $
    25,278
    
    
    $
    26,459
    
    
    $
    21,382
    
    
    $
    73,119Maintenance
    
    
    47,889
    
    
    
    41,125
    
    
    
    22,593
    
    
    
    111,607Services and other
    
    
    35,994
    
    
    
    25,212
    
    
    
    6,633
    
    
    
    67,839Total revenue
    
    $
    109,161
    
    
    $
    92,796
    
    
    $
    50,608
    
    
    $
    252,565Three months ended March 31, 2004 (Predecessor)Software
    
    $
    27,302
    
    
    $
    24,429
    
    
    $
    20,813
    
    
    $
    72,544Maintenance
    
    
    42,431
    
    
    
    38,857
    
    
    
    20,742
    
    
    
    102,030Services and other
    
    
    33,775
    
    
    
    20,704
    
    
    
    5,590
    
    
    
    60,069Total revenue
    
    $
    103,508
    
    
    $
    83,990
    
    
    $
    47,145
    
    
    $
    234,643
 Operating Income
    
    Americas
    
    
    Europe
    
    
    Asia Pacific
    
    
    TotalThree months
ended March 31,
2005 (Successor)
    
    $
    45,536
    
    
    $
    38,409
    
    
    $
    28,655
    
    
    $
    112,600Three months ended
March 31, 2004
(Predecessor)
    
    $
    42,922
    
    
    $
    36,763
    
    
    $
    27,421
    
    
    $
    107,106
 Accounts Receivable
    
    Americas
    
    
    Europe
    
    
    Asia Pacific
    
    
    TotalAs of March 31, 2005 (Successor)
    
    $
    85,751
    
    
    $
    107,280
    
    
    $
    46,346
    
    
    $
    239,377As of December 31, 2004 (Successor)
    
    $
    79,371
    
    
    $
    108,356
    
    
    $
    45,453
    
    
    $
    233,180
 9




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UGS Corp. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) A reconciliation of operating income for reportable segments to operating income is as follows
(in thousands): Successor
    
    
    
    PredecessorThree months
    
    
    
    Three monthsended
    
    
    
    endedMarch 31, 2005
    
    
    
    March 31, 2004Total operating income for reportable segments
    
    $
    112,600
    
    
    
    $
    107,106Research and development
    
    
    (35,981
    )
    
    
    
    (33,597
    )Amortization of capitalized and acquired software
and other intangible assets
    
    
    (33,756
    )
    
    
    
    (15,472
    )Corporate and unallocated costs
    
    
    (29,019
    )
    
    
    
    (21,100
    )Operating income
    
    $
    13,844
    
    
    
    $
    36,937
 The following presents information about the Companys operations in selected geographical
regions that represent more than 10% of total revenue (in thousands): Successor
    
    
    
    PredecessorThree months
    
    
    
    Three monthsended
    
    
    
    endedTotal Revenue:
    
    March 31, 2005
    
    
    
    March 31, 2004United States
    
    $
    103,189
    
    
    
    $
    97,243Germany
    
    
    28,132
    
    
    
    
    26,632Japan
    
    
    30,137
    
    
    
    
    28,073All Other
    
    
    91,107
    
    
    
    
    82,695Total
    
    $
    252,565
    
    
    
    $
    234,643
 SuccessorMarch 31,
    
    
    December 31,Net Property, Plant and Equipment:
    
    2005
    
    
    2004United States
    
    $
    22,143
    
    
    $
    22,798Germany
    
    
    601
    
    
    
    768Japan
    
    
    927
    
    
    
    774All Other
    
    
    8,757
    
    
    
    9,411Total
    
    $
    32,428
    
    
    $
    33,751
 Note 11: Commitments and Contingencies Legal Proceedings The Company is not a party to any litigation other than ordinary, routine litigation
incidental to its business. In the opinion of management, the ultimate liability, if any, resulting
from the aforementioned contingencies will not have a material adverse effect on the Companys
consolidated results of operations or financial position. Guarantees The Company adopted the initial recognition and measurement provisions of Financial Accounting
Standards Board (FASB) Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, on January
1, 2003, which provisions apply on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company has adopted the disclosure provisions of FIN No. 45 in the
preparation of these financial statements. In the ordinary course of business, the Company is not
subject to potential obligations under guarantees that fall within the scope of FIN No. 45 except
for standard indemnification and warranty provisions that are contained within many of its software
license agreements, and these give rise only to the 10




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UGS Corp. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) disclosure requirements prescribed by FIN No. 45. In addition, under previously existing accounting
principles, the Company continues to monitor the conditions that are subject to the guarantees and
indemnifications to identify whether it is probable that a loss has occurred, and will recognize
any such losses under the guarantees and indemnifications when those losses are estimable. The
Company incurred no significant losses related to such indemnifications or guarantees during the
three months ended March 31, 2005 and 2004. Note 12: Comprehensive (Loss) Income The following table presents the calculation of comprehensive (loss) income (in thousands): Successor
    
    
    
    PredecessorThree months
    
    
    
    Three monthsended
    
    
    
    endedMarch 31, 2005
    
    
    
    March 31, 2004Net (loss) income
    
    $
    (8,169
    )
    
    
    $
    25,461Currency translation adjustments, net of taxes
    
    
    (6,222
    )
    
    
    
    (1,653
    )Change in minimum pension liability
    
    
    
    
    
    
    
    485Change in fair value of derivative instruments, net of taxes
    
    
    (1,197
    )
    
    
    
    Comprehensive (loss) income
    
    $
    (15,588
    )
    
    
    $
    24,293
 Note 13: Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which requires
share-based compensation transactions to be accounted for using a fair-value-based method and the
resulting cost recognized in the financial statements. SFAS No. 123(R) is effective for the
Companys share-based awards granted, modified, or settled in any interim or annual period
beginning after December 15, 2005. The Company has not yet determined the impact SFAS No. 123(R)
will have on its financial position or results of operations. In March 2005, the FASB issued FIN No. 47, Accounting for Conditional Asset Retirement
Obligations. FIN No. 47 provides guidance relating to the identification of and financial
reporting for legal obligations to perform an asset retirement activity. FIN No. 47 requires
recognition of a liability for the fair value of a conditional asset retirement obligation when
incurred if the liabilitys fair value can be reasonably estimated. FIN No. 47 is effective no
later than the end of December 31, 2005. The Company is reviewing FIN No. 47 to determine whether
adoption will have an impact on the Companys results of operations or financial position. Note 14: Financial Statements of Guarantors The Companys senior unsecured subordinated notes and the obligations under the Companys
senior secured credit facility are guaranteed by certain wholly owned subsidiaries. The guarantees
are full, unconditional and joint and several. The following unaudited condensed consolidating
schedules of operations, balance sheets and cash flows are presented for the parent company (UGS
Corp.), the guarantor subsidiaries, the non-guarantor subsidiaries and the total consolidated UGS
Corp. 11




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UGS Corp. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING
SCHEDULE OF OPERATIONS
(in thousands) Three months ended March 31, 2005Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    
    
    
    
    ConsolidatedRevenue:Software
    
    $
    23,801
    
    
    $
    270
    
    
    $
    49,048
    
    
    $
    
    
    
    
    
    
    
    $
    73,119Maintenance
    
    
    44,111
    
    
    
    137
    
    
    
    67,359
    
    
    
    
    
    
    
    
    
    
    
    111,607Services and other
    
    
    35,117
    
    
    
    44,464
    
    
    
    32,708
    
    
    
    (44,450
    )
    
    
    (a
    )
    
    
    67,839Total revenue
    
    
    103,029
    
    
    
    44,871
    
    
    
    149,115
    
    
    
    (44,450
    )
    
    
    
    
    
    
    252,565Cost of revenue:Software
    
    
    2,249
    
    
    
    102
    
    
    
    2,105
    
    
    
    
    
    
    
    
    
    
    
    4,456Maintenance
    
    
    4,879
    
    
    
    30
    
    
    
    8,454
    
    
    
    
    
    
    
    
    
    
    
    13,363Services and other
    
    
    27,507
    
    
    
    
    
    
    
    72,939
    
    
    
    (44,450
    )
    
    
    (a
    )
    
    
    55,996Amortization of capitalized software and
acquired intangible assets
    
    
    10,841
    
    
    
    14,010
    
    
    
    1,335
    
    
    
    
    
    
    
    
    
    
    
    26,186Total cost of revenue
    
    
    45,476
    
    
    
    14,142
    
    
    
    84,833
    
    
    
    (44,450
    )
    
    
    
    
    
    
    100,001Gross profit
    
    
    57,553
    
    
    
    30,729
    
    
    
    64,282
    
    
    
    
    
    
    
    
    
    
    
    152,564Operating expenses:Selling,
general and administrative
    
    
    47,419
    
    
    
    658
    
    
    
    47,092
    
    
    
    
    
    
    
    
    
    
    
    95,169Research and development
    
    
    35,981
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,981Amortization of other intangibles assets
    
    
    2,622
    
    
    
    
    
    
    
    4,948
    
    
    
    
    
    
    
    
    
    
    
    7,570Total operating expenses
    
    
    86,022
    
    
    
    658
    
    
    
    52,040
    
    
    
    
    
    
    
    
    
    
    
    138,720Operating (loss) income
    
    
    (28,469
    )
    
    
    30,071
    
    
    
    12,242
    
    
    
    
    
    
    
    
    
    
    
    13,844Interest expense and amortization of
deferred financing fees
    
    
    (22,013
    )
    
    
    16,581
    
    
    
    (15,731
    )
    
    
    
    
    
    
    
    
    
    
    (21,163
    )Other (expense) income, net
    
    
    (2,025
    )
    
    
    (3,322
    )
    
    
    523
    
    
    
    
    
