H & A International Jewelry, Ltd. - Page 21

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          Mr. Galanti's reasoning is flawed.10  The "reasonable" salary               
          used for each title is based upon a full-time position.  It is              
          most unlikely that Mr. Haviv could have worked 160 hours per                
          week.                                                                       
               In addition, in considering whether a reasonable investor              
          would have approved of compensation to Mr. Haviv of over $600,000           
          per year, Mr. Galanti focused on Mr. and Mrs. Haviv's return on             
          their $500 investment since 1983.  That calculation resulted in             
          an annualized growth rate of 72 percent.  We recognize the                  
          caution with which such a ratio must be examined.11  Return on              
          equity is a much more accurate indicator of company performance.            
          (See our discussion, infra.)  As opposed to the 72 percent                  
          figure, petitioner's return on equity year by year from 1988 to             
          1992 was 35 percent, 21 percent, 16 percent, 36 percent, and -51            
          percent respectively.  Since a board makes its bonus decisions              
          from year to year, return on equity may also be examined from               
          year to year.  Thus, a strong return in 1 year does not guarantee           
          board approval of bonuses in the next year, especially if there             
          are financial reverses the second year.                                     



          10        Mr. Galanti believes that it would have been reasonable           
          to pay Mr. Haviv $1,377,632 in 1991 for a company that earned               
          $84,911 and $1,424,765 in 1992 for a company that lost $132,278.            
          11        For example, if Mr. and Mrs. Haviv had invested $1,000            
          in 1983 their annualized return on investment would have been 36            
          percent whereas a smaller $250 investment would have given them             
          an annualized return of 144 percent.                                        




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