##### Table of Contents



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 June 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period fromto
 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
 (972) 987-3000
 
 o þ
  o o þ
 o þ




---



##### 



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 June 30, 2006 and 2005
    
    
    1Condensed Consolidated Statements of Operations for the six months
ended June 30, 2006 and 2005
    
    
    2Condensed Consolidated Balance Sheets as of June 30, 2006 and
December 31, 2005
    
    
    3Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2006 and 2005
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    25Item 3.
    
    Qualitative and Quantitative Disclosures About Market Risk
    
    
    43Item 4.
    
    Controls and Procedures
    
    
    44Part II.
    
    OTHER INFORMATIONItem 1A.
    
    Risk Factors
    
    
    45Item 6.
    
    Exhibits
    
    
    54Signatures
    
    
    55Certification of President and Chief Executive OfficerCertification of Chief Financial OfficerSection1350 Certifications




---



##### Table of Contents



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
 Three monthsendedJune 30, 2006
    
    
    June 30, 2005Revenue:License
    
    $
    86,017
    
    
    $
    81,777Maintenance
    
    
    135,142
    
    
    
    128,301Services and other
    
    
    75,500
    
    
    
    74,932Total revenue
    
    
    296,659
    
    
    
    285,010Cost of revenue:License
    
    
    2,175
    
    
    
    5,944Maintenance
    
    
    15,695
    
    
    
    14,495Services and other
    
    
    57,167
    
    
    
    66,701Amortization of capitalized software and acquired intangible assets
    
    
    37,713
    
    
    
    31,038Total cost of revenue
    
    
    112,750
    
    
    
    118,178Gross profit
    
    
    183,909
    
    
    
    166,832Operating expenses:Selling, general and administrative
    
    
    117,850
    
    
    
    110,410Research and development
    
    
    47,388
    
    
    
    38,659In-process research and development
    
    
    
    
    
    
    4,100Restructuring
    
    
    
    
    
    
    1,774Amortization of other intangible assets
    
    
    8,547
    
    
    
    8,739Total operating expenses
    
    
    173,785
    
    
    
    163,682Operating income
    
    
    10,124
    
    
    
    3,150Interest expense and amortization of deferred financing fees
    
    
    (26,520
    )
    
    
    (25,216
    )Other income (expense), net
    
    
    7,703
    
    
    
    (8,583
    )Loss before income taxes
    
    
    (8,693
    )
    
    
    (30,649
    )Benefit for income taxes
    
    
    (2,274
    )
    
    
    (8,625
    )Net loss
    
    $
    (6,419
    )
    
    $
    (22,024
    )
  1




---



##### Table of Contents



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands)
 Six monthsendedJune 30, 2006
    
    
    June 30, 2005Revenue:License
    
    $
    165,527
    
    
    $
    154,896Maintenance
    
    
    260,831
    
    
    
    239,908Services and other
    
    
    144,095
    
    
    
    142,771Total revenue
    
    
    570,453
    
    
    
    537,575Cost of revenue:License
    
    
    6,099
    
    
    
    10,400Maintenance
    
    
    30,800
    
    
    
    27,858Services and other
    
    
    113,015
    
    
    
    122,697Amortization of capitalized software and acquired intangible assets
    
    
    74,759
    
    
    
    57,224Total cost of revenue
    
    
    224,673
    
    
    
    218,179Gross profit
    
    
    345,780
    
    
    
    319,396Operating expenses:Selling, general and administrative
    
    
    225,661
    
    
    
    205,579Research and development
    
    
    98,613
    
    
    
    74,640In-process research and development
    
    
    
    
    
    
    4,100Restructuring
    
    
    (535
    )
    
    
    1,774Amortization of other intangible assets
    
    
    17,366
    
    
    
    16,309Total operating expenses
    
    
    341,105
    
    
    
    302,402Operating income
    
    
    4,675
    
    
    
    16,994Interest expense and amortization of deferred financing fees
    
    
    (52,967
    )
    
    
    (46,379
    )Other income (expense), net
    
    
    9,937
    
    
    
    (13,407
    )Loss before income taxes
    
    
    (38,355
    )
    
    
    (42,792
    )Benefit for income taxes
    
    
    (12,782
    )
    
    
    (12,599
    )Net loss
    
    $
    (25,573
    )
    
    $
    (30,193
    )
  2




---



##### Table of Contents



UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share amounts)
 June 30, 2006
    
    
    December 31, 2005Assets:Current assetsCash and cash equivalents
    
    $
    61,472
    
    
    $
    61,532Accounts receivable, net
    
    
    258,645
    
    
    
    251,763Prepaids and other
    
    
    29,206
    
    
    
    22,389Deferred income taxes
    
    
    17,351
    
    
    
    26,471Total current assets
    
    
    366,674
    
    
    
    362,155Property and equipment, net
    
    
    32,031
    
    
    
    36,645Goodwill
    
    
    1,416,422
    
    
    
    1,393,472Capitalized and acquired software, net
    
    
    434,919
    
    
    
    464,994Customer accounts, net
    
    
    190,095
    
    
    
    203,064Other intangible assets, net
    
    
    124,032
    
    
    
    135,265Other assets
    
    
    36,910
    
    
    
    39,623Total assets
    
    $
    2,601,083
    
    
    $
    2,635,218Liabilities and Stockholders Equity:Current liabilitiesAccounts payable and accrued liabilities
    
    $
    146,489
    
    
    $
    159,976Deferred revenue
    
    
    173,827
    
    
    
    133,027Income taxes payable
    
    
    9,245
    
    
    
    11,895Current portion of long-term debt
    
    
    6,500
    
    
    
    Total current liabilities
    
    
    336,061
    
    
    
    304,898Other long-term liabilities
    
    
    63,770
    
    
    
    48,511Deferred income taxes
    
    
    107,706
    
    
    
    147,440Long-term debt
    
    
    1,180,970
    
    
    
    1,212,046Stockholders equityCommon stock, $ .01 par value, 3,000 shares authorized;
100 issued and outstanding at June 30, 2006 and December
31, 2005
    
    
    
    
    
    
    Additional paid-in capital
    
    
    1,011,626
    
    
    
    1,005,991Retained deficit
    
    
    (88,775
    )
    
    
    (63,202
    )Accumulated other comprehensive loss, net of tax
    
    
    (10,275
    )
    
    
    (20,466
    )Total stockholders equity
    
    
    912,576
    
    
    
    922,323Total liabilities and stockholders equity
    
    $
    2,601,083
    
    
    $
    2,635,218
  3




---



##### Table of Contents



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Six monthsendedJune 30, 2006
    
    
    June 30, 2005Cash flows from operating activitiesNet loss
    
    $
    (25,573
    )
    
    $
    (30,193
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Benefit for deferred income taxes
    
    
    (17,282
    )
    
    
    (25,740
    )Depreciation and amortization
    
    
    102,726
    
    
    
    81,403Amortization of deferred financing fees
    
    
    2,765
    
    
    
    2,842In-process research and development
    
    
    
    
    
    
    4,100Stock-based compensation
    
    
    252
    
    
    
    154Unrealized (gain) loss on revaluation of foreign denominated assets and
liabilities
    
    
    (16,935
    )
    
    
    23,486Unrealized loss (gain) on foreign currency revaluation of derivative instruments
    
    
    7,078
    
    
    
    (16,965
    )Other
    
    
    3,663
    
    
    
    2,239Changes in operating assets and liabilities, net of effect of acquisitions:Accounts receivable
    
    
    2,874
    
    
    
    4,385Prepaids and other
    
    
    (6,058
    )
    
    
    (1,405
    )Accounts payable and accrued liabilities
    
    
    (21,740
    )
    
    
    (10,894
    )Deferred revenue
    
    
    33,952
    
    
    
    46,982Income taxes payable
    
    
    (7,217
    )
    
    
    54Other long-term liabilities
    
    
    2,509
    
    
    
    (164
    )Total adjustments
    
    
    86,587
    
    
    
    110,477Net cash provided by operating activities
    
    
    61,014
    
    
    
    80,284Cash flows from investing activitiesAcquisitions, net of cash acquired
    
    
    
    
    
    
    (218,392
    )Acquired software
    
    
    (4,000
    )
    
    
    Cash received from prior parent for acquisition related tax matters
    
    
    
    
    
    
    14,871Payments for purchases of property and equipment
    
    
    (4,560
    )
    
    
    (5,804
    )Capitalized software costs
    
    
    (34,155
    )
    
    
    (39,445
    )Proceeds from sale of marketable securities
    
    
    
    
    
    
    23,194Other
    
    
    (368
    )
    
    
    (62
    )Net cash used in investing activities
    
    
    (43,083
    )
    
    
    (225,638
    )Cash flows from financing activitiesProceeds from revolver credit line
    
    
    78,800
    
    
    
    81,351Payments on revolver credit line
    
    
    (72,300
    )
    
    
    (87,351
    )Proceeds from note payable
    
    
    5,951
    
    
    
    6,802Payments on notes payable
    
    
    (345
    )
    
    
    (2,773
    )Proceeds from bank notes and bonds, net
    
    
    
    
    
    
    234,094Payments on bank notes and bonds
    
    
    (37,000
    )
    
    
    (69,351
    )Capital contributed by parent (stock options exercised)
    
    
    553
    
    
    
    508Capital contributed by parent (compensatory payment)
    
    
    3,819
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (20,522
    )
    
    
    163,280Effect of exchange rates on cash and cash equivalents
    
    
    2,531
    
    
    
    (3,252
    )Net (decrease) increase in cash and cash equivalents
    
    
    (60
    )
    
    
    14,674Cash and cash equivalents at beginning of period
    
    
    61,532
    
    
    
    58,400Cash and cash equivalents at end of period
    
    $
    61,472
    
    
    $
    73,074
  4




---



##### Table of Contents



UGS Corp.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Note 1: Basis of Presentation
      Note 2: Stock-Based Compensation
  5




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
   Three months
    
    Six monthsended
    
    endedJune 30, 2006
    
    June 30, 2006Expected term (in years)
    
    
    7.5
    
    
    
    7.5Dividend yields
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    44.68
    %
    
    
    43.25
    %Risk-free interest rate
    
    
    5.10
    %
    
    
    4.62
    %Expected forfeiture rate
    
    
    6.00
    %
    
    
    6.00
    %
    Stock Option Plan
  Weighted-Weighted-
    
    
    AverageUGS Capital Corp.
    
