##### 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 March 31, 2006
 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
  (972) 987-3000
  
 o þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filed 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 March 31, 2006 and 2005
    
    
    1Condensed Consolidated Balance Sheets as of March 31, 2006 and
December 31, 2005
    
    
    2Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2006 and 2005
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    20Item 3.
    
    Qualitative and Quantitative Disclosures About Market Risk
    
    
    34Item 4.
    
    Controls and Procedures
    
    
    35Part II.
    
    OTHER INFORMATIONItem 6.
    
    Exhibits
    
    
    35Signatures
    
    
    36Certification of President & CEO Pursuant to Rules 13a-14(a)/15d-14(a)Certification of CFO Pursuant to Rules 13a-14(a)/15d-14(a)Certifications of CEO & CFO Pursuant to 18 U.S.C. Section 1350




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##### Table of Contents



UGS Corp.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands)
 Three monthsendedMarch 31, 2006
    
    
    March 31, 2005Revenue:License
    
    $
    79,510
    
    
    $
    73,119Maintenance
    
    
    125,689
    
    
    
    111,607Services and other
    
    
    68,595
    
    
    
    67,839Total revenue
    
    
    273,794
    
    
    
    252,565Cost of revenue:License
    
    
    3,924
    
    
    
    4,456Maintenance
    
    
    15,105
    
    
    
    13,363Services and other
    
    
    55,848
    
    
    
    55,996Amortization of capitalized software and acquired intangible assets
    
    
    37,046
    
    
    
    26,186Total cost of revenue
    
    
    111,923
    
    
    
    100,001Gross profit
    
    
    161,871
    
    
    
    152,564Operating expenses:Selling, general and administrative
    
    
    107,811
    
    
    
    95,169Research and development
    
    
    51,225
    
    
    
    35,981Restructuring
    
    
    (535
    )
    
    
    Amortization of other intangible assets
    
    
    8,819
    
    
    
    7,570Total operating expenses
    
    
    167,320
    
    
    
    138,720Operating (loss) income
    
    
    (5,449
    )
    
    
    13,844Interest expense and amortization of deferred financing fees
    
    
    (26,447
    )
    
    
    (21,163
    )Other income (expense), net
    
    
    2,234
    
    
    
    (4,824
    )Loss before income taxes
    
    
    (29,662
    )
    
    
    (12,143
    )Benefit for income taxes
    
    
    (10,508
    )
    
    
    (3,974
    )Net loss
    
    $
    (19,154
    )
    
    $
    (8,169
    )
  1




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##### Table of Contents



UGS Corp.
 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share amounts)
 March 31, 2006
    
    
    December 31, 2005Assets:Current assetsCash and cash equivalents
    
    $
    61,282
    
    
    $
    61,532Accounts receivable, net
    
    
    254,062
    
    
    
    251,763Prepaids and other
    
    
    20,401
    
    
    
    18,622Deferred income taxes
    
    
    21,846
    
    
    
    26,471Total current assets
    
    
    357,591
    
    
    
    358,388Property and equipment, net
    
    
    34,236
    
    
    
    36,645Goodwill
    
    
    1,391,040
    
    
    
    1,393,472Capitalized and acquired software, net
    
    
    446,626
    
    
    
    464,994Customer accounts, net
    
    
    196,581
    
    
    
    203,064Other intangible assets, net
    
    
    129,457
    
    
    
    135,265Other assets
    
    
    38,146
    
    
    
    39,623Total assets
    
    $
    2,593,677
    
    
    $
    2,631,451Liabilities and Stockholders Equity:Current liabilitiesAccounts payable and accrued liabilities
    
    $
    160,957
    
    
    $
    159,976Deferred revenue
    
    
    170,808
    
    
    
    133,027Income taxes payable
    
    
    864
    
    
    
    3,528Total current liabilities
    
    
    332,629
    
    
    
    296,531Other long-term liabilities
    
    
    51,645
    
    
    
    48,511Deferred income taxes
    
    
    118,531
    
    
    
    152,040Long-term debt
    
    
    1,181,051
    
    
    
    1,212,046Stockholders equityCommon stock, $ .01 par value, 3,000 shares authorized;
100 issued and outstanding at March 31, 2006 and December
31, 2005
    
    
    
    
    
    
    Additional paid-in capital
    
    
    1,006,329
    
    
    
    1,005,991Retained deficit
    
    
    (82,356
    )
    
    
    (63,202
    )Accumulated other comprehensive loss, net of tax
    
    
    (14,152
    )
    
    
    (20,466
    )Total stockholders equity
    
    
    909,821
    
    
    
    922,323Total liabilities and stockholders equity
    
    $
    2,593,677
    
    
    $
    2,631,451
  2




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##### Table of Contents



UGS Corp.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Three monthsendedMarch 31, 2006
    
    
    March 31, 2005Cash flows from operating activitiesNet loss
    
    $
    (19,154
    )
    
    $
    (8,169
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Benefit for deferred income taxes
    
    
    (18,145
    )
    
    
    (11,432
    )Depreciation and amortization
    
    
    51,285
    
    
    
    37,534Amortization of deferred financing fees
    
    
    1,382
    
    
    
    1,452Stock-based compensation
    
    
    118
    
    
    
    222Unrealized (gain) loss on revaluation of foreign denominated assets and
liabilities
    
