Case 12-08 Going, Going, Gone

First Class Telecommunications Inc. ("FCT" or "the Company") is a leading regional wireless telecommunications service provider in the United States serving approximately 3 million wireless customers in markets in small cities and rural areas covering parts of seven states in the Midwest and Northeast. In addition to providing wireless service to subscribers (i.e., customers), the Company also sells cell phones. The Company has two operating segments: retail (selling of cell phones) and services (providing wireless service). See Appendix A for financial highlights and excerpts from a draft of FCT's 2012 Form 10-K.

In addition, the entity has debt totaling $200 million. The debt has financial covenants as well as a material adverse change clause, which if triggered may result in the lender demanding full payment of all outstanding amounts. See Appendix B-1 for the audit team's debt compliance memo and Appendix B-2 for management's calculation of the actual covenant ratio calculation as of December 31, 2012, as well as the projected covenant ratio calculations for each of the quarter-ends in FY2013.

Finally, before the annual assessment of goodwill performed at year-end, FCT had goodwill of $230 million recorded on its books. As of the testing date, the team is not aware of any events or circumstances that would have resulted in an impairment of goodwill since the December 31, 2011, assessment. During the annual goodwill impairment analysis as of December 31, 2012, the Company did not elect the option of performing a Step 0 assessment of goodwill under ASC 350-20-35, but rather elected to start with the Step 1 approach discussed in ASC 350-20-35-4. The Company determined both segments passed the first step of the goodwill impairment test. Refer to Appendix C for excerpts of the valuation analysis provided to the audit team directly from management's third-party valuation firm, VALU.

Required:

1. Read and consider the information in Appendixes A through C. What events or conditions may cause substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time?

2. Assuming the events or conditions identified in Question 1 cause the audit team to believe substantial doubt exists about FCT's ability to continue as a going concern for a reasonable period of time, what are the next steps the audit team needs to perform?

3. Upon completing the steps in (2) above, the engagement team obtained additional information from management included in Appendix D. Read and consider this information and determine what type of audit evidence the audit team may consider obtaining, or what type of audit procedures it may perform, to confirm or dispel whether there is substantial doubt about FCT's ability to continue as a going concern for a reasonable period of time?

4. After considering identified conditions and events and management's plans, assume that the audit team concluded that as of December 31, 2012, there is not substantial doubt about FCT's ability to continue as a going concern for a reasonable period. What are theaudit team's responsibilities regarding its consideration of the Company's ability to continue as a going concern during its review of the Company's interim financial information for the three months ended March 31, 2013?

Case 12-8: Going, Going, Gone Page 1 APPENDIX A FINANCIAL HIGHLIGHTS FOR FIRST CLASS TELECOMMUNICATIONS INC. Balance Sheet as of 12/31/12 Cash and short-term investments Net accounts receivable Inventories Other current assets Total current assets Net property, plant, and equipment Long-term investments Intangible assets Goodwill Investment in joint venture Other assets Total long-term assets 12/31/2012 in 000's $240,000 250,000 100,000 70,000 660,000 430,000 150,000 100,000 230,000 7,000 23,000 940,000 Total assets $1,600,000 Accounts payable Income taxes payable Short-term debt Other current liabilities Total current liabilities Other long-term liabilities Total long-term liabilities $190,000 100,000 200,000 150,000 640,000 - Total liabilities 640,000 Preferred stock Common equity Total shareholders' equity Total liabilities and shareholders' equity 960,000 960,000 $1,600,000 Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 12-8: Going, Going, Gone Income Statement for the Y/E Revenue Operating