    
    
    
    
    
    
    (4,824
    )(Loss) income before income taxes
    
    
    (52,507
    )
    
    
    43,330
    
    
    
    (2,966
    )
    
    
    
    
    
    
    
    
    
    
    (12,143
    )Provision (benefit) for income taxes
    
    
    (18,101
    )
    
    
    15,165
    
    
    
    (1,038
    )
    
    
    
    
    
    
    
    
    
    
    (3,974
    )Net (loss) income
    
    $
    (34,406
    )
    
    $
    28,165
    
    
    $
    (1,928
    )
    
    $
    
    
    
    
    
    
    
    $
    (8,169
    )
    12




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UGS Corp. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING
SCHEDULE OF OPERATIONS
(in thousands) Three months ended March 31, 2004Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    
    
    
    
    ConsolidatedRevenue:Software
    
    $
    24,805
    
    
    $
    1,638
    
    
    $
    46,101
    
    
    $
    
    
    
    
    
    
    
    $
    72,544Maintenance
    
    
    38,767
    
    
    
    217
    
    
    
    63,046
    
    
    
    
    
    
    
    
    
    
    
    102,030Services and other

    
    
    32,950
    
    
    
    33,529
    
    
    
    27,119
    
    
    
    (33,529
    )
    
    
    (a
    )
    
    
    60,069Total revenue
    
    
    96,522
    
    
    
    35,384
    
    
    
    136,266
    
    
    
    (33,529
    )
    
    
    
    
    
    
    234,643Cost of revenue:Software
    
    
    2,286
    
    
    
    540
    
    
    
    2,820
    
    
    
    
    
    
    
    
    
    
    
    5,646Maintenance
    
    
    5,568
    
    
    
    31
    
    
    
    8,802
    
    
    
    
    
    
    
    
    
    
    
    14,401Services and other
    
    
    26,736
    
    
    
    19
    
    
    
    55,824
    
    
    
    (33,529
    )
    
    
    (a
    )
    
    
    49,050Amortization of capitalized software and
acquired intangible assets
    
    
    13,972
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,972Total cost of revenue
    
    
    48,562
    
    
    
    590
    
    
    
    67,446
    
    
    
    (33,529
    )
    
    
    
    
    
    
    83,069Gross profit
    
    
    47,960
    
    
    
    34,794
    
    
    
    68,820
    
    
    
    
    
    
    
    
    
    
    
    151,574Operating expenses:Selling,
general and administrative
    
    
    37,807
    
    
    
    1,770
    
    
    
    39,963
    
    
    
    
    
    
    
    
    
    
    
    79,540Research and development
    
    
    32,437
    
    
    
    1,160
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,597Amortization of other intangibles assets
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500Total operating expenses
    
    
    71,744
    
    
    
    2,930
    
    
    
    39,963
    
    
    
    
    
    
    
    
    
    
    
    114,637Operating (loss) income
    
    
    (23,784
    )
    
    
    31,864
    
    
    
    28,857
    
    
    
    
    
    
    
    
    
    
    
    36,937Interest expense
    
    
    (1,209
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,209
    )Other income, net
    
    
    635
    
    
    
    597
    
    
    
    209
    
    
    
    
    
    
    
    
    
    
    
    1,441(Loss) income before income taxes
    
    
    (24,358
    )
    
    
    32,461
    
    
    
    29,066
    
    
    
    
    
    
    
    
    
    
    
    37,169Provision (benefit) for income taxes
    
    
    (9,827
    )
    
    
    11,362
    
    
    
    10,173
    
    
    
    
    
    
    
    
    
    
    
    11,708Net (loss) income
    
    $
    (14,531
    )
    
    $
    21,099
    
    
    $
    18,893
    
    
    $
    
    
    
    
    
    
    
    $
    25,461
    13




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##### Table of Contents



UGS Corp. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) SUPPLEMENTAL UNAUDITED CONDENSED
CONSOLIDATING BALANCE SHEET
(in thousands) March 31, 2005Guarantor
    
    
    Non-GuarantorParent Company
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssets:Current assetsCash and cash equivalents
    
    $
    22,642
    
    
    $
    740
    
    
    $
    62,648
    
    
    $
    
    
    
    $
    86,030Accounts receivable, net
    
    
    80,510
    
    
    
    366
    
    
    
    158,501
    
    
    
    
    
    
    
    239,377Prepaids and other
    
    
    9,441
    
    
    
    
    
    
    
    7,540
    
    
    
    
    
    
    
    16,981Deferred income taxes
    
    
    58,526
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,526Total current assets
    
    
    171,119
    
    
    
    1,106
    
    
    
    228,689
    
    
    
    
    
    
    
    400,914Property and equipment, net
    
    
    21,314
    
    
    
    
    
    
    
    11,114
    
    
    
    
    
    
    
    32,428Goodwill
    
    
    331,550
    
    
    
    542,785
    
    
    
    429,424
    
    
    
    
    
    
    
    1,303,759Capitalized and acquired software, net
    
    
    190,261
    
    
    
    232,722
    
    
    
    5,944
    
    
    
    
    
    
    
    428,927Customer accounts, net
    
    
    83,656
    
    
    
    
    
    
    
    128,465
    
    
    
    
    
    
    
    212,121Other intangible assets, net
    
    
    52,136
    
    
    
    
    
    
    
    60,054
    
    
    
    
    
    
    
    112,190Intercompany credit agreement
    
    
    21,484
    
    
    
    235,381
    
    
    
    
    
    
    
    (256,865
    )  (b)
    
    
    Other assets
    
    
    591,834
    
    
    
    
    
    
    
    5,031
    
    
    
    (555,866
    )  (a)
    
    
    40,999Total assets
    
    $
    1,463,354
    
    
    $
    1,011,994
    
    
    $
    868,721
    
    
    $
    (812,731
    )
    
    $
    2,531,338Liabilities and Stockholders Equity:Current liabilitiesAccounts payable and accrued liabilities
    
    $
    64,026
    
    
    $
    3,091
    
    
    $
    66,406
    
    
    $
    
    
    
    $
    133,523Deferred revenue
    
    
    65,947
    
    
    
    830
    
    
    
    78,337
    
    
    
    
    
    
    
    145,114Intercompany credit agreement
    
    
    
    
    
    
    
    
    
    
    256,865
    
    
    
    (256,865
    )  (b)
    
    
    Current portion of long-term debt
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Total current liabilities
    
    
    134,973
    
    
    
    3,921
    
    
    
    401,608
    
    
    
    (256,865
    )
    
    
    283,637Other long-term liabilities
    
    
    
    
    
    
    20,626
    
    
    
    13,529
    
    
    
    
    
    
    
    34,155Deferred income taxes
    
    
    57,640
    
    
    
    81,453
    
    
    
    67,968
    
    
    
    
    
    
    
    207,061Long-term debt
    
    
    1,045,000
    
    
    
    
    
    
    
    7,260
    
    
    
    
    
    
    
    1,052,260Total stockholders equity
    
    
    225,741
    
    
    
    905,994
    
    
    
    378,356
    
    
    
    (555,866
    )  (a)
    
    
    954,225Total liabilities and
stockholders equity
    
    $
    1,463,354
    
    
    $
    1,011,994
    
    
    $
    868,721
    
    
    $
    (812,731
    )
    
    $
    2,531,338
   (a) - Elimination of investment in guarantor subsidiary.(b) - Elimination of intercompany balances. 14




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##### Table of Contents



UGS Corp. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) SUPPLEMENTAL UNAUDITED CONDENSED
CONSOLIDATING BALANCE SHEET
(in thousands) December 31, 2004Guarantor
    
    
    Non-GuarantorParent Company
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssets:Current assetsCash and cash equivalents
    
    $
    (1,951
    )
    
    $
    251
    
    
    $
    60,100
    
    
    $
    
    
    
    $
    58,400Accounts receivable, net
    
    
    74,211
    
    
    
    1,980
    
    
    
    156,989
    
    
    
    
    
    
    
    233,180Prepaids and other
    
    
    14,458
    
    
    
    220
    
    
    
    9,191
    
    
    
    
    
    
    
    23,869Deferred income taxes
    
    
    60,978
    
    
    
    
    
    
    
    1,912
    
    
    
    
    
    
    
    62,890Total current assets
    
    
    147,696
    
    
    
    2,451
    
    
    
    228,192
    
    
    
    
    
    
    
    378,339Property and equipment, net
    
    
    21,884
    
    
    
    
    
    
    
    11,867
    
    
    
    
    
    
    
    33,751Goodwill
    
    
    325,681
    
    
    
    542,785
    
    
    
    449,482
    
    
    
    
    
    
    
    1,317,948Capitalized and acquired software, net
    
    
    182,737
    
    
    
    246,732
    
    
    
    6,347
    
    
    
    
    
    
    
    435,816Customer accounts, net
    
    
    85,941
    
    
    
    
    
    
    
    132,020
    
    
    
    
    
    
    
    217,961Other intangible assets, net
    
    
    54,073
    
    
    
    
    
    
    
    62,428
    
    
    
    
    
    
    
    116,501Intercompany credit agreement
    
    
    70,888
    
    
    
    205,734
    
    
    
    
    
    
    
    (276,622
    )  (b)
    
    
    Other assets
    
    
    592,688
    
    
    
    
    
    
    
    5,874
    
    
    
    (555,866
    )  (a)
    
    
    42,696Total assets
    
    $
    1,481,588
    
    
    $
    997,702
    
    
    $
    896,210
    
    
    $
    (832,488
    )
    
    $
    2,543,012Liabilities and Stockholders Equity:Current liabilitiesAccounts payable and accrued liabilities
    
    $
    67,243
    
    
    $
    325
    
    
    $
    82,722
    
    
    $
    
    
    