    
    (5,932
    )
    
    
    11,000Unrealized loss (gain) on foreign currency revaluation of derivative instruments
    
    
    2,818
    
    
    
    (7,606
    )Other
    
    
    1,073
    
    
    
    740Changes in operating assets and liabilities, net of effect of acquisitions:Accounts receivable
    
    
    2,250
    
    
    
    (10,616
    )Prepaids and other
    
    
    (1,350
    )
    
    
    1,135Accounts payable and accrued liabilities
    
    
    (410
    )
    
    
    (14,569
    )Deferred revenue
    
    
    35,901
    
    
    
    34,517Income taxes payable
    
    
    (3,567
    )
    
    
    (337
    )Other long-term liabilities
    
    
    1,021
    
    
    
    (1,092
    )Total adjustments
    
    
    66,444
    
    
    
    40,948Net cash provided by operating activities
    
    
    47,290
    
    
    
    32,779Cash flows from investing activitiesCash received from prior parent for acquisition related tax matters
    
    
    
    
    
    
    10,964Payments for purchases of property and equipment
    
    
    (1,661
    )
    
    
    (2,028
    )Capitalized software costs
    
    
    (15,465
    )
    
    
    (17,389
    )Other
    
    
    (591
    )
    
    
    942Net cash used in investing activities
    
    
    (17,717
    )
    
    
    (7,511
    )Cash flows from financing activitiesProceeds from revolver credit line
    
    
    
    
    
    
    29,300Payments on revolver credit line
    
    
    
    
    
    
    (35,300
    )Proceeds from note payable
    
    
    5,951
    
    
    
    6,439Proceeds from bank notes and bonds, net
    
    
    
    
    
    
    2,500Payments on bank notes and bonds
    
    
    (37,000
    )
    
    
    Capital contributed by parent (stock options exercised)
    
    
    220
    
    
    
    229Net cash (used in) provided by financing activities
    
    
    (30,829
    )
    
    
    3,168Effect of exchange rates on cash and cash equivalents
    
    
    1,006
    
    
    
    (806
    )Net (decrease) increase in cash and cash equivalents
    
    
    (250
    )
    
    
    27,630Cash and cash equivalents at beginning of period
    
    
    61,532
    
    
    
    58,400Cash and cash equivalents at end of period
    
    $
    61,282
    
    
    $
    86,030
  3




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##### Table of Contents



UGS Corp.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Note 1: Basis of Presentation
      Note 2: Stock-Based Compensation
  4




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
   Three monthsendedMarch 31, 2006Expected term (in years)
    
    
    7.5Dividend yields
    
    
    0
    %Expected volatility
    
    
    42.50
    %Risk-free interest rate
    
    
    4.37
    %Expected forfeiture rate
    
    
    6.00
    %
   Stock Option Plan
  Weighted-Weighted-
    
    AverageUGS Capital Corp.
    
    Average
    
    RemainingClass A Common
    
    Exercise
    
    ContractualFixed Options
    
    Shares
    
    Price
    
    TermOutstanding at December 31, 2005
    
    
    10,273,200
    
    
    $
    1.98Granted
    
    
    269,000
    
    
    
    7.70Exercised
    
    
    (220,001
    )
    
    
    1.00Forfeited
    
    
    (22,533
    )
    
    
    1.00Outstanding at March 31, 2006
    
    
    10,299,666
    
    
    $
    2.15
    
    
    
    8.58Exercisable at March 31, 2006
    
    
    2,517,874
    
    
    $
    1.01
    
    
    
    8.35
 5




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Retention Incentive Plan
   Weighted-
    
    
    
    
    
    
    
    
    
    Weighted-UGS Capital
    
    Weighted-
    
    Average
    
    UGS Capital
    
    Weighted-
    
    AverageCorp. Class L
    
    Average
    
    Remaining
    
    Corp. II
    
    Average
    
    RemainingCommon
    
    Exercise
    
    Contractual
    
    Preferred
    
    Exercise
    
    ContractualFixed Options
    
    Shares
    
    Price
    
    Term
    
    Shares
    
    Price
    
    TermOutstanding at March
31, 2006
    
    
    12,712
    
    
    $
    81
    
    
    
    8.40
    
    
    
    3,573
    
    
    $
    100
    
    
    
    8.40
 Note 3: Property and Equipment
  Three monthsendedMarch 31, 2006
    
    March 31, 2005Depreciation expense
    
    $
    4,376
    
    
    $
    3,026
 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
    
    
    
    
    
    
    11,734
    
    
    
    
    
    
    
    11,734Balance as of March 31, 2006
    
    $
    532,276
    
    
    $
    477,098
    
    
    $
    381,666
    
    
    $
    1,391,040
  6




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Note 5: Other Intangible Assets
  March 31, 2006Weighted-
    
    
    GrossAverage Useful
    
    
    Carrying
    
    
    AccumulatedLife
    
    
    Amount
    
    
    Amortization
    
    
    TotalDefinite Useful LivesCapitalized software
    
    
    3.0
    
    
    $
    120,773
    
    
    $
    18,350
    
    
    $
    102,423Acquired software
    
    
    5.0
    
    
    
    530,383
    
    
    
    186,180
    
    
    
