##### 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 September 30, 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
  o o þ
 o þ




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##### 



UGS CORP.
INDEX TO FORM 10-Q
 PagePart I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Statements of Operations for the three months ended September 30, 2006 and 2005
    
    
    1Condensed Consolidated Statements of Operations for the nine months ended September 30, 2006 and 2005
    
    
    2Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3.
    
    Qualitative and Quantitative Disclosures About Market Risk
    
    
    44Item 4.
    
    Controls and Procedures
    
    
    46Part II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    47Item 1A.
    
    Risk Factors
    
    
    47Item 6.
    
    Exhibits
    
    
    47Signatures
    
    
    48First Amendment to Personal Services AgreementCertification Pursuant Rules 13a-14(a) and 15d-14(a)Certification Pursuant Rules 13a-14(a) and 15d-14(a)Certification 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 monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Revenue:License
    
    $
    85,527
    
    
    $
    89,842Maintenance
    
    
    137,542
    
    
    
    129,706Services and other
    
    
    72,476
    
    
    
    70,701Total revenue
    
    
    295,545
    
    
    
    290,249Cost of revenue:License
    
    
    4,114
    
    
    
    4,761Maintenance
    
    
    15,810
    
    
    
    14,459Services and other
    
    
    57,195
    
    
    
    58,451Amortization of capitalized software and acquired intangible assets
    
    
    39,097
    
    
    
    32,059Total cost of revenue
    
    
    116,216
    
    
    
    109,730Gross profit
    
    
    179,329
    
    
    
    180,519Operating expenses:Selling, general and administrative
    
    
    112,027
    
    
    
    107,803Research and development
    
    
    43,416
    
    
    
    44,350Amortization of other intangible assets
    
    
    7,991
    
    
    
    9,018Total operating expenses
    
    
    163,434
    
    
    
    161,171Operating income
    
    
    15,895
    
    
    
    19,348Interest expense and amortization of deferred financing fees
    
    
    (27,576
    )
    
    
    (25,197
    )Other income (expense), net
    
    
    1,087
    
    
    
    (919
    )Loss before income taxes
    
    
    (10,594
    )
    
    
    (6,768
    )Benefit for income taxes
    
    
    (3,161
    )
    
    
    (2,002
    )Net loss
    
    $
    (7,433
    )
    
    $
    (4,766
    )
  1




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##### Table of Contents



UGS Corp.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands)
 Nine monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Revenue:License
    
    $
    251,054
    
    
    $
    244,738Maintenance
    
    
    398,373
    
    
    
    369,614Services and other
    
    
    216,571
    
    
    
    213,472Total revenue
    
    
    865,998
    
    
    
    827,824Cost of revenue:License
    
    
    10,213
    
    
    
    15,161Maintenance
    
    
    46,610
    
    
    
    42,317Services and other
    
    
    170,210
    
    
    
    181,148Amortization of capitalized software and acquired intangible assets
    
    
    113,856
    
    
    
    89,283Total cost of revenue
    
    
    340,889
    
    
    
    327,909Gross profit
    
    
    525,109
    
    
    
    499,915Operating expenses:Selling, general and administrative
    
    
    337,688
    
    
    
    313,382Research and development
    
    
    142,029
    
    
    
    118,990In-process research and development
    
    
    
    
    
    
    4,100Restructuring
    
    
    (535
    )
    
    
    1,774Amortization of other intangible assets
    
    
    25,357
    
    
    
    25,327Total operating expenses
    
    
    504,539
    
    
    
    463,573Operating income
    
    
    20,570
    
    
    
    36,342Interest expense and amortization of deferred financing fees
    
    
    (80,543
    )
    
    
    (71,576
    )Other income (expense), net
    
    
    11,024
    
    
    
    (14,326
    )Loss before income taxes
    
    
    (48,949
    )
    
    
    (49,560
    )Benefit for income taxes
    
    
    (15,943
    )
    
    
    (14,601
    )Net loss
    
    $
    (33,006
    )
    
    $
    (34,959
    )
  2




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##### Table of Contents



UGS Corp.
 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share amounts)
 September 30,
    
    
    December 31,2006
    
    
    2005Assets:Current assetsCash and cash equivalents
    
    $
    59,257
    
    
    $
    61,532Accounts receivable, net
    
    
    241,352
    
    
    
    251,763Prepaids and other
    
    
    35,629
    
    
    
    22,389Deferred income taxes
    
    
    16,663
    
    
    
    26,471Total current assets
    
    
    352,901
    
    
    
    362,155Property and equipment, net
    
    
    30,633
    
    
    
    36,645Goodwill
    
    
    1,423,338
    
    
    
    1,393,472Capitalized and acquired software, net
    
    
    417,031
    
    
    
    464,994Customer accounts, net
    
    
    183,607
    
    
    
    203,064Other intangible assets, net
    
    
    119,093
    
    
    
    135,265Other assets
    
    
    35,380
    
    
    
    39,623Total assets
    
    $
    2,561,983
    
    
    $
    2,635,218Liabilities and Stockholders Equity:Current liabilitiesAccounts payable and accrued liabilities
    
    $
    171,605
    
    
    $
    159,976Deferred revenue
    
    
    152,301
    
    
    
    133,027Income taxes payable
    
    
    7,844
    
    
    
    11,895Total current liabilities
    
    
    331,750
    
    
    
    304,898Other long-term liabilities
    
    
    61,035
    
    
    
    48,511Deferred income taxes
    
    
    100,472
    
    
    
    147,440Long-term debt
    
    
    1,155,296
    
    
    
    1,212,046Stockholders equityCommon stock, $ .01 par value, 3,000 shares authorized;
100 issued and outstanding at September 30, 2006 and
December 31, 2005
    
    
    
    
    
    
    Additional paid-in capital
    
    
    1,014,823
    
    
    
    1,005,991Retained deficit
    
    
    (96,208
    )
    
    
    (63,202
    )Accumulated other comprehensive loss, net of tax
    
    
    (5,185
    )
    
    
    (20,466
    )Total stockholders equity
    
    
    913,430
    
    
    
    922,323Total liabilities and stockholders equity
    
    $
    2,561,983
    
    
    $
    2,635,218
  3




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##### Table of Contents



UGS Corp.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Nine monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Cash flows from operating activitiesNet loss
    
    $
    (33,006
    )
    
    $
    (34,959
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Benefit for deferred income taxes
    
    
    (21,241
    )
    
    
    (40,246
    )Depreciation and amortization
    
    
    154,886
    
    
    
    126,792Amortization of deferred financing fees
    
    
    4,148
    
    
    
    4,231In-process research and development
    
    
    
    
    
    
    4,100Stock-based compensation
    
    
    438
    
    
    
    467Unrealized (gain) loss on revaluation of foreign denominated assets and
liabilities
    
    
    (24,062
    )
    
    
    22,782Unrealized loss (gain) on foreign currency revaluation of derivative instruments
    
    
    7,680
    
    
    
    (17,044
    )Other
    
    
    3,205
    
    
    
    2,920Changes in operating assets and liabilities, net of effect of acquisitions:Accounts receivable
    
    
    19,285
    
    
    
    10,128Prepaids and other
    
    
    (12,325
    )
    
    
    3,674Accounts payable and accrued liabilities
    
    
    8,450
    
    
    
    990Deferred revenue
    
    
    11,799
    
    
    
    32,375Income taxes payable
    
    
    (10,936
    )
    
    
    2,676Other long-term liabilities
    
    
    3,295
    
    
    
    (425
    )Total adjustments
    
    
    144,622
    
    
    
    153,420Net cash provided by operating activities
    
    
    111,616
    
    
    
    118,461Cash flows from investing activitiesAcquisitions, net of cash acquired
    
    
    
    
    
    
    (218,437
    )Acquired software
    
    
    (4,000
    )
    
    
    Cash received from prior parent for acquisition related tax matters
    
    
    
    
    
    
    11,354Payments for purchases of property and equipment
    
    
    (7,589
    )
    
    
    (8,542
    )Capitalized software costs
    
    
    (51,755
    )
    
    
    (56,889
    )Proceeds from sale of marketable securities
    
    
    
    
    
    
    23,194Other
    
    
    (1,100
    )
    
    
    (842
    )Net cash used in investing activities
    
    
    (64,444
    )
    
    
    (250,162
    )Cash flows from financing activitiesProceeds from revolver credit line
    