    
    Average
    
    
    Remaining
    
    
    AggregateClass A Common
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicFixed Options
    
    Shares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at December 31, 2005
    
    
    10,273,200
    
    
    $
    1.98Granted
    
    
    409,000
    
    
    
    7.56Exercised
    
    
    (335,300
    )
    
    
    1.00Forfeited
    
    
    (202,683
    )
    
    
    1.00Outstanding at June 30, 2006
    
    
    10,144,217
    
    
    $
    2.25
    
    
    
    8.36
    
    
    $
    51,228,296Exercisable at June 30, 2006
    
    
    3,075,350
    
    
    $
    1.29
    
    
    
    8.16
    
    
    $
    18,482,854
 6




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Retention Incentive Plan
  Weighted-Weighted-
    
    
    AverageUGS Capital Corp. II
    
    
    Average
    
    
    RemainingPreferred
    
    
    Exercise
    
    
    ContractualFixed Options
    
    Shares
    
    
    Price
    
    
    TermOutstanding at December 31, 2005
    
    
    3,573
    
    
    $
    100.00Exercised
    
    
    (1,896
    )
    
    
    100.00Outstanding at June 30, 2006
    
    
    1,677
    
    
    $
    100.00
    
    
    
    7.91Exercisable at June 30, 2006
    
    
    1,677
    
    
    $
    100.00
    
    
    
    7.91
  Weighted-UGS Capital
    
    
    Weighted-
    
    
    AverageCorp. Class L
    
    
    Average
    
    
    RemainingCommon
    
    
    Exercise
    
    
    ContractualFixed Options
    
    Shares
    
    
    Price
    
    
    TermOutstanding and
exercisable at June 30, 2006
    
    
    12,712
    
    
    $
    81
    
    
    
    7.91
 Note 3: Property and Equipment
  Three monthsendedJune 30, 2006
    
    
    June 30, 2005Depreciation expense
    
    $
    4,200
    
    
    $
    3,243
 Six monthsendedJune 30, 2006
    
    June 30, 2005Depreciation expense
    
    $
    8,576
    
    
    $
    6,269
 Note 4: Goodwill
  Americas
    
    
    Europe
    
    
    Asia Pacific
    
    
    TotalBalance as of December 31, 2005
    
    $
    536,734
    
    
    $
    474,559
    
    
    $
    382,179
    
    
    $
    1,393,472Tecnomatix purchase price allocation
adjustments
    
    
    (4,458
    )
    
    
    (9,195
    )
    
    
    (513
    )
    
    
    (14,166
    )Impact of foreign currency translation
    
    
    
    
    
    
    37,116
    
    
    
    
    
    
    
    37,116Balance as of June 30, 2006
    
    $
    532,276
    
    
    $
    502,480
    
    
    $
    381,666
    
    
    $
    1,416,422
 7




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
  Note 5: Other Intangible Assets
  June 30, 2006Weighted
    
    
    GrossAverage Useful
    
    
    Carrying
    
    
    AccumulatedLife
    
    
    Amount
    
    
    Amortization
    
    
    TotalDefinite Useful LivesCapitalized software
    
    
    3.0
    
    
    $
    139,300
    
    
    $
    26,566
    
    
    $
    112,734Acquired software
    
    
    5.0
    
    
    
    535,662
    
    
    
    213,477
    
    
    
    322,185Customer accounts
    
    
    10.0
    
    
    
    242,273
    
    
    
    52,178
    
    
    
    190,095Maintenance agreements
    
    
    10.0
    
    
    
    110,039
    
    
    
    20,246
    
    
    
    89,793Noncompete agreements
    
    
    2.0
    
    
    
    11,460
    
    
    
    9,704
    
    
    
    1,756Trademarks/tradenames
    
    
    7.0
    
    
    
    45,895
    
    
    
    13,412
    
    
    
    32,483Total other intangible assets
    
    
    
    
    
    $
    1,084,629
    
    
    $
    335,583
    
    
    $
    749,046
 December 31, 2005Weighted
    
    
    GrossAverage Useful
    
    
    Carrying
    
    
    AccumulatedLife
    
    
    Amount
    
    
    Amortization
    
    
    TotalDefinite Useful LivesCapitalized software
    
    
    3.0
    
    
    $
    105,035
    
    
    $
    10,743
    
    
    $
    94,292Acquired software
    
    
    5.0
    
    
    
    529,789
    
    
    
    159,087
    
    
    
    370,702Customer accounts
    
    
    10.0
    
    
    
    242,273
    
    
    
    39,209
    
    
    
    203,064Maintenance agreements
    
    
    10.0
    
    
    
    110,039
    
    
    
    14,744
    
    
    
    95,295Noncompete agreements
    
    
    2.0
    
    
    
    11,460
    
    
    
    7,136
    
    
    
    4,324Trademarks/tradenames
    
    
    7.0
    
    
    
    45,787
    
    
    
    10,141
    
    
    
    35,646Total other intangible assets
    
    
    
    
    
    $
    1,044,383
    
    
    $
    241,060
    
    
    $
    803,323
  Three monthsendedJune 30, 2006
    
    
    June 30, 2005Capitalized software
    
    $
    8,182
    
    
    $
    1,601Acquired software
    
    
    26,058
    
    
    
    26,001Acquired and other intangible assets
    
    
    13,001
    
    
    
    13,024Total amortization expense
    
    $
    47,241
    
    
    $
    40,626Amortization of certain acquired software
allocated to operating expense
    
    $
    981
    
    
    $
    849
 8




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Six monthsendedJune 30, 2006
    
    
    June 30, 2005Capitalized software
    
    $
    15,818
    
    
    $
    2,712Acquired software
    
    
    52,060
    
    
    
    48,478Acquired and other intangible assets
    
    
    26,272
    
    
    
    23,944Total amortization expense
    
    $
    94,150
    
    
    $
    75,134Amortization of certain acquired software
allocated to operating expense
    
    $
    2,025
    
    
    $
    1,601
  Note 6: Restructuring Activities
  Employee
    
    
    ExitSeparations
    
    
    Costs
    
    
    TotalBalance at December 31, 2005
    
    $
    3,778
    
    
    $
    13,324
    
    
    $
    17,102Cash payments
    
    
    (840
    )
    
    
    (3,120
    )
    
    
    (3,960
    )Reduction of accrual
    
    
    (1,231
    )
    
    
    (2,758
    )
    
    
    (3,989
    )Balance at June 30, 2006
    
    $
    1,707
    
    
    $
    7,446
    
    
    $
    9,153
     9




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
  Note 7: Debt
  Note payable, due December 31, 2014 (1,573.1 million yen)
    
    $
    13,670Revolving credit facility, due May 27, 2010, LIBOR plus 2.50%
    
    
    6,500Senior unsecured subordinated notes, due June 1, 2012, 10.0%
    
    
    550,000Secured term loan, due March 31, 2012, LIBOR plus 2.0%
    
    
    617,300Total long-term debt
    
    
    1,187,470Less current portion
    
    
    6,500Total long-term debt, less current portion
    
    $
    1,180,970
  Note payable, due December 31, 2014 (913.6 million yen)
    
    $
    7,746Senior unsecured subordinated notes, due June 1, 2012, 10.0%
    
    
    550,000Secured term loan, due March 31, 2012, LIBOR plus 2.0%
    
    
    654,300Total long-term debt
    
    
    1,212,046Less current portion
    
    
    Total long-term debt, less current portion
    
    $
    1,212,046
 Note Payable
  Debt Covenants
  Parent Company Debt
  10




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Note 8: Income Taxes
  Three monthsendedJune 30, 2006
    
    
    June 30, 2005Current
    
    $
    (3,137
    )
    
    $
    5,683Deferred
    
    
    863
    
    
    
    (14,308
    )Total
    
    $
    (2,274
    )
    
    $
    (8,625
    )
 Six monthsendedJune 30, 2006
    
    
    June 30, 2005Current
    
    $
    4,500
    
    
    $
    13,141Deferred
    
    
    (17,282
    )
    
    
    (25,740
    )Total
    
    $
    (12,782
    )
    
    $
    (12,599
    )
  Three monthsendedJune 30, 2006
    
    
    June 30, 2005U.S. loss
    
    $
    (4,694
    )
    
    $
    (7,656
    )Non-U.S. loss
    
    
    (3,999
    )
    
    
    (22,993
    )Total
    
    $
    (8,693
    )
    
    $
    (30,649
    )
 Six monthsendedJune 30, 2006
    
    
    June 30, 2005U.S. loss
    
    $
    (23,434
    )
    
    $
    (29,606
    )Non-U.S. loss
    
    
    (14,921
    )
    
    
    (13,186
    )Total
    
    $
    (38,355
    )
    
    $
    (42,792
    )
    Note 9: Pension Benefits of Certain Foreign Subsidiaries
 11




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
   Six monthsendedJune 30, 2006
    
    
    June 30, 2005Service cost
    
    $
    1,986
    
    
    $
    1,382Interest cost
    
    
    607
    
    
    
    423Expected return on plan assets
    
    
    (119
    )
    
    
    (112
    )Amortization of prior service cost
    
    
    69
    
    
    
    Amortization of net actuarial loss
    
    
    26
    
    
    
    28Net periodic benefit cost
    
    $
    2,569
    
    
    $
    1,721
 Note 10: Segment Information
   Revenue
    
    Americas
    
    
    Europe
    
    
    Asia Pacific
    
    
    TotalThree months ended June 30, 2006License
    
    $
    30,992
    
    
    $
    31,262
    
    
    $
    23,763
    
    
    $
    86,017Maintenance
    
    
    56,658
    
    
    