    344,203Customer accounts
    
    
    10.0
    
    
    
    242,273
    
    
    
    45,692
    
    
    
    196,581Maintenance agreements
    
    
    10.0
    
    
    
    110,039
    
    
    
    17,495
    
    
    
    92,544Noncompete agreements
    
    
    2.0
    
    
    
    11,460
    
    
    
    8,557
    
    
    
    2,903Trademarks/tradenames
    
    
    7.0
    
    
    
    45,787
    
    
    
    11,775
    
    
    
    34,010Total other intangible assets
    
    
    
    
    
    $
    1,060,713
    
    
    $
    288,049
    
    
    $
    772,664
 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 monthsendedMarch 31, 2006
    
    
    March 31, 2005Capitalized software
    
    $
    7,636
    
    
    $
    1,111Acquired software
    
    
    26,001
    
    
    
    22,477Acquired and other intangible assets
    
    
    13,272
    
    
    
    10,920Total amortization expense
    
    $
    46,909
    
    
    $
    34,508Amortization of certain acquired
software allocated to operating expense
    
    $
    1,044
    
    
    $
    752
  7




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Note 6: Restructuring Activities
  Employee
    
    
    ExitSeparations
    
    
    Costs
    
    
    TotalBalance at December 31, 2005
    
    $
    3,778
    
    
    $
    13,324
    
    
    $
    17,102Cash payments
    
    
    (390
    )
    
    
    (2,193
    )
    
    
    (2,583
    )Reduction of accrual
    
    
    (1,231
    )
    
    
    
    
    
    
    (1,231
    )Balance at March 31, 2006
    
    $
    2,157
    
    
    $
    11,131
    
    
    $
    13,288
    Note 7: Debt
  Note payable, due December 31, 2014 (1,613.5 million yen)
    
    $
    13,751Senior unsecured subordinated notes, due June 1, 2012, 10.0%
    
    
    550,000Secured term loan, due March 31, 2012, LIBOR plus 2.00%
    
    
    617,300Total long-term debt
    
    
    1,181,051Less current portion
    
    
    Total long-term debt, less current portion
    
    $
    1,181,051
 8




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
  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
  Note 8: Income Taxes
  Three monthsendedMarch 31, 2006
    
    
    March 31, 2005Current
    
    $
    7,637
    
    
    $
    7,458Deferred
    
    
    (18,145
    )
    
    
    (11,432
    )Total
    
    $
    (10,508
    )
    
    $
    (3,974
    )
  Three monthsendedMarch 31, 2006
    
    
    March 31, 2005U.S. loss
    
    $
    (18,740
    )
    
    $
    (21,950
    )Non-U.S. (loss) income
    
    
    (10,922
    )
    
    
    9,807Total
    
    $
    (29,662
    )
    
    $
    (12,143
    )
  9




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Note 9: Pension Benefits of Certain Foreign Subsidiaries
   Three monthsendedMarch 31, 2006
    
    
    March 31, 2005Service cost
    
    $
    978
    
    
    $
    686Interest cost
    
    
    297
    
    
    
    212Expected return on plan assets
    
    
    (59
    )
    
    
    (57
    )Amortization of prior service cost
    
    
    35
    
    
    
    Amortization of net actuarial loss
    
    
    12
    
    
    
    15Net periodic benefit cost
    
    $
    1,263
    
    
    $
    856
 Note 10: Segment Information
   Americas
    
    
    Europe
    
    
    Asia Pacific
    
    
    TotalRevenueThree months ended March 31, 2006License
    
    $
    31,136
    
    
    $
    28,343
    
    
    $
    20,031
    
    
    $
    79,510Maintenance
    
    
    55,237
    
    
    
    43,988
    
    
    
    26,464
    
    
    
    125,689Services and other
    
    
    34,931
    
    
    
    26,982
    
    
    
    6,682
    
    
    
    68,595Total revenue
    
    $
    121,304
    
    
    $
    99,313
    
    
    $
    53,177
    
    
    $
    273,794Three months ended March 31, 2005License
    
    $
    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
    
    
    $
    252,565
 10




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Americas
    
    Europe
    
    Asia Pacific
    
    TotalOperating IncomeThree months ended March 31, 2006
    
    $
    55,295
    
    
    $
    39,653
    
    
    $
    30,234
    
    
    $
    125,182Three months ended March 31, 2005
    
    $
    45,536
    
    
    $
    38,409
    
    
    $
    28,655
    
    
    $
    112,600
 Americas
    
    Europe
    
    Asia Pacific
    
    TotalAccounts ReceivableAs of March 31, 2006
    
    $
    92,332
    
    
    $
    120,665
    
    
    $
    41,065
    
    
    $
    254,062As of December 31, 2005
    
    $
    86,726
    
    
    $
    114,228
    
    
    $
    50,809
    
    
    $
    251,763
  Three monthsendedMarch 31, 2006
    
    
    March 31, 2005Total operating income for reportable segments
    
    $
    125,182
    
    
    $
    112,600Research and development
    
    
    (51,225
    )
    
    
    (35,981
    )Restructuring
    
    
    535
    
    
    
    Amortization of capitalized and acquired software
and other intangible assets
    
    
    (45,865
    )
    
    
    (33,756
    )Corporate and unallocated costs
    
    
    (34,076
    )
    
