Preparing the New Management’s Discussion and 
Analysis of Financial Condition and Results of Operations

By Stanley Keller

June 2007

A. Introduction
 
1. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is a dynamic disclosure vehicle that adapts to meet changing regulatory concepts and internal and external developments affecting a company. This is illustrated by the SEC's December 2003 MD&A interpretive guidance. Release No. 33-8350 (Dec. 19, 2003). MD&A has gained equal status with the financial statements as the most important sources of disclosure regarding the company and its financial position. In that connection, it is integral to an understanding of the company's financial statements.
 
2. MD&A dates from 1980 and its requirements are found in Item 303 of Regulation S-K (and the comparable item of Regulation S-B) applicable to Securities Exchange Act periodic reports on Form 10-K and Form 10-Q (and other comparable forms) and certain Securities Act registration statements.
 
3. Primary sources of SEC guidance on MD&A are:
 
- 1987 interpretive release on MD&A
 
- 1988 interpretive release on defense contract disclosure, but relevant more generally on disclosure of contingencies
 
- 1989 comprehensive interpretive release on MD&A
 
- December 2001 cautionary advice regarding critical accounting policies
 
- January 2002 statement regarding certain MD&A topics
 
- May 2002 rulemaking proposal regarding disclosure of critical accounting estimates
 
- January 2003 rulemaking regarding disclosure of off-balance sheet arrangements and contractual obligations
 
- February 2003 Fortune 500 review summary
 
- December 2003 interpretive release providing MD&A guidance
 
- June 2005 Report under § 401(c) of the Sarbanes-Oxley Act relating to off-balance sheet arrangements.
 
- SEC enforcement actions relating to MD&A, including most prominently Caterpillar, Inc.; Bank of Boston Corp.; Gibson Greetings, Inc.; Sony Corporation; and Edison Schools, Inc.
 
4. The purpose of MD&A is to provide investors in a clear and straightforward manner with an informative discussion and transparent information necessary to an understanding of the company's financial condition, changes in financial condition and results of operations, with three principal objectives:
 
- Provide a narrative explanation of the company's financial statements that enables investors to see the company through the eyes of management (e.g., analysis of the reasons for material changes and identification of key risks).
 
- Enhance overall financial disclosure and provide the context for analyzing the financial statements (e.g., critical accounting estimates; off-balance sheet arrangements).
 
- Provide information about the quality and potential variability of the company's earnings and cash flow so that investors can ascertain the likelihood that past performance is indicative of future performance (e.g., known trends and uncertainties that are reasonably likely to affect future results).

B. Guidelines for Preparing MD&A
 
1. The process for preparing MD&A should involve combining both an overall perspective (the "1,000-foot view") with greater detail necessary for an understanding of material information (the "100-foot view"). This can be accomplished through a layering of information that conveys the most important information and a roadmap of more detailed disclosure, for example, through the use of an overview and introductory paragraphs to particular sections. Expanded use of tables and headings can also help the presentation of MD&A information. Duplicative disclosure should be avoided (although there are limitations on the ability to cross-refer outside the MD&A).
 
- What is apparent is that effective MD&A is not a process of marking up the last one.
 
- It also requires top-down guidance from senior executives in its formulation and active involvement of the company's disclosure committee. MD&A is part of an ongoing process that involves telling the company's story through earnings releases, investor calls and webpostings, investor presentations, annual reports and board reviews. Each of these sources should be consulted to tell a consistent, cohesive and complete story.
 
2. MD&A is best understood by examining its component parts. At the same time, the importance of disaggregating information down to segments and even lower subdivisions where material needs to be kept in mind.
 
- Any well written MD&A will emphasize the material, focus on analysis (the "A" in MD&A), avoid mere narrative recitation of what is apparent from the financial statements and eschew redundancies and irrelevancies.
 
- Generally, a three year period is covered.
 