expenses Operating income Less: depreciation and amortization Earnings before interest and taxes Less: loss on investment in joint venture Less: interest expense Earnings before taxes Less: income taxes Net income Page 2 12/31/12 in 000's $1,605,000 1,450,000 155,000 34,000 121,000 3,000 16,000 102,000 40,800 $61,200 Other Information In May 2010, the Company formed a 50-50 joint venture, Randall Development LLC (the JV), with TPAC, the Company's JV partner (collectively, the JV Partners), with each party contributing $14 million to develop and market a specialty cell phone. TPAC is a public enterprise. Because of a downturn in the JV's operations, during 2012, the Company recorded an impairment of 50 percent of its original investment in the JV. FIRST CLASS TELECOMMUNICATIONS INC. FORM 10-K NOTES EXCERPT NOTE: INCLUDED BELOW IS AN EXCERPT FROM ITEM 1A RISK FACTORS OF FIRST CLASS COMMUNICATIONS INC.'S DRAFT FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2012. Item 1A. Risk Factors Investors in our securities should carefully consider the risks described below and other information included in this report. Our business, financial condition, or consolidated results of operations could be materially adversely affected by any of these risks, and the trading price of our securities could decline because of any of these risks. Investors in our securities could lose all or part of their investment as a result of any such decline. This report also contains forward-looking statements that involve risks and uncertainties; see \"Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995.\" Our actual results could Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 12-8: Going, Going, Gone Page 3 differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks described below: Risks Relating to Our Business and Our Industry The prolonged effects of the recession in the United States and prolonged downturn in the economy, including the effects on unemployment, consumer confidence, consumer debt levels, consumer spending, and other macroeconomic conditions, which could affect the demand for the products and services we provide and our customers' ability to pay for them. The effects of vigorous competition in our markets, which may make it difficult for us to attract and retain customers and to grow our customer base and revenue, which may increase churn, which could reduce our revenue and increase our costs. The fact that many of our competitors are larger than we are, have greater financial resources than we do, are less leveraged than we are, have more extensive coverage areas than we do, and may offer less expensive and more technologically advanced products and services than we do. Our ability to gain access to the latest technology handsets in a time frame and at a cost similar to our competitors. The effects of adding new subscribers (i.e., customers) with lower credit ratings. Market prices for the products and services we offer may decline in the future. Changes and developments in technology, including our ability to upgrade our networks to remain competitive and our ability to anticipate and react to frequent and significant technological changes, which may render certain technologies used by us obsolete. The effects of consolidation in the telecommunications industry. The effects of governmental regulation of the telecommunications industry. Our ability to attract and retain qualified personnel. We heavily rely on two significant suppliers of cell phones, Phone Builder Inc. and Electronics Today Inc. The current economic conditions could negatively affect these suppliers, which could negatively affect our ability to market, distribute, and sell our products and services. The supplier contracts with Phone Builder Inc. and Electronics Today Inc. are set to expire on May 31, 2013, and July 1, 2014, respectively, which may affect our ability to obtain products timely and at reasonable prices. The effects of network disruptions and system failures. The results of litigation filed or which may be filed against us or our vendors, including litigation relating to wireless billing, using wireless telephones while operating an automobile, and litigation relating to infringement of patents. Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 12-8: Going, Going, Gone Page 4 Risks Related to Our Capital Structure Our substantial debt obligations, including restrictive covenants, which place limitations on how we conduct business. The potential occurrence of an event that triggers the material adverse change clause in the debt agreement. Our ability to generate cash and the availability and cost of additional capital to fund our operations and our significant planned capital expenditures. Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 12-8: Going, Going, Gone Page 1 APPENDIX B-1 Memo Date: December 7, 2012 To: Audit Files From: Audit Team Subject: Debt Covenants The purpose of this memo is to document our consideration and assessment of the financial and other covenants associated with First Class Telecommunications Inc.'s (\"the Company's\") Revolving Debt Agreement (the \"Agreement\") with First National Bank, set to expire on December 31, 2013. Upon reading Article 4 of the Agreement, the audit team has classified the relevant covenants into two primary categories: financial and other. See below for a description of each significant covenant. Financial 4.26 Ratio Calculation The Company must comply with the maximum total leverage ratio noted below: Maximum Total Leverage Ratio Calculation The ratio of (x) total consolidated debt at each quarter-end to (y) total consolidated EBITDA at each quarter-end must not equal or exceed 4.50. Note that \"total consolidated debt\" is defined as the aggregate amount of indebtedness of the borrower and its consolidated subsidiaries as of such date determined on a consolidated basis in accordance with U.S. GAAP. \"Total consolidated EBITDA\" is defined as consolidated revenue, less consolidated operating expenses. Other 4.05 Taxes The Company and its subsidiaries are required to pay, before delinquency, all material taxes, assessments, and governmental levies, except those contested in good faith. 4.06 Material Adverse Change Clause The Agreement includes a material adverse change clause in which, if it is determined this has occurred, the lender may require the Company to pay the debt immediately in full. The definition of a material adverse change in the Agreement is noted as \"(1) a material adverse change on the business, assets, operations, properties, financial condition, or liabilities of holdings, the borrower and subsidiaries taken as a whole (including loss of assets or impairments); (2) a material adverse change on the ability of the borrower or the loan parties (taken as a whole) to perform their respective obligations under any loan document to which the borrower or any of the loan parties is a party; or (3) a material adverse change on the rights of and remedies of the lenders under any loan document.\" 4.07 Corporate Existence The Company shall do or cause to be done all things necessary to preserve and keep in full force its corporate existence and the rights of the company. Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 12-8: Going, Going, Gone Appendix B-2 Page 1 In 000's, except ratio Actual 12/31/2012 Maximum Total Leverage Ratio Calculation Projected 3/31/2013 6/30/2013 9/30/2013 12/31/2013 Total consolidated debt Divided by: total consolidated EBITDA Equals: total leverage ratio 200,000 p. 3 116,750 p. 2 1.72 250,000 p. 3 90,000 p. 2 2.78 260,000 p. 3 60,000 p. 2 4.34 275,000 p. 3 65,000 p. 2 4.24 300,000 p. 3 70,000 p. 2 4.29 In compliance? YES YES YES YES YES Requirement: Total leverage ratio shall not equal or exceed 4.50 at any quarter-end. See Appendix B-1 for further details. 2010 Copyright Deloitte Development LLC All Rights Reserved. Case 12-8: Going, Going, Gone Appendix B-2 Page 2 In 000's Revenue Operating expenses FYE 12/31/10 Reported FYE 12/31/11 FYE 12/31/12 $1,225,000 $1,410,000 $1,605,000 $325,000 $375,000 1,245,000 1,315,000 1,450,000 361,750 Quarterly Results FYE 12/31/12 3/31/2012 6/30/2012 9/30/2012 12/31/2012 FYE 12/31/2012 $425,000 $480,000 $1,605,000 362,250 362,750 363,250 1,450,000 155,000 Operating income (loss) EBITDA (20,000) 95,000 155,000 (36,750) 12,750 62,250 116,750 Less: depreciation and amortization 29,125 31,500 34,000 7,750 8,250 8,750 9,250 Earnings (loss) before interest and taxes EBIT Income/(loss) on investment in JV Interest expense (49,125) 2,000 12,000 63,500 4,000 14,000 121,000 (3,000) 