    52,222
    
    
    
    26,262
    
    
    
    135,142Services and other
    
    
    38,862
    
    
    
    29,919
    
    
    
    6,719
    
    
    
    75,500Total revenue
    
    $
    126,512
    
    
    $
    113,403
    
    
    $
    56,744
    
    
    $
    296,659Three months ended June 30, 2005License
    
    $
    30,891
    
    
    $
    31,106
    
    
    $
    19,780
    
    
    $
    81,777Maintenance
    
    
    54,001
    
    
    
    50,173
    
    
    
    24,127
    
    
    
    128,301Services and other
    
    
    40,468
    
    
    
    28,486
    
    
    
    5,978
    
    
    
    74,932Total revenue
    
    $
    125,360
    
    
    $
    109,765
    
    
    $
    49,885
    
    
    $
    285,010
 Revenue
    
    Americas
    
    
    Europe
    
    
    Asia Pacific
    
    
    TotalSix months ended June 30, 2006License
    
    $
    62,128
    
    
    $
    59,605
    
    
    $
    43,794
    
    
    $
    165,527
 12




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Maintenance
    
    
    111,895
    
    
    
    96,210
    
    
    
    52,726
    
    
    
    260,831Services and other
    
    
    73,793
    
    
    
    56,901
    
    
    
    13,401
    
    
    
    144,095Total revenue
    
    $
    247,816
    
    
    $
    212,716
    
    
    $
    109,921
    
    
    $
    570,453Six months ended June 30, 2005License
    
    $
    56,169
    
    
    $
    57,565
    
    
    $
    41,162
    
    
    $
    154,896Maintenance
    
    
    101,890
    
    
    
    91,298
    
    
    
    46,720
    
    
    
    239,908Services and other
    
    
    76,462
    
    
    
    53,698
    
    
    
    12,611
    
    
    
    142,771Total revenue
    
    $
    234,521
    
    
    $
    202,561
    
    
    $
    100,493
    
    
    $
    537,575
 Operating Income
    
    Americas
    
    Europe
    
    Asia Pacific
    
    TotalThree months ended June 30, 2006
    
    $
    59,265
    
    
    $
    49,752
    
    
    $
    32,547
    
    
    $
    141,564Three months ended June 30, 2005
    
    $
    55,634
    
    
    $
    43,463
    
    
    $
    23,850
    
    
    $
    122,947
 Operating Income
    
    Americas
    
    Europe
    
    Asia Pacific
    
    TotalSix months ended June 30, 2006
    
    $
    114,560
    
    
    $
    89,405
    
    
    $
    62,781
    
    
    $
    266,746Six months ended June 30, 2005
    
    $
    101,170
    
    
    $
    81,873
    
    
    $
    52,506
    
    
    $
    235,547
 Accounts Receivable
    
    Americas
    
    Europe
    
    Asia Pacific
    
    TotalAs of June 30, 2006
    
    $
    88,771
    
    
    $
    117,027
    
    
    $
    52,847
    
    
    $
    258,645As of December 31, 2005
    
    $
    86,726
    
    
    $
    114,228
    
    
    $
    50,809
    
    
    $
    251,763
  Three monthsendedJune 30, 2006
    
    
    June 30, 2005Total operating income for reportable segments
    
    $
    141,564
    
    
    $
    122,947Research and development
    
    
    (47,388
    )
    
    
    (38,659
    )In-process research and development
    
    
    
    
    
    
    (4,100
    )Restructuring
    
    
    
    
    
    
    (1,774
    )Amortization of capitalized and acquired software
and other intangible assets
    
    
    (46,260
    )
    
    
    (39,777
    )Corporate and unallocated costs
    
    
    (37,792
    )
    
    
    (35,487
    )Operating income
    
    $
    10,124
    
    
    $
    3,150
 Six monthsendedJune 30, 2006
    
    
    June 30, 2005Total operating income for reportable segments
    
    $
    266,746
    
    
    $
    235,547Research and development
    
    
    (98,613
    )
    
    
    (74,640
    )In-process research and development
    
    
    
    
    
    
    (4,100
    )Restructuring
    
    
    535
    
    
    
    (1,774
    )Amortization of capitalized and acquired software
and other intangible assets
    
    
    (92,125
    )
    
    
    (73,533
    )Corporate and unallocated costs
    
    
    (71, 868
    )
    
    
    (64,506
    )Operating income
    
    $
    4,675
    
    
    $
    16,994
  13




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Three monthsendedTotal Revenue:
    
    June 30, 2006
    
    
    June 30, 2005United States
    
    $
    116,703
    
    
    $
    117,808Germany
    
    
    38,523
    
    
    
    36,481Japan
    
    
    25,945
    
    
    
    24,653All Other
    
    
    115,488
    
    
    
    106,068Total
    
    $
    296,659
    
    
    $
    285,010
 Six monthsendedTotal Revenue:
    
    June 30, 2006
    
    
    June 30, 2005United States
    
    $
    230,255
    
    
    $
    220,997Germany
    
    
    73,481
    
    
    
    64,613Japan
    
    
    56,888
    
    
    
    54,790All Other
    
    
    209,829
    
    
    
    197,175Total
    
    $
    570,453
    
    
    $
    537,575
 Note 11: Commitments and Contingencies
 Legal Proceedings
  Guarantees
  Other
  14




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
  Note 12: Comprehensive Loss
  Three monthsendedJune 30, 2006
    
    
    June 30, 2005Net loss
    
    $
    (6,419
    )
    
    $
    (22,024
    )Currency translation adjustments, net of taxes
    
    
    8,479
    
    
    
    (15,309
    )Change in fair value of derivative instruments, net of taxes
    
    
    (4,603
    )
    
    
    1,819Comprehensive loss
    
    $
    (2,543
    )
    
    $
    (35,514
    )
 Six monthsendedJune 30, 2006
    
    
    June 30, 2005Net loss
    
    $
    (25,573
    )
    
    $
    (30,193
    )Currency translation adjustments, net of taxes
    
    
    13,879
    
    
    
    (21,531
    )Change in fair value of derivative instruments, net of taxes
    
    
    (3,688
    )
    
    
    622Comprehensive loss
    
    $
    (15,382
    )
    
    $
    (51,102
    )
 Note 13: Related Party Transactions
   Note 14: Recent Accounting Pronouncements
  15




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
   Note 15: Financial Statements of Guarantors
  16




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING
SCHEDULE OF OPERATIONS
(in thousands)
 Three months ended June 30, 2006Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue:License
    
    $
    22,795
    
    
    $
    418
    
    
    $
    62,804
    
    
    $
    
    
    
    $
    86,017Maintenance
    
    
    49,870
    
    
    
    116
    
    
    
    85,156
    
    
    
    
    
    
    
    135,142Services and other
    
    
    35,915
    
    
    
    58,733
    
    
    
    39,478
    
    
    
    (58,626)
    (a)
    
    
    75,500Total revenue
    
    
    108,580
    
    
    
    59,267
    
    
    
    187,438
    
    
    
    (58,626
    )
    
    
    296,659Cost of revenue:License
    
    
    (150
    )
    
    
    30
    
    
    
    2,295
    
    
    
    
    
    
    
    2,175Maintenance
    
    
    5,423
    
    
    
    6
    
    
    
    10,266
    
    
    
    
    
    
    
    15,695Services and other
    
    
    25,025
    
    
    
    
    
    
    
    90,768
    
    
    
    (58,626
    ) (a)
    
    
    57,167Amortization of capitalized software and
acquired intangible assets
    
    
    17,844
    
    
    
    14,010
    
    
    
    5,859
    
    
    
    
    
    
    
    37,713Total cost of revenue
    
    
    48,142
    
    
    
    14,046
    
    
    
    109,188
    
    
    
    (58,626
    )
    
    
    112,750Gross profit
    
    
    60,438
    
    
    
    45,221
    
    
    
    78,250
    
    
    
    
    
    
    
    183,909Operating expenses:Selling, general and adminstrative
    
    
    56,421
    
    
    
    1,442
    
    
    
    59,987
    
    
    
    
    
    
    
    117,850Research and development
    
    
    47,388
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,388Amortization of other intangibles assets
    
    
    2,512
    
    
    
    
    
    
    
    6,035
    
    
    
    
    
    
    
    8,547Total operating expenses
    
    
    106,321
    
    
    
    1,442
    
    
    
    66,022
    
    
    
    
    
    
    
    173,785Operating (loss) income
    
    
    (45,883
    )
    
    
    43,779
    
    
    
    12,228
    
    
    
    
    
    
    
    10,124Interest expense and amortization of
deferred financing fees
    
    
    (25,686
    )
    
    
    10,231
    
    
    
    (11,065
    )
    
    
    
    
    
    
    (26,520
    )Other (expense) income, net
    
    
    28
    
    
    
    8,261
    
    
    
    (586
    )
    
    
    
    
    
    
    7,703(Loss) income before income taxes
    
    
    (71,541
    )
    
    
    62,271
    
    
    
    577
    
    
    
    
    
    
    
    (8,693
    )(Benefit) provision for income taxes
    
    
    (24,271
    )
    
    
    21,795
    
    
    
    202
    
    
    
    
    
    
    
    (2,274
    )Net (loss) income
    
    $
    (47,270
    )
    
    $
    40,476
    
    
    $
    375
    
    
    $
    
    
    
    $
    (6,419
    )
 
 (a)
    
    - Elimination represents statutory royalty revenue to guarantor subsidiaries and statutory
royalty expense to non-guarantor subsidiaries. 17




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING
SCHEDULE OF OPERATIONS
(in thousands)
 Three months ended June 30, 2005Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue:License
    
    $
    25,920
    
    
    $
    140
    
    
    $
    55,717
    
    
    $
    
    
    
    $
    81,777Maintenance
    
    
    48,283
    
    
    
    109
    
    
    
    79,909
    
    
    
    
    
    
    
    128,301Services and other
    
    
    37,904
    
    
    
    44,839
    
    
    
    36,964
    
    
    
    (44,775
    )(a)
    