3. The components of MD&A (certain of which are described in more detail below) can be viewed as the following:
 
- An overview that discusses what the company is about, how it makes money, what are the trends and drivers of the business, what are the principal risks and challenges that face it, and what are the strategies and opportunities for growth and the uncertainties associated with carrying them out. This can involve company specific information, as well as general economic and industry-wide factors.
 
- A discussion of results of operations focusing on the reasons for the historic results and period-to-period changes and the extent to which these past results are indicative of future results. This involves addressing known trends and uncertainties that can affect future results, applying the MD&A two-part materiality test. That test requires disclosure unless the matter is both unlikely to occur and not material. It is also an opportunity to provide the company's forecasts and the risks associated with those forecasts. A proper analysis may involve non-GAAP financial information to the extent meaningful, as well as non-financial factors relevant to the business (which may be macro-economic, industry-based or company specific). Segment and below segment information may be most important here.
 
- Discussion of liquidity, cash flow and capital resources has taken on increased importance. It requires addressing the company's cash needs, both short-term and long-term, for operations, capital expenditures, debt repayments and distributions. It then requires addressing how the company expects to meet those needs, such as from internally generated funds and external sources (with requisite specificity), and risks associated with obtaining the necessary funds. This could require discussion of covenants that affect the ability to raise funds, as well as when there is an existing or possible default. Changes in cash flow also should be discussed with identification of the specific elements that affected cash flow.
 
- Closely related for an understanding of cash needs, as well as the company's balance sheet and financial position, is a compilation of contractual commitments and a discussion of off-balance sheet obligations (as affected by FIN 45 regarding guarantees and indemnities and FIN 46R regarding variable interest entities). Although not required by the MD&A rules adopted in 2003, contingent liabilities may need discussion to give an accurate picture of the company's cash needs and financial position.
 
- If the company engages in trading activities, non-exchange traded obligations would have to be discussed as set forth in the January 2002 statement.
 
- Similarly, related and near-related party transactions need to be discussed if their terms mean that past performance is not necessarily indicative of the future.
 
- Critical accounting estimates (formerly policies) requires special attention in order to provide a context for understanding the financial statements and the variability of certain items that could be material. This should not be a repetition of the note describing accounting policies but rather an analysis of those policies that involve estimates and assumptions that are highly subjective and judgmental and whose variability could have a material impact on the financial statements. The discussion should include quantification and sensitivity analyses when meaningful and reasonably available.
 
- Sometimes, the MD&A is used as the vehicle for setting forth risk factors, often called "investment considerations." These serve to qualify disclosures by identifying risks and uncertainties and to provide a basis for using the forward-looking information safe harbor. The proposed amendment of Form 10-K as part of the Securities Offering Reform proposal to require risk factors may alter this practice.
 
4. The MD&A in the Form 10-K sets the baseline as the complete discussion, prepared annually. The Form 10-Q MD&A is an update that describes the results for the quarter and material changes from the Form 10-K MD&A. The reader is presumed to be familiar with the Form 10-K, and therefore repetition from it can be avoided in the Form 10-Q.
 
5. With the introduction of expanded and accelerated Form 8-K current disclosure, the nature of MD&A as the core of periodic reporting is likely to evolve. It will have to reflect and amplify upon the current reports during the period. In connection with preparing the periodic MD&A, consideration should be given to whether all required Form 8-Ks have been filed inasmuch as the safe harbor from Rule 10b-5 liability for failure to file a Form 8-K applies only until the next periodic report.

C. Specific MD&A Requirements
 
1. Material Known Trends and Uncertainties
 
- A two-part analysis for required forward-looking disclosures:
 
- Is the known trend, demand, commitment, event or uncertainty reasonably likely to occur? If management cannot determine that an event is not likely to occur, then ask:
 
- Will the reasonably likely impact of the event be material? If management cannot determine that the impact is not reasonably likely to be material, disclosure is required.
 
- "Reasonably likely" is more than "remote" and less than "more likely than not."
 
