Johann T. and Johanna Hess - Page 19

                                       - 19 -                                         
               Dear Mr. Heebink:                                                      
               The Actual Income reported for 1995 was probably                       
               overstated, based on additional costs incurred over                    
               amounts reserved on jobs reported as Sold/Shipped at                   
               the end of the year.  We have attempted to quantify                    
               what those impacts might have been based on an outlook                 
               as of November 11, 1995.  In addition, since the 1996                  
               forecast was based on 1995 results, that forecast was                  
               overly optimistic.                                                     
          HII’s financial statement for 1995 was not restated to reflect              
          the alleged understatement of reserves.18  HII’s income tax                 
          return for 1995 was not amended to reflect the alleged                      
          understatement.  HII had a substantial tax liability for its 1995           
          fiscal year.  HII reported taxable income of $5,990,541 and a               
          total tax of $2,042,501.  HII’s 1995 return was prepared by Mr.             
          Gaynor in or about November 13, 1995.  Any additional expenses              
          represented by the alleged reserves were deducted in later years.           
               The alleged understatement was not discovered by HII’s                 
          accountant, Gary Gaynor, in his appraisal of HII as of July 31,             
          1995, and even petitioners admit that the alleged understatement            


               18Petitioners allege that HII did not restate its financial            
          statement for 1995 because bonuses and profit sharing had been              
          paid to employees on the basis of the originally reported                   
          results, and management did not want to penalize employees and              
          destroy morale based on errors and misstatements by a few people.           
          Petitioners also allege that HII did not want to incur the                  
          expense of redoing its financial statements and audits.  However,           
          petitioners do not explain how HII’s employees would have been              
          affected by a restatement.  We are not satisfied that this factor           
          and the expense of redoing the financial statements and audits              
          fully explain HII’s failure to restate its financial statement              
          considering the extent of the alleged understatement of reserves            
          and the resulting overstatement of earnings.                                




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