16,000 (44,500) 1,000 3,250 4,500 1,200 3,750 53,500 900 4,250 107,500 (6,100) 4,750 121,000 ($3,000) 16,000 Earnings (loss) before taxes Provision (benefit) for income taxes (59,125) - 53,500 19,800 102,000 38,000 (46,750) (18,700) 1,950 780 50,150 20,060 96,650 35,860 102,000 38,000 Net income (loss) (59,125) 33,700 64,000 (28,050) 1,170 30,090 60,790 64,000 p. 1 34,000 Quarterly Projections Year 1 Debt Covenant Analysis 3/31/2013 Revenue Operating expenses Operating income EBITDA Less: depreciation and amortization 6/30/2013 9/30/2013 12/31/2013 Total Year 1 $400,000 $410,000 $465,000 $480,000 $1,755,000 310,000 350,000 400,000 410,000 1,470,000 285,000 90,000 p. 1 60,000 p. 1 65,000 p. 1 70,000 p. 1 6,000 7,500 10,000 12,250 35,750 Earnings before interest and taxes EBIT Income/(loss) on investment in JV Interest expense 84,000 400 3,750 52,500 500 4,250 55,000 350 4,750 57,750 450 5,250 249,250 $1,700 18,000 Earnings before taxes - EBT Provision for income taxes 80,650 32,260 48,750 19,500 50,600 20,240 52,950 21,180 232,950 93,180 Net income 48,390 29,250 30,360 31,770 139,770 2010 Copyright Deloitte Development LLC All Rights Reserved. Case 12-8 : Going, Going Gone Appendix B-2 Page 3 In 000's Actual 12/31/2012 Consolidated Balance Sheet Projected 3/31/2013 6/30/2013 9/30/2013 12/31/2013 ASSETS Cash and short-term investments Net accounts receivable Inventories Other current assets Total current assets Net PP&E Long-term investments Intangible assets Goodwill Investment in joint venture Other assets Total long-term assets Total assets LIABILITIES & SHAREHOLDERS' EQUITY Accounts payable Income taxes payable Short-term debt Other current liabilities Total current liabilities Other long-term liabilities Total long-term liabilities $240,000 250,000 100,000 70,000 660,000 $260,000 300,000 150,000 80,000 790,000 $200,000 350,000 250,000 85,000 885,000 $185,000 275,000 300,000 90,000 850,000 $170,000 400,000 340,000 100,000 1,010,000 430,000 150,000 100,000 230,000 7,000 23,000 940,000 450,000 150,000 100,000 230,000 7,000 30,000 967,000 450,000 150,000 150,000 230,000 7,000 25,000 1,012,000 475,000 150,000 150,000 230,000 7,000 25,000 1,037,000 500,000 200,000 150,000 230,000 7,000 20,000 1,107,000 1,600,000 1,757,000 1,897,000 1,887,000 2,117,000 $190,000 100,000 200,000 p. 1 150,000 640,000 $206,850 125,000 250,000 p. 1 160,000 741,850 $272,900 150,000 260,000 p. 1 170,000 852,900 $172,750 175,000 275,000 p. 1 190,000 812,750 $301,250 200,000 300,000 p. 1 210,000 1,011,250 - - - - - Total liabilities 640,000 741,850 852,900 812,750 1,011,250 Preferred stock Common equity Total shareholders' equity 960,000 960,000 1,008,390 1,008,390 1,037,640 1,037,640 1,068,000 1,068,000 1,099,770 1,099,770 1,600,000 $1,750,240 $1,890,540 $1,880,750 $2,111,020 Total liabilities and shareholders' equity 2010 Copyright Deloitte Development LLC All Rights Reserved. Case 12-8: Going, Going, Gone Appendix C Page 1 Note: Since this is only an excerpt of the third-party valuation analysis, the market approach method and related assumptions have been omitted because they are not pertinent to the case study. Exhibit 1 First Class Communications Inc. December 31, 2012, ASC 350 Goodwill Impairment Analysis Summary Step 1 Test $US in thousands Reporting Unit Retail Service Market Approach $742,500 550,000 Income Approach $930,000 p.2 500,000 p.3 Total $1,292,500 $1,430,000 Weighting 1/2 each 1/2 each Fair Value of Equity $840,000 530,000 $1,370,000 Book Value of Equity Step 1 Passed? $730,000 p.4 YES 230,000 p.4 YES $960,000 2010 Copyright Deloitte Development LLC All Rights Reserved. Case 12-8: Going, Going, Gone Appendix C Page 1 Note: For the purposes of this case study, assume that the assumptions in this analysis were tested by the audit team's fair value specialists and no issues were noted. Exhibit 3 First Class Communications Inc.: Retail Reporting Unit December 31, 2012 Income Approach: Discounted Cash Flow Method $US in thousands Revenue Revenue growth Operating expenses Reported FYE FYE FYE 12/31/10 12/31/11 12/31/12 $1,125,000 $1,160,000 $1,200,000 3.1% 3.4% 1,045,000 1,075,000 1,090,000 80,000 7.1% 85,000 6.3% 7.3% 110,000 29.4% 9.2% Less: depreciation and amortization 28,125 29,000 30,000 Earnings before interest and taxes (EBIT) 51,875 56,000 80,000 Provision