    
    (29,019
    )Operating (loss) income
    
    $
    (5,449
    )
    
    $
    13,844
  Three monthsendedMarch 31, 2006
    
    
    March 31, 2005Total Revenue:United States
    
    $
    113,552
    
    
    $
    103,189Germany
    
    
    34,958
    
    
    
    28,132Japan
    
    
    30,943
    
    
    
    30,137All Other
    
    
    94,341
    
    
    
    91,107Total
    
    $
    273,794
    
    
    $
    252,565
 March 31,
    
    
    December 31,2006
    
    
    2005Net Property, Plant and Equipment:United States
    
    $
    22,060
    
    
    $
    23,647Germany
    
    
    1,111
    
    
    
    1,163Japan
    
    
    926
    
    
    
    1,096All Other
    
    
    10,139
    
    
    
    10,739Total
    
    $
    34,236
    
    
    $
    36,645
 Note 11: Commitments and Contingencies
 Legal Proceedings
  11




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Guarantees
  Other
   Note 12: Comprehensive Loss
  Three monthsendedMarch 31, 2006
    
    
    March 31, 2005Net loss
    
    $
    (19,154
    )
    
    $
    (8,169
    )Currency translation adjustments, net of taxes
    
    
    5,399
    
    
    
    (6,222
    )Change in fair value of derivative instruments, net of taxes
    
    
    915
    
    
    
    (1,197
    )Comprehensive loss
    
    $
    (12,840
    )
    
    $
    (15,588
    )
 12




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Note 13: Financial Statements of Guarantors
  13




---



##### 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 March 31, 2006Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue:License
    
    $
    25,280
    
    
    $
    404
    
    
    $
    53,826
    
    
    $
    
    
    
    $
    79,510Maintenance
    
    
    49,211
    
    
    
    188
    
    
    
    76,290
    
    
    
    
    
    
    
    125,689Services and other
    
    
    32,520
    
    
    
    49,376
    
    
    
    35,928
    
    
    
    (49,229
    )(a)
    
    
    68,595Total revenue
    
    
    107,011
    
    
    
    49,968
    
    
    
    166,044
    
    
    
    (49,229
    )
    
    
    273,794Cost of revenue:License
    
    
    860
    
    
    
    149
    
    
    
    2,915
    
    
    
    
    
    
    
    3,924Maintenance
    
    
    4,972
    
    
    
    49
    
    
    
    10,084
    
    
    
    
    
    
    
    15,105Services and other
    
    
    25,375
    
    
    
    
    
    
    
    79,702
    
    
    
    (49,229
    )(a)
    
    
    55,848Amortization of capitalized software and
acquired intangible assets
    
    
    17,301
    
    
    
    14,010
    
    
    
    5,735
    
    
    
    
    
    
    
    37,046Total cost of revenue
    
    
    48,508
    
    
    
    14,208
    
    
    
    98,436
    
    
    
    (49,229
    )
    
    
    111,923Gross profit
    
    
    58,503
    
    
    
    35,760
    
    
    
    67,608
    
    
    
    
    
    
    
    161,871Operating expenses:Selling,
general and administrative
    
    
    49,915
    
    
    
    561
    
    
    
    57,335
    
    
    
    
    
    
    
    107,811Research and development
    
    
    51,225
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,225Restructuring
    
    
    
    
    
    
    
    
    
    
    (535
    )
    
    
    
    
    
    
    (535
    )Amortization of other intangibles assets
    
    
    2,623
    
    
    
    
    
    
    
    6,196
    
    
    
    
    
    
    
    8,819Total operating expenses
    
    
    103,763
    
    
    
    561
    
    
    
    62,996
    
    
    
    
    
    
    
    167,320Operating (loss) income
    
    
    (45,260
    )
    
    
    35,199
    
    
    
    4,612
    
    
    
    
    
    
    
    (5,449
    )Interest expense and amortization of
deferred financing fees
    
    
    (27,409
    )
    
    
    12,754
    
    
    
    (11,792
    )
    
    
    
    
    
    
    (26,447
    )Other (expense) income, net
    
    
    (2,483
    )
    
    
    5,296
    
    
    
    (579
    )
    
    
    
    
    
    
    2,234(Loss) income before income taxes
    
    
    (75,152
    )
    
    
    53,249
    
    
    
    (7,759
    )
    
    
    
    
    
    
    (29,662
    )(Benefit) provision for income taxes
    
    
    (26,429
    )
    
    
    18,637
    
    
    
    (2,716
    )
    
    
    
    
    
    
    (10,508
    )Net (loss) income
    
    $
    (48,723
    )
    
    $
    34,612
    
    
    $
    (5,043
    )
    
    $
    
    
    
    $
    (19,154
    )
 
 (a)
    
    - Elimination represents statutory royalty revenue to guarantor subsidiaries and statutory
royalty expense to non-guarantor subsidiaries. 14




---



##### 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 March 31, 2005Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue:License
    
    $
    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:License
    
    
    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
    )(Benefit) provision for income taxes
    
    
    (18,101
    )
    
    
    15,165
    
    
    
    (1,038
    )
    
    
    
    
    
    
    (3,974
    )Net (loss) income
    
    $
    (34,406
    )
    
    $
    28,165
    
    
    $
    (1,928
    )
    