    
    121,800
    
    
    
    118,551Payments on revolver credit line
    
    
    (121,800
    )
    
    
    (124,551
    )Proceeds from notes payable
    
    
    6,850
    
    
    
    10,297Payments on notes payable
    
    
    (345
    )
    
    
    (2,773
    )Proceeds from bank notes and bonds
    
    
    
    
    
    
    225,271Payments on bank notes and bonds
    
    
    (62,300
    )
    
    
    (74,597
    )Capital contributed by parent (stock options exercised)
    
    
    639
    
    
    
    508Capital contributed by parent (compensatory payment)
    
    
    3,819
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (51,337
    )
    
    
    152,706Effect of exchange rates on cash and cash equivalents
    
    
    1,890
    
    
    
    (3,152
    )Net (decrease) increase in cash and cash equivalents
    
    
    (2,275
    )
    
    
    17,853Cash and cash equivalents at beginning of period
    
    
    61,532
    
    
    
    58,400Cash and cash equivalents at end of period
    
    $
    59,257
    
    
    $
    76,253
  4




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##### Table of Contents



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




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
  2004 Management Incentive Plan
  Stock Options
   Three months
    
    Nine monthsended
    
    endedSeptember 30,
    
    September 30,2006
    
    2006Expected term (in years)
    
    
    7.5
    
    
    
    7.5Dividend yields
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    43.28
    %
    
    
    43.25
    %Risk-free interest rate
    
    
    4.89
    %
    
    
    4.65
    %Expected forfeiture rate
    
    
    6.00
    %
    
    
    6.00
    %
   6




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
  Weighted-Weighted-
    
    AverageUGS Capital Corp.
    
    Average
    
    RemainingClass A Common
    
    Exercise
    
    Contractual
    
    AggregateFixed Options
    
    Shares
    
    Price
    
    Term
    
    Intrinsic ValueOutstanding at December 31, 2005
    
    
    10,273,200
    
    
    $
    1.98Granted
    
    
    459,000
    
    
    
    7.33Exercised
    
    
    (421,133
    )
    
    
    1.00Forfeited
    
    
    (336,333
    )
    
    
    1.91Outstanding at September 30, 2006
    
    
    9,974,733
    
    
    $
    2.27
    
    
    
    8.11
    
    
    $
    31,420,412Exercisable at September 30, 2006
    
    
    3,426,825
    
    
    $
    1.38
    
    
    
    7.93
    
    
    $
    13,844,373
 Deferred Stock Award
   Retention Incentive Plan
  Stock Options
  7




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Weighted-Weighted-
    
    AverageUGS Capital Corp. II
    
    Average
    
    RemainingPreferred
    
    Exercise
    
    ContractualFixed Options
    
    Shares
    
    Price
    
    TermOutstanding at December 31, 2005
    
    
    3,573
    
    
    $
    100.00Exercised
    
    
    (3,573
    )
    
    
    100.00Outstanding at September 30, 2006
    
    
    
    
    
    
    
    
    
    
    
  Weighted-UGS Capital
    
    Weighted-
    
    AverageCorp. Class L
    
    Average
    
    RemainingCommon
    
    Exercise
    
    ContractualFixed Options
    
    Shares
    
    Price
    
    TermOutstanding and
exercisable at September 30,
2006
    
    
    12,712
    
    
    $
    81
    
    
    
    7.65
 Restricted Stock Awards
  Note 3: Property and Equipment
  Three monthsendedSeptember 30,
    
    September 30,2006
    
    2005Depreciation expense
    
    $
    4,295
    
    
    $
    3,573
 Nine monthsendedSeptember 30,
    
    September 30,2006
    
    2005Depreciation expense
    
    $
    12,871
    
    
    $
    9,842
 8




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 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
    )Imputed interest on note payable
    
    
    
    
    
    
    
    
    
    
    (1,117
    )
    
    
    (1,117
    )Impact of foreign currency translation
    
    
    
    
    
    
    45,149
    
    
    
    
    
    
    
    45,149Balance as of September 30, 2006
    
    $
    532,276
    
    
    $
    510,513
    
    
    $
    380,549
    
    
    $
    1,423,338
   Note 5: Other Intangible Assets
  September 30, 2006Weighted
    
    
    GrossAverage Useful
    
    
    Carrying
    
    
    AccumulatedLife
    
    
    Amount
    
    
    Amortization
    
    
    TotalDefinite Useful LivesCapitalized software
    
    
    3.0
    
    
    $
    156,910
    
    
    $
    35,982
    
    
    $
    120,928Acquired software
    
    
    5.0
    
    
    
    536,620
    
    
    
    240,517
    
    
    
    296,103Customer accounts
    
    
    10.0
    
    
    
    242,273
    
    
    
    58,666
    
    
    
    183,607Maintenance agreements
    
    
    10.0
    
    
    
    110,039
    
    
    
    22,997
    
    
    
    87,042Noncompete agreements
    
    
    2.0
    
    
    
    11,460
    
    
    
    10,287
    
    
    
    1,173Trademarks/tradenames
    
    
    7.0
    
    
    
    45,931
    
    
    
    15,053
    
    
    
    30,878Total other intangible assets
    
    
    
    
    
    $
    1,103,233
    
    
    $
    383,502
    
    
    $
    719,731
 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
 9




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
  Three monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Capitalized software
    
    $
    9,410
    
    
    $
    2,641Acquired software
    
    
    26,202
    
    
    
    26,001Acquired and other intangible assets
    
    
    12,253
    
    
    
    13,174Total amortization expense
    
    $
    47,865
    
    
    $
    41,816Amortization of certain acquired software
allocated to operating expense
    
    $
    777
    
    
    $
    739
 Nine monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Capitalized software
    
    $
    25,228
    
    
    $
    5,353Acquired software
    
    
    78,262
    
    
    
    74,480Acquired and other intangible assets
    
    
    38,525
    
    
    
    37,118Total amortization expense
    
    $
    142,015
    
    
    $
    116,951Amortization of certain acquired software
allocated to operating expense
    
    $
    2,802
    
    
    $
    2,341
  Note 6: Restructuring Activities
  Employee
    
    
    ExitSeparations
    
    
    Costs
    
    
    TotalBalance at December 31, 2005
    
    $
    3,778
    
    
    $
    13,324
    
    
    $
    17,102Cash payments
    
    
    (1,366
    )
    
    
    (3,684
    )
    
    
    (5,050
    )Reduction of accrual
    
    
    (1,231
    )
    
    
    (2,758
    )
    
    
    (3,989
    )Balance at September 30, 2006
    
    $
    1,181
    
    
    $
    6,882
    
    
    $
    8,063
  10




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
     Note 7: Debt
  Note payable, due December 31, 2014 (1,566.6 million yen)
    
    $
    13,296Senior unsecured subordinated notes, due June 1, 2012, 10.0%
    
    
    550,000Secured term loan, due March 31, 2012, LIBOR plus 1.75%
    
    
    592,000Total long-term debt
    
    $
    1,155,296
  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
    
    $
    1,212,046
 Note Payable
  Debt Covenants
  11




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
  Parent Company Debt
  Note 8: Income Taxes
  Three monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Current
    
    $
    798
    
    
    $
    12,504Deferred
    
    
    (3,959
    )
    
    
    (14,506
    )Total
    
    $
    (3,161
    )
    
    $
    (2,002
    )
 Nine monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Current
    
    $
    5,298
    
    
    $
    25,645Deferred
    
    
    (21,241
    )
    
    
    (40,246
    )Total
    
    $
    (15,943
    )
    
    $
    (14,601
    )
  Three monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005U.S. loss
    
    $
    (959
    )
    
    $
    (8,035
    )Non-U.S. loss
    
    
    (9,635
    )
    
    
    1,267Total
    
    $
    (10,594
    )
    
    $
    (6,768
    )
 Nine monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005U.S. loss
    
    $
    (24,393
    )
    
    $
    (37,641
    )Non-U.S. loss
    
    
    (24,556
    )
    
    
    (11,919
    )Total
    
    $
    (48,949
    )
    
    $
    (49,560
    )
 12




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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
   Nine monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Service cost
    
    $
    3,026
    
    
    $
    2,019Interest cost
    
    
    927
    
    
    
    629Expected return on plan assets
    
    
    (183
    )
    
    
    (164
    )Amortization of prior service cost
    
    
    102
    
    
    