for income taxes 20,750 22,400 Debt-free net income Debt-free net income growth Debt-free net margin 31,125 Operating income (EBITDA) Operating income growth Operating margin 1,200,000 1,225,000 1,260,000 1,260,000 110,000 0.0% 8.8% 140,000 27.3% 10.8% 200,000 42.9% 14.3% 175,000 -12.5% 12.5% 240,000 37.1% 16.0% 240,000 31,250 32,500 35,000 35,000 37,500 37,500 78,750 107,500 165,000 140,000 202,500 202,500 32,000 31,500 43,000 66,000 56,000 81,000 81,000 33,600 8.0% 2.9% 48,000 42.9% 4.0% 47,250 -1.6% 3.8% 64,500 36.5% 5.0% 99,000 53.5% 7.1% 84,000 -15.2% 6.0% 121,500 44.6% 8.1% 121,500 31,250 (25,000) (5,000) 32,500 (25,000) (5,000) 35,000 (20,000) (10,000) 35,000 (25,000) - 37,500 (37,500) (10,000) 37,500 (37,500) (10,000) $48,500 $67,000 $104,000 $94,000 $111,500 0.9449 0.8437 0.7533 0.6726 0.6005 $45,828 $56,528 $78,343 $63,224 $66,956 29,000 (25,000) (4,000) 30,000 (30,000) (5,000) Free cash flow to the firm $25,250 $33,600 $43,000 Present value factor (mid-year convention) Present value of discrete cash flows Less: interest-bearing debt Normalized Terminal $1,500,000 1,160,000 28,125 (30,000) (4,000) Business enterprise value Year 1 Year 2 Year 3 Year 4 Year 5 $1,250,000 $1,300,000 $1,400,000 $1,400,000 $1,500,000 4.2% 4.0% 7.7% 0.0% 7.1% 1,140,000 Cash flow adjustments: add/(deduct) Plus: depreciation and amortization Less: capital expenditures Less: incremental working capital Total present value of discrete cash flows Present value of terminal value Entity Projections Two-Year CAGR* 3.3% $310,879 766,270 17.3% 24.2% 30.5% Capitalization multiple Terminal value 16.0% 8.1% 111,500 $114,845 11.1111x $1,276,054 $1,077,149 150,000 p.4 Equity value $927,149 Equity value (rounded) $930,000 p.1 Assumptions: Discount rate Depreciation and amortization rate Incremental working capital rate Long-term growth rate Corporate income tax rate 12.0% 2.5% 10.0% 3.0% 40.0% * Two-year CAGR: Compound annual growth rate of key financial metrics 2010 Copyright Deloitte Development LLC All Rights Reserved. Case 12-8: Going, Going, Gone Appendix C Page 1 Note: For the purposes of this case study, assume that the assumptions in this analysis were tested by the audit team's fair value specialists and no issues were noted. Exhibit 4 First Class Communications Inc.: Service Reporting Unit December 31, 2012 Income Approach: Discounted Cash Flow Method $US in thousands Revenue Revenue growth Operating expenses Operating income (EBITDA) Operating income growth Operating margin Less: depreciation and amortization Earnings before interest and taxes (EBIT) Provision for income taxes Debt-free net income Debt-free net income growth Debt-free net margin Cash flow adjustments: add/(deduct) Plus: depreciation and amortization Less: capital expenditures Less: incremental working capital Free cash flow to the firm FYE 12/31/10 $100,000 Reported FYE 12/31/11 $250,000 150.0% FYE 12/31/12 $405,000 62.0% 200,000 240,000 350,000 -100.0% 10,000 90.0% 4.0% 55,000 450.0% 13.6% 1,000 2,500 4,050 7,500 50,950 3,000 Year 1 $450,000 11.1% Year 2 $500,000 11.1% Year 3 $550,000 10.0% Year 4 $600,000 9.1% Year 5 $640,000 6.7% 400,000 440,000 475,000 500,000 525,000 525,000 50,000 -9.1% 11.1% 60,000 20.0% 12.0% 75,000 25.0% 13.6% 100,000 33.3% 16.7% 115,000 15.0% 18.0% 115,000 4,500 5,000 5,500 6,000 6,400 6,400 45,500 55,000 69,500 94,000 108,600 108,600 20,380 18,200 22,000 27,800 37,600 43,440 43,440 4,500 -104.5% 1.8% 30,570 579.3% 7.5% 27,300 -10.7% 6.1% 33,000 20.9% 6.6% 41,700 26.4% 7.6% 56,400 35.3% 9.4% 65,160 15.5% 10.2% 65,160 1,000 (5,000) (400) 2,500 (7,500) (15,000) 4,050 (5,000) (15,500) 4,500 (5,000) (4,500) 5,000 (5,000) (5,000) 5,500 (5,000) (5,000) 6,000 (7,500) (5,000) 6,400 (6,400) (4,000) 6,400 (6,400) (4,000) ($105,400) ($15,500) $14,120 (100,000) (101,000) (101,000) Present value factor (mid-year convention) Present value of discrete cash flows Total present value of discrete cash flows Present value of terminal value $139,517 407,787 Business enterprise value $547,304 Less: interest-bearing debt Entity Projections Two-Year CAGR* 101.2% 50,000 p.4 Equity value $497,304 Equity value (rounded) $500,000 p.1 NM NM NM $22,300 $28,000 $37,200 $49,900 $61,160 0.9407 0.8325 0.7367 0.6520 0.5770 $20,978 $23,310 $27,405 $32,535 $35,289 Normalized Terminal $640,000 Capitalization