    $
    150,290Deferred revenue
    
    
    49,376
    
    
    
    1,242
    
    
    
    59,409
    
    
    
    
    
    
    
    110,027Income taxes payable
    
    
    
    
    
    
    
    
    
    
    337
    
    
    
    
    
    
    
    337Intercompany credit agreement
    
    
    
    
    
    
    
    
    
    
    276,622
    
    
    
    (276,622
    )  (b)
    
    
    Current portion of long-term debt
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Total current liabilities
    
    
    121,619
    
    
    
    1,567
    
    
    
    419,090
    
    
    
    (276,622
    )
    
    
    265,654Other long-term liabilities
    
    
    
    
    
    
    26,390
    
    
    
    14,621
    
    
    
    
    
    
    
    41,011Deferred income taxes
    
    
    63,736
    
    
    
    86,357
    
    
    
    67,029
    
    
    
    
    
    
    
    217,122Long-term debt
    
    
    1,048,500
    
    
    
    
    
    
    
    1,123
    
    
    
    
    
    
    
    1,049,623Total stockholders equity
    
    
    247,733
    
    
    
    883,388
    
    
    
    394,347
    
    
    
    (555,866
    )  (a)
    
    
    969,602Total liabilities and
stockholders equity
    
    $
    1,481,588
    
    
    $
    997,702
    
    
    $
    896,210
    
    
    $
    (832,488
    )
    
    $
    2,543,012
   (a) - Elimination of investment in guarantor subsidiary.(b) - Elimination of intercompany balances. 15




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UGS Corp. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) SUPPLEMENTAL UNAUDITED CONDENSED
CONSOLIDATING SCHEDULE OF CASH FLOWS
(in thousands) Three months ended March 31,2005Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedCash flows from operating activitiesNet (loss) income
    
    $
    (34,406
    )
    
    $
    28,165
    
    
    $
    (1,928
    )
    
    $
    (8,169
    )Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:Benefit for deferred income taxes
    
    
    (4,324
    )
    
    
    (4,904
    )
    
    
    (2,204
    )
    
    
    (11,432
    )Depreciation and amortization
    
    
    16,192
    
    
    
    14,010
    
    
    
    7,332
    
    
    
    37,534Amortization of deferred financing fees
    
    
    1,452
    
    
    
    
    
    
    
    
    
    
    
    1,452Equity compensation through retention plan
    
    
    222
    
    
    
    
    
    
    
    
    
    
    
    222Other
    
    
    60
    
    
    
    133
    
    
    
    547
    
    
    
    740Unrealized loss on revaluation of foreign
denominated assets and liabilities
    
    
    
    
    
    
    
    
    
    
    11,000
    
    
    
    11,000Unrealized gain on foreign currency revaluation of
derivative instruments
    
    
    
    
    
    
    (7,606
    )
    
    
    
    
    
    
    (7,606
    )Changes in operating assets and liabilities, net of effect
of acquisitions:Accounts receivable
    
    
    (5,656
    )
    
    
    1,481
    
    
    
    (6,441
    )
    
    
    (10,616
    )Prepaids and other
    
    
    6,255
    
    
    
    220
    
    
    
    1,149
    
    
    
    7,624Accounts payable and accrued liabilities
    
    
    (2,700
    )
    
    
    2,766
    
    
    
    (14,635
    )
    
    
    (14,569
    )Deferred revenue
    
    
    13,502
    
    
    
    (412
    )
    
    
    21,427
    
    
    
    34,517Income taxes payable
    
    
    
    
    
    
    
    
    
    
    (337
    )
    
    
    (337
    )Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    (1,092
    )
    
    
    (1,092
    )Total adjustments
    
    
    25,003
    
    
    
    5,688
    
    
    
    16,746
    
    
    
    47,437Net cash (used in) provided by operating activities
    
    
    (9,403
    )
    
    
    33,853
    
    
    
    14,818
    
    
    
    39,268Cash flows from investing activitiesCash received from prior parent for acquisition
related tax matters
    
    
    4,475
    
    
    
    
    
    
    
    
    
    
    
    4,475Purchases of property and equipment
    
    
    (1,460
    )
    
    
    
    
    
    
    (568
    )
    
    
    (2,028
    )Capitalized software costs
    
    
    (17,389
    )
    
    
    
    
    
    
    
    
    
    
    (17,389
    )Other
    
    
    (673
    )
    
    
    
    
    
    
    1,615
    
    
    
    942Net cash (used in) provided by investing activities
    
    
    (15,047
    )
    
    
    
    
    
    
    1,047
    
    
    
    (14,000
    )Cash flows from financing activitiesBorrowings (payments) under intercompany
credit agreement, net
    
    
    52,314
    
    
    
    (33,364
    )
    
    
    (18,950
    )
    
    
    Proceeds from revolver credit line
    
    
    29,300
    
    
    
    
    
    
    
    
    
    
    
    29,300Payments on revolver credit line
    
    
    (35,300
    )
    
    
    
    
    
    
    
    
    
    
    (35,300
    )Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    6,439
    
    
    
    6,439Proceeds from bank notes and bonds
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    2,500Capital contributed by parent
    
    
    229
    
    
    
    
    
    
    
    
    
    
    
    229Net cash provided by (used in) financing activities
    
    
    49,043
    
    
    
    (33,364
    )
    
    
    (12,511
    )
    
    
    3,168Effect of exchange rates on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (806
    )
    
    
    (806
    )Net increase in cash and cash equivalents
    
    
    24,593
    
    
    
    489
    
    
    
    2,548
    
    
    
    27,630Cash and cash equivalents at beginning of period
    
    
    (1,951
    )
    
    
    251
    
    
    
    60,100
    
    
    
    58,400Cash and cash equivalents at end of period
    
    $
    22,642
    
    
    $
    740
    
    
    $
    62,648
    
    
    $
    86,030
 16




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UGS Corp. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) SUPPLEMENTAL UNAUDITED CONDENSED
CONSOLIDATING SCHEDULE OF CASH FLOWS
(in thousands) Three months ended March 31,2004Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedCash flows from operating activitiesNet (loss) income
    
    $
    (14,531
    )
    
    $

    21,099
    
    
    $
    18,893
    
    
    $
    25,461Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:Benefit for deferred income taxes
    
    
    (52,531
    )
    
    
    
    
    
    
    
    
    
    
    (52,531
    )Depreciation and amortization
    
    
    18,794
    
    
    
    
    
    
    
    1,415
    
    
    
    20,209Other
    
    
    402
    
    
    
    1,300
    
    
    
    493
    
    
    
    2,195Unrealized gain on revaluation of foreign denominated
assets and liabilities
    
    
    
    
    
    
    
    
    
    
    (600
    )
    
    
    (600
    )Changes in operating assets and liabilities, net of effect
of acqusitions:Accounts receivable
    
    
    9,344
    
    
    
    (338
    )
    
    
    (8,124
    )
    
    
    882Prepaids and other
    
    
    (3,892
    )
    
    
    16
    
    
    
    181
    
    
    
    (3,695
    )Accounts payable and accrued liabilities
    
    
    (11,279
    )
    
    
    (30,556
    )
    
    
    32,746
    
    
    
    (9,089
    )Deferred revenue
    
    
    2,265
    
    
    
    (756
    )
    
    
    21,877
    
    
    
    23,386Income taxes payable
    
    
    
    
    
    
    
    
    
    
    41,688
    
    
    
    41,688Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    1,039
    
    
    
    1,039Total adjustments
    
    
    (36,897
    )
    
    
    (30,334
    )
    
    
    90,715
    
    
    
    23,484Net cash (used in) provided by operating activities
    
    
    (51,428
    )
    
    
    (9,235
    )
    
    
    109,608
    
    
    
    48,945Cash flows from investing activitiesPurchases of property and equipment
    
    
    (935
    )
    
    
    
    
    
    
    (428
    )
    
    
    (1,363
    )Capitalized software costs
    
    
    (14,378
    )
    
    
    
    
    
    
    
    
    
    
    (14,378
    )Purchase of long-term investments
    
    
    
    
    
    
    
    
    
    
    (411
    )
    
    
    (411
    )Other
    
    
    (505
    )
    
    
    
    
    
    
    (41
    )
    
    
    (546
    )Net cash used in investing activities
    
    
    (15,818
    )
    
    
    
    
    
    
    (880
    )
    
    
    (16,698
    )Cash flows from financing activitiesBorrowings (payments) under intercompany credit agreement, net
    
    
    68,668
    
    
    
    11,920
    
    
    
    (104,363
    )
    
    
    (23,775
    )Net cash provided by (used in) financing activities
    
    
    68,668
    
    
    
    11,920
    
    
    
    (104,363
    )
    
    
    (23,775
    )Effect of exchange rates on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    86
    
    
    
    86Net increase in cash and cash equivalents
    
    
    1,422
    
    
    
    2,685
    
    
    
    4,451
    
    
    
    8,558Cash and cash equivalents at beginning of period
    
    
    (5,498
    )
    
    
    654
    
    
    
    45,158
    
    
    
    40,314Cash and cash equivalents at end of period
    
    $
    (4,076
    )
    
    $
    3,339
    
    
    $
    49,609
    
    
    $
    48,872
 17




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UGS Corp. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) Note 15: Subsequent Event On April 1, 2005, the Company acquired all of the outstanding equity of Tecnomatix for
approximately $228.0 million in cash, or $17.00 a share. The business combination will be accounted
for as a purchase in accordance with SFAS No. 141 allocating the purchase price to the tangible and
intangible assets acquired and liabilities assumed based on their estimated fair values. The
Company financed this acquisition primarily from borrowings under the senior secured credit
facility. The excess of total purchase price over the value of assets and liabilities at closing,
including identifiable intangible assets, will be allocated to goodwill, which will be subject to
annual impairment review. 18