    Amortization of net actuarial loss
    
    
    40
    
    
    
    44Net periodic benefit cost
    
    $
    3,912
    
    
    $
    2,528
 Note 10: Segment Information
   13




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
  Revenue
    
    Americas
    
    
    Europe
    
    
    Asia Pacific
    
    
    TotalThree months ended September 30, 2006License
    
    $
    29,970
    
    
    $
    29,835
    
    
    $
    25,722
    
    
    $
    85,527Maintenance
    
    
    56,003
    
    
    
    51,927
    
    
    
    29,612
    
    
    
    137,542Services and other
    
    
    36,957
    
    
    
    28,888
    
    
    
    6,631
    
    
    
    72,476Total revenue
    
    $
    122,930
    
    
    $
    110,650
    
    
    $
    61,965
    
    
    $
    295,545Three months ended September 30, 2005License
    
    $
    32,535
    
    
    $
    34,682
    
    
    $
    22,625
    
    
    $
    89,842Maintenance
    
    
    54,575
    
    
    
    48,420
    
    
    
    26,711
    
    
    
    129,706Services and other
    
    
    36,737
    
    
    
    27,718
    
    
    
    6,246
    
    
    
    70,701Total revenue
    
    $
    123,847
    
    
    $
    110,820
    
    
    $
    55,582
    
    
    $
    290,249
 Revenue
    
    Americas
    
    
    Europe
    
    
    Asia Pacific
    
    
    TotalNine months ended September 30, 2006License
    
    $
    92,098
    
    
    $
    89,440
    
    
    $
    69,516
    
    
    $
    251,054Maintenance
    
    
    167,898
    
    
    
    148,137
    
    
    
    82,338
    
    
    
    398,373Services and other
    
    
    110,750
    
    
    
    85,789
    
    
    
    20,032
    
    
    
    216,571Total revenue
    
    $
    370,746
    
    
    $
    323,366
    
    
    $
    171,886
    
    
    $
    865,998Nine months ended September 30, 2005License
    
    $
    88,704
    
    
    $
    92,247
    
    
    $
    63,787
    
    
    $
    244,738Maintenance
    
    
    156,465
    
    
    
    139,718
    
    
    
    73,431
    
    
    
    369,614Services and other
    
    
    113,199
    
    
    
    81,416
    
    
    
    18,857
    
    
    
    213,472Total revenue
    
    $
    358,368
    
    
    $
    313,381
    
    
    $
    156,075
    
    
    $
    827,824
 Operating Income
    
    Americas
    
    Europe
    
    Asia Pacific
    
    TotalThree months ended September 30, 2006
    
    $
    56,204
    
    
    $
    47,881
    
    
    $
    36,729
    
    
    $
    140,814Three months ended September 30, 2005
    
    $
    56,123
    
    
    $
    51,322
    
    
    $
    30,382
    
    
    $
    137,827
 Operating Income
    
    Americas
    
    Europe
    
    Asia Pacific
    
    TotalNine months ended September 30, 2006
    
    $
    170,764
    
    
    $
    137,286
    
    
    $
    99,510
    
    
    $
    407,560Nine months ended September 30, 2005
    
    $
    157,293
    
    
    $
    133,194
    
    
    $
    82,887
    
    
    $
    373,374
 Accounts Receivable
    
    Americas
    
    Europe
    
    Asia Pacific
    
    TotalAs of September 30, 2006
    
    $
    86,799
    
    
    $
    104,904
    
    
    $
    49,649
    
    
    $
    241,352As of December 31, 2005
    
    $
    86,726
    
    
    $
    114,228
    
    
    $
    50,809
    
    
    $
    251,763
 14




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
  Three monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Total operating income for reportable segments
    
    $
    140,814
    
    
    $
    137,827Research and development
    
    
    (43,416
    )
    
    
    (44,350
    )Amortization of capitalized and acquired software
and other intangible assets
    
    
    (47,088
    )
    
    
    (41,077
    )Corporate and unallocated costs
    
    
    (34,415
    )
    
    
    (33,052
    )Operating income
    
    $
    15,895
    
    
    $
    19,348
 Nine monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Total operating income for reportable segments
    
    $
    407,560
    
    
    $
    373,374Research and development
    
    
    (142,029
    )
    
    
    (118,990
    )In-process research and development
    
    
    
    
    
    
    (4,100
    )Restructuring
    
    
    535
    
    
    
    (1,774
    )Amortization of capitalized and acquired software
and other intangible assets
    
    
    (139,213
    )
    
    
    (114,610
    )Corporate and unallocated costs
    
    
    (106,283
    )
    
    
    (97,558
    )Operating income
    
    $
    20,570
    
    
    $
    36,342
  Three monthsendedSeptember 30,
    
    
    September 30,Total Revenue:
    
    2006
    
    
    2005United States
    
    $
    114,063
    
    
    $
    116,575Germany
    
    
    41,731
    
    
    
    40,353Japan
    
    
    30,758
    
    
    
    30,514All Other
    
    
    108,993
    
    
    
    102,807Total
    
    $
    295,545
    
    
    $
    290,249
 Nine monthsendedSeptember 30,
    
    
    September 30,Total Revenue:
    
    2006
    
    
    2005United States
    
    $
    344,318
    
    
    $
    337,572Germany
    
    
    115,212
    
    
    
    104,966Japan
    
    
    87,646
    
    
    
    85,304All Other
    
    
    318,822
    
    
    
    299,982Total
    
    $
    865,998
    
    
    $
    827,824
 15




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Note 11: Commitments and Contingencies
 Legal Proceedings
  Guarantees
  Other
   Note 12: Comprehensive Loss
  Three monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Net loss
    
    $
    (7,433
    )
    
    $
    (4,766
    )Currency translation adjustments, net of taxes
    
    
    2,409
    
    
    
    490Change in fair value of derivative instruments, net of taxes
    
    
    2,681
    
    
    
    (773
    )Comprehensive loss
    
    $
    (2,343
    )
    
    $
    (5,049
    )
 16




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Nine monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Net loss
    
    $
    (33,006
    )
    
    $
    (34,959
    )Currency translation adjustments, net of taxes
    
    
    16,288
    
    
    
    (21,041
    )Change in fair value of derivative instruments, net of taxes
    
    
    (1,007
    )
    
    
    (151
    )Comprehensive loss
    
    $
    (17,725
    )
    
    $
    (56,151
    )
 Note 13: Related Party Transactions
   Note 14: Recent Accounting Pronouncements
     17




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
  Note 15: Financial Statements of Guarantors
  SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING
SCHEDULE OF OPERATIONS
(in thousands)
 Three months ended September 30, 2006Non-Parent
    
    
    Guarantor
    
    
    GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    
    
    
    
    ConsolidatedRevenue:License
    
    $
    25,179
    
    
    $
    987
    
    
    $
    59,361
    
    
    $
    
    
    
    
    
    
    
    $
    85,527Maintenance
    
    
    49,255
    
    
    
    142
    
    
    
    88,145
    
    
    
    
    
    
    
    
    
    
    
    137,542Services and other
    
    
    33,861
    
    
    
    60,172
    
    
    
    38,594
    
    
    
    (60,151
    )
    
    
    (a
    )
    
    
    72,476Total revenue
    
    
    108,295
    
    
    
    61,301
    
    
    
    186,100
    
    
    
    (60,151
    )
    
    
    
    
    
    
    295,545Cost of revenue:License
    
    
    1,588
    
    
    
    (62
    )
    
    
    2,588
    
    
    
    
    
    
    
    
    
    
    
    4,114Maintenance
    
    
    5,468
    
    
    
    61
    
    
    
    10,281
    
    
    
    
    
    
    
    
    
    
    
    15,810Services and other
    
    
    24,966
    
    
    
    
    
    
    
    92,380
    
    
    
    (60,151
    )
    
    
    (a
    )
    
    
    57,195Amortization of capitalized software and
acquired intangible assets
    
    
    19,163
    
    
    
    14,010
    
    
    
    5,924
    
    
    
    
    
    
    
    
    
    
    
    39,097Total cost of revenue
    
    
    51,185
    
    
    
    14,009
    
    
    
    111,173
    
    
    
    (60,151
    )
    
    
    
    
    
    
    116,216Gross profit
    
    
    57,110
    
    
    
    47,292
    
    
    
    74,927
    
    
    
    
    
    
    
    
    
    
    