multiple Terminal value Assumptions: Discount rate Depreciation and amortization rate Incremental working capital rate Long-term growth rate Corporate income tax rate 18.0% 10.2% $61,160 $63,606 11.1111x $706,737 13.0% 1.0% 10.0% 4.0% 40.0% * Two-year CAGR: Compound annual growth rate of key financial metrics 2010 Copyright Deloitte Development LLC All Rights Reserved. Case 12-8: Going, Going, Gone Appendix C Page 1 Exhibit 7 First Class Communications Inc. Reporting Unit Balance Sheets $US in thousands ASSETS Cash and short-term investments Net accounts receivable Inventories Other current assets Total current assets Net PP&E Long-term investments Intangible assets Goodwill Other assets Total long-term assets Total assets LIABILITIES & SHAREHOLDERS' EQUITY Accounts payable Income taxes payable Short-term debt Other current liabilities Total current liabilities Other long-term liabilities Total long-term liabilities Retail Balance Sheets as of 12/31/12 Service Total $140,000 150,000 100,000 40,000 430,000 $100,000 100,000 30,000 230,000 $240,000 250,000 100,000 70,000 660,000 400,000 100,000 70,000 180,000 20,000 770,000 30,000 50,000 30,000 50,000 10,000 170,000 $1,200,000 $400,000 $140,000 80,000 150,000 100,000 470,000 $50,000 20,000 50,000 50,000 170,000 p.2 - - Common Size Service Total 11.7% 12.5% 8.3% 3.3% 35.8% 25.0% 25.0% 0.0% 7.5% 57.5% 15.0% 15.6% 6.3% 4.4% 41.3% 33.3% 8.3% 5.8% 15.0% 1.7% 64.2% 7.5% 12.5% 7.5% 12.5% 2.5% 42.5% 26.9% 9.4% 6.3% 14.4% 1.9% 58.8% $1,600,000 100.0% 100.0% 100.0% $190,000 100,000 200,000 150,000 640,000 11.7% 6.7% 12.5% 8.3% 39.2% 12.5% 5.0% 12.5% 12.5% 42.5% 11.9% 6.3% 12.5% 9.4% 40.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 430,000 150,000 A 100,000 230,000 30,000 940,000 p.3 Retail - Total liabilities 470,000 170,000 640,000 39.2% 42.5% 40.0% Preferred stock Common equity Total shareholders' equity 730,000 730,000 230,000 230,000 960,000 960,000 0.0% 60.8% 60.8% 0.0% 57.5% 57.5% 0.0% 60.0% 60.0% $1,600,000 100.0% 100.0% 100.0% Total liabilities and shareholders' equity $1,200,000 A p.1 p.1 $400,000 This balance includes the JV balance of $14,154. 2010 Copyright Deloitte Development LLC All Rights Reserved. Case 12-8: Going, Going, Gone Page 1 APPENDIX D Management's Responses to Conditions Identified When management originally negotiated its credit facility with First National Bank (FNB), it selected that facility over numerous competing offers. A competing lender, Second National Bank (SNB), maintained close contact with management for two to three years and would periodically offer unsolicited supplemental lines of credit. Although management never accepted these offers and eventually lost contact with the SNB representative, it is confident that the relationship can be re-established and a new credit facility negotiated. Management has reached out to SNB as the first step in re-establishing a relationship. Management is also attempting to renew its agreement with FNB. If management does not renew the Company's agreement with FNB, management is nevertheless confident that it can negotiate a new agreement with SNB. FCT does not believe it will be in default of its debt covenants because (1) management expects to be in compliance with the maximum total leverage ratio as defined in the Revolving Debt Agreement (the \"Agreement\") up until the time the Agreement with FNB expires on December 31, 2013, and (2) the situations that may trigger the material adverse change clause have not occurred historically. See Appendix B-2 for the expected maximum total leverage ratios at each interim period in 2013. If actual results are not in line with its forecasts, management plans to meet targeted forecasts and not default on its loan covenants by doing one or more of the following (1) raise retail prices of its cell phones by 5-10 percent, (2) reduce its workforce by 30 percent, or (3) reduce key executive compensation by 2 percent. Management is currently in negotiations with one of the existing suppliers and one replacement supplier. Although an agreement has not been reached, management believes the negotiations are close to final and is confident the Company will have new supplier contracts before the expiration of the two existing contracts. 2010 Copyright Deloitte Development LLC All Rights Reserved