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##### Table of Contents



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements contained in this Quarterly Report onForm 10-Qthat relate to our future
performance, including, without limitation, statements with respect to our anticipated results of
operations or level of business for fiscal 2005 or any other future period, are forward-looking
statements within the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements are based on current expectations only, and are subject to
certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results may vary materially
from those anticipated, estimated, or projected. The factors that could cause actual results to
materially differ include a failure of the PLM market to develop, loss or downsizing of key
customers, highly competitive industry, inability to deliver new and innovative PLM software
products and services, substantial, prolonged economic downturn in the markets, disruptions in
international markets, future terrorist attacks, changes in pricing models for PLM software
products, and intellectual property rights protection and infringement claims. These risks are
described in our Registration Statement onForm S-4(File No. 333-123664) under the heading Risk
Factors. We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events, or otherwise. Key Business Metrics Our business performance is directly impacted by our ability to generate software revenue
through the sale of CAx and collaborative product development management (cPDM) licenses to
existing and new customers. CAx includes computer aided design, computer aided engineering and
computer aided manufacturing applications. In conjunction with our initial license sale, we
generally sign maintenance contracts to provide technical services as needed by customers in order
to successfully implement the PLM software in their organization. Following the initial license
sale, our objective is to sign and subsequently renew maintenance contracts. We actively manage our
business with the goal of maximizing research and development and sales and marketing productivity.
To that end, we carefully evaluate capital investments in research and development projects and
sales and marketing initiatives. The following is a brief description of the major components of
our financial performance and how we manage them. Revenue We earn revenue from three primary sources: software, maintenance and services. For the three
months ended March 31, 2005, software accounted for 29% of total revenue, maintenance accounted for
44% and services and other accounted for 27%. Software revenue is generated primarily by the sale
of perpetual software licenses and, to a lesser extent, the sale of term-based licenses to existing
and new customers, and includes both upfront seat purchases as well as follow-on purchases of
additional seats or functionality. Software sales are generally accompanied by maintenance
contracts, which are priced based on a percentage of the software sale. These maintenance contracts
provide for when-and-if available upgrades to our applications and technical support. Lastly,
services revenue is primarily driven by software sales and includes technical services such as
training and implementation to facilitate the efficient implementation and usage of our software. For the three months ended March 31, 2005, approximately 65% of our total revenue was
generated from CAx applications, while the remaining 35% was from cPDM, which approximates our
results for fiscal 2004. CAx licenses are usually shared at a single workstation, whereas cPDM
licenses are usually specific to each end-user and are typically priced lower. For the three months
ended March 31, 2005, maintenance revenue was composed largely of CAx related revenue due to the
higher installed base of CAx. Cost of Revenue Our software and maintenance revenue have high gross margins due to the fact that they require
limited dedicated resources and costs after the initial sale. Services revenue is labor intensive
and usually 19




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##### Table of Contents



customer- or industry-specific and consequently entails more direct costs than either license
or maintenance revenue. The cost of software revenue includes packaging, distribution and
third-party royalties; the cost of maintenance revenue is comprised of help desk and technical
support and third-party royalties; and the cost of services revenue consists of labor,
labor-related costs for teams of technical specialists and third-party contractors. Cost of revenue
also includes amortization of intangible assets for capitalized and acquired software and
maintenance agreements. Sales and Marketing In general, we manage our customer relationships through a large, direct sales force organized
by geography (the Americas, Europe and Asia Pacific). Additionally, we have sales representatives
fully dedicated to serving our major customer accounts across the globe. Our direct sales force,
including sales managers, account executives, field sales employees and pre-sales technical
support, is trained to sell both CAx and cPDM software and services. Sales costs are comprised of
salaries for all sales personnel and variable commissions for the field sales staff. The sales
representatives are compensated on a monthly basis for new license and services revenue. We also offer products through third-party distributors and have some value-added resellers.
Our indirect sales channel consists of a network of distributors and resellers covering several
regions, including the Americas, Eastern Europe, the Middle East, Japan and South Korea. Solid Edge
is primarily marketed and licensed through our indirect sales channels. Our global marketing organization focuses on product level initiatives to increase brand
equity. We utilize direct marketing initiatives in order to generate new leads for our sales force.
Marketing costs include salaries, trade shows, conferences, product collateral, sponsorship fees
and local seminars. Research and Development Costs Research and development expenses include payroll, employee benefits, other labor related
costs, facilities, workstations and software costs associated with product development. These costs
are expensed as research and development. Once projects achieve technological feasibility, we
capitalize the software development costs until the product is available for general release.
Expenses for major projects are carefully evaluated to manage return on investment requirements. We
expect that our research and development spending will continue in line with historic levels. In
addition, we have agreed with one of our major customers that unless it otherwise consents, we will
maintain research and development expenses at or above a minimum percentage of net sales. The
required percentage is significantly below the percentage anticipated for the foreseeable future
and, accordingly, we do not anticipate any impact of this commitment. In the comparisons that follow in this section, we define total research and development costs
as the sum of research and development costs, which appear as an expense line item on our condensed
consolidated statement of operations, and capitalized software costs. We exclude third-party
royalty fees and customer directed research and development, which are included in cost of revenue.
The following is a summary of total research and development costs (in thousands): Successor
    
    
    
    PredecessorThree months
    
    
    
    Three monthsended
    
    
    
    endedMarch 31, 2005
    
    
    
    March 31, 2004Research and development costs
    
    $
    35,981
    
    
    
    $
    33,597Capitalized software costs
    
    
    17,389
    
    
    
    
    14,378Total research and development costs
    
    $
    53,370
    
    
    
    $
    47,975
 20




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##### Table of Contents



Factors Affecting our Results of Operations In making comparisons of our financial performance for the periods presented, it is important
to be aware of the following factors that have impacted our stated financial results: Impact of the Acquisition of UGS PLM Solutions Inc. The purchase price of UGS PLM Solutions Inc. was allocated based on fair value of the specific
tangible and intangible assets and liabilities at the time of the acquisition pursuant to a
valuation. The excess of the total purchase price over the value of our assets and liabilities at
closing was allocated to goodwill, which will be subject to annual impairment review. From
September 2001 through May 26, 2004, we operated as a wholly owned subsidiary of EDS, who provided
us with certain tax, legal, treasury, finance, accounting, marketing and human resource services.
Our condensed consolidated financials for the three months ended March 31, 2004 reflect the costs
that EDS charged us for these services. For three months ended March 31, 2005, additional costs for
these types of activities, along with the incremental costs we incurred as a stand-alone entity
subsequent to the acquisition date, were approximately $2.8 million. The purchase accounting adjustments that had a material impact on our financial position and
results of operations include: Deferred Revenue Prior to the acquisition, our deferred revenue balance was $138.3 million. The purchase
accounting adjustment to reflect the deferred revenue balance at its fair value was $48.8 million,
which resulted in a beginning deferred revenue balance on May 27, 2004 of $89.5 million. This
adjustment has the effect of reducing revenue in periods subsequent to the acquisition through June
2005. For the three months ended March 31, 2005, total revenue was reduced by $4.6 million due to
the deferred revenue adjustment, which resulted in corresponding reductions to gross profit,
operating income and income before income taxes. Amortization of Acquired Intangible Assets Prior to the acquisition, our intangible assets balance, net of accumulated amortization, was
$216.1 million. As a result of the purchase accounting associated with the acquisition, the prior
net intangible asset balance was written off and a new basis of $805.8 million was allocated to
intangible assets pursuant to a valuation. This results in higher expense in cost of revenue for
the amortization of capitalized and acquired software and maintenance agreements and in operating
expenses for the amortization of all other intangible assets. In 2005, amortization will be
approximately $130.0 million of annual amortization expense, or approximately $32.5 million of
quarterly amortization expense. Capitalization of Software Development Costs Due to the purchase accounting associated with acquisition, the book value of all capitalized
software as of May 26, 2004 was written off and included in the valuation of completed technology
(software) discussed above. As a result, amortization of capitalized software is lower when
compared to the prior year, resulting in amortization of $1.1 million for the three months ended
March 31, 2005 compared to $8.2 million for the three months ended March 31, 2004. As we continue
to capitalize internally developed software we expect our annual amortization of capitalized
software (which is reflected in cost of revenue) will grow until it reaches a level consistent with
pre-acquisition software capitalization levels (anticipated to occur in 2008). Interest Expense As part of the acquisition on May 27, 2004, we entered into long-term debt arrangements that
provided for a $500.0 million term loan, a $125.0 million revolving credit facility and $550.0
million of senior subordinated notes. In addition, we capitalized the financing fees related to
entering into these debt 21