- Information may be material if it:
 
- Masks a change in earnings or other trends.
 
- Hides a failure to meet analysts' consensus expectations.
 
- Involves concealment of an unlawful transaction.
 
- Affects the company's compliance with regulatory requirements.
 
- Changes a loss into an income or vice versa.
 
- Has the effect of increasing management's compensation - for example, by satisfying requirements for bonuses.
 
2. Key Indicators

- Non-financial data that may be important to an investors understanding may include:
 
- Macro-economic information (e.g., interest rates or economic growth rates and their anticipated trends).
 
- Industry specific measures (such as industry metric and value drivers).
 
- Company specific items (e.g., product development cycles, customer / vendor relations).
 
- Other (e.g. manufacturing plant capacity and utilization, backlog, trends in bookings and employee turnover).
 
3. Liquidity
 
- A discussion of cash requirements might include:
 
- Funds necessary to maintain current operations, complete projects underway and achieve stated objectives or plans.
 
- Commitments for capital or other expenditures.
 
- The reasonably likely exposure to future cash requirements associated with known trends or uncertainties, and an indication of the time periods in which resolution of the uncertainties is anticipated.
 
- Use the table of contractual obligations as a starting point.
 
- Explain why debt is incurred.
 
- Discuss cash needs in the long and short term.
 
- The discussion should focus on sources and uses of cash.
 
- Operating Cash flows:
 
- Address key drivers of cash flow and the changes in these drivers.
 
- If a company has negative cash flow discuss the operational reasons for this conditions.
 
- Financing Cash flows:
 
- If the company intends to meet its cash requirements through financing arrangements, evaluate whether such options are "reasonably likely to be available."
 
- Discuss restrictions on the ability to access cash flow.
 
- The discussion could also include a description of the company's cash management program:
 
- Describe the consequences of the company's choices regarding the timing and purpose of cash expenditures.
 
- For example, a decision to decrease capital spending below historical levels may result in less interest expense and depreciation, but higher future repair and maintenance expenses or a higher cost base than the company would otherwise have.
 
4. Debt Instruments, Guarantees and Related Covenants

- There are at least two scenarios in which a company should discuss material debt covenants:
 
- If the company is in breach, or is reasonably likely to be in breach, of a covenant and the impact on the company is material.
 
- If the covenants limit, or are reasonably likely to limit, the ability of the company to undertake additional debt financing.
 
- Consider whether disclosure in other circumstances is appropriate (e.g., highly leveraged company).
 
5. Critical Accounting Estimates
 
- Reported results may imply a degree of precision that doesn't exist even though there has been a correct application of GAAP.
 
- Investors need to understand the possibility, likelihood and implication of changes in the financial and operating status on the methods, assumptions and estimates used for accounting measurements.
 
- The discussion should not reiterate what is contained in the accounting policies footnote.
 
- It should address those policies that contain estimates and assumptions that management worries about, applying two tests for "critical:"
 
- Requires assumptions regarding matters that are highly uncertain; and
 
- Different estimates, or changes in estimates that are reasonably likely to occur, would have a material impact on presentation of financial condition, changes in financial condition, or results of operations.
 
- The discussion should cover:
 
- How the company arrived at the estimate.
 
- How accurate the estimate or assumption has been in the past.
 
- How much the estimate or assumption has changed in the past.
 
- Whether the estimate or assumption is reasonably likely to change in the future.
 
- Include sensitivity analysis and quantification "when quantitative information is reasonably available and will provide material information for investors."
 
- For example, if reasonably likely changes in the long-term rate of return used in accounting for a company's pension plan would have a material effect on the financial condition or operating performance of the company, the impact that could result given the range of reasonably likely outcomes should be disclosed and, because of the nature of the estimates of long-term rates of return, quantified.
 