    
    74,932Total revenue
    
    
    112,107
    
    
    
    45,088
    
    
    
    172,590
    
    
    
    (44,775
    )
    
    
    285,010Cost of revenue:License
    
    
    1,801
    
    
    
    50
    
    
    
    4,093
    
    
    
    
    
    
    
    5,944Maintenance
    
    
    5,493
    
    
    
    12
    
    
    
    8,990
    
    
    
    
    
    
    
    14,495Services and other
    
    
    28,096
    
    
    
    26
    
    
    
    83,354
    
    
    
    (44,775
    )(a)
    
    
    66,701Amortization of capitalized software and
acquired intangible assets
    
    
    11,329
    
    
    
    14,010
    
    
    
    5,699
    
    
    
    
    
    
    
    31,038Total cost of revenue
    
    
    46,719
    
    
    
    14,098
    
    
    
    102,136
    
    
    
    (44,775
    )
    
    
    118,178Gross profit
    
    
    65,388
    
    
    
    30,990
    
    
    
    70,454
    
    
    
    
    
    
    
    166,832Operating expenses:Selling, general and adminstrative
    
    
    49,158
    
    
    
    629
    
    
    
    60,623
    
    
    
    
    
    
    
    110,410Research and development
    
    
    38,659
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,659In-process research and development
    
    
    
    
    
    
    
    
    
    
    4,100
    
    
    
    
    
    
    
    4,100Restructuring
    
    
    
    
    
    
    
    
    
    
    1,774
    
    
    
    
    
    
    
    1,774Amortization of other intangibles assets
    
    
    2,623
    
    
    
    
    
    
    
    6,116
    
    
    
    
    
    
    
    8,739Total operating expenses
    
    
    90,440
    
    
    
    629
    
    
    
    72,613
    
    
    
    
    
    
    
    163,682Operating (loss) income
    
    
    (25,052
    )
    
    
    30,361
    
    
    
    (2,159
    )
    
    
    
    
    
    
    3,150Interest expense and amortization of
deferred financing fees
    
    
    (24,202
    )
    
    
    12,416
    
    
    
    (13,430
    )
    
    
    
    
    
    
    (25,216
    )Other income (expense), net
    
    
    1,490
    
    
    
    (9,389
    )
    
    
    (684
    )
    
    
    
    
    
    
    (8,583
    )(Loss) income before income taxes
    
    
    (47,764
    )
    
    
    33,388
    
    
    
    (16,273
    )
    
    
    
    
    
    
    (30,649
    )Provision (benefit) for income taxes
    
    
    (14,615
    )
    
    
    11,686
    
    
    
    (5,696
    )
    
    
    
    
    
    
    (8,625
    )Net (loss) income
    
    $
    (33,149
    )
    
    $
    21,702
    
    
    $
    (10,577
    )
    
    $
    
    
    
    $
    (22,024
    )
 
 (a)
    
    - Elimination represents statutory royalty revenue to guarantor subsidiaries and statutory
royalty expense to non-guarantor subsidiaries. 18




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING
SCHEDULE OF OPERATIONS
(in thousands)
 Six months ended June 30, 2006Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue:License
    
    $
    48,075
    
    
    $
    822
    
    
    $
    116,630
    
    
    $
    
    
    
    $
    165,527Maintenance
    
    
    99,081
    
    
    
    304
    
    
    
    161,446
    
    
    
    
    
    
    
    260,831Services and other
    
    
    68,435
    
    
    
    108,109
    
    
    
    75,406
    
    
    
    (107,855
    )(a)
    
    
    144,095Total revenue
    
    
    215,591
    
    
    
    109,235
    
    
    
    353,482
    
    
    
    (107,855
    )
    
    
    570,453Cost of revenue:License
    
    
    710
    
    
    
    179
    
    
    
    5,210
    
    
    
    
    
    
    
    6,099Maintenance
    
    
    10,395
    
    
    
    55
    
    
    
    20,350
    
    
    
    
    
    
    
    30,800Services and other
    
    
    50,400
    
    
    
    
    
    
    
    170,470
    
    
    
    (107,855
    )(a)
    
    
    113,015Amortization of capitalized software and
acquired intangible assets
    
    
    35,145
    
    
    
    28,020
    
    
    
    11,594
    
    
    
    
    
    
    
    74,759Total cost of revenue
    
    
    96,650
    
    
    
    28,254
    
    
    
    207,624
    
    
    
    (107,855
    )
    
    
    224,673Gross profit
    
    
    118,941
    
    
    
    80,981
    
    
    
    145,858
    
    
    
    
    
    
    
    345,780Operating expenses:Selling, general and adminstrative
    
    
    106,336
    
    
    
    2,003
    
    
    
    117,322
    
    
    
    
    
    
    
    225,661Research and development
    
    
    98,613
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,613Restructuring
    
    
    
    
    
    
    
    
    
    
    (535
    )
    
    
    
    
    
    
    (535
    )Amortization of other intangibles assets
    
    
    5,135
    
    
    
    
    
    
    
    12,231
    
    
    
    
    
    
    
    17,366Total operating expenses
    
    
    210,084
    
    
    
    2,003
    
    
    
    129,018
    
    
    
    
    
    
    
    341,105Operating (loss) income
    
    
    (91,143
    )
    
    
    78,978
    
    
    
    16,840
    
    
    
    
    
    
    
    4,675Interest expense and amortization of
deferred financing fees
    
    
    (53,095
    )
    
    
    22,985
    
    
    
    (22,857
    )
    
    
    
    
    
    
    (52,967
    )Other (expense) income, net
    
    
    (2,455
    )
    
    
    13,557
    
    
    
    (1,165
    )
    
    
    
    
    
    
    9,937(Loss) income before income taxes
    
    
    (146,693
    )
    
    
    115,520
    
    
    
    (7,182
    )
    
    
    
    
    
    
    (38,355
    )(Benefit) provision for income taxes
    
    
    (50,700
    )
    
    
    40,432
    
    
    
    (2,514
    )
    
    
    
    
    
    
    (12,782
    )Net (loss) income
    
    $
    (95,993
    )
    
    $
    75,088
    
    
    $
    (4,668
    )
    
    $
    
    
    
    $
    (25,573
    )
 
 (a)
    -
    Elimination represents statutory royalty revenue to guarantor subsidiaries and statutory
royalty expense to non-guarantor subsidiaries. 19




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING
SCHEDULE OF OPERATIONS
(in thousands)
 Six months ended June 30, 2005Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue:License
    
    $
    49,721
    
    
    $
    410
    
    
    $
    104,765
    
    
    $
    
    
    
    $
    154,896Maintenance
    
    
    92,394
    
    
    
    246
    
    
    
    147,268
    
    
    
    
    
    
    
    239,908Services and other
    
    
    73,021
    
    
    
    89,303
    
    
    
    69,672
    
    
    
    (89,225
    )(a)
    
    
    142,771Total revenue
    
    
    215,136
    
    
    
    89,959
    
    
    
    321,705
    
    
    
    (89,225
    )
    
    
    537,575Cost of revenue:License
    
    
    4,050
    
    
    
    152
    
    
    
    6,198
    
    
    
    
    
    
    
    10,400Maintenance
    
    
    10,372
    
    
    
    42
    
    
    
    17,444
    
    
    
    
    
    
    
    27,858Services and other
    
    
    55,603
    
    
    
    26
    
    
    
    156,293
    
    
    
    (89,225
    )(a)
    
    
    122,697Amortization of capitalized software and
acquired intangible assets
    
    
    22,170
    
    
    
    28,020
    
    
    
    7,034
    
    
    
    
    
    
    
    57,224Total cost of revenue
    
    
    92,195
    
    
    
    28,240
    
    
    
    186,969
    
    
    
    (89,225
    )
    
    
    218,179Gross profit
    
    
    122,941
    
    
    
    61,719
    
    
    
    134,736
    
    
    
    
    
    
    
    319,396Operating expenses:Selling, general and adminstrative
    
    
    96,577
    
    
    
    1,287
    
    
    
    107,715
    
    
    
    
    
    
    
    205,579Research and development
    
    
    74,640
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,640In-process research and development
    
    
    
    
    
    
    
    
    
    
    4,100
    
    
    
    
    
    
    
    4,100Restructuring
    
    
    
    
    
    
    
    
    
    
    1,774
    
    
    
    
    
    
    
    1,774Amortization of other intangibles assets
    
    
    5,245
    
    
    
    
    
    
    
    11,064
    
    
    
    
    
    
    
    16,309Total operating expenses
    
    
    176,462
    
    
    
    1,287
    
    
    
    124,653
    
    
    
    
    
    
    
    302,402Operating (loss) income
    
    
    (53,521
    )
    
    
    60,432
    
    
    
    10,083
    
    
    
    
    
    
    
    16,994Interest expense and amortization of
deferred financing fees
    
    
    (46,215
    )
    
    
    28,997
    
    
    
    (29,161
    )
    
    
    
    
    
    
    (46,379
    )Other (expense) income, net
    
    
    (535
    )
    
    
    (12,711
    )
    
    
    (161
    )
    
    
    
    
    
    
    (13,407
    )(Loss) income before income taxes
    
    
    (100,271
    )
    
    
    76,718
    
    
    
    (19,239
    )
    
    
    
    
    
    
    (42,792
    )Provision (benefit) for income taxes
    
    
    (32,716
    )
    
    
    26,851
    
    
    
    (6,734
    )
    
    
    
    
    
    
    (12,599
    )Net (loss) income
    
    $
    (67,555
    )
    
    $
    49,867
    
    
    $
    (12,505
    )
    
    $
    
    
    
    $
    (30,193
    )
 
 (a)
    -
    Elimination represents statutory royalty revenue to guarantor subsidiaries and statutory
royalty expense to non-guarantor subsidiaries. 20




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 SUPPLEMENTAL UNAUDITED CONDENSED
CONSOLIDATING BALANCE SHEET
(in thousands)
 June 30, 2006Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssets:Current assets
Cash and cash equivalents
    
    $
    (1,840
    )
    