    179,329Operating expenses:Selling, general and adminstrative
    
    
    52,646
    
    
    
    1,208
    
    
    
    58,173
    
    
    
    
    
    
    
    
    
    
    
    112,027Research and development
    
    
    43,416
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,416Amortization of other intangibles assets
    
    
    2,288
    
    
    
    
    
    
    
    5,703
    
    
    
    
    
    
    
    
    
    
    
    7,991Total operating expenses
    
    
    98,350
    
    
    
    1,208
    
    
    
    63,876
    
    
    
    
    
    
    
    
    
    
    
    163,434Operating (loss) income
    
    
    (41,240
    )
    
    
    46,084
    
    
    
    11,051
    
    
    
    
    
    
    
    
    
    
    
    15,895Interest expense and amortization of
deferred financing fees
    
    
    (29,301
    )
    
    
    12,867
    
    
    
    (11,142
    )
    
    
    
    
    
    
    
    
    
    
    (27,576
    )Other (expense) income, net
    
    
    2,256
    
    
    
    (1,172
    )
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    1,087(Loss) income before income taxes
    
    
    (68,285
    )
    
    
    57,779
    
    
    
    (88
    )
    
    
    
    
    
    
    
    
    
    
    (10,594
    )(Benefit) provision for income taxes
    
    
    (23,353
    )
    
    
    20,223
    
    
    
    (31
    )
    
    
    
    
    
    
    
    
    
    
    (3,161
    )Net (loss) income
    
    $
    (44,932
    )
    
    $
    37,556
    
    
    $
    (57
    )
    
    $
    
    
    
    
    
    
    
    $
    (7,433
    )
 
 (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)
 Three months ended September 30, 2005Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue:License
    
    $
    27,042
    
    
    $
    993
    
    
    $
    61,807
    
    
    $
    
    
    
    $
    89,842Maintenance
    
    
    48,735
    
    
    
    54
    
    
    
    80,917
    
    
    
    
    
    
    
    129,706Services and other
    
    
    33,974
    
    
    
    44,939
    
    
    
    36,604
    
    
    
    (44,816
    )(a)
    
    
    70,701Total revenue
    
    
    109,751
    
    
    
    45,986
    
    
    
    179,328
    
    
    
    (44,816
    )
    
    
    290,249Cost of revenue:License
    
    
    1,890
    
    
    
    368
    
    
    
    2,503
    
    
    
    
    
    
    
    4,761Maintenance
    
    
    4,973
    
    
    
    49
    
    
    
    9,437
    
    
    
    
    
    
    
    14,459Services and other
    
    
    27,234
    
    
    
    
    
    
    
    76,033
    
    
    
    (44,816
    )(a)
    
    
    58,451Amortization of capitalized software and
acquired intangible assets
    
    
    12,355
    
    
    
    14,010
    
    
    
    5,694
    
    
    
    
    
    
    
    32,059Total cost of revenue
    
    
    46,452
    
    
    
    14,427
    
    
    
    93,667
    
    
    
    (44,816
    )
    
    
    109,730Gross profit
    
    
    63,299
    
    
    
    31,559
    
    
    
    85,661
    
    
    
    
    
    
    
    180,519Operating expenses:Selling, general and adminstrative
    
    
    49,061
    
    
    
    1,368
    
    
    
    57,374
    
    
    
    
    
    
    
    107,803Research and development
    
    
    44,350
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,350Amortization of other intangibles assets
    
    
    2,623
    
    
    
    
    
    
    
    6,395
    
    
    
    
    
    
    
    9,018Total operating expenses
    
    
    96,034
    
    
    
    1,368
    
    
    
    63,769
    
    
    
    
    
    
    
    161,171Operating (loss) income
    
    
    (32,735
    )
    
    
    30,191
    
    
    
    21,892
    
    
    
    
    
    
    
    19,348Interest expense and amortization of
deferred financing fees
    
    
    (25,064
    )
    
    
    13,686
    
    
    
    (13,819
    )
    
    
    
    
    
    
    (25,197
    )Other (expense) income, net
    
    
    (2,367
    )
    
    
    236
    
    
    
    1,212
    
    
    
    
    
    
    
    (919
    )(Loss) income before income taxes
    
    
    (60,166
    )
    
    
    44,113
    
    
    
    9,285
    
    
    
    
    
    
    
    (6,768
    )(Benefit) provision for income taxes
    
    
    (20,692
    )
    
    
    15,440
    
    
    
    3,250
    
    
    
    
    
    
    
    (2,002
    )Net (loss) income
    
    $
    (39,474
    )
    
    $
    28,673
    
    
    $
    6,035
    
    
    $
    
    
    
    $
    (4,766
    )
 
  19




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING
SCHEDULE OF OPERATIONS
(in thousands)
 Nine months ended September 30, 2006Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue:License
    
    $
    73,254
    
    
    $
    1,809
    
    
    $
    175,991
    
    
    $
    
    
    
    $
    251,054Maintenance
    
    
    148,336
    
    
    
    446
    
    
    
    249,591
    
    
    
    
    
    
    
    398,373Services and other
    
    
    102,296
    
    
    
    168,281
    
    
    
    114,000
    
    
    
    (168,006
    )(a)
    
    
    216,571Total revenue
    
    
    323,886
    
    
    
    170,536
    
    
    
    539,582
    
    
    
    (168,006
    )
    
    
    865,998Cost of revenue:License
    
    
    2,298
    
    
    
    117
    
    
    
    7,798
    
    
    
    
    
    
    
    10,213Maintenance
    
    
    15,863
    
    
    
    116
    
    
    
    30,631
    
    
    
    
    
    
    
    46,610Services and other
    
    
    75,366
    
    
    
    
    
    
    
    262,850
    
    
    
    (168,006
    )(a)
    
    
    170,210Amortization of capitalized software and
acquired intangible assets
    
    
    54,308
    
    
    
    42,030
    
    
    
    17,518
    
    
    
    
    
    
    
    113,856Total cost of revenue
    
    
    147,835
    
    
    
    42,263
    
    
    
    318,797
    
    
    
    (168,006
    )
    
    
    340,889Gross profit
    
    
    176,051
    
    
    
    128,273
    
    
    
    220,785
    
    
    
    
    
    
    
    525,109Operating expenses:Selling, general and adminstrative
    
    
    158,982
    
    
    
    3,211
    
    
    
    175,495
    
    
    
    
    
    
    
    337,688Research and development
    
    
    142,029
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,029Restructuring
    
    
    
    
    
    
    
    
    
    
    (535
    )
    
    
    
    
    
    
    (535
    )Amortization of other intangibles assets
    
    
    7,423
    
    
    
    
    
    
    
    17,934
    
    
    
    
    
    
    
    25,357Total operating expenses
    
    
    308,434
    
    
    
    3,211
    
    
    
    192,894
    
    
    
    
    
    
    
    504,539Operating (loss) income
    
    
    (132,383
    )
    
    
    125,062
    
    
    
    27,891
    
    
    
    
    
    
    
    20,570Interest expense and amortization of
deferred financing fees
    
    
    (82,251
    )
    
    
    35,852
    
    
    
    (34,144
    )
    
    
    
    
    
    
    (80,543
    )Other (expense) income, net
    
    
    (344
    )
    
    
    12,385
    
    
    
    (1,017
    )
    
    
    
    
    
    
    11,024(Loss) income before income taxes
    
    
    (214,978
    )
    
    
    173,299
    
    
    
    (7,270
    )
    
    
    
    
    
    
    (48,949
    )(Benefit) provision for income taxes
    
    
    (74,054
    )
    
    
    60,655
    
    
    
    (2,544
    )
    
    
    
    
    
    
    (15,943
    )Net (loss) income
    
    $
    (140,924
    )
    
    $
    112,644
    
    
    $
    (4,726
    )
    
    $
    
    
    
    $
    (33,006
    )
 
  20




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##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING
SCHEDULE OF OPERATIONS
(in thousands)
 Nine months ended September 30, 2005Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue:Software
    
    $
    76,763
    
    
    $
    1,403
    
    
    $
    166,572
    
    
    $
    
    
    
    $
    244,738Maintenance
    
    
    141,129
    
    
    
    300
    
    
    
    228,185
    
    
    
    
    
    
    
    369,614Services and other
    
    
    106,995
    
    
    
    134,242
    
    
    
    106,276
    
    
    
    (134,041
    )(a)
    