6. Off-Balance Sheet Arrangements
 
- Arrangements with off-balance sheet entities must be disclosed when those entities:
 
- Provide financing, liquidity, or market or credit risk support for the registrant;
 
- Engage in leasing, hedging, research and development services with the registrant; or
 
- Expose the registrant to liability that is not reflected on the face of the financial statements; and
 
- Are neither readily apparent nor easily understood from the financial statements.
 
- Registrants must disclose contingencies inherent in the arrangements that are reasonably likely to affect the continued availability of a material historical source of liquidity and finance, revenues, expenses and results of operations, and their effects.
 
- The SEC expressly adopted the "reasonably likely" disclosure threshold and abandoned the proposed "may have a material current or future effect" disclosure threshold.
 
- Off-balance sheet arrangements are defined to include any contractual arrangement to which an unconsolidated entity is a party, under which the registrant has:
 
- Any obligation under certain guarantees such as financial standby letters of credit, market value guarantee, guarantee of market price of common stock of the guaranteed party, performance guarantee - look to FIN 45 as the basis for determining whether a guarantee contract is an off-balance sheet arrangement.
 
- Retained or contingent interests.
 
- Certain derivative instruments (instruments indexed to the registrants common stock and classified as stockholder's equity under GAAP).
 
- Variable interests as defined in FIN 46 (investments or other interests that will absorb a portion of an entity's losses if they occur or receive a portion of the entity's expected residual returns if they occur).
 
7. Disclosure of Contractual Obligations
 
- Item 303(a)(5) of Regulation S-K requires tabular disclosure of known contractual obligations, aggregated by type of contractual obligation specified in the table and for the specified periods, in substantially the format attached as Exhibit A.
 
- GAAP already requires companies to aggregate and assess the categories listed in the table, except for purchase obligations. GAAP defines long-term debt, capital lease obligations and operating leases.
 
- Items that are not required to be included in the table but that should be discussed if material are the cash requirement for items such as interest, taxes or amounts to be funded to cover retirement or post-employment benefits.
 
- You can disaggregate categories of obligations and the time periods as long as all the obligations that fall within the specified categories are disclosed for the periods. See Exhibit B for examples.
 
- Purchase obligations required to be included in the table are defined as an "agreement to purchase good or services that is enforceable and legally binding on the registrant that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction."
 
- Some purchase obligations are executory contracts, and therefore are not recognized as liabilities in accordance with GAAP. However, the SEC stated that because purchase obligations may have a significant effect on a company's liquidity, they should be included in the table.
 
- Because of the breadth of the term, many companies have limited the scope of purchase obligations identified. The SEC has indicated that this is an acceptable approach as long as the methodology used is clearly described and is reasonable.
 
- An example is: "Purchase commitments represent obligations under agreements which are not unilaterally cancelable by us, are legally enforceable and specify fixed or minimum amounts or quantities of goods or services at fixed or minimum prices. We generally require purchase orders for vendor and third-party spending. The amount presented above as purchase commitments includes an analysis of all known contracts exceeding $ 5 million in the aggregate as well as all known open purchase orders. We expect to fund these commitments with existing cash and cash flows from operations."
 
8. Equity Buyback Disclosure
 
- Companies historically have discussed equity buyback programs in the liquidity section of MD&A. There is now a separate specific line item disclosure requirement.
 
- Repurchases of equity securities registered under Section 12 of the Exchange Act must be reported in a tabular format on a month-to-month basis under Item 703 of Regulation S-K.
 
- This requirement applies whether private or public repurchases are involved and regardless of whether the repurchases are pursuant to Rule 10b-18.
 
- Material repurchase plans and activity also should continue to be discussed in the MD&A.
 
- Providing the table in MD&A is sufficient to satisfy Item 703, as long as the table satisfies the requirements of Item 703 and a cross-reference is made in Part II, Item 5 of Form 10-K or Part II, Item 2 of Form 10-Q; however, additional disclosure may be required in MD&A if the buyback activity is material.
 
- Examples of Item 703 buyback disclosure are included in Exhibit C.