    $
    117
    
    
    $
    63,195
    
    
    $
    
    
    
    $
    61,472Accounts receivable, net
    
    
    76,098
    
    
    
    642
    
    
    
    181,905
    
    
    
    
    
    
    
    258,645Prepaids and other
    
    
    8,052
    
    
    
    
    
    
    
    21,154
    
    
    
    
    
    
    
    29,206Deferred income taxes
    
    
    17,351
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,351Total current assets
    
    
    99,661
    
    
    
    759
    
    
    
    266,254
    
    
    
    
    
    
    
    366,674Property and equipment, net
    
    
    19,371
    
    
    
    
    
    
    
    12,660
    
    
    
    
    
    
    
    32,031Goodwill
    
    
    324,151
    
    
    
    542,785
    
    
    
    549,486
    
    
    
    
    
    
    
    1,416,422Capitalized and acquired software, net
    
    
    212,481
    
    
    
    162,671
    
    
    
    59,767
    
    
    
    
    
    
    
    434,919Customer accounts, net
    
    
    72,231
    
    
    
    
    
    
    
    117,864
    
    
    
    
    
    
    
    190,095Other intangible assets, net
    
    
    42,669
    
    
    
    
    
    
    
    81,363
    
    
    
    
    
    
    
    124,032Intercompany balances
    
    
    
    
    
    
    717,111
    
    
    
    
    
    
    
    (717,111
    )(b)
    
    
    Other assets
    
    
    810,092
    
    
    
    
    
    
    
    15,071
    
    
    
    (788,253
    )(a)
    
    
    36,910Total assets
    
    $
    1,580,656
    
    
    $
    1,423,326
    
    
    $
    1,102,465
    
    
    $
    (1,505,364
    )
    
    $
    2,601,083Liabilities and Stockholders Equity:Current liabilitiesAccounts payable and accrued liabilities
    
    $
    52,335
    
    
    $
    2,845
    
    
    $
    91,309
    
    
    $
    
    
    
    $
    146,489Deferred revenue
    
    
    72,807
    
    
    
    329
    
    
    
    100,691
    
    
    
    
    
    
    
    173,827Income taxes payable
    
    
    
    
    
    
    
    
    
    
    9,245
    
    
    
    
    
    
    
    9,245Intercompany balances
    
    
    341,026
    
    
    
    
    
    
    
    376,085
    
    
    
    (717,111
    ) (b)
    
    
    Current portion of long-term debt
    
    
    6,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,500Total current liabilities
    
    
    472,668
    
    
    
    3,174
    
    
    
    577,330
    
    
    
    (717,111
    )
    
    
    336,061Other long-term liabilities
    
    
    
    
    
    
    19,114
    
    
    
    44,656
    
    
    
    
    
    
    
    63,770Deferred income taxes
    
    
    7,668
    
    
    
    56,936
    
    
    
    43,102
    
    
    
    
    
    
    
    107,706Long-term debt
    
    
    1,167,300
    
    
    
    
    
    
    
    13,670
    
    
    
    
    
    
    
    1,180,970Total stockholders equity
    
    
    (66,980
    )
    
    
    1,344,102
    
    
    
    423,707
    
    
    
    (788,253
    )(a)
    
    
    912,576Total liabilities and
stockholders equity
    
    $
    1,580,656
    
    
    $
    1,423,326
    
    
    $
    1,102,465
    
    
    $
    (1,505,364
    )
    
    $
    2,601,083
 
 (a)
    -
    Elimination of investment in guarantor subsidiary.(b)
    -
    Elimination of intercompany balances. 21




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 SUPPLEMENTAL UNAUDITED CONDENSED
CONSOLIDATING BALANCE SHEET
(in thousands)
 December 31, 2005Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssets:Current assetsCash and cash equivalents
    
    $
    (4,266
    )
    
    $
    962
    
    
    $
    64,836
    
    
    $
    
    
    
    $
    61,532Accounts receivable, net
    
    
    73,305
    
    
    
    1,654
    
    
    
    176,804
    
    
    
    
    
    
    
    251,763Prepaids and other
    
    
    10,111
    
    
    
    
    
    
    
    12,278
    
    
    
    
    
    
    
    22,389Deferred income taxes
    
    
    26,471
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,471Total current assets
    
    
    105,621
    
    
    
    2,616
    
    
    
    253,918
    
    
    
    
    
    
    
    362,155Property and equipment, net
    
    
    22,721
    
    
    
    
    
    
    
    13,924
    
    
    
    
    
    
    
    36,645Goodwill
    
    
    324,151
    
    
    
    542,785
    
    
    
    526,536
    
    
    
    
    
    
    
    1,393,472Capitalized and acquired software, net
    
    
    206,926
    
    
    
    190,691
    
    
    
    67,377
    
    
    
    
    
    
    
    464,994Customer accounts, net
    
    
    76,801
    
    
    
    
    
    
    
    126,263
    
    
    
    
    
    
    
    203,064Other intangible assets, net
    
    
    46,327
    
    
    
    
    
    
    
    88,938
    
    
    
    
    
    
    
    135,265Intercompany balances
    
    
    
    
    
    
    614,587
    
    
    
    
    
    
    
    (614,587
    )(b)
    
    
    Other assets
    
    
    812,857
    
    
    
    
    
    
    
    15,019
    
    
    
    (788,253
    )(a)
    
    
    39,623Total assets
    
    $
    1,595,404
    
    
    $
    1,350,679
    
    
    $
    1,091,975
    
    
    $
    (1,402,840
    )
    
    $
    2,635,218Liabilities and Stockholders Equity:Current liabilitiesAccounts payable and accrued liabilities
    
    $
    56,304
    
    
    $
    1,566
    
    
    $
    102,106
    
    
    $
    
    
    
    $
    159,976Deferred revenue
    
    
    59,210
    
    
    
    699
    
    
    
    73,118
    
    
    
    
    
    
    
    133,027Income taxes payable
    
    
    
    
    
    
    
    
    
    
    11,895
    
    
    
    
    
    
    
    11,895Intercompany balances
    
    
    248,246
    
    
    
    
    
    
    
    366,341
    
    
    
    (614,587
    )(b)
    
    
    Total current liabilities
    
    
    363,760
    
    
    
    2,265
    
    
    
    553,460
    
    
    
    (614,587
    )
    
    
    304,898Other long-term liabilities
    
    
    
    
    
    
    6,270
    
    
    
    42,241
    
    
    
    
    
    
    
    48,511Deferred income taxes
    
    
    9,689
    
    
    
    66,743
    
    
    
    71,008
    
    
    
    
    
    
    
    147,440Long-term debt
    
    
    1,204,300
    
    
    
    
    
    
    
    7,746
    
    
    
    
    
    
    
    1,212,046Total stockholders equity
    
    
    17,655
    
    
    
    1,275,401
    
    
    
    417,520
    
    
    
    (788,253
    )(a)
    
    
    922,323Total liabilities and
stockholders equity
    
    $
    1,595,404
    
    
    $
    1,350,679
    
    
    $
    1,091,975
    
    
    $
    (1,402,840
    )
    
    $
    2,635,218
 
 (a)
    -
    Elimination of investment in guarantor subsidiary.(b)
    -
    Elimination of intercompany balances. 22




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 SUPPLEMENTAL UNAUDITED CONDENSED
CONSOLIDATING SCHEDULE OF CASH FLOWS
(in thousands)
 Six months ended June 30, 2006Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedCash flows from operating activitiesNet (loss) income
    
    $
    (95,993
    )
    
    $
    75,088
    
    
    $
    (4,668
    )
    
    $
    (25,573
    )Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:Benefit for deferred income taxes
    
    
    864
    
    
    
    (9,807
    )
    
    
    (8,339
    )
    
    
    (17,282
    )Depreciation and amortization
    
    
    46,888
    
    
    
    28,020
    
    
    
    27,818
    
    
    
    102,726Amortization of deferred financing fees
    
    
    2,765
    
    
    
    
    
    
    
    
    
    
    
    2,765Stock-based compensation
    
    
    236
    
    
    
    
    
    
    
    16
    
    
    
    252Unrealized gain on revaluation of foreign
denominated assets and liabilities
    
    
    
    
    
    
    
    
    
    
    (16,935
    )
    
    
    (16,935
    )Unrealized loss on foreign currency revaluation of
derivative instruments
    
    
    
    
    
    
    7,078
    
    
    
    
    
    
    
    7,078Other
    
    
    2,576
    
    
    
    (22
    )
    
    
    1,109
    
    
    
    3,663Changes in operating assets and liabilities, net of effect
of acqusitions:Accounts receivable
    
    
    (3,527
    )
    
    
    1,034
    
    
    
    5,367
    
    
    
    2,874Prepaids and other
    
    
    2,059
    
    
    
    
    
    
    
    (8,117
    )
    
    
    (6,058
    )Accounts payable and accrued liabilities
    
    
    (5,772
    )
    
    
    1,279
    
    
    
    (17,247
    )
    
    
    (21,740
    )Deferred revenue
    
    
    13,480
    
    
    
    (374
    )
    
    
    20,846
    
    
    
    33,952Income taxes payable
    
    
    
    
    
    
    
    
    
    
    (7,217
    )
    
    
    (7,217
    )Other long-term liabilities
    
    
    
    
    
    
    94
    
    
    
    2,415
    
    
    
    2,509Total adjustments
    
    
    59,569
    
    
    
    27,302
    
    
    
    (284
    )
    
    
    86,587Net cash (used in) provided by operating activities
    
    
    (36,424
    )
    
    
    102,390
    
    
    
    (4,952
    )
    
    
    61,014Cash flows from investing activitiesAcquired software
    
    
    (4,000
    )
    
    
    
    
    
    
    
    
    
    
    (4,000
    )Payments for purchases of property and equipment
    
    
    (2,604
    )
    
    
    
    
    
    
    (1,956
    )
    
    
    (4,560
    )Capitalized software costs
    
    
    (33,917
    )
    
    
    
    
    
    
    (238
    )
    