    $
    
    
    
    $
    (8,169
    )
 
 (a)
    
    - Elimination represents statutory royalty revenue to guarantor subsidiaries and statutory
royalty expense to non-guarantor subsidiaries. 15




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 SUPPLEMENTAL UNAUDITED CONDENSED
CONSOLIDATING BALANCE SHEET
(in thousands)
 March 31, 2006Guarantor
    
    
    Non-GuarantorParent Company
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssets:Current assetsCash and cash equivalents
    
    $
    (1,553
    )
    
    $
    341
    
    
    $
    62,494
    
    
    $
    
    
    
    $
    61,282Accounts receivable, net
    
    
    80,680
    
    
    
    564
    
    
    
    172,818
    
    
    
    
    
    
    
    254,062Prepaids and other
    
    
    10,955
    
    
    
    
    
    
    
    9,446
    
    
    
    
    
    
    
    20,401Deferred income taxes
    
    
    21,846
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,846Total current assets
    
    
    111,928
    
    
    
    905
    
    
    
    244,758
    
    
    
    
    
    
    
    357,591Property and equipment, net
    
    
    21,246
    
    
    
    
    
    
    
    12,990
    
    
    
    
    
    
    
    34,236Goodwill
    
    
    324,151
    
    
    
    542,785
    
    
    
    524,104
    
    
    
    
    
    
    
    1,391,040Capitalized and acquired software, net
    
    
    206,374
    
    
    
    176,682
    
    
    
    63,570
    
    
    
    
    
    
    
    446,626Customer accounts, net
    
    
    74,516
    
    
    
    
    
    
    
    122,065
    
    
    
    
    
    
    
    196,581Other intangible assets, net
    
    
    44,389
    
    
    
    
    
    
    
    85,068
    
    
    
    
    
    
    
    129,457Intercompany balances
    
    
    
    
    
    
    663,056
    
    
    
    
    
    
    
    (663,056
    )(b)
    
    
    Other assets
    
    
    811,475
    
    
    
    
    
    
    
    14,924
    
    
    
    (788,253
    )(a)
    
    
    38,146Total assets
    
    $
    1,594,079
    
    
    $
    1,383,428
    
    
    $
    1,067,479
    
    
    $
    (1,451,309
    )
    
    $
    2,593,677Liabilities and Stockholders Equity:Current liabilitiesAccounts payable and accrued
liabilities
    
    $
    66,888
    
    
    $
    2,003
    
    
    $
    92,066
    
    
    $
    
    
    
    $
    160,957Deferred revenue
    
    
    75,695
    
    
    
    427
    
    
    
    94,686
    
    
    
    
    
    
    
    170,808Income taxes payable
    
    
    
    
    
    
    
    
    
    
    864
    
    
    
    
    
    
    
    864Intercompany balances
    
    
    307,399
    
    
    
    
    
    
    
    355,657
    
    
    
    (663,056
    )(b)
    
    
    Total current liabilities
    
    
    449,982
    
    
    
    2,430
    
    
    
    543,273
    
    
    
    (663,056
    )
    
    
    332,629Other long-term liabilities
    
    
    
    
    
    
    8,404
    
    
    
    43,241
    
    
    
    
    
    
    
    51,645Deferred income taxes
    
    
    2,093
    
    
    
    61,839
    
    
    
    54,599
    
    
    
    
    
    
    
    118,531Long-term debt
    
    
    1,167,300
    
    
    
    
    
    
    
    13,751
    
    
    
    
    
    
    
    1,181,051Total stockholders equity
    
    
    (25,296
    )
    
    
    1,310,755
    
    
    
    412,615
    
    
    
    (788,253
    ) (a)
    
    
    909,821Total liabilities and
stockholders equity
    
    $
    1,594,079
    
    
    $
    1,383,428
    
    
    $
    1,067,479
    
    
    $
    (1,451,309
    )
    
    $
    2,593,677
 
 (a)
    
     Elimination of investment in guarantor subsidiary.(b)
    
     Elimination of intercompany balances. 16




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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, 2005Guarantor
    
    
    Non-GuarantorParent Company
    
    
    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
    
    
    
    
    
    
    
    8,511
    
    
    
    
    
    
    
    18,622Deferred income taxes
    
    
    26,471
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,471Total current assets
    
    
    105,621
    
    
    
    2,616
    
    
    
    250,151
    
    
    
    
    
    
    
    358,388Property 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
    
    
    $
    1,088,208
    
    
    $
    (1,402,840
    )
    
    $
    2,631,451Liabilities 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
    
    
    
    
    
    
    
    
    
    
    3,528
    
    
    
    
    
    
    
    3,528Intercompany balances
    
    
    248,246
    
    
    
    
    
    
    
    366,341
    
    
    
    (614,587
    )(b)
    
    
    Total current liabilities
    
    
    363,760
    
    
    
    2,265
    
    
    
    545,093
    
    
    
    (614,587
    )
    
    
    296,531Other long-term liabilities
    
    
    
    
    
    
    6,270
    
    
    
    42,241
    
    
    
    
    
    
    
    48,511Deferred income taxes
    
    
    9,689
    
    
    
    66,743
    
    
    
    75,608
    
    
    
    
    
    
    
    152,040Long-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
    
    
    $
    1,088,208
    
    
    $
    (1,402,840
    )
    