November 29, 2005
Exhibit A
Contractual Obligations	Payments due by Period	
	 	 	 	 	 	
		Less than			More than	
	Total	1 year	1-3 years	3-5 years	5 years	
Long-Term Debt Obligations	 	 	 	 	 	
	 	 	 	 	 	
Capital (Finance) Lease	 	 	 	 	 	
Obligations	 	 	 	 	 	
	 	 	 	 	 	
Operating Leases	 	 	 	 	 	
	 	 	 	 	 	
Purchase Obligations	 	 	 	 	 	
	 	 	 	 	 	
Other Long-Term Liabilities	 	 	 	 	 	
Reflected on the Company's	 	 	 	 	 	
Balance Sheet under GAAP of the	 	 	 	 	 	
primary financial statements	 	 	 	 	 	
	 	 	 	 	 	
Total	 	 	 	 	 	
Exhibit B
Example of Disaggregated Presentation of Years
	Payments due in	
	 	 	 	 	 	 	 	
	Total	2005	2006	2007	2008	2009	Thereafter	
Long-term debt	1,434	102	103	99	98	98	934	
	 	 	 	 	 	 	 	
Operating leases	1,076	97	104	107	92	87	589	
	 	 	 	 	 	 	 	
Flight equipment obligations	6,580	640	790	1,030	1,045	990	2,085	
	 	 	 	 	 	 	 	
Short-term borrowings	30	30	-	-	-	-	-	
	 	 	 	 	 	 	 	
Facilities and other	236	98	40	23	27	23	25	
	 	 	 	 	 	 	 	
Total	9,356	967	1,037	1,259	1,262	1.198	3.633	
Example of Disaggregated Categories of Obligations
(In thousands)	Payments Due by Period	
	 	 	 	 	
	2005	2006	2007	2008	
Credit facility term loan A	$ 73,056	$ 111,459	$ 133,578	$ 71,448	
	 	 	 	 	
Credit facility term loan B	2,697	2,697	2,697	258,895	
	 	 	 	 	
Credit facility revolver				48,189	
	 	 	 	 	
9% senior notes	 	 	 	 	
	 	 	 	 	
12.25% senior subordinated discount	 	 	 	 	
notes	 	 	 	 	
	 	 	 	 	
7.25% senior subordinated notes	 	 	 	 	
	 	 	 	 	
5.0% convertible notes				349,413	
	 	 	 	 	
6.25% convertible notes			212,742	 	
	 	 	 	 	
3.25% convertible notes	 	 	 	 	
	 	 	 	 	
2.25% convertible notes	44	 	 	 	
	 	 	 	 	
Long-term obligations, excluding	75,797	114,156	349,017	727,945	
capital leases and other notes	 	 	 	 	
	 	 	 	 	
Cash interest expense	195,000	184,000	172,000	136,000	
	 	 	 	 	
Capital lease payments (including	5,548	4,635	19,233	3,355	
interest) and other notes payable	 	 	 	 	
	 	 	 	 	
Operating lease payments	87,905	75,104	62,075	52,234	
	 	 	 	 	
Purchase obligations for acquisitions	31,400	 	 	 	
	 	 	 	 	
Other long-term liabilities	1,069	322	329	337	
	 	 	 	 	
Total	$ 396,719	$ 378,217	$ 602,654	$ 919,871	
(In thousands)	Payments Due by Period	
	 	 	 	
	2009	Thereafter	Total	
Credit facility term loan A			$ 389,541	
	 	 	 	
Credit facility term loan B			266,986	
	 	 	 	
Credit facility revolver			48,189	
	 	 	 	
9% senior notes		$ 1,000,000	1,000,000	
	 	 	 	
12.25% senior subordinated discount	$ 808,000		808,000	
notes	 	 	 	
	 	 	 	
7.25% senior subordinated notes		400,000	400,000	
	 	 	 	
5.0% convertible notes			349,413	
	 	 	 	
6.25% convertible notes			212,742	
	 	 	 	
3.25% convertible notes		210,000	210,000	
	 	 	 	
2.25% convertible notes			44	
	 	 	 	
Long-term obligations, excluding	808,000	1,610,000	3,684,915	
capital leases and other notes	 	 	 	
	 	 	 	