    
    213,472Total revenue
    
    
    324,887
    
    
    
    135,945
    
    
    
    501,033
    
    
    
    (134,041
    )
    
    
    827,824Cost of revenue:Software
    
    
    5,940
    
    
    
    520
    
    
    
    8,701
    
    
    
    
    
    
    
    15,161Maintenance
    
    
    15,345
    
    
    
    91
    
    
    
    26,881
    
    
    
    
    
    
    
    42,317Services and other
    
    
    82,837
    
    
    
    26
    
    
    
    232,326
    
    
    
    (134,041
    )(a)
    
    
    181,148Amortization of capitalized software and
acquired intangible assets
    
    
    34,525
    
    
    
    42,030
    
    
    
    12,728
    
    
    
    
    
    
    
    89,283Total cost of revenue
    
    
    138,647
    
    
    
    42,667
    
    
    
    280,636
    
    
    
    (134,041
    )
    
    
    327,909Gross profit
    
    
    186,240
    
    
    
    93,278
    
    
    
    220,397
    
    
    
    
    
    
    
    499,915Operating expenses:Selling, general and adminstrative
    
    
    145,638
    
    
    
    2,655
    
    
    
    165,089
    
    
    
    
    
    
    
    313,382Research and development
    
    
    118,990
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118,990In-process research and development
    
    
    
    
    
    
    
    
    
    
    4,100
    
    
    
    
    
    
    
    4,100Restructuring
    
    
    
    
    
    
    
    
    
    
    1,774
    
    
    
    
    
    
    
    1,774Amortization of other intangibles assets
    
    
    7,868
    
    
    
    
    
    
    
    17,459
    
    
    
    
    
    
    
    25,327Total operating expenses
    
    
    272,496
    
    
    
    2,655
    
    
    
    188,422
    
    
    
    
    
    
    
    463,573Operating (loss) income
    
    
    (86,256
    )
    
    
    90,623
    
    
    
    31,975
    
    
    
    
    
    
    
    36,342Interest expense and amortization of
deferred financing fees
    
    
    (71,279
    )
    
    
    42,683
    
    
    
    (42,980
    )
    
    
    
    
    
    
    (71,576
    )Other (expense) income, net
    
    
    (2,902
    )
    
    
    (12,475
    )
    
    
    1,051
    
    
    
    
    
    
    
    (14,326
    )(Loss) income before income taxes
    
    
    (160,437
    )
    
    
    120,831
    
    
    
    (9,954
    )
    
    
    
    
    
    
    (49,560
    )(Benefit) provision for income taxes
    
    
    (53,408
    )
    
    
    42,291
    
    
    
    (3,484
    )
    
    
    
    
    
    
    (14,601
    )Net (loss) income
    
    $
    (107,029
    )
    
    $
    78,540
    
    
    $
    (6,470
    )
    
    $
    
    
    
    $
    (34,959
    )
 
  21




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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)
 September 30, 2006Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssets:Current assetsCash and cash equivalents
    
    $
    88
    
    
    $
    179
    
    
    $
    58,990
    
    
    $
    
    
    
    $
    59,257Accounts receivable, net
    
    
    76,507
    
    
    
    482
    
    
    
    164,363
    
    
    
    
    
    
    
    241,352Prepaids and other
    
    
    11,396
    
    
    
    
    
    
    
    24,233
    
    
    
    
    
    
    
    35,629Deferred income taxes
    
    
    16,663
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,663Total current assets
    
    
    104,654
    
    
    
    661
    
    
    
    247,586
    
    
    
    
    
    
    
    352,901Property and equipment, net
    
    
    19,001
    
    
    
    
    
    
    
    11,632
    
    
    
    
    
    
    
    30,633Goodwill
    
    
    324,151
    
    
    
    542,785
    
    
    
    556,402
    
    
    
    
    
    
    
    1,423,338Capitalized and acquired software, net
    
    
    212,508
    
    
    
    148,661
    
    
    
    55,862
    
    
    
    
    
    
    
    417,031Customer accounts, net
    
    
    69,946
    
    
    
    
    
    
    
    113,661
    
    
    
    
    
    
    
    183,607Other intangible assets, net
    
    
    41,105
    
    
    
    
    
    
    
    77,988
    
    
    
    
    
    
    
    119,093Intercompany balances
    
    
    
    
    
    
    765,568
    
    
    
    
    
    
    
    (765,568
    )(b)
    
    
    Other assets
    
    
    808,709
    
    
    
    
    
    
    
    14,924
    
    
    
    (788,253
    )(a)
    
    
    35,380Total assets
    
    $
    1,580,074
    
    
    $
    1,457,675
    
    
    $
    1,078,055
    
    
    $
    (1,553,821
    )
    
    $
    2,561,983Liabilities and Stockholders Equity:Current liabilitiesAccounts payable and accrued liabilities
    
    $
    74,341
    
    
    $
    3,759
    
    
    $
    93,505
    
    
    $
    
    
    
    $
    171,605Deferred revenue
    
    
    64,633
    
    
    
    139
    
    
    
    87,529
    
    
    
    
    
    
    
    152,301Income taxes payable
    
    
    
    
    
    
    
    
    
    
    7,844
    
    
    
    
    
    
    
    7,844Intercompany balances
    
    
    395,366
    
    
    
    
    
    
    
    370,202
    
    
    
    (765,568
    )(b)
    
    
    Total current liabilities
    
    
    534,340
    
    
    
    3,898
    
    
    
    559,080
    
    
    
    (765,568
    )
    
    
    331,750Other long-term liabilities
    
    
    1,527
    
    
    
    13,957
    
    
    
    45,551
    
    
    
    
    
    
    
    61,035Deferred income taxes
    
    
    14,345
    
    
    
    52,032
    
    
    
    34,095
    
    
    
    
    
    
    
    100,472Long-term debt
    
    
    1,142,000
    
    
    
    
    
    
    
    13,296
    
    
    
    
    
    
    
    1,155,296Total stockholders equity
    
    
    (112,138
    )
    
    
    1,387,788
    
    
    
    426,033
    
    
    
    (788,253
    )(a)
    
    
    913,430Total liabilities and
stockholders equity
    
    $
    1,580,074
    
    
    $
    1,457,675
    
    
    $
    1,078,055
    
    
    $
    (1,553,821
    )
    
    $
    2,561,983
 
 
 22




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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, 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
 
 
 23




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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)
 Nine months ended September 30, 2006Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedCash flows from operating activitiesNet (loss) income
    
    $
    (140,924
    )
    
    $
    112,644
    
    
    $
    (4,726
    )
    
    $
    (33,006
    )Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:Benefit for deferred income taxes
    
    
    5,878
    
    
    
    (14,711
    )
    
    
    (12,408
    )
    
    
    (21,241
    )Depreciation and amortization
    
    
    71,404
    
    
    
    42,030
    
    
    
    41,452
    
    
    
    154,886Amortization of deferred financing fees
    
    
    4,148
    
    
    
    
    
    
    
    
    
    
    
    4,148Stock-based compensation
    
    
    407
    
    
    
    
    
    
    
    31
    
    
    
    438Unrealized gain on revaluation of foreign
denominated assets and liabilities
    
    
    
    
    
    
    
    
    
    
    (24,062
    )
    
    
    (24,062
    )Unrealized loss on foreign currency revaluation of
derivative instruments
    
    
    
    
    
    
    7,680
    
    
    
    
    
    
    
    7,680Other
    
    
    1,573
    
    
    
    (51
    )
    
    
    1,683
    
    
    
    3,205Changes in operating assets and liabilities, net of effect
of acqusitions:Accounts receivable
    
    
    (3,928
    )
    
    
    1,223
    
    
    
    21,990
    
    
    
    19,285Prepaids and other
    
    
    (1,285
    )
    
    
    
    
    
    
    (11,040
    )
    
    
    (12,325
    )Accounts payable and accrued liabilities
    
    
    17,197
    
    
    
    2,193
    
    
    
    (10,940
    )
    
    
    8,450Deferred revenue
    
    
    5,268
    
    
    
    (577
    )
    
    
    7,108
    
    
    
    11,799Income taxes payable
    
    
    
    
    
    
    
    
    
    
    (10,936
    )
    
    
    (10,936
    )Other long-term liabilities
    
    
    
    
    
    
    (15
    )
    
    
    3,310
    
    
    
    3,295Total adjustments
    
    
    100,662
    
    
    
    37,772
    
    
    
