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D. Agreement to Continue at 50 Percent the Percentage
of Net Housefile Mailing Income the Fundraising
Contract Required to be Retained in the Escrow
Account to Reimburse W&H
As indicated above, the Contract originally provided that,
after 2 years, the percentage of net housefile mailing income that
petitioner was required to retain in the Escrow Account be lowered
from 50 percent to 30 percent. In March and April 1986, Watson
proposed to petitioner that this percentage remain at 50 percent,
rather than be lowered, because of higher prospect mailing
expenses resulting from an increase in postal rates. In exchange
for petitioner’s agreement to this, W&H would reduce its creative
fee on housefile package mailings from $5,000 to $2,500 and cap
its mailing fee at $50,000 for any housefile mailing done in
excess of 500,000 letters. On April 26, 1986, petitioner’s board
of directors accepted Watson’s proposal.
E. April 1987 Addendum to the Contract
The certified public accounting firm that examined
petitioner’s annual financial statements issued a qualified
opinion, dated April 18, 1986, as to petitioner’s 1985 financial
statement. The certified public accounting firm elaborated on its
concerns in a management letter dated May 23, 1986, to the
executive committee of petitioner’s board of directors. This
management letter states, in pertinent part, as follows:
General Fund
1. Continued Existence of the Agency [petitioner].
Our gravest concern is the viability of the
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