Cash interest expense	130,000	103,000	920,000	
	 	 	 	
Capital lease payments (including	3,215	208,645	244,631	
interest) and other notes payable	 	 	 	
	 	 	 	
Operating lease payments	42,591	289,857	609,766	
	 	 	 	
Purchase obligations for acquisitions			31,400	
	 	 	 	
Other long-term liabilities	345	3,551	5,953	
	 	 	 	
Total	$ 984,151	$ 2,215,053	$ 5,496,665	
Exhibit C
Buyback Disclosure
 
Form 10-K, Part II
 
Item 5. Market For Registrants' Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
(e) The following table provides information about purchases by the company and its affiliated purchasers during the quarter ended December 31, 2004 of equity securities that are registered by the company pursuant to Section 12 of the Exchange Act:
Issuer Purchases of Equity Securities
				(d)	
				Maximum Number	
			(c)	(or Approximate	
			Total Number of	Dollar Value) of	
	(a)		Shares (or Units)	Shares (or Units)	
	Total Number	(b)	Purchased as Part	that May Yet Be	
	of Shares (or	Average Price	of Publicly	Purchased Under	
	Units)	Paid per Share	Announced Plans or	the Plans or	
Period	Purchased (1)	(or Unit)	Programs (2)	Programs (3)	
10/01/04-		$	 	 	
10/31/04	 	 	 	 	
	 	 	 	 	
11/01/04-		$	 	 	
11/30/04	 	 	 	 	
	 	 	 	 	
12/01/04-		$	 	 	
12/31/04	 	 	 	 	
	 	 	 	 	
Total		$	 	 	
	 	 	 	 	
 (1)(2)(3) Required footnote disclosures	
Example of Disclosure for Stock-For-Stock Exercises under Item 703 of Regulation S-K
 
Item 2. Changes in securities, use of proceeds and issuer purchases of equity securities
	Total Number of	 	 	
Period	Shares Purchased	Average Price Paid	Per Share	
Jan. 1, 2005 to Jan. 31, 2005	-		-	
	 	 	 	
Feb. 1, 2005 to Feb. 28, 2005	21,780	$	6.25	
	 	 	 	
Mar. 1, 2005 to Mar. 31, 2005	-		-	
	 	 	 	
Total	21,780	$	6.25	
	 	 	 	
* The terms of the stock options granted under certain of our equity	
incentive plans allow employees to surrender shares of our common stock	
as payment towards the exercise price and tax withholding obligations in	
connection with the exercise of a stock option. In February 2005, one	
employee surrendered 21,780 shares, valued at $ 6.25 per share (equal to	
the closing price of our common stock on the date of such exercise), as	
payment for such obligations.	
		Maximum Number	
	Total Number of	(or Approximate	
	Shares Purchased	Dollar Value) of	
	as Part of Publicly	Shares that May Yet	
	Announced Plans	Be Purchased Under	
Period	or Programs	the Plans or	
		Programs	
Jan. 1, 2005 to Jan. 31, 2005	-	-	
	 	 	
Feb. 1, 2005 to Feb. 28, 2005	-	-	
	 	 	
Mar. 1, 2005 to Mar. 31, 2005	-	-	
	 	 	
Total	-	-	
	 	 	
* The terms of the stock options granted under certain of our equity	
incentive plans allow employees to surrender shares of our common stock	
as payment towards the exercise price and tax withholding obligations in	
connection with the exercise of a stock option. In February 2005, one	
employee surrendered 21,780 shares, valued at $ 6.25 per share (equal to	
the closing price of our common stock on the date of such exercise), as	
payment for such obligations.