    6,188
    
    
    
    144,622Net cash (used in) provided by operating activities
    
    
    (40,262
    )
    
    
    150,416
    
    
    
    1,462
    
    
    
    111,616Cash flows from investing activitiesAcquired software
    
    
    (4,000
    )
    
    
    
    
    
    
    
    
    
    
    (4,000
    )Payments for purchases of property and equipment
    
    
    (4,852
    )
    
    
    
    
    
    
    (2,737
    )
    
    
    (7,589
    )Capitalized software costs
    
    
    (51,288
    )
    
    
    
    
    
    
    (467
    )
    
    
    (51,755
    )Other
    
    
    (1,056
    )
    
    
    
    
    
    
    (44
    )
    
    
    (1,100
    )Net cash used in investing activities
    
    
    (61,196
    )
    
    
    
    
    
    
    (3,248
    )
    
    
    (64,444
    )Cash flows from financing activitiesIntercompany borrowings (payments)
    
    
    157,592
    
    
    
    (151,199
    )
    
    
    (6,393
    )
    
    
    Proceeds from revolver credit line
    
    
    121,800
    
    
    
    
    
    
    
    
    
    
    
    121,800Payments on revolver credit line
    
    
    (121,800
    )
    
    
    
    
    
    
    
    
    
    
    (121,800
    )Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    6,850
    
    
    
    6,850Payments on notes payable
    
    
    
    
    
    
    
    
    
    
    (345
    )
    
    
    (345
    )Payments on bank notes and bonds
    
    
    (62,300
    )
    
    
    
    
    
    
    
    
    
    
    (62,300
    )Intercompany Dividends
    
    
    6,062
    
    
    
    
    
    
    
    (6,062
    )
    
    
    Capital contributed by parent (stock options exercised)
    
    
    639
    
    
    
    
    
    
    
    
    
    
    
    639Capital contributed by parent (compensatory payment)
    
    
    3,819
    
    
    
    
    
    
    
    
    
    
    
    3,819Net cash provided by (used in) financing activities
    
    
    105,812
    
    
    
    (151,199
    )
    
    
    (5,950
    )
    
    
    (51,337
    )Effect of exchange rates on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    1,890
    
    
    
    1,890Net increase (decrease) in cash and cash equivalents
    
    
    4,354
    
    
    
    (783
    )
    
    
    (5,846
    )
    
    
    (2,275
    )Cash and cash equivalents at beginning of period
    
    
    (4,266
    )
    
    
    962
    
    
    
    64,836
    
    
    
    61,532Cash and cash equivalents at end of period
    
    $
    88
    
    
    $
    179
    
    
    $
    58,990
    
    
    $
    59,257
 24




---



##### Table of Contents



UGS Corp.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 SUPPLEMENTAL UNAUDITED CONDENSED
CONSOLIDATING SCHEDULE OF CASH FLOWS
(in thousands)
 Nine months ended September 30, 2005Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedCash flows from operating activitiesNet (loss) income
    
    $
    (107,029
    )
    
    $
    78,540
    
    
    $
    (6,470
    )
    
    $
    (34,959
    )Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:Benefit for deferred income taxes
    
    
    (14,970
    )
    
    
    (14,711
    )
    
    
    (10,565
    )
    
    
    (40,246
    )Depreciation and amortization
    
    
    50,653
    
    
    
    42,030
    
    
    
    34,109
    
    
    
    126,792Amortization of deferred financing fees
    
    
    4,231
    
    
    
    
    
    
    
    
    
    
    
    4,231In-process research and development
    
    
    
    
    
    
    
    
    
    
    4,100
    
    
    
    4,100Stock-based compensation
    
    
    467
    
    
    
    
    
    
    
    
    
    
    
    467Other
    
    
    817
    
    
    
    (157
    )
    
    
    2,260
    
    
    
    2,920Unrealized gain on foreign currency revaluation of
derivative instruments
    
    
    
    
    
    
    (17,044
    )
    
    
    
    
    
    
    (17,044
    )Unrealized loss on revaluation of foreign
denominated assets and liabilities
    
    
    
    
    
    
    
    
    
    
    22,782
    
    
    
    22,782Changes in operating assets and liabilities, net of effect
of acqusitions:Accounts receivable
    
    
    182
    
    
    
    1,500
    
    
    
    8,446
    
    
    
    10,128Prepaids and other
    
    
    4,611
    
    
    
    220
    
    
    
    (1,157
    )
    
    
    3,674Accounts payable and accrued liabilities
    
    
    6,062
    
    
    
    142
    
    
    
    (5,214
    )
    
    
    990Deferred revenue
    
    
    11,869
    
    
    
    (536
    )
    
    
    21,042
    
    
    
    32,375Income taxes payable
    
    
    
    
    
    
    
    
    
    
    2,676
    
    
    
    2,676Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    (425
    )
    
    
    (425
    )Total adjustments
    
    
    63,922
    
    
    
    11,444
    
    
    
    78,054
    
    
    
    153,420Net cash (used in) provided by operating activities
    
    
    (43,107
    )
    
    
    89,984
    
    
    
    71,584
    
    
    
    118,461Cash flows from investing activitiesAcquisitions, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (218,437
    )
    
    
    (218,437
    )Cash received from prior parent for acquisition
related tax matters
    
    
    11,354
    
    
    
    
    
    
    
    
    
    
    
    11,354Payments for purchases of property and equipment
    
    
    (5,805
    )
    
    
    
    
    
    
    (2,737
    )
    
    
    (8,542
    )Capitalized software costs
    
    
    (55,061
    )
    
    
    
    
    
    
    (1,828
    )
    
    
    (56,889
    )Proceeds from sale of marketable securities
    
    
    
    
    
    
    
    
    
    
    23,194
    
    
    
    23,194Other
    
    
    (2,278
    )
    
    
    280
    
    
    
    1,156
    
    
    
    (842
    )Net cash (used in) provided by investing activities
    
    
    (51,790
    )
    
    
    280
    
    
    
    (198,652
    )
    
    
    (250,162
    )Cash flows from financing activitiesIntercompany borrowings (payments)
    
    
    (74,961
    )
    
    
    (89,313
    )
    
    
    164,274
    
    
    
    Proceeds from revolver credit line
    
    
    118,551
    
    
    
    
    
    
    
    
    
    
    
    118,551Payments on revolver credit line
    
    
    (124,551
    )
    
    
    
    
    
    
    
    
    
    
    (124,551
    )Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    10,297
    
    
    
    10,297Payments on notes payable
    
    
    
    
    
    
    
    
    
    
    (2,773
    )
    
    
    (2,773
    )Proceeds from bank notes and bonds, net
    
    
    225,201
    
    
    
    
    
    
    
    70
    
    
    
    225,271Payments on bank notes and bonds
    
    
    (51,000
    )
    
    
    
    
    
    
    (23,597
    )
    
    
    (74,597
    )Capital contributed by parent
    
    
    508
    
    
    
    
    
    
    
    
    
    
    
    508Net cash provided by (used in) financing activities
    
    
    93,748
    
    
    
    (89,313
    )
    
    
    148,271
    
    
    
    152,706Effect of exchange rates on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (3,152
    )
    
    
    (3,152
    )Net increase in cash and cash equivalents
    
    
    (1,149
    )
    
    
    951
    
    
    
    18,051
    
    
    
    17,853Cash and cash equivalents at beginning of period
    
    
    (1,951
    )
    
    
    251
    
    
    
    60,100
    
    
    
    58,400Cash and cash equivalents at end of period
    
    $
    (3,100
    )
    
    $
    1,202
    
    
    $
    78,151
    
    
    $
    76,253
 25




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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 our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2006 (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
   26




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##### Table of Contents



Cost of Revenue
  Sales and Marketing
    Research and Development Costs
   27




---



##### Table of Contents



Three monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Research and development costs
    
    $
    43,416
    
    
    $
    44,350Capitalized software costs
    
    
    17,829
    
    
    
    17,444Total Research and Development Costs
    
    $
    61,245
    
    
    $
    61,794
 Nine monthsEndedSeptember 30,
    
    
    September 30,2006
    
    
    2005Research and development costs
    
    $
    142,029
    
    
    $
    118,990Capitalized software costs
    
    
    51,755
    
    
    
    56,889Total Research and Development Costs
    
    $
    193,784
    
    
    $
    175,879
 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
  28




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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.
   29