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arrangements. These activities result in higher interest expense. For the three months ended
March 31, 2005, net income includes $21.2 million of interest expense and amortized deferred
financing fees compared to $1.2 million for the three months ended March 31, 2004. Other Acquisitions D-Cubed. Ltd. On June 30, 2004, we acquired all of the stock of D-Cubed, Ltd., for an aggregate purchase
price of $22.0 million. The purchase price was allocated based on fair value of the specific
tangible and intangible assets and liabilities at the time of the acquisition pursuant to a
valuation. The fair value estimated for intangible assets will result in slightly higher expense in
cost of revenue for the amortization of capitalized and acquired software and maintenance
agreements and in operating expenses for the amortization of all other intangible assets. The
excess of total purchase price over the value of our assets and liabilities at closing, including
identifiable intangible assets, was allocated to goodwill, which will be subject to annual
impairment review. Tecnomatix Technologies Ltd On April 1, 2005, we acquired all of the outstanding equity of Tecnomatix Technologies Ltd.
(Tecnomatix) for approximately $228.0 million in cash, or $17.00 a share. The purchase price will
be allocated in the second quarter based on fair value of the specific tangible and intangible
assets and liabilities at the time of the acquisition pursuant to a valuation. We financed this
acquisition primarily from borrowings under our senior secured credit facility, which we recently
amended to permit such additional borrowings for this purpose. The excess of total purchase price
over the value of our assets and liabilities at closing, including identifiable intangible assets,
will be allocated to goodwill, which will be subject to annual impairment review. Services Arrangement We have historically deployed certain of our personnel from our research and development group
to support the services arrangement of one of our largest customers with the underlying cost being
allocated to cost of revenue. As a result of a modification to our services agreement with this
customer, such resources will no longer be deployed directly in support of such an engagement. In
addition, revenue from this arrangement is now classified as maintenance revenue. For the three
months ended March 31, 2005, our maintenance revenue increased by approximately $6.5 million,
offset by a decline in services revenue of approximately $3.5 million. In addition, our cost of
revenue was lower by approximately $2.2 million while research and development expenses increased
accordingly, offset by applicable capitalized software costs. The resulting impact to our gross
profit was an increase of approximately $5.2 million when compared to the prior year. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based
upon our condensed consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates, assumptions and judgments that affect the reported
amounts of assets, liabilities, net sales and expenses and relating disclosure of contingent assets
and liabilities. On an on-going basis we evaluate our estimates, including those related to
amortization periods, intangible assets and goodwill, income taxes, restructuring activities,
litigation, and contingencies. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about carrying values of assets and liabilities that are not readily
apparent from other sources. Our results would be affected if we were to make different estimates
under different assumptions or conditions. 22




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Capitalized Software Development Costs We account for software development costs in accordance with SFAS No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Costs related to the
development of a software product to be sold are expensed until technological feasibility of a
product or product enhancement has been reached. Costs incurred after this point are capitalized on
a project-by-project basis. Judgment is required in determining when technological feasibility of a
product or product enhancement is established. Upon release of a product or product enhancement to
customers, we cease capitalization and begin amortization, which is calculated on a
project-by-project basis as the greater of (1) the ratio that the current product revenue bears to
the total of current and anticipated future years revenue or (2) the straight-line method over the
remaining estimated economic lives of the software products. We generally amortize the software
costs of new releases of enhancements over a three year period based upon the estimated future
economic life of the enhancement. The carrying values of capitalized costs are evaluated for
impairment when events or circumstances indicate that the carrying value of the asset may not be
recoverable. The carrying values of capitalized costs are evaluated for impairment on an annual
basis. If expected cash flows are insufficient to recover the carrying amount of the asset, then an
impairment loss is recognized to state the asset at its net realizable value. We have had no
impairments of capitalized software costs. Revenue Recognition We generate revenue from new software licenses, maintenance contracts for software license
updates and product support and professional services, which include training, consulting and
implementation services. We recognize revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position (SOP) 97-2, Software Revenue Recognition, as
amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions. Following is a discussion of the determination of revenue recognition: We recognize software license revenue when all of the following are met:  
    Persuasive Evidence of an Arrangement Exists.It is our practice to require that a
written order signed by both the customer and us, or a purchase order from those
customers that have previously negotiated an end user license arrangement, be received.
    Delivery Has Occurred.We deliver software by both physical and electronic means.
Both means of delivery transfer title and risk to the customer. For electronic delivery
of the software, delivery is complete when the customer has been provided electronic
access to their software. Acceptance provisions included in a software license agreement
generally grant customers a right of refund or replacement only if the licensed software
does not perform in accordance with its published specifications. Based on our history,
the likelihood of non-acceptance in these situations is remote, and we recognize revenue
when all other criteria of revenue recognition are met. If the likelihood of
nonacceptance is determined to be other than remote, revenue is recognized upon the
earlier of receipt of written acceptance or when the acceptance period has lapsed.
    The Vendors Fee is Fixed or Determinable.Fees are generally considered fixed or
determinable when payment terms are set forth at the contract execution date, with our
payment terms being generally less than 90 days. We recognize revenue for delivered
elements only when the fair value of the undelivered elements is known, uncertainties
regarding customer acceptance are resolved, and there are no refund, cancellation, or
return rights affecting the revenue recognized for delivered elements.
    Collectibility is Probable.Customers must meet collectibility requirements
pursuant to our credit policy. We perform a collectibility assessment for each
transaction. For contracts that do not meet our collectibility criteria, revenue is
recognized when cash is received. 23




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Our software license agreements generally include multiple products and services, or
elements. For multiple element sales orders, revenue is allocated to the individual elements
based on vendor-specific objective evidence of fair value (VSOE) of the individual elements. The
application of software revenue recognition requires judgment, including the determination of the
fair value of the elements and whether a software arrangement includes multiple elements. The fair
value of the undelivered elements is determined based on the historical evidence of stand-alone
sales of these elements to customers, or VSOE. VSOE does not exist for the license element,
therefore, we use the residual method to recognize revenue when a license agreement includes one or
more elements to be delivered at a future date and VSOE of all undelivered elements exists. Under
the residual method, the fair value of any undelivered elements is deferred and the remaining
portion of the arrangement fee is recognized as revenue. If evidence of the fair value of one or
more undelivered elements does not exist, the total revenue is deferred and recognized when
delivery of those elements occurs or when fair value is established. Changes to the elements in a
software arrangement, the ability to identify VSOE for those elements, the fair value of the
respective elements and changes to a products estimated life cycle could materially impact the
amount of earned and unearned revenue. We defer revenue associated with payments received from customers for the delivery of future
services, where VSOE of undelivered elements in a bundled arrangement does not exist, or if other
conditions to revenue recognition have not been met. SOP 97-2 requires the seller of software that
includes post contract customer support (maintenance or PCS) to establish VSOE of the undelivered
element of the contract in order to account separately for the PCS revenue. We determine VSOE by a
consistent pricing of PCS and PCS renewals as a percentage of the software license fees and by
reference to contractual renewals, when the renewal terms are substantive. In those cases where
VSOE of PCS is determined by reference to contractual renewals, we consider factors such as whether
the period of the initial PCS term is relatively long when compared to the term of the software
license or whether the PCS renewal rate is significantly below our normal pricing practices.
Revenues for PCS are recognized ratably over the maintenance term specified in the contract. In
arrangements where VSOE of PCS cannot be determined (for example, a time-based software license
with a duration of one year or less), we recognize revenue for the entire arrangement ratably over
the PCS term. Professional services are not considered essential to the functionality of the other elements
of the arrangement and are accounted for as a separate element. Our revenues for professional
services are generally recognized as the services are performed. If there is a significant
uncertainty about the project completion or receipt of payment for the professional services,
revenue is deferred until the uncertainty is sufficiently resolved. If we do not have a sufficient
basis to measure progress towards completion, revenue is recognized when we receive final
acceptance from the customer. Business Combinations In accordance with SFAS No. 141, Business Combinations, we allocate the purchase price of
acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as
in-process research and development based on their estimated fair values. Valuations are performed
to assist in determining the fair values of assets acquired and liabilities assumed, which requires
management to make significant estimates and assumptions, especially with respect to intangible
assets. Management makes estimates of fair value based upon assumptions believed to be reasonable.
These estimates are based on historical experience and information obtained from the management of
the acquired companies. Critical estimates in valuing certain of the intangible assets include but
are not limited to: future expected cash flows from license sales, maintenance agreements, services
contracts, customer contracts and acquired developed technologies and patents; expected costs to
develop the in-process research and development into commercially viable products and estimating
cash flows from the projects when completed; the acquired companys brand awareness and market
position, as well as assumptions about the period of time the acquired brand will continue to be
used in the combined companys product portfolio; and discount rates. In connection with the acquisition of UGS PLM Solutions Inc. from EDS and the acquisition of
D-Cubed, Ltd., valuations were prepared to determine fair values for the allocation of the purchase

prices. Although the valuations have been completed, the purchase price allocations may change for
up to one year 24




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subsequent to the respective acquisition date due to customary adjustments based on the final
determination of certain assets and liabilities that existed at the time of the respective
acquisitions. These adjustments are not expected to be material to our consolidated financial
statements. Other estimates associated with the accounting for acquisitions include restructuring costs.
Restructuring costs are primarily comprised of severance costs, change of control payments, costs
of vacating duplicate facilities, and contract termination costs. Restructuring costs were
accounted for under Emerging Issues Task Force (EITF) Issue No. 95-3, Recognition of Liabilities
in Connection with a Purchase Business Combination, and have been recognized as a liability
assumed in the business combination. Restructuring costs are based upon plans that have been
committed to by management and are subject to refinement. To estimate restructuring costs accounted
for under EITF Issue No. 95-3, management utilized assumptions of future costs to operate and
eventually vacate duplicate facilities. Estimated restructuring costs may change as additional
information becomes available regarding the assets acquired and liabilities assumed and as
management continues its assessment of the pre-merger operations and executes the approved plan.
Decreases to the estimates of executing the currently approved plans accounted for under EITF Issue
No. 95-3 will be recorded as an adjustment to goodwill while increases to the estimates will be
recorded as an adjustment to goodwill within one year of the acquisition date and to the results of
operations thereafter. Recoverability of Goodwill, Acquired Intangible Assets and Long-Lived Assets We account for goodwill under SFAS No. 142, Goodwill and Other Intangible Assets, which
requires us to review goodwill for impairment on an annual basis, and between annual tests whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable. SFAS
No. 142 prescribes a two-phase process for impairment testing of goodwill. The first phase screens
for impairment, while the second phase, if necessary, measures the impairment. We perform our
annual impairment test at October 1, or more frequently if circumstances indicate the potential for
impairment which requires management to rely on a number of factors, including operating results,
business plans and anticipated future cash flows. No impairment loss was identified as a result of
this test. We review our long-lived assets and intangible assets with definite useful lives under SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which requires us to
review for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of long-lived assets to be held and used and
intangible assets with definite useful lives is measured by a comparison of the carrying amount of
an asset to the future undiscounted cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed are
reported at the lower of the carrying amount or fair value, less cost to sell. There were no
impairment charges in the periods presented. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be
applied to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Judgments and estimates are
required in assessing the future tax consequences of events that have been recognized on our
financial statements or tax returns. Our operations were included in EDS consolidated income tax returns in certain countries
through May 26, 2004. While we were in EDS consolidated income tax return, current and deferred
taxes were allocated to us as if taxes were computed on the separate return method. Certain of
our tax attributes, such as net operating loss and tax credit carry-forwards, may be impacted by
the filing of short tax year 2004 consolidated income tax returns by EDS. Such tax attributes as
presented in our financial statements 25