    
    (34,155
    )Other
    
    
    (383
    )
    
    
    
    
    
    
    15
    
    
    
    (368
    )Net cash used in investing activities
    
    
    (40,904
    )
    
    
    
    
    
    
    (2,179
    )
    
    
    (43,083
    )Cash flows from financing activitiesIntercompany borrowings (payments)
    
    
    99,820
    
    
    
    (103,235
    )
    
    
    3,415
    
    
    
    Proceeds from revolver credit line
    
    
    78,800
    
    
    
    
    
    
    
    
    
    
    
    78,800Payments on revolver credit line
    
    
    (72,300
    )
    
    
    
    
    
    
    
    
    
    
    (72,300
    )Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    5,951
    
    
    
    5,951Payments on notes payable
    
    
    
    
    
    
    
    
    
    
    (345
    )
    
    
    (345
    )Payments on bank notes and bonds
    
    
    (37,000
    )
    
    
    
    
    
    
    
    
    
    
    (37,000
    )Intercompany dividends
    
    
    6,062
    
    
    
    
    
    
    
    (6,062
    )
    
    
    Capital contributed by parent (stock options exercised)
    
    
    553
    
    
    
    
    
    
    
    
    
    
    
    553Capital contributed by parent (compensatory payment)
    
    
    3,819
    
    
    
    
    
    
    
    
    
    
    
    3,819Net cash provided by (used in) financing activities
    
    
    79,754
    
    
    
    (103,235
    )
    
    
    2,959
    
    
    
    (20,522
    )Effect of exchange rates on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    2,531
    
    
    
    2,531Net increase (decrease) in cash and cash equivalents
    
    
    2,426
    
    
    
    (845
    )
    
    
    (1,641
    )
    
    
    (60
    )Cash and cash equivalents at beginning of period
    
    
    (4,266
    )
    
    
    962
    
    
    
    64,836
    
    
    
    61,532Cash and cash equivalents at end of period
    
    $
    (1,840
    )
    
    $
    117
    
    
    $
    63,195
    
    
    $
    61,472
 23




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 SUPPLEMENTAL UNAUDITED CONDENSED
CONSOLIDATING SCHEDULE OF CASH FLOWS
(in thousands)
 Six months ended June 30, 2005Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedCash flows from operating activitiesNet (loss) income
    
    $
    (67,555
    )
    
    $
    49,867
    
    
    $
    (12,505
    )
    
    $
    (30,193
    )Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:Benefit for deferred income taxes
    
    
    (9,599
    )
    
    
    (9,807
    )
    
    
    (6,334
    )
    
    
    (25,740
    )Depreciation and amortization
    
    
    32,881
    
    
    
    28,020
    
    
    
    20,502
    
    
    
    81,403Amortization of deferred financing fees
    
    
    2,842
    
    
    
    
    
    
    
    
    
    
    
    2,842In-process research and development
    
    
    
    
    
    
    
    
    
    
    4,100
    
    
    
    4,100Stock-based compensation
    
    
    154
    
    
    
    
    
    
    
    
    
    
    
    154Other
    
    
    588
    
    
    
    9
    
    
    
    1,642
    
    
    
    2,239Unrealized gain on foreign currency revaluation of
derivative instruments
    
    
    
    
    
    
    (16,965
    )
    
    
    
    
    
    
    (16,965
    )Unrealized loss on revaluation of foreign
denominated assets and liabilities
    
    
    
    
    
    
    
    
    
    
    23,486
    
    
    
    23,486Changes in operating assets and liabilities, net of effect
of acqusitions:Accounts receivable
    
    
    (90
    )
    
    
    1,671
    
    
    
    2,804
    
    
    
    4,385Prepaids and other
    
    
    (1,354
    )
    
    
    220
    
    
    
    (271
    )
    
    
    (1,405
    )Accounts payable and accrued liabilities
    
    
    3,050
    
    
    
    104
    
    
    
    (14,048
    )
    
    
    (10,894
    )Deferred revenue
    
    
    13,180
    
    
    
    (529
    )
    
    
    34,331
    
    
    
    46,982Income taxes payable
    
    
    
    
    
    
    
    
    
    
    54
    
    
    
    54Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    (164
    )
    
    
    (164
    )Total adjustments
    
    
    41,652
    
    
    
    2,723
    
    
    
    66,102
    
    
    
    110,477Net cash (used in) provided by operating activities
    
    
    (25,903
    )
    
    
    52,590
    
    
    
    53,597
    
    
    
    80,284Cash flows from investing activitiesAcquisitions, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (218,392
    )
    
    
    (218,392
    )Cash received from prior parent for acquisition
related tax matters
    
    
    14,871
    
    
    
    
    
    
    
    
    
    
    
    14,871Payments for purchases of property and equipment
    
    
    (3,795
    )
    
    
    
    
    
    
    (2,009
    )
    
    
    (5,804
    )Capitalized software costs
    
    
    (38,501
    )
    
    
    
    
    
    
    (944
    )
    
    
    (39,445
    )Proceeds from sale of marketable securities
    
    
    
    
    
    
    
    
    
    
    23,194
    
    
    
    23,194Other
    
    
    (1,762
    )
    
    
    280
    
    
    
    1,420
    
    
    
    (62
    )Net cash (used in) provided by investing activities
    
    
    (29,187
    )
    
    
    280
    
    
    
    (196,731
    )
    
    
    (225,638
    )Cash flows from financing activitiesIntercompany borrowings (payments)
    
    
    (126,710
    )
    
    
    (51,519
    )
    
    
    178,229
    
    
    
    Proceeds from revolver credit line
    
    
    81,351
    
    
    
    
    
    
    
    
    
    
    
    81,351Payments on revolver credit line
    
    
    (87,351
    )
    
    
    
    
    
    
    
    
    
    
    (87,351
    )Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    6,802
    
    
    
    6,802Payments on notes payable
    
    
    
    
    
    
    
    
    
    
    (2,773
    )
    
    
    (2,773
    )Proceeds from bank notes and bonds, net
    
    
    225,201
    
    
    
    
    
    
    
    8,893
    
    
    
    234,094Payments on bank notes and bonds
    
    
    (36,000
    )
    
    
    
    
    
    
    (33,351
    )
    
    
    (69,351
    )Capital contributed by parent
    
    
    508
    
    
    
    
    
    
    
    
    
    
    
    508Net cash provided by (used in) financing activities
    
    
    56,999
    
    
    
    (51,519
    )
    
    
    157,800
    
    
    
    163,280Effect of exchange rates on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (3,252
    )
    
    
    (3,252
    )Net increase in cash and cash equivalents
    
    
    1,909
    
    
    
    1,351
    
    
    
    11,414
    
    
    
    14,674Cash and cash equivalents at beginning of period
    
    
    (1,951
    )
    
    
    251
    
    
    
    60,100
    
    
    
    58,400Cash and cash equivalents at end of period
    
    $
    (42
    )
    
    $
    1,602
    
    
    $
    71,514
    
    
    $
    73,074
 24




---



##### Table of Contents



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Statements contained in this Quarterly Report on Form 10-Q that relate to our future
performance, including, without limitation, statements with respect to our anticipated results of
operations or level of business for fiscal 2006 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, potential
bankruptcies in the automotive industry, disruptions in international markets ,fluctuations in
quarterly results, future terrorist attacks, ability to complete or integrate future acquisitions,
changes in pricing models for PLM software products, difficulties in our partner relationships,
impact of defects, major design errors or security flaws, loss of the use of facilities or systems,
intellectual property rights protection and infringement claims, loss of senior executives or
employees, high level of indebtedness, and complexity of assessing adequacy of our provision for
income taxes. These risks are described in Item 1A of this Quarterly Report on Form 10-Q 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
  Revenue
   25




---



##### Table of Contents



Cost of Revenue
  Sales and Marketing
    Research and Development Costs
   26




---



##### Table of Contents



Three monthsendedJune 30, 2006
    
    
    June 30, 2005Research and development costs
    
    $
    47,388
    
    
    $
    38,659Capitalized software costs
    
    
    18,690
    
    
    
    22,056Total Research and Development Costs
    
    $
    66,078
    
    
    $
    60,715
 Six monthsendedJune 30, 2006
    
    
    June 30, 2005Research and development costs
    
    $
    98,613
    
    
    $
    74,640Capitalized software costs
    
    
    34,155
    
    
    
    39,445Total Research and Development Costs
    
    $
    132,768
    
    
    $
    114,085
 Factors Affecting our Results of Operations
  Impact of Acquisitions
  Deferred Revenue
  Amortization of Acquired Intangible Assets
  Acquisition Related Interest Expense
  Critical Accounting Policies and Estimates
  27




---



##### Table of Contents



Capitalized Software Development Costs
  Revenue Recognition
   
    
    persuasive evidence of an arrangement exists;
    
    delivery has occurred or services have been rendered;
    
    the fee is fixed or determinable; and
    
    collectibility is probable.
   28




---



##### Table of Contents



Business Combinations
  29




---



##### Table of Contents



Recoverability of Goodwill, Acquired Intangible Assets and Long-Lived Assets
   Income Taxes
   30




---



##### Table of Contents



Recent Accounting Pronouncements
   Segment Revenue and Operating Income
  Geographic Segment Revenue
  31




---



##### Table of Contents



Three monthsended
    
    
    
    
    
    
    PercentageJune 30, 2006
    
    
    June 30, 2005
    
    
    Increase
    
    
    IncreaseAmericas
    
    $
    126,512
    
    
    $
    125,360
    
    
    $
    1,152
    
    
    
    0.9
    %Europe
    
    
    113,403
    
    
    
    109,765
    
    
    
    3,638
    
    
    
    3.3
    %Asia Pacific
    
    
    56,744
    
    
    
    49,885
    
    
    
    6,859
    
    
    
    13.7
    %Total revenue
    
    $
    296,659
    
    
    $
    285,010
    
    
    $
    11,649
    
    
    
    4.1
    %
 Six monthsended
    
    
    
    
    