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30




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##### Table of Contents



Business Combinations
   Recoverability of Goodwill, Acquired Intangible Assets and Long-Lived Assets
   Income Taxes
  31




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Recent Accounting Pronouncements
    32




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##### Table of Contents



Segment Revenue and Operating Income
  Geographic Segment Revenue
  Three monthsended
    
    
    
    
    
    
    PercentageSeptember 30,
    
    
    September 30,
    
    
    Increase/
    
    
    Increase/2006
    
    
    2005
    
    
    (Decrease)
    
    
    (Decrease)Americas
    
    $
    122,930
    
    
    $
    123,847
    
    
    $
    (917
    )
    
    
    (0.7
    %)Europe
    
    
    110,650
    
    
    
    110,820
    
    
    
    (170
    )
    
    
    (0.2
    %)Asia Pacific
    
    
    61,965
    
    
    
    55,582
    
    
    
    6,383
    
    
    
    11.5
    %Total revenue
    
    $
    295,545
    
    
    $
    290,249
    
    
    $
    5,296
    
    
    
    1.8
    %
    33




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##### Table of Contents



Nine monthsendedSeptember 30,
    
    
    September 30,
    
    
    
    
    
    
    Percentage2006
    
    
    2005
    
    
    Increase
    
    
    IncreaseAmericas
    
    $
    370,746
    
    
    $
    358,368
    
    
    $
    12,378
    
    
    
    3.5
    %Europe
    
    
    323,366
    
    
    
    313,381
    
    
    
    9,985
    
    
    
    3.2
    %Asia Pacific.
    
    
    171,886
    
    
    
    156,075
    
    
    
    15,811
    
    
    
    10.1
    %Total revenue
    
    $
    865,998
    
    
    $
    827,824
    
    
    $
    38,174
    
    
    
    4.6
    %
    Geographic Segment Operating Income
  Three monthsendedSeptember 30,
    
    
    September 30,
    
    
    Increase/
    
    
    Percentage2006
    
    
    2005
    
    
    (Decrease)
    
    
    Increase/(Decrease)Americas
    
    $
    56,204
    
    
    $
    56,123
    
    
    $
    81
    
    
    
    0.1
    %Europe
    
    
    47,881
    
    
    
    51,322
    
    
    
    (3,441
    )
    
    
    (6.7
    %)Asia Pacific
    
    
    36,729
    
    
    
    30,382
    
    
    
    6,347
    
    
    
    20.9
    %Total operating income
    
    $
    140,814
    
    
    $
    137,827
    
    
    $
    2,987
    
    
    
    2.2
    %
   34




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Nine monthsendedSeptember 30,
    
    
    September 30,
    
    
    
    
    
    
    Percentage2006
    
    
    2005
    
    
    Increase
    
    
    IncreaseAmericas
    
    $
    170,764
    
    
    $
    157,293
    
    
    $
    13,471
    
    
    
    8.6
    %Europe
    
    
    137,286
    
    
    
    133,194
    
    
    
    4,092
    
    
    
    3.1
    %Asia Pacific
    
    
    99,510
    
    
    
    82,887
    
    
    
    16,623
    
    
    
    20.1
    %Total operating income
    
    $
    407,560
    
    
    $
    373,374
    
    
    $
    34,186
    
    
    
    9.2
    %
     Three monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Total operating income for reportable segments
    
    $
    140,814
    
    
    $
    137,827Research and development
    
    
    (43,416
    )
    
    
    (44,350
    )Amortization of capitalized and acquired software
and other intangible assets
    
    
    (47,088
    )
    
    
    (41,077
    )Corporate and unallocated costs
    
    
    (34,415
    )
    
    
    (33,052
    )Operating income
    
    $
    15,895
    
    
    $
    19,348
 35




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Nine monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Total operating income for reportable segments
    
    $
    407,560
    
    
    $
    373,374Research and development
    
    
    (142,029
    )
    
    
    (118,990
    )In-process research and development
    
    
    
    
    
    
    (4,100
    )Restructuring
    
    
    535
    
    
    
    (1,774
    )Amortization of capitalized and acquired software
and other intangible assets
    
    
    (139,213
    )
    
    
    (114,610
    )Corporate and unallocated costs
    
    
    (106,283
    )
    
    
    (97,558
    )Operating income
    
    $
    20,570
    
    
    $
    36,342
 Results of Operations
  Three months endedSeptember 30, 2006
    
    
    September 30, 2005(percentage of total revenue)
    
    
    
    
    
    
    (percentage of total revenue)Revenue:License
    
    $
    85,527
    
    
    
    28.9
    %
    
    $
    89,842
    
    
    
    31.0
    %Maintenance
    
    
    137,542
    
    
    
    46.6
    %
    
    
    129,706
    
    
    
    44.6
    %Services and other (a)
    
    
    72,476
    
    
    
    24.5
    %
    
    
    70,701
    
    
    
    24.4
    %Total revenue
    
    
    295,545
    
    
    
    100.0
    %
    
    
    290,249
    
    
    
    100.0
    %Cost of revenue (includes amortization of
capitalized and acquired software)
    
    
    116,216
    
    
    
    39.3
    %
    
    
    109,730
    
    
    
    37.8
    %Gross profit
    
    
    179,329
    
    
    
    60.7
    %
    
    
    180,519
    
    
    
    62.2
    %Operating expenses:Selling, general and administrative
    
    
    112,027
    
    
    
    37.9
    %
    
    
    107,803
    
    
    
    37.1
    %Research and development
    
    
    43,416
    
    
    
    14.7
    %
    
    
    44,350
    
    
    
    15.3
    %Amortization of other intangible assets
    
    
    7,991
    
    
    
    2.7
    %
    
    
    9,018
    
    
    
    3.1
    %Total operating expenses
    
    
    163,434
    
    
    
    55.3
    %
    
    
    161,171
    
    
    
    55.5
    %Operating income
    
    
    15,895
    
    
    
    5.4
    %
    
    
    19,348
    
    
    
    6.7
    %Interest expense and amortization of deferred financing fees
    
    
    (27,576
    )
    
    
    -9.3
    %
    
    
    (25,197
    )
    
    
    -8.7
    %Other income (expense), net
    
    
    1,087
    
    
    
    0.4
    %
    
    
    (919
    )
    
    
    -0.3
    %Loss before taxes
    
    
    (10,594
    )
    
    
    -3.5
    %
    
    
    (6,768
    )
    
    
    -2.2
    %Benefit for income taxes
    
    
    (3,161
    )
    
    
    -1.1
    %
    
    
    (2,002
    )
    
    
    -0.7
    %Net loss
    
    $
    (7,433
    )
    
    
    -2.4
    %
    
    $
    (4,766
    )
    
    
    -1.5
    %
 
 (a)
    
    Other revenue consists primarily of hardware sales. 36




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##### Table of Contents



Nine months endedSeptember 30, 2006
    
    
    September 30, 2005(percentage of total revenue)
    
    
    (percentage of total revenue)Revenue:License
    
    $
    251,054
    
    
    
    29.0
    %
    
    $
    244,738
    
    
    
    29.6
    %Maintenance
    
    
    398,373
    
    
    
    46.0
    %
    
    
    369,614
    
    
    
    44.6
    %Services and other (a)
    
    
    216,571
    
    
    
    25.0
    %
    
    
    213,472
    
    
    
    25.8
    %Total revenue
    
    
    865,998
    
    
    
    100.0
    %
    
    
    827,824
    
    
    
    100.0
    %Cost of revenue (includes amortization of
capitalized and acquired software)
    
    
    340,889
    
    
    
    39.4
    %
    
    
    327,909
    
    
    
    39.6Gross profit
    
    
    525,109
    
    
    
    60.6
    %
    
    
    499,915
    
    
    
    60.4
    %Operating expenses:Selling, general and administrative
    
    
    337,688
    
    
    
    39.0
    %
    
    
    313,382
    
    
    
    37.9
    %Research and development
    
    
    142,029
    
    
    
    16.4
    %
    
    
    118,990
    
    
    
    14.4
    %In-Process research and development
    
    
    
    
    
    
    0.0
    %
    
    
    4,100
    
    
    
    0.5
    %Restructuring
    
    
    (535
    )
    
    
    -0.1
    %
    
    
    1,774
    
    
    
    0.2
    %Amortization of other intangible assets
    
    
    25,357
    
    
    
    2.9
    %
    
    
    25,327
    
    
    