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represent managements estimate based on information available at the time of the financial
statements. The allocation of the actual tax attributes to the Company from EDS will be made in
accordance with the appropriate provisions of the Internal Revenue Code. Fluctuations in the actual
outcome of these future tax consequences could materially impact our financial position or our
results of operations. We are not contractually obligated to pay EDS for our share of any consolidated income tax
liabilities while part of the EDS consolidated tax return group. Any consolidated income tax
liabilities calculated on a separate return basis as due and payable by us were treated as non-cash
capital contributions from EDS to us. Furthermore, pursuant to the stock purchase agreement between
us and EDS, all income tax liabilities for all tax periods up to, and including, the period ending
May 26, 2004 are the financial responsibility of EDS. Pricing of Historic EDS Services Until December 31, 2001, we had been a party to a management services agreement with EDS under
which EDS performed various management services for us. We were charged amounts under this
agreement which approximated EDS cost of providing the services, plus a fixed fee equal to 0.5% of
our total revenues, up to a maximum fixed fee of $2.5 million annually. Had a similar agreement
been in place following December 31, 2001, our corporate expenses would have amounted to $1.2
million for the three months ended March 31, 2004. These amounts are reflected in the condensed
consolidated financial statements as selling, general and administrative expenses and represent the
estimated costs of providing services to us. These numbers may not reflect what the actual costs of
these services would have been if we had to acquire these services from third-parties. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which requires
share-based compensation transactions to be accounted for using a fair-value-based method and the
resulting cost recognized in the financial statements. SFAS No. 123(R) is effective for our
share-based awards granted, modified, or settled in any interim or annual period beginning after
December 15, 2005. We have not yet determined the impact SFAS No. 123(R) will have on our financial
position or results of operations. In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional
Asset Retirement Obligations. FIN No. 47 provides guidance relating to the identification of and
financial reporting for legal obligations to perform an asset retirement activity. FIN No. 47
requires recognition of a liability for the fair value of a conditional asset retirement obligation
when incurred if the liabilitys fair value can be reasonably estimated. FIN No. 47 is effective no
later than the end of December 31, 2005. We are reviewing FIN No. 47 to determine whether adoption
will have an impact on our financial position or results of operations. Segment Revenue and Operating Income Our business consists of three primary operating segments based on geographic location: the
Americas (which is comprised of North and South America), Europe and Asia Pacific. We use several
metrics to measure the performance of each segment, including revenue and operating income. These
results are used, in part, to evaluate the performance of, and allocate resources to, each of the
segments. Certain operating expenses, which are separately managed at the corporate level, are not
allocated to the reportable segments. Unallocated costs not reflected in segment operating income
include research and development costs, amortization of capitalized software and intangible assets
and corporate general and administrative costs, including finance, human resources, legal and IT. Geographic Segment Revenue The Americas is our largest segment representing 43.2% of total segment revenue for the three
months ended March 31, 2005 and 44.1% for the three months ended March 31, 2004. For the three
months 26




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ended March 31, 2005, the Americas total revenue for the three months ended March 31, 2005
increased $5.7 million, or 5.5%, to $109.2 million from $103.5 million for the three months ended
March 31, 2004. The increase was driven by an increase in maintenance revenue of $5.5 million,
which largely resulted from the classification of revenue from one of our largest customers that is
now recognized as maintenance revenue rather than services revenue due to a modification to our
services agreement with this customer. Total revenue was also aided by an increase in services
revenue of $2.2 million that resulted from the addition of several sizeable services projects. This
increase was partially offset by the $2.1 million impact of the purchase accounting adjustment for
deferred revenue. Europe is our second largest segment representing 36.8% of total segment revenue for the three
months ended March 31, 2005 and 35.8% of total segment revenue for the three months ended March 31,
2004. Total revenue for the three months ended March 31, 2005 in Europe increased $8.8 million, or
10.5%, to $92.8 million from $84.0 million for the three months ended March 31, 2004. The growth in
Europe was largely driven by the growth in services revenue of $4.5 million. Total revenue also
benefited from foreign currency translation due to the appreciation of the Euro compared to the
U.S. Dollar. The increase in total revenue was partially offset by the $1.6 million impact of the
purchase accounting adjustment for deferred revenue. Asia Pacific is our third largest segment representing 20.0% of total segment revenue for the
three months ended March 31, 2005 and 2004. Asias total revenue increased $3.5 million, or 7.4%,
to $50.6 million for the three months ended March 31, 2005 from $47.1 million for the three months
ended March 31, 2004. The increase was primarily due to growth in maintenance revenue of $1.9
million, which was aided by increased maintenance orders. The increase in total revenue is also
attributable to growth in services revenue of $1.0 million, which largely resulted from sizeable
services projects in South Korea and Japan. The impact of foreign currency translation is not as
significant for revenue in Asia Pacific as most contracts are signed in U.S. Dollars. Geographic Segment Operating Income The Americas represented 40.4% of total segment operating income for the three months ended
March 31, 2005 and 40.1% for the three months ended March 31, 2004. For the three months ended
March 31, 2005, the Americas operating income increased $2.6 million, or 6.1%, to $45.5 million
from $42.9 million for the three months ended March 31, 2004. The increase was primarily driven by
the increase in revenue discussed above. For the three months ended March 31, 2005, the Americas
operating margin increased slightly to 41.7% from 41.5%. Operating income for the three months
ended March 31, 2005 in the Americas includes a reduction of revenue resulting from the purchase
accounting adjustment discussed above. Europe represented 34.1% of total segment operating income for the three months ended March
31, 2005 and 34.3% for the three months ended March 31, 2004. For the three months ended March 31,
2005, operating income in Europe increased $1.6 million, or 4.3%, to $38.4 million from $36.8
million for the three months ended March 31, 2004. The increase was driven by the growth in revenue
discussed above. For the three months ended March 31, 2005, operating margins in Europe decreased
to 41.4% from 43.8% for the three months ended March 31, 2004. The margin decrease was primarily
attributable to an increased usage of third-party consultants for certain services projects, which
we expect will continue for the foreseeable future. Operating income for the three months ended
March 31, 2005 in Europe includes a reduction of revenue resulting from the purchase accounting
adjustment discussed above. Asia Pacific represented 25.5% of total segment operating income for the three months ended
March 31, 2005 and 25.6% for the three months ended March 31, 2004. For the three months ended
March 31, 2005, operating income in Asia Pacific increased $1.3 million, or 4.7%, to $28.7 million
from $27.4 million for the three months ended March 31, 2004. The increase was driven by the growth
in revenue discussed above. For the three months ended March 31, 2005, operating margins in Asia
Pacific decreased to 56.6% from 58.2% for the three months ended March 31, 2004. The margin
decrease was primarily attributable to higher sales commissions commensurate with increased
revenue. The decrease is also attributable to the increased usage of third-party consultants, which
we expect will continue should services revenue increase. 27




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Operating income for the three months ended March 31, 2005 in Asia Pacific includes a
reduction of revenue resulting from the purchase accounting adjustment discussed above. The following table represents our segment revenue and our segment operating income, which
excludes certain corporate level charges that we do not allocate by segment (in thousands): Americas
    
    
    Europe
    
    
    Asia Pacific
    
    
    TotalThree months ended March 31, 2005 (Successor)Revenue
    
    $
    109,161
    
    
    $
    92,796
    
    
    $
    50,608
    
    
    $
    252,565Operating income
    
    
    45,536
    
    
    
    38,409
    
    
    
    28,655
    
    
    
    112,600Three months ended March 31, 2004 (Predecessor)Revenue
    
    $
    103,508
    
    
    $
    83,990
    
    
    $
    47,145
    
    
    $
    234,643Operating income
    
    
    42,922
    
    
    
    36,763
    
    
    
    27,421
    
    
    
    107,106
 A reconciliation of operating income for reportable segments to operating income is as follows
(in thousands): Successor
    
    
    
    PredecessorThree months
    
    
    
    Three monthsended
    
    
    
    endedMarch 31, 2005
    
    
    
    March 31, 2004Total operating income for reportable segments
    
    $
    112,600
    
    
    
    $
    107,106Research and development
    
    
    (35,981
    )
    
    
    
    (33,597
    )Amortization of capitalized and acquired software
and other intangible assets
    
    
    (33,756
    )
    
    
    
    (15,472
    )Corporate and unallocated costs
    
    
    (29,019
    )
    
    
    
    (21,100
    )Operating income
    
    $
    13,844
    
    
    
    $
    36,937
 Results of Operations The following tables set forth information regarding our revenue, operating expenses, net
(loss) income and other information for the periods indicated (in thousands): Successor
    
    
    
    PredecessorThree months ended
    
    
    
    Three months endedMarch 31, 2005
    
    
    
