R.U. Nutts

Steven L. Jager, C.P.A.

An Accountancy Corporation
15250 Ventura Boulevard, Suite 1100 * Sherman Oaks, CA 91403 * (818) 501-5797 Fax (818) 501-8560

June 4, 1997

R.U. Nutts
805 N. Sheik Street
Beverly Hills, CA 90210

RE: Engagement for set-up and maintenance of computerized accounting system,
and periodic financial reporting.

Dear Mr. Nutts:

Based on our prior discussions, and from our last meeting on May 31, I have prepared the enclosed
engagement letter for your review and signature. You will notice that in describing the services to be
provided, I have specified that "compiled" financial statements will be presented to you on an annual
basis, instead of the "audited" statements that you initially requested.

As you know, the "audit" is the highest level of service provided. The objective of the audit is for the
CPA to perform procedures which will enable him to provide reasonable assurance (the "opinion")
that the financial position and the results of operations in conformity with generally accepted accounting
principles applied on a consistent basis.

The next level of service is the "review". A review provides limited assurance that no material modifications
are required for the financial statements to conform with generally accepted accounting principles. It is
substantially less in scope than an audit and no opinion can be expressed.

Finally, a "compilation" is the basic level of service. A compilation involves presenting, in the form of
financial statements, information that is the representation of the management and/ or owners of the
financial entity. No assurance is provided, and no opinion is expressed.

To be sure, every client would desire the "benefits" that only an audit can provide. However, audits are
not necessarily the best value (they are always more expensive than reviews or compilations). In fact,
some of these benefits may only be illusory. Consequently, it is important to consider other factors
in the decision - especially in your particular situation.

Fee Considerations: As mentioned parenthetically above, audits can be very expensive because
a considerably greater amount of work must be done than when performing a review or compilation.
Moreover, a surcharge would have to be imposed over and above my standard hourly fees to
cover the additional costs and expertise brought to bear on this engagement. My estimate of the
total additional "surcharge" would be in the range of $6,000 to $10,000 annually.
Expected Use: It is important to consider who the reader/user of the financial statements will be
and "buy" accordingly. If your use is intended to be primarily internal, then clearly there is little reason
to have audited statements. On the other hand, if the statements will be consistently given to your
bank or to some other creditor, then let us consider a higher level. Most banks today will accept a
REVIEWED statement instead of an audit, and many will even accept a COMPILED personal
financial statement if accompanied by the personal tax return.

With regard to the federal or state taxing authorities, it will make no difference at all whether you
have audited, reviewed or compiled financial statements. There is no correlation between the
underlying accountant's report and the incidence of a tax examination, the ease with which a tax
examination is survived, and the results achieved.

Moreover, it is very important to note that by performing a financial audit of your personal books
and records, I would, of course, be required to do so in accordance with generally accepted
accounting principles, which for personal financial statements, are often quite different than
tax reporting principles.

In practical terms, you must look at the cost/benefit relationship in making this decision. My recom-
mendation is that we contract for a "compilation" of your personal "general ledger" as well as for
your corporation. It is certainly possible to "upgrade" to a "review", if your bank or some other creditor
requests it. Moreover, although I believe that a "compilation" is in your best interest, the ultimate
decision is yours.

Finally, the engagement letter enclosed calls for the monthly funding towards aggregate annual
fees of $450 per month. We have discussed that this type of arrangement does NOT mean a fixed
fee of any sort. All of my hourly fees are based on time charges at standard hourly rates plus out-of-
pocket costs. Periodically (at least every six months or more often), we will compare the calculated
time charges and costs to amounts paid or "funded", and we will settle the difference by way of an
additional cash payment then owed to me, or possibly, in a credit to you for the subsequent period.
Should you decide to contract for a "review", the monthly funding amount will be $600; for an "audit"
it will be "$1000.

In the meantime, my office has already begun the initial stages of creating your personal general
ledger on the Peachtree software system, according to the arrangements that we discussed on
May 31, in anticipation that we will go forward with the engagement as set forth in the
engagement letter.

As always, should you have any questions, please do not hesitate to call me.

Best personal regards,

STEVEN L. JAGER, CPA
AN ACCOUNTANCY CORPORATION

SLJ/lmw
enclosure

cc: Eric Shark, Esq.

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