    $
    2,631,451
 
 (a)
    
     Elimination of investment in guarantor subsidiary.(b)
    
     Elimination of intercompany balances. 17




---



##### Table of Contents



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, 2006Guarantor
    
    
    Non-GuarantorParent Company
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedCash flows from operating activitiesNet (loss) income
    
    $
    (48,723
    )
    
    $
    34,612
    
    
    $
    (5,043
    )
    
    $
    (19,154
    )Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:Benefit for deferred income taxes
    
    
    (9,065
    )
    
    
    (4,904
    )
    
    
    (4,176
    )
    
    
    (18,145
    )Depreciation and amortization
    
    
    23,281
    
    
    
    14,009
    
    
    
    13,995
    
    
    
    51,285Amortization of deferred financing fees
    
    
    1,382
    
    
    
    
    
    
    
    
    
    
    
    1,382Stock-based compensation
    
    
    112
    
    
    
    
    
    
    
    6
    
    
    
    118Unrealized gain on revaluation of foreign
denominated assets and liabilities
    
    
    
    
    
    
    
    
    
    
    (5,932
    )
    
    
    (5,932
    )Unrealized loss on foreign currency revaluation of
derivative instruments
    
    
    
    
    
    
    2,818
    
    
    
    
    
    
    
    2,818Other
    
    
    819
    
    
    
    (8
    )
    
    
    262
    
    
    
    1,073Changes in operating assets and liabilities, net of effect
of acquisitions:Accounts receivable
    
    
    (7,490
    )
    
    
    1,098
    
    
    
    8,642
    
    
    
    2,250Prepaids and other
    
    
    (845
    )
    
    
    
    
    
    
    (505
    )
    
    
    (1,350
    )Accounts payable and accrued liabilities
    
    
    10,531
    
    
    
    437
    
    
    
    (11,378
    )
    
    
    (410
    )Deferred revenue
    
    
    16,449
    
    
    
    (272
    )
    
    
    19,724
    
    
    
    35,901Income taxes payable
    
    
    
    
    
    
    
    
    
    
    (3,567
    )
    
    
    (3,567
    )Other long-term liabilities
    
    
    
    
    
    
    21
    
    
    
    1,000
    
    
    
    1,021Total adjustments
    
    
    35,174
    
    
    
    13,199
    
    
    
    18,071
    
    
    
    66,444Net cash (used in) provided by operating activities
    
    
    (13,549
    )
    
    
    47,811
    
    
    
    13,028
    
    
    
    47,291Cash flows from investing activitiesPayments for purchases of property and equipment
    
    
    (1,012
    )
    
    
    
    
    
    
    (649
    )
    
    
    (1,661
    )Capitalized software costs
    
    
    (15,346
    )
    
    
    
    
    
    
    (119
    )
    
    
    (15,465
    )Other
    
    
    (618
    )
    
    
    
    
    
    
    27
    
    
    
    (591
    )Net cash used in investing activities
    
    
    (16,976
    )
    
    
    
    
    
    
    (741
    )
    
    
    (17,717
    )Cash flows from financing activitiesIntercompany borrowings (payments)
    
    
    63,956
    
    
    
    (48,432
    )
    
    
    (15,524
    )
    
    
    Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    5,951
    
    
    
    5,951Payments on bank notes and bonds
    
    
    (37,000
    )
    
    
    
    
    
    
    
    
    
    
    (37,000
    )Intercompany Dividends
    
    
    6,062
    
    
    
    
    
    
    
    (6,062
    )
    
    
    Capital contributed by parent (stock options exercised)
    
    
    220
    
    
    
    
    
    
    
    
    
    
    
    220Net cash provided by (used in) financing activities
    
    
    33,238
    
    
    
    (48,432
    )
    
    
    (15,635
    )
    
    
    (30,829
    )Effect of exchange rates on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    1,006
    
    
    
    1,006Net increase (decrease) in cash and cash equivalents
    
    
    2,713
    
    
    
    (621
    )
    
    
    (2,342
    )
    
    
    (250
    )Cash and cash equivalents at beginning of period
    
    
    (4,266
    )
    
    
    962
    
    
    
    64,836
    
    
    
    61,532Cash and cash equivalents at end of period
    
    $
    (1,553
    )
    
    $
    341
    
    
    $
    62,494
    
    
    $
    61,282
 18




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##### Table of Contents



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, 2005Guarantor
    
    
    Non-GuarantorParent Company
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    1,452Stock-based compensation
    
    
    222
    
    
    
    
    
    
    
    
    
    
    
    222Unrealized 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
    )Other
    
    
    60
    
    
    
    133
    
    
    
    547
    
    
    
    740Changes in operating assets and liabilities, net of effect
of acquisitions:Accounts receivable
    
    
    (5,656
    )
    
    
    1,481
    
    
    
    (6,441
    )
    
    
    (10,616
    )Prepaids and other
    
    
    (234
    )
    
    
    220
    
    
    
    1,149
    
    
    
    1,135Accounts 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
    
    
    18,514
    
    
    
    5,688
    
    
    
    16,746
    
    
    
    40,948Net cash (used in) provided by operating activities
    
    
    (15,892
    )
    
    
    33,853
    
    
    
    14,818
    
    
    