    March 31, 2004(percentage of
    
    
    
    
    
    
    
    (percentage oftotal revenue)
    
    
    
    
    
    
    
    total revenue)Revenue:Software
    
    $
    73,119
    
    
    
    29.0
    %
    
    
    $
    72,544
    
    
    
    30.9
    %Maintenance
    
    
    111,607
    
    
    
    44.2
    %
    
    
    
    102,030
    
    
    
    43.5
    %Services and other (a)
    
    
    67,839
    
    
    
    26.8
    %
    
    
    
    60,069
    
    
    
    25.6
    %Total revenue
    
    
    252,565
    
    
    
    100.0
    %
    
    
    
    234,643
    
    
    
    100.0
    %Cost of revenue (includes amortization of
capitalized and acquired software)
    
    
    100,001
    
    
    
    39.6
    %
    
    
    
    83,069
    
    
    
    35.4
    %Gross profit
    
    
    152,564
    
    
    
    60.4
    %
    
    
    
    151,574
    
    
    
    64.6
    %Operating expenses:Selling, general and administrative
    
    
    95,169
    
    
    
    37.7
    %
    
    
    
    79,540
    
    
    
    33.9
    %Research and development
    
    
    35,981
    
    
    
    14.2
    %
    
    
    
    33,597
    
    
    
    14.3
    %Amortization of other intangible assets
    
    
    7,570
    
    
    
    3.0
    %
    
    
    
    1,500
    
    
    
    0.6
    %Total operating expenses
    
    
    138,720
    
    
    
    54.9
    %
    
    
    
    114,637
    
    
    
    48.8
    %Operating income
    
    
    13,844
    
    
    
    5.5
    %
    
    
    
    36,937
    
    
    
    15.8
    %Interest expense and amortization of deferred financing fees
    
    
    (21,163
    )
    
    
    -8.4
    %
    
    
    
    (1,209
    )
    
    
    -0.5
    %Other (expense) income, net
    
    
    (4,824
    )
    
    
    -1.9
    %
    
    
    
    1,441
    
    
    
    0.6
    %(Loss) income before taxes
    
    
    (12,143
    )
    
    
    -4.8
    %
    
    
    
    37,169
    
    
    
    15.9
    %Provision (benefit) for income taxes
    
    
    (3,974
    )
    
    
    -1.6
    %
    
    
    
    11,708
    
    
    
    5.0
    %Net (loss) income
    
    $
    (8,169
    )
    
    
    -3.2
    %
    
    
    $
    25,461
    
    
    
    10.9
    %
   (a)
    
    Other revenue consists primarily of hardware sales. 28




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Three Months Ended March 31, 2005 (Successor) Compared to Three Months Ended March 31, 2004
(Predecessor) Total Revenue For the three months ended March 31, 2005, total revenue increased $18.0 million, or 7.7%, to
$252.6 million from $234.6 million for the three months ended March 31, 2004. Revenue increased for
all components compared to the same period in 2004. This increase was partially offset by the
reduction in revenue of $4.6 million due to the purchase accounting adjustment for deferred
revenue, which impacted maintenance revenue.  
    Software. Software revenue accounted for 29.0% of total revenue for the three months
ended March 31, 2005 compared to 30.9% for the three months ended March 31, 2004. For the
three months ended March 31, 2005, software revenue grew $0.6 million, or 0.8%, to $73.1
million from $72.5 million for the three months ended March 31, 2004. Although software
revenue grew compared to the prior year, the increase was not as pronounced due in large
part to the revenue recognized on a sizeable software deal during the three months ended
March 31, 2004.
    Maintenance. Maintenance revenue accounted for 44.2% of total revenue for the three
months ended March 31, 2005 and 43.5% of total revenue for the three months ended March
31, 2004. For the three months ended March 31, 2005, maintenance revenue increased $9.6
million, or 9.4%, to $111.6 million from $102.0 million for the three months ended March
31, 2004. Maintenance revenue increased primarily as a result of the classification of
revenue from one of our largest customers that is now recognized as maintenance revenue
rather than services revenue due to a modification to our services agreement with this
customer. Maintenance revenue also benefited from foreign currency translation due to the
appreciation of the Euro compared to the U.S. Dollar. The increase was partially offset
by lower maintenance revenue from the purchase accounting impact described above.
    Services and other. Services and other revenue accounted for 26.8% of total revenue
for the three months ended March 31, 2005 and 25.6% of total revenue for the three months
ended March 31, 2004. For the three months ended March 31, 2005, services and other
revenue grew $7.7 million, or 12.8%, to $67.8 million from $60.1 million for the three
months ended March 31, 2004. Services revenue grew across all segments. This growth was
partially offset by the classification of revenue from one of our largest customers as
maintenance revenue rather than services revenue as discussed above. Gross Profit For the three months ended March 31, 2005, gross profit increased $1.0 million, or 0.7%, to
$152.6 million from $151.6 million for the three months ended March 31, 2004. The increase was
primarily due to the increase in maintenance revenue, which typically carries a higher margin.
However, gross profit for the three months ended March 31, 2005 was reduced by the impact of
purchase accounting, which resulted in $4.6 million of lower revenue and $12.2 million of
amortization of certain intangible assets over prior year amortization. Operating Expenses Selling, General and Administrative For the three months ended March 31, 2005, selling, general and administrative expenses
increased $15.7 million, or 19.6%, to $95.2 million from $79.5 million for the three months ended
March 31, 2004. As a percentage of total revenue, selling, general and administrative expenses
increased to 37.7% for the three months ended March 31, 2005 from 33.9% for the three months ended
March 31, 2004. The increase is due, in part, to costs associated with new hires in our sales
organization and to higher sales commissions. 29




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The increase was also due to incremental costs in our general and administrative organization
that resulted from the addition of personnel to support our operations as a stand-alone entity. Research and Development For the three months ended March 31, 2005, research and development expenses increased $2.4
million, or 7.1%, to $36.0 million from $33.6 million for the three months ended March 31, 2004. As
previously discussed, we capitalize software development costs once technological feasibility is
established. For the three months ended March 31, 2005, cash outflows for capitalized software
costs increased $3.0 million, or 20.8%, to $17.4 million from $14.4 million for the three months
ended March 31, 2004. For the three months ended March 31, 2005, total research and development expenses increased
$5.4 million, or 11.3%, to $53.4 million from $48.0 million for the three months ended March 31,
2004. This increase was primarily due to continued investments in the Teamcenter product line. For
the three months ended March 31, 2005, total research and development costs as a percent of revenue
increased slightly to 21.1% from 20.5% for the three months ended March 31, 2004. Amortization of Other Intangible Assets For the three months ended March 31, 2005, amortization of other intangible assets increased
$6.1 million, or 406.7%, to $7.6 million from $1.5 million for the three months ended March 31,
2004. The increase in amortization is directly related to the intangibles associated with the
acquisition of UGS PLM Solutions Inc. Operating Income For the three months ended March 31, 2005, operating income decreased $23.1 million, or 62.6%,
to $13.8 million from $36.9 million for the three months ended March 31, 2004. As a percentage of
total revenue, operating income decreased to 5.5% for the three months ended March 31, 2005
compared to 15.8% for the three months ended March 31, 2004. Operating income was lower primarily
due to the impact of purchase accounting, which resulted in lower revenue of $4.6 million and
greater amortization of intangible assets of $18.2 million. Interest Expense and Amortization of Deferred Financing Fees For the three months ended March 31, 2005, interest expense and amortization of deferred
financing fees increased $20.0 million to $21.2 million from $1.2 million for the three months
ended March 31, 2004. The increase is directly related to the interest expense associated with the
debt incurred for the acquisition of UGS PLM Solutions Inc. Provision (Benefit) for Income Taxes For the three months ended March 31, 2005, the provision for income taxes decreased $15.7
million, or 134.2%, to a benefit of $4.0 million from an expense of $11.7 million for the three
months ended March 31, 2004. The decrease is primarily due to a decrease in the income before taxes
from $37.2 million for the three months ended March 31, 2004 to a loss of $12.1 million for the
three months ended March 31, 2005. The effective tax rate increased from 31.5% for the three months
ended March 31, 2004 to a benefit of 32.7% for the three months ended March 31, 2005. 30




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Liquidity and Capital Resources Non-GAAP Measures EBITDA is presented solely as a supplemental disclosure with respect to liquidity because we
believe it provides a key indicator of our ability to pay our debt. Further, we have included
information concerning EBITDA because we use such information in determining compensation of our
management and in our review of the performance of our business. EBITDA as presented herein is not
necessarily comparable to similarly titled measures. EBITDA represents net income (loss) before
interest expense, income taxes, depreciation and amortization. EBITDA is not a recognized term
under generally accepted accounting principles, or GAAP. EBITDA does not represent net income, as
that term is defined under GAAP, and should not be considered as an alternative to net income as an
indicator of our operating performance. Additionally, EBITDA is not intended to be a measure of
free cash flow available for management or discretionary use as such measures do not consider
certain cash requirements such as capital expenditures (including capitalized software expense),
tax payments and debt service requirements. The following is a reconciliation of our EBITDA to net
cash provided by operating activities and net income (loss), the GAAP measures we believe to be
most directly comparable to EBITDA (in thousands): Successor
    
    
    
    PredecessorUGS Corp.
    