    3.1
    %Total operating expenses
    
    
    504,539
    
    
    
    58.3
    %
    
    
    463,573
    
    
    
    55.9
    %Operating income
    
    
    20,570
    
    
    
    2.4
    %
    
    
    36,342
    
    
    
    4.4
    %Interest expense and amortization of deferred financing fees
    
    
    (80,543
    )
    
    
    -9.3
    %
    
    
    (71,576
    )
    
    
    -8.6
    %Other income (expense), net
    
    
    11,024
    
    
    
    1.3
    %
    
    
    (14,326
    )
    
    
    -1.7
    %Loss before taxes
    
    
    (48,949
    )
    
    
    -5.7
    %
    
    
    (49,560
    )
    
    
    -6.0
    %Benefit for income taxes
    
    
    (15,943
    )
    
    
    -1.8
    %
    
    
    (14,601
    )
    
    
    -1.8
    %Net loss
    
    $
    (33,006
    )
    
    
    -3.9
    %
    
    $
    (34,959
    )
    
    
    -4.2
    %
 
 (a)
    
    Other revenue consists primarily of hardware sales. Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
 Total Revenue
  Three monthsendedSeptember 30,
    
    
    September 30,
    
    
    Increase/
    
    
    Percentage2006
    
    
    2005
    
    
    (Decrease)
    
    
    Increase/(Decrease)License
    
    $
    85,527
    
    
    $
    89,842
    
    
    $
    (4,315
    )
    
    
    (4.8
    %)Maintenance
    
    
    137,542
    
    
    
    129,706
    
    
    
    7,836
    
    
    
    6.0
    %Services and other
    
    
    72,476
    
    
    
    70,701
    
    
    
    1,775
    
    
    
    2.5
    %Total revenue
    
    $
    295,545
    
    
    $
    290,249
    
    
    $
    5,296
    
    
    
    1.8
    %
  
    
    License. Although license revenue was higher in Asia Pacific for the three months
ended September 30, 2006, total license revenue decreased due to license sales with a
lower average deal size in our Americas and Europe segments. License revenue accounted
for 28.9% of total revenue for the three months ended September 30, 2006 and 31.0% for
the three months ended September 30, 2005.
    
    Maintenance.Maintenance revenue for the three months ended September 30, 2006 was
higher for all operating segments. Also, maintenance revenue reflected a greater increase
of $1.8 million because of the purchase accounting adjustment described above.
Maintenance revenue accounted for 46.6% of total revenue for the three months ended
September 30, 2006 and 44.6% for the three months ended September 30, 2005.
 37




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
    
    Services and other. Services and other revenue was higher primarily due to the
increase in Europe service revenue. Services and other revenue accounted for 24.5% of
total revenue for the three months ended September 30, 2006 and 24.4% of total revenue
for the three months ended September 30, 2005.
 Gross Profit
  Operating Expenses
 Selling, General and Administrative
  Research and Development
   Amortization of Other Intangible Assets
  Operating Income
  38




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Interest Expense and Amortization of Deferred Financing Fees
  Benefit for Income Taxes
  Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
 Total Revenue
  Nine monthsendedPercentageSeptember 30, 2006
    
    
    September 30, 2005
    
    
    Increase
    
    
    IncreaseLicense
    
    $
    251,054
    
    
    $
    244,738
    
    
    $
    6,316
    
    
    
    2.6
    %Maintenance
    
    
    398,373
    
    
    
    369,614
    
    
    
    28,759
    
    
    
    7.8
    %Services and other
    
    
    216,571
    
    
    
    213,472
    
    
    
    3,099
    
    
    
    1.5
    %Total revenue
    
    $
    865,998
    
    
    $
    827,824
    
    
    $
    38,174
    
    
    
    4.6
    %
  
    
    License. License revenue in the 2006 period benefited from $7.0 million from
Tecnomatix that was not part of our operations during the first three months of 2005.
License revenue also benefited from license sales in the last six months with a higher
average deal size in our Asia Pacific segment. License revenue accounted for 29.0% of
total revenue for the nine months ended September 30, 2006 and 29.6% for the nine months
ended September 30, 2005.
    
    Maintenance.Maintenance revenue in the 2006 period benefited from $7.3 million from
Tecnomatix that was not part of our operations during the first three months of 2005.
Maintenance revenue also benefited from renewals on the existing customer base. Also,
maintenance revenue reflected a greater increase of $9.0 million because of the purchase
accounting adjustment described above. Maintenance revenue accounted for 46.0% of total
revenue for the nine months ended September 30, 2006 and 44.6% of total revenue for the
nine months ended September 30, 2005.
 39




---



##### Table of Contents




    
    Services and other. Services and other revenue in the 2006 period benefited from $4.4
million from Tecnomatix that was not part of our operations during the first three months
of 2005. Services and other revenue also benefited from higher revenue in our Europe
segment, which was partially offset by a decrease in revenue in the Americas automotive
sector. Services and other revenue accounted for 25.0% of total revenue for the nine
months ended September 30, 2006 and 25.8% of total revenue for the nine months ended
September 30, 2005.
 Gross Profit
  Operating Expenses
 Selling, General and Administrative
  Research and Development
   Restructuring
  40




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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
  41




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Nine monthsendedSeptember 30,
    
    
    September 30,2006
    
    
    2005Reconciliation of EBITDA to net cash
provided by operating activities:EBITDA
    
    $
    186,480
    
    
    $
    148,808Benefit for deferred income taxes
    
    
    (21,241
    )
    
    
    (40,246
    )Amortization of deferred financing fees
    
    
    4,148
    
    
    
    4,231In-process research and development
    
    
    
    
    
    
    4,100Stock-based compensation
    
    
    438
    
    
    
    467Other
    
    
    3,205
    
    
    
    2,920Unrealized (gain) loss on revaluation of foreign
denominated assets and liabilities
    
    
    (24,062
    )
    
    
    22,782Unrealized loss (gain) on foreign currency revaluation
of derivative instruments
    
    
    7,680
    
    
    
    (17,044
    )Changes in operating assets and liabilities
    
    
    19,568
    
    
    
    49,418Interest expense
    
    
    (80,543
    )
    
    
    (71,576
    )Benefit for income taxes
    
    
    15,943
    
    
    
    14,601Net cash provided by operating activities
    
    $
    111,616
    
    
    $
    118,461Reconciliation of EBITDA to net loss:EBITDA
    
    $
    186,480
    
    
    $
    148,808Interest expense
    
    
    (80,543
    )
    
    
    (71,576
    )Benefit for income taxes
    
    
    15,943
    
    
    
    14,601Depreciation and amortization
    
    
    (154,886
    )
    
    
    (126,792
    )Net loss
    
    $
    (33,006
    )
    
    $
    (34,959
    )
 Debt and Commitments
     42




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Capital Expenditures
  43




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Historical Cash Flow
    Off Balance Sheet Obligations
  Inflation
  Seasonality
  
 ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Exchange Risk
   44




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Interest
    
    Notional
    
    USD ExchangeExpiration
    
    Rate
    
    Value
    
    Rate to  1(in millions)Pay fixed
    
    December 15, 2014
    
    
    9.0
    %
    
    

    44.7
    
    
    
    1.2238Receive fixed
    
    
    
    
    9.025
    %Pay fixed
    
    December 15, 2016
    
    
    9.0
    %
    
    
    42.3
    
    
    
    1.2238Receive fixed
    
    
    
    
    9.08
    %
  Interest Rate Risk
  45




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##### Table of Contents



Expected maturity date as of September 30, 2006
    
    September 30, 2006Fair2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    Therefore
    
    Total
    
    ValuePay fixed/receive variable
    
    $
    100.0
    
    
    $
    125.0
    
    
    $
    175.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    400.0
    
    
    $
    (1.5
    )Average pay rate
    
    
    5.44
    %
    
    
    5.34
    %
    
    
    5.26
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.35
    %Average receive rate *
    
    
    5.08
    %
    
    
    4.77
    %
    
    
    4.87
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.89
    %
 
 *
    
    Represents the average 3-month forward LIBOR interest rates at September 29, 2006.  
 ITEM 4: CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   46




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1: LEGAL PROCEEDINGS
  
 ITEM 1A: RISK FACTORS
  
 ITEM 6: EXHIBITS
  47




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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 Financial Officer) 48




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description10.1
    
    First Amendment to Personal Services Agreement31.1
    
    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
 49