    32,779Cash flows from investing activitiesCash received from prior parent for acquisition
related tax matters
    
    
    10,964
    
    
    
    
    
    
    
    
    
    
    
    10,964Purchases 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
    
    
    (8,558
    )
    
    
    
    
    
    
    1,047
    
    
    
    (7,511
    )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 (stock options exercised)
    
    
    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
 19




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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 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, disruptions in
international markets, future terrorist attacks, ability to complete or integrate future
acquisitions, changes in pricing models for PLM software products, intellectual property rights
protection and infringement claims, high level of indebtedness, and complexity of assessing
adequacy of our provision for income taxes.. These risks are described in our Annual Report on Form
10-K (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
  Revenue
   20




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##### Table of Contents



Cost of Revenue
  Sales and Marketing
    Research and Development Costs
   Three monthsendedMarch 31, 2006
    
    
    March 31, 2005Research and development costs
    
    $
    51,225
    
    
    $
    35,981Capitalized software costs
    
    
    15,465
    
    
    
    17,389Total Research and Development Costs
    
    $
    66,690
    
    
    $
    53,370
 21




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##### Table of Contents



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
  Capitalized Software Development Costs
  22




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##### Table of Contents



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.
    23




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##### Table of Contents



Business Combinations
   24




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##### Table of Contents



Recoverability of Goodwill, Acquired Intangible Assets and Long-Lived Assets
   Income Taxes
    25




---



##### Table of Contents



Segment Revenue and Operating Income
  Geographic Segment Revenue
  Three monthsended
    
    
    
    
    
    
    PercentageMarch 31, 2006
    
    
    March 31, 2005
    
    
    Increase
    
    
    IncreaseAmericas
    
    $
    121,304
    
    
    $
    109,161
    
    
    $
    12,143
    
    
    
    11.1
    %Europe
    
    
    99,313
    
    
    
    92,796
    
    
    
    6,517
    
    
    
    7.0
    %Asia Pacific
    
    
    53,177
    
    
    
    50,608
    
    
    
    2,569
    
    
    
    5.1
    %Total revenue
    
    $
    273,794
    
    
    $
    252,565
    
    
    $
    21,229
    
    
    
    8.4
    %
    26




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##### Table of Contents



Geographic Segment Operating Income
  Three monthsended
    
    
    
    
    
    
    PercentageMarch 31, 2006
    
    
    March 31, 2005
    
    
    Increase
    
    
    IncreaseAmericas
    
    $
    55,295
    
    
    $
    45,536
    
    
    $
    9,759
    
    
    
    21.4
    %Europe
    
    
    39,653
    
    
    
    38,409
    
    
    
    1,244
    
    
    
    3.2
    %Asia Pacific
    
    
    30,234
    
    
    
    28,655
    
    
    
    1,579
    
    
    
    5.5
    %Total revenue
    
    $
    125,182
    
    
    $
    112,600
    
    
    $
    12,582
    
    
    
    11.2
    %
     Three monthsendedMarch 31, 2006
    
    
    March 31, 2005Total operating income for reportable segments
    
    $
    125,182
    
    
    $
    112,600Research and development
    
    
    (51,225
    )
    
    
    (35,981
    )Restructuring
    
    
    535
    
    
    
    Amortization of capitalized and acquired software
and other intangible assets
    
    
    (45,865
    )
    
    
    (33,756
    )Corporate and unallocated costs
    
    
    (34,076
    )
    
    
    (29,019
    )Operating (loss) income
    
    $
    (5,449
    )
    
    $
    13,844
 27




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##### Table of Contents



Results of Operations
  Three months endedMarch 31, 2006
    
    
    March 31, 2005(percentage of total revenue)
    
    
    (percentage of total revenue)Revenue:License
    
    $
    79,510
    
    
    
    29.0
    %
    
    $
    73,119
    
    
    
    29.0
    %Maintenance
    
    
    125,689
    
    
    
    45.9
    %
    
    
    111,607
    
    
    
    44.2
    %Services and other (a)
    
    
    68,595
    
    
    
    25.1
    %
    
    
    67,839
    
    
    
    26.8
    %Total revenue
    
    
    273,794
    
    
    
    100.0
    %
    
    
    252,565
    
    
    
    100.0
    %Cost of revenue (includes amortization of
capitalized and acquired software)
    
    
    111,923
    
    
    
    40.9
    %
    
    
    100,001
    
    
    
    39.6
    %Gross profit
    
    
    161,871
    
    
    
    59.1
    %
    
    
    152,564
    
    
    
    60.4
    %Operating expenses:Selling, general and administrative
    
    
    107,811
    
    
    
    39.4
    %
    
    
    95,169
    
    
    
    37.7
    %Research and development
    
    
    51,225
    
    
    
    18.7
    %
    
    
    35,981
    
    
    
    14.2
    %Restructuring
    
    
    (535
    )
    
    
    -0.2
    %
    
    
    
    
    
    
    0.0
    %Amortization of other intangible assets
    
    
    8,819
    
    
    
    3.2
    %
    
    
    7,570
    
    
    
    3.0
    %Total operating expenses
    
    
    167,320
    
    
    
    61.1
    %
    
    
    138,720
    
    
    
    54.9
    %Operating (loss) income
    
    
    (5,449
    )
    