    
    
    UGS PLMSolutions Inc.Three
    
    
    
    Threemonths ended
    
    
    
    months endedMarch 31, 2005
    
    
    
    March 31, 2004Reconciliation of EBITDA to net cash provided by
operating activities:EBITDA
    
    $
    46,554
    
    
    
    $
    58,587Benefit for deferred income taxes
    
    
    (11,432
    )
    
    
    
    (52,531
    )Amortization of deferred financing fees
    
    
    1,452
    
    
    
    
    Equity compensation through retention plan
    
    
    222
    
    
    
    
    Other
    
    
    740
    
    
    
    
    2,195Unrealized loss (gain) on revaluation of foreign
denominated assets and liabilities
    
    
    11,000
    
    
    
    
    (600
    )Unrealized gain on foreign currency revaluation of
derivative instruments
    
    
    (7,606
    )
    
    
    
    Changes in
operating assets and liabilities
    
    
    15,527
    
    
    
    
    54,211Interest expense
    
    
    (21,163
    )
    
    
    
    (1,209
    )Benefit (provision) for income taxes
    
    
    3,974
    
    
    
    
    (11,708
    )Net cash provided by operating activities
    
    $
    39,268
    
    
    
    $
    48,945Reconciliation of EBITDA to net (loss) income:EBITDA
    
    $
    46,554
    
    
    
    $
    58,587Interest expense
    
    
    (21,163
    )
    
    
    
    (1,209
    )Benefit (provision) for income taxes
    
    
    3,974
    
    
    
    
    (11,708
    )Depreciation and amortization
    
    
    (37,534
    )
    
    
    
    (20,209
    )Net (loss) income
    
    $
    (8,169
    )
    
    
    $
    25,461
 Debt and Commitments Prior to our separation from EDS, we were a party to an intercompany credit agreement with EDS
under which EDS lent us cash to fund daily cash requirements and under which we were required to
lend EDS all of our excess cash. That agreement was terminated in connection with the acquisition
of UGS 31




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PLM Solutions Inc. Our principal historic sources of liquidity have been cash flow generated
from operations and borrowings from EDS under the intercompany credit agreement. Our principal cash
requirements were for working capital, capital expenditures and loans to EDS under the intercompany
credit agreement. Following the acquisition of UGS PLM Solutions Inc., our primary source of liquidity is cash
flow generated from operations and availability under the revolving portion of our senior secured
credit facility. As of March 31, 2005, we had approximately $109.8 million of borrowing
availability under our revolving loan facility, which takes into consideration approximately $0.2
million of letters of credit outstanding on that date, and $15 million of available overdraft
lines. Our primary cash requirements have been and are expected to be for debt service, working
capital, capital expenditures and research and development. Our debt structure consists of $550.0 million aggregate principal amount of our senior
unsecured subordinated notes and our senior secured credit facility, consisting of (i) a $725.0
million term loan facility with a maturity on March 31, 2012, of which $500.0 million was
outstanding as of March 31, 2005 and of which $225.0 million was drawn upon the closing of our
acquisition of Tecnomatix on April 1, 2005 and (ii) a $125.0 million revolving credit facility with
a maturity on May 27, 2010. The borrowings under our senior secured credit facility bear interest at either a floating
base rate or a LIBOR rate, in each case plus an applicable margin. The term loan currently carries
an interest rate of LIBOR plus 2.0%. In addition to paying interest on outstanding principal under
our senior secured credit facility, we pay a commitment fee (calculated in arrears) to the lenders
under the revolving credit facility in respect of the unused revolving commitments, currently at a
rate equal to 0.50% per annum. Beginning in June 2005, the term loan will begin to amortize in an amount equal to 1.0% per
annum in equal quarterly installments for the first six years, with the remaining 94.0% payable in
year seven, in equal quarterly installments. Subject to exceptions, our senior secured credit
facility will require mandatory prepayments of the term loans with our annual excess cash flow (if
any) and with the net cash proceeds of specified asset sales or other asset dispositions and
issuances of debt securities. The obligations under our senior secured credit facility are
guaranteed by UGS PLM Solutions Asia/Pacific Incorporated, UGS Japanese Holdings, Inc., UGS
European Holdings, Inc. and UGS Israeli Holdings, Inc. and will be guaranteed by all of our
existing and future wholly owned domestic subsidiaries (except for unrestricted subsidiaries) and
by our parent and will be secured by a perfected security interest in substantially all of our
assets and assets of our direct and indirect restricted domestic subsidiaries that are guarantors,
in each case, now owned or later acquired, including a pledge of all of our capital stock, the
capital stock of each of our domestic subsidiaries and 65% of the capital stock of some of our
foreign subsidiaries that are directly owned by us or one of our restricted domestic subsidiaries. Based on our current and anticipated levels of operations and conditions in our markets and
industry, we believe that our cash on hand, cash flow from operations and availability under the
revolving credit facility will enable us to meet our working capital, capital expenditure, debt
service and other funding requirements for the foreseeable future. However, our ability to fund our
working capital needs, research and development activities, debt payments and other obligations,
and to comply with the financial covenants under our debt agreements, depends on our future
operating performance and cash flow, which are in turn subject to prevailing economic conditions,
the level of IT spending and other factors, many of which are beyond our control. Any future
acquisitions, joint ventures or other similar transactions will likely require additional capital
and there can be no assurance that any such capital will be available to us on acceptable terms, if
at all. Capital Expenditures Capital expenditures including capitalized software increased to $19.4 million for the three
months ended March 31, 2005 from $15.7 million for the three months ended March 31, 2004. The
increase is
primarily due to a higher level of development activities resulting from the continuation of
new product launches and enhancements and growth in the infrastructure of existing products. We
expect to spend approximately $85.0 million in capital expenditures in fiscal 2005. 32




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Historical Cash Flow Our largest source of operating cash flows is from our customers upon the purchase of license
and maintenance services, maintenance renewals and professional services. Our primary uses of cash
from operating activities are for personnel and facilities related expenditures. Cash provided by
operating activities decreased compared to the prior period primarily due to the interest payments
on our long-term debt. For the three months ended March 31, 2005, cash used in investing activities decreased $2.7
million. Although capital expenditures increased compared to the prior period, as discussed above,
this increase was offset by cash received from EDS for the settlement of certain tax matters
related to the acquisition of UGS PLM Solutions Inc. The change in cash flows from financing activities compared to the prior period is directly
related to the impact of our new debt arrangements discussed above. Off Balance Sheet Obligations We do not have any material off balance sheet obligations. Inflation Historically, inflation has not had a material effect on our results of operations. Seasonality Our quarterly operating results have fluctuated significantly in the past and are likely to
fluctuate significantly in the future. We have historically realized, and we expect to continue to
realize, higher software revenue in the last two weeks of each fiscal quarter. A large portion of
our annual software revenue is typically sold during the month of December, and our software
revenue, total revenue, operating income and net income have generally been lower in the first
quarter of a given year than in the fourth quarter of the preceding year. 
 ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Exchange Risk We are subject to inherent risks attributed to operating in a global economy. Although a
sizeable portion of our revenue and costs are denominated in U.S. Dollars, we are exposed to the
impact of exchange rate volatility between the U.S. Dollar and the subsidiaries functional
currencies, primarily from the Euro and Pound Sterling. A devaluation in either of these currencies
could have a negative impact on our operating results and cash flows. We are exposed to credit loss in the event of non-performance by the other party to the
derivative financial instruments. We mitigate this risk by entering into agreements directly with a
number of major financial institutions that meet our credit standards and that we expect to fully
satisfy their contractual obligations. We view derivative financial instruments purely as a risk
management tool and, therefore, do not use them for speculative trading purposes. In September 2004, we entered into two cross-currency interest rate swap contracts to hedge
the impact of foreign currency fluctuations in interest and principal payments relating to
intercompany loans denominated in Euros. As of March 31, 2005, the following contracts were
outstanding: 33




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Interest
    
    
    Notional
    
    
    ExchangeExpiration
    
    
    Rate
    
    
    Value
    
    
    Rate to  1(in millions)Pay fixed
    
    December 15, 2014
    
    
    9.0
    %
    
    
    59.9
    
    
    
    1.2238Receive fixed
    
    
    
    
    
    
    9.025
    %Pay fixed
    
    December 15, 2016
    
    
    9.0
    %
    
    
    48.1
    
    
    
    1.2238Receive fixed
    
    
    
    
    
    
    9.08
    %
 Both swaps, which have been designated as cash flow hedges, effectively convert the future
interest and principal payments on the hedged portion of the intercompany loans from Euros to U.S.
Dollars. For the three months ended March 31, 2005, there was no hedge ineffectiveness recorded in
the statement of operations. Over the next twelve months, we do not expect any derivatives losses
currently recorded in accumulated other comprehensive (loss) income to be reclassified into
earnings. Interest Rate Risk We are subject to interest rate risk for the variable interest rates on our $725.0 million
secured term loan, which includes the $225.0 million drawn upon the closing of our acquisition of
Tecnomatix, and our $125.0 million revolving credit facility. Assuming the revolving credit
facility is fully drawn, each quarter point change in our variable interest rate debt would result
in a $2.1 million change in annual interest expense. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We carried out an evaluation, under the supervision and with the participation of our
management, including our President and Chief Executive Officer and our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure control and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934, as amended, as of the end of the period
covered by this quarterly report. Based upon this evaluation, our President and Chief Executive
Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were
effective. 
 PART II  OTHER INFORMATION 
 ITEM 6. EXHIBITS The list of exhibits in the Exhibit Index to this report is incorporated herein by reference. 34




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of
Plano, State of Texas, on this 16th day of May, 2005. /s/ Douglas E. BarnettDouglas E. BarnettSenior Vice President and Chief Financial Officer(on behalf of the
Registrant and as Chief Financial Officer)
 35




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EXHIBIT INDEX Exhibit No.
    
    Description31.1
    
    Certification of President and Chief Executive Officer
pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)31.2
    
    Certification of Chief Financial Officer pursuant to Exchange
Act Rules 13a-14(a) and 15d-14(a)32.1
    
    Certification of President and Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C. Section 1350
 36