    
    PercentageJune 30, 2006
    
    
    June 30, 2005
    
    
    Increase
    
    
    IncreaseAmericas
    
    $
    247,816
    
    
    $
    234,521
    
    
    $
    13,295
    
    
    
    5.7
    %Europe
    
    
    212,716
    
    
    
    202,561
    
    
    
    10,155
    
    
    
    5.0
    %Asia Pacific
    
    
    109,921
    
    
    
    100,493
    
    
    
    9,428
    
    
    
    9.4
    %Total revenue
    
    $
    570,453
    
    
    $
    537,575
    
    
    $
    32,878
    
    
    
    6.1
    %
       32




---



##### Table of Contents



Geographic Segment Operating Income
  Three monthsended
    
    
    
    
    
    
    PercentageJune 30, 2006
    
    
    June 30, 2005
    
    
    Increase
    
    
    IncreaseAmericas
    
    $
    59,265
    
    
    $
    55,634
    
    
    $
    3,631
    
    
    
    6.5
    %Europe
    
    
    49,752
    
    
    
    43,463
    
    
    
    6,289
    
    
    
    14.5
    %Asia Pacific
    
    
    32,547
    
    
    
    23,850
    
    
    
    8,697
    
    
    
    36.5
    %Total operating income
    
    $
    141,564
    
    
    $
    122,947
    
    
    $
    18,617
    
    
    
    15.1
    %
 Six monthsended
    
    
    
    
    
    
    PercentageJune 30, 2006
    
    
    June 30, 2005
    
    
    Increase
    
    
    IncreaseAmericas
    
    $
    114,560
    
    
    $
    101,170
    
    
    $
    13,390
    
    
    
    13.2
    %Europe
    
    
    89,405
    
    
    
    81,872
    
    
    
    7,533
    
    
    
    9.2
    %Asia Pacific
    
    
    62,781
    
    
    
    52,505
    
    
    
    10,276
    
    
    
    19.6
    %Total operating income
    
    $
    266,746
    
    
    $
    235,547
    
    
    $
    31,199
    
    
    
    13.2
    %
     33




---



##### Table of Contents



Three monthsendedJune 30, 2006
    
    
    June 30, 2005Total operating income for reportable segments
    
    $
    141,564
    
    
    $
    122,947Research and development
    
    
    (47,388
    )
    
    
    (38,659
    )In-process research and development
    
    
    
    
    
    
    (4,100
    )Restructuring
    
    
    
    
    
    
    (1,774
    )Amortization of capitalized and acquired software
and other intangible assets
    
    
    (46,260
    )
    
    
    (39,777
    )Corporate and unallocated costs
    
    
    (37,792
    )
    
    
    (35,487
    )Operating income
    
    $
    10,124
    
    
    $
    3,150
 Six monthsendedJune 30, 2006
    
    
    June 30, 2005Total operating income for reportable segments
    
    $
    266,746
    
    
    $
    235,547Research and development
    
    
    (98,613
    )
    
    
    (74,640
    )In-process research and development
    
    
    
    
    
    
    (4,100
    )Restructuring
    
    
    535
    
    
    
    (1,774
    )Amortization of capitalized and acquired software
and other intangible assets
    
    
    (92,125
    )
    
    
    (73,533
    )Corporate and unallocated costs
    
    
    (71,868
    )
    
    
    (64,506
    )Operating income
    
    $
    4,675
    
    
    $
    16,994
 34




---



##### Table of Contents



Results of Operations
  Three months endedJune 30, 2006
    
    
    June 30, 2005(percentage of total revenue)
    
    
    
    
    
    
    (percentage of total revenue)Revenue:License
    
    $
    86,017
    
    
    
    28.9
    %
    
    $
    81,777
    
    
    
    28.7
    %Maintenance
    
    
    135,142
    
    
    
    45.6
    %
    
    
    128,301
    
    
    
    45.0
    %Services and other (a)
    
    
    75,500
    
    
    
    25.5
    %
    
    
    74,932
    
    
    
    26.3
    %Total revenue
    
    
    296,659
    
    
    
    100.0
    %
    
    
    285,010
    
    
    
    100.0
    %Cost of revenue (includes amortization of
capitalized and acquired software)
    
    
    112,750
    
    
    
    38.0
    %
    
    
    118,178
    
    
    
    41.5
    %Gross profit
    
    
    183,909
    
    
    
    62.0
    %
    
    
    166,832
    
    
    
    58.5
    %Operating expenses:Selling, general and administrative
    
    
    117,850
    
    
    
    39.7
    %
    
    
    110,410
    
    
    
    38.7
    %Research and development
    
    
    47,388
    
    
    
    16.0
    %
    
    
    38,659
    
    
    
    13.6
    %In-process research and development
    
    
    
    
    
    
    0.0
    %
    
    
    4,100
    
    
    
    1.4
    %Restructuring
    
    
    
    
    
    
    0.0
    %
    
    
    1,774
    
    
    
    0.6
    %Amortization of other intangible assets
    
    
    8,547
    
    
    
    2.9
    %
    
    
    8,739
    
    
    
    3.1
    %Total operating expenses
    
    
    173,785
    
    
    
    58.6
    %
    
    
    163,682
    
    
    
    57.4
    %Operating income
    
    
    10,124
    
    
    
    3.4
    %
    
    
    3,150
    
    
    
    1.1
    %Interest expense and amortization of deferred financing fees
    
    
    (26,520
    )
    
    
    -8.9
    %
    
    
    (25,216
    )
    
    
    -8.8
    %Other income (expense), net
    
    
    7,703
    
    
    
    2.6
    %
    
    
    (8,583
    )
    
    
    -3.0
    %Loss before taxes
    
    
    (8,693
    )
    
    
    -2.9
    %
    
    
    (30,649
    )
    
    
    -10.7
    %Benefit for income taxes
    
    
    (2,274
    )
    
    
    -0.8
    %
    
    
    (8,625
    )
    
    
    -3.0
    %Net loss
    
    $
    (6,419
    )
    
    
    -2.1
    %
    
    $
    (22,024
    )
    
    
    -7.7
    %
 
 (a)
    
    Other revenue consists primarily of hardware sales. Six months endedJune 30, 2006
    
    
    June 30, 2005(percentage of total revenue)
    
    
    
    
    
    
    (percentage of total revenue)Revenue:License
    
    $
    165,527
    
    
    
    29.0
    %
    
    $
    154,896
    
    
    
    28.8
    %Maintenance
    
    
    260,831
    
    
    
    45.7
    %
    
    
    239,908
    
    
    
    44.6
    %Services and other (a)
    
    
    144,095
    
    
    
    25.3
    %
    
    
    142,771
    
    
    
    26.6
    %Total revenue
    
    
    570,453
    
    
    
    100.0
    %
    
    
    537,575
    
    
    
    100.0
    %Cost of revenue (includes amortization of
capitalized and acquired software)
    
    
    224,673
    
    
    
    39.4
    %
    
    
    218,179
    
    
    
    40.6
    %Gross profit
    
    
    345,780
    
    
    
    60.6
    %
    
    
    319,396
    
    
    
    59.4
    %Operating expenses:Selling, general and administrative
    
    
    225,661
    
    
    
    39.6
    %
    
    
    205,579
    
    
    
    38.2
    %Research and development
    
    
    98,613
    
    
    
    17.3
    %
    
    
    74,640
    
    
    
    13.9
    %In-Process research and development
    
    
    
    
    
    
    0.0
    %
    
    
    4,100
    
    
    
    0.8
    %Restructuring
    
    
    (535
    )
    
    
    -0.1
    %
    
    
    1,774
    
    
    
    0.3
    %Amortization of other intangible assets
    
    
    17,366
    
    
    
    3.0
    %
    
    
    16,309
    
    
    
    3.0
    %Total operating expenses
    
    
    341,105
    
    
    
    59.9
    %
    
    
    302,402
    
    
    
    56.2
    %Operating income
    
    
    4,675
    
    
    
    0.8
    %
    
    
    16,994
    
    
    
    3.2
    %Interest expense and amortization of deferred financing fees
    
    
    (52,967
    )
    
    
    -9.3
    %
    
    
    (46,379
    )
    
    
    -8.6
    %Other income (expense), net
    
    
    9,937
    
    
    
    1.7
    %
    
    
    (13,407
    )
    
    
    -2.5
    %Loss before taxes
    
    
    (38,355
    )
    
    
    -6.8
    %
    
    
    (42,792
    )
    
    
    -7.9
    %Benefit for income taxes
    
    
    (12,782
    )
    
    
    -2.2
    %
    
    
    (12,599
    )
    
    
    -2.3
    %Net loss
    
    $
    (25,573
    )
    
    
    -4.5
    %
    
    $
    (30,193
    )
    
    
    -5.6
    %
 
 (a)
    
    Other revenue consists primarily of hardware sales. 35




---



##### Table of Contents



Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
 Total Revenue
  Three monthsendedPercentageJune 30, 2006
    
    
    June 30, 2005
    
    
    Increase
    
    
    IncreaseLicense
    
    $
    86,017
    
    
    $
    81,777
    
    
    $
    4,240
    
    
    
    5.2
    %Maintenance
    
    
    135,142
    
    
    
    128,301
    
    
    
    6,841
    
    
    
    5.3
    %Services and other
    
    
    75,500
    
    
    
    74,932
    
    
    
    568
    
    
    
    0.8
    %Total revenue
    
    $
    296,659
    
    
    $
    285,010
    
    
    $
    11,649
    
    
    
    4.1
    %
  
    
    License. License revenue in the 2006 period benefited, in part, from license sales
with a higher average deal size in our Asia Pacific segment. License revenue accounted
for 28.9% of total revenue for the three months ended June 30, 2006 and 28.7% for the
three months ended June 30, 2005.
    
    Maintenance.Maintenance revenue for the three months ended June 30, 2006 was higher
for all operating segments. Also, maintenance revenue reflects a greater increase because
of the purchase accounting adjustment described above. Maintenance revenue accounted for
45.6% of total revenue for the three months ended June 30, 2006 and 45.0% for the three
months ended June 30, 2005.
    