    
    -2.0
    %
    
    
    13,844
    
    
    
    5.5
    %Interest expense and amortization of deferred financing fees
    
    
    (26,447
    )
    
    
    -9.7
    %
    
    
    (21,163
    )
    
    
    -8.4
    %Other income (expense), net
    
    
    2,234
    
    
    
    0.8
    %
    
    
    (4,824
    )
    
    
    -1.9
    %Loss before taxes
    
    
    (29,662
    )
    
    
    -10.8
    %
    
    
    (12,143
    )
    
    
    -4.8
    %Benefit for income taxes
    
    
    (10,508
    )
    
    
    -3.8
    %
    
    
    (3,974
    )
    
    
    -1.6
    %Net loss
    
    $
    (19,154
    )
    
    
    -7.0
    %
    
    $
    (8,169
    )
    
    
    -3.2
    %
 
 (a)
    
    Other revenue consists primarily of hardware sales. 28




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##### Table of Contents



Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
 Total Revenue
  Three monthsended
    
    
    
    
    
    
    PercentageMarch 31, 2006
    
    
    March 31, 2005
    
    
    Increase
    
    
    IncreaseLicense
    
    $
    79,510
    
    
    $
    73,119
    
    
    $
    6,391
    
    
    
    8.7
    %Maintenance
    
    
    125,689
    
    
    
    111,607
    
    
    
    14,082
    
    
    
    12.6
    %Services and other
    
    
    68,595
    
    
    
    67,839
    
    
    
    756
    
    
    
    1.1
    %Total revenue
    
    $
    273,794
    
    
    $
    252,565
    
    
    $
    21,229
    
    
    
    8.4
    %
  
    
    License. License revenue in the 2006 period benefited from the inclusion of
Tecnomatix, which contributed revenue of $7.0 million. License revenue accounted for
29.0% of total revenue for both periods.
    
    Maintenance.Tecnomatix contributed maintenance revenue of $7.3 million in the 2006
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 45.9% of total revenue for
the three months ended March 31, 2006 and 44.2% of total revenue for the three months
ended March 31, 2005.
    
    Services and other. Services revenue benefited from the addition of Tecnomatix, which
contributed revenue of $4.4 million. This increase was primarily offset by a decrease in
services revenue in the Americas automotive sector. Services and other revenue accounted
for 25.1% of total revenue for the three months ended March 31, 2006 and 26.8% of total
revenue for the three months ended March 31, 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.
 Gross Profit
  29




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##### Table of Contents



Operating Expenses
 Selling, General and Administrative
  Research and Development
   Restructuring
  Amortization of Other Intangible Assets
  Operating (Loss) Income
  30




---



##### Table of Contents



Interest Expense and Amortization of Deferred Financing Fees
  Benefit for Income Taxes
  Liquidity and Capital Resources
 Non-GAAP Measures
  Three monthsendedMarch 31, 2006
    
    
    March 31, 2005Reconciliation of EBITDA to net cash
provided by operating activities:EBITDA
    
    $
    48,070
    
    
    $
    46,554Benefit for deferred income taxes
    
    
    (18,145
    )
    
    
    (11,432
    )Amortization of deferred financing fees
    
    
    1,382
    
    
    
    1,452Stock-based compensation
    
    
    118
    
    
    
    222Other
    
    
    1,073
    
    
    
    740Unrealized loss (gain) on revaluation of foreign
denominated assets and liabilities
    
    
    (5,932
    )
    
    
    11,000Unrealized (gain) loss on foreign currency revaluation
of derivative instruments
    
    
    2,818
    
    
    
    (7,606
    )Changes in operating assets and liabilities
    
    
    33,845
    
    
    
    9,038Interest expense
    
    
    (26,447
    )
    
    
    (21,163
    )Benefit for income taxes
    
    
    10,508
    
    
    
    3,974Net cash provided by operating activities
    
    $
    47,290
    
    
    $
    32,779Reconciliation of EBITDA to net loss:EBITDA
    
    $
    48,070
    
    
    $
    46,554Interest expense
    
    
    (26,447
    )
    
    
    (21,163
    )Benefit for income taxes
    
    
    10,508
    
    
    
    3,974Depreciation and amortization
    
    
    (51,285
    )
    
    
    (37,534
    )Net loss
    
    $
    (19,154
    )
    
    $
    (8,169
    )
 31




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##### Table of Contents



Debt and Commitments
      32




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##### Table of Contents



Capital Expenditures
  Historical Cash Flow
    Off Balance Sheet Obligations
  Inflation
  Seasonality
  33




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##### Table of Contents



ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Exchange Risk
      USDInterest
    
    Notional
    
    ExchangeExpiration
    
    Rate
    
    Value
    
    Rate to  1(in millions)Pay fixed
    
    December 15, 2014
    
    
    9.0
    %
    
    
    45.9
    
    
    
    1.2238Receive fixed
    
    
    
    
    
    
    9.025
    %Pay fixed
    
    December 15, 2016
    
    
    9.0
    %
    
    
    42.7
    
    
    
    1.2238Receive fixed
    
    
    
    
    
    
    9.08
    %
  Interest Rate Risk
  34




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   
 PART II  OTHER INFORMATION
 
 ITEM 6. EXHIBITS
  35




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##### 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)
 36




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##### 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
 37