    Services and other. Services revenue was higher in our Europe and Asia Pacific
segments, with Europe having the largest increase due to cPDM services projects, which
are generally larger in scope than CAx service projects. This increase was partially
offset by lower services revenue in the Americas automotive sector. Services and other
revenue accounted for 25.45% of total revenue for the three months ended June 30, 2006
and 26.3% of total revenue for the three months ended June 30, 2005.
 Gross Profit
  36




---



##### Table of Contents



Operating Expenses
 Selling, General and Administrative
  Research and Development
   Restructuring
  Amortization of Other Intangible Assets
  Operating Income
  Interest Expense and Amortization of Deferred Financing Fees
  37




---



##### Table of Contents



Benefit for Income Taxes
  Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
 Total Revenue
  Six monthsendedPercentageJune 30, 2006
    
    
    June 30, 2005
    
    
    Increase
    
    
    IncreaseLicense
    
    $
    165,527
    
    
    $
    154,896
    
    
    $
    10,631
    
    
    
    6.9
    %Maintenance
    
    
    260,831
    
    
    
    239,908
    
    
    
    20,923
    
    
    
    8.7
    %Services and other
    
    
    144,095
    
    
    
    142,771
    
    
    
    1,324
    
    
    
    0.9
    %Total revenue
    
    $
    570,453
    
    
    $
    537,575
    
    
    $
    32,878
    
    
    
    6.2
    %
  
    
    License. License revenue in the 2006 period benefited from the inclusion of Tecnomatix
operations for six months, which contributed revenue of $5.6 million more than the prior
period. License revenue also benefited from license sales in the last three months with
a higher average deal size in our Asia Pacific segment. License revenue accounted for
29.0% of total revenue for the six months ended June 30, 2006 and 28.8% for the six
months ended June 30, 2005.
    
    Maintenance.Tecnomatix contributed maintenance revenue of $8.0 million more in the
2006 period than in the 2005 period. Maintenance revenue also benefited from renewals on
the existing customer base. Also, maintenance revenue reflects a greater increase because
of the purchase accounting adjustment described above. Maintenance revenue accounted for
45.7% of total revenue for the six months ended June 30, 2006 and 44.6% of total revenue
for the six months ended June 30, 2005.
    
    Services and other. Services revenue benefited from the addition of Tecnomatix, which
contributed revenue $4.0 million more revenue in the 2006 period than in the 2005 period.
This increase was primarily offset by a decrease in services revenue in the Americas
automotive sector. Services and other revenue accounted for 25.3% of total revenue for
the six months ended June 30, 2006 and 26.6% of total revenue for the six months ended
June 30, 2005. In addition to the decrease of service revenues in the Americas described
above, the decrease in services revenue as a percent of total revenue was also due to the
incorporation of Tecnomatix operations, which added a higher proportion of maintenance
and license revenue than services revenue.
 38




---



##### Table of Contents



Gross Profit
  Operating Expenses
 Selling, General and Administrative
  Research and Development
   Restructuring
  39




---



##### Table of Contents



Amortization of Other Intangible Assets
  Operating Income
  Interest Expense and Amortization of Deferred Financing Fees
  Benefit for Income Taxes
  Liquidity and Capital Resources
 Non-GAAP Measures
  40




---



##### Table of Contents



Six monthsendedJune 30, 2006
    
    
    June 30, 2005Reconciliation of EBITDA to net cash
provided by operating activities:EBITDA
    
    $
    117,338
    
    
    $
    84,990Benefit for deferred income taxes
    
    
    (17,282
    )
    
    
    (25,740
    )Amortization of deferred financing fees
    
    
    2,765
    
    
    
    2,842In-process research and development
    
    
    
    
    
    
    4,100Stock-based compensation
    
    
    252
    
    
    
    154Other
    
    
    3,663
    
    
    
    2,239Unrealized (gain) loss on revaluation of foreign
denominated assets and liabilities
    
    
    (16,935
    )
    
    
    23,486Unrealized loss (gain) on foreign currency revaluation
of derivative instruments
    
    
    7,078
    
    
    
    (16,965
    )Changes in operating assets and liabilities
    
    
    4,320
    
    
    
    38,958Interest expense
    
    
    (52,967
    )
    
    
    (46,379
    )Benefit for income taxes
    
    
    12,782
    
    
    
    12,599Net cash provided by operating activities
    
    $
    61,014
    
    
    $
    80,284Reconciliation of EBITDA to net loss:EBITDA
    
    $
    117,338
    
    
    $
    84,990Interest expense
    
    
    (52,967
    )
    
    
    (46,379
    )Benefit for income taxes
    
    
    12,782
    
    
    
    12,599Depreciation and amortization
    
    
    (102,726
    )
    
    
    (81,403
    )Net loss
    
    $
    (25,573
    )
    
    $
    (30,193
    )
 Debt and Commitments
     41




---



##### Table of Contents



Capital Expenditures
  42




---



##### Table of Contents



Historical Cash Flow
    Off Balance Sheet Obligations
  Inflation
  Seasonality
  
 ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Exchange Risk
    43




---



##### Table of Contents



USDInterest
    
    
    Notional
    
    
    ExchangeExpiration
    
    
    Rate
    
    
    Value
    
    
    Rate to  1(in millions)Pay fixed
    
    December 15, 2014
    
    
    9.0
    %
    
    
    45.3
    
    
    
    1.2238Receive fixed
    
    
    
    
    
    
    9.025
    %Pay fixed
    
    December 15, 2016
    
    
    9.0
    %
    
    
    42.5
    
    
    
    1.2238Receive fixed
    
    
    
    
    
    
    9.08
    %
  Interest Rate Risk
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   44




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1A: RISK FACTORS
  If the PLM market does not develop as we anticipate, our revenue will be adversely affected.
   The loss or downsizing of key customers would significantly reduce our earnings.
  Our industry is and will likely remain highly competitive.
   45




---



##### Table of Contents



If we are unable to deliver new and innovative PLM software products and services, our revenues
will be adversely affected.
  
    
    enhance and expand our existing PLM software products and services; and
    
    deliver new, high-quality PLM software products and services in a cost-effective and timely
manner.
  Substantial, prolonged economic downturns in the markets in which we operate could cause our
customers to reduce their spending on capital investments, which has in the past and could in the
future, negatively affect our results of operations.
  Continued levels of financial distress and the potential for future bankruptcies in the automotive
industry could materially and adversely affect our revenues and profitability.
  46




---



##### Table of Contents



Our international sales constitute a substantial portion of our total sales and could be negatively
affected by disruptions in international markets caused by currency exchange rate fluctuations,
government actions, international political or economic instability, or other similar events.
  
 
 
 
 We expect that our quarterly operating results will fluctuate, which may result in fluctuations in
the trading price of our 10% senior subordinated notes.
  Future terrorist attacks could lead to decreased capital expenditures on PLM software and services
and could negatively affect our business.
  47




---



##### Table of Contents



We received certain indemnities from EDS that may not adequately protect us from liability
against all consequences or aspects of matters we were indemnified against.
  Our ability to complete or integrate future acquisitions may adversely affect our business or
financial performance.
   Declining unit prices and increased productivity of PLM software products, or changes in the
pricing models for PLM software products, could negatively impact our revenue growth.
   48




---



##### Table of Contents



As a result of our strategy of partnering with other companies for product development, marketing,
distribution, and services, our products and business development could be adversely affected if we
experience difficulties with our partners.
  Defects, major design errors or security flaws in our products could harm our reputation and expose
us to potential liability.
    Our facilities and systems are subject to the risk of temporary damage due to system interference,
breakdown or physical harm.
   49




---



##### Table of Contents



Our international activities subject us to export requirements, the violation of which could
adversely affect us.
  If we are unable to protect our intellectual property rights, it could negatively affect the value
of our brands and products.
    Claims that our products infringe the intellectual property rights of others could increase our
costs and reduce our sales, which would adversely affect our revenue and operating margins.
  50




---



##### Table of Contents



The loss of technology licensed from third-parties on a non-exclusive basis that we integrate in
our software could delay implementation of our products or force us to pay higher license fees.
  If we lose the services of our senior executives or employees who possess specialized market
knowledge and technical skills, it could reduce our ability to compete, to manage our operations
effectively, or to develop new products and services.
    51




---



##### Table of Contents



Our level of indebtedness could adversely affect our ability to raise additional capital to fund
our operations, limit our ability to react to changes in the economy or our industry and prevent us
from meeting our obligations under our senior subordinated notes.
  (In millions)Senior secured credit facility
    
    $
    617.3Senior subordinated notes
    
    $
    550.0Revolving credit facility
    
    $
    6.5Other debt
    
    $
    13.7Total debt
    
    $
    1,187.5Stockholders equity
    
    $
    912.6
  
 
 
 
 
 
   
    
    fluctuations in interest rates;
    
    customer actions increasing competition;
    
    global economic situations;
    
    increased operating costs; and
 52




---



##### Table of Contents




    
    trends in our industry.
   Restrictive covenants may adversely affect us.
  
    
    incur, assume or guarantee additional indebtedness;
    
    issue redeemable stock and preferred stock;
    
    repurchase capital stock;
 
 
    
    sell certain assets;
    
    create liens on certain assets without securing the senior subordinated notes;
    
    merge, consolidate, sell or otherwise dispose of substantially all of our assets;
    
    enter into agreements that restrict dividends from subsidiaries;
    
    enter into certain transactions with our affiliates; and
    
    change our business.
  53




---



##### Table of Contents



Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt
service obligations to increase significantly.
  Our global presence increases the complexity of assessing the adequacy of our provision for income
taxes.
  We may incur losses associated with currency fluctuations and may not be able to effectively hedge
our exposure.
  
 ITEM 6. EXHIBITS
  54




---



##### Table of Contents



SIGNATURES
  /s/ Douglas E. BarnettDouglas E. BarnettSenior Vice President and Chief Financial Officer(on behalf of the Registrant and as Chief FinancialOfficer)
 55




---



##### Table of Contents



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
 56