- 21 -
adjustment resulted in a significant understatement of the value
that Mr. Heebink derived in his valuation analysis.
Nevertheless, we believe Mr. Heebink’s valuation analysis is
entitled to some consideration. Although his valuation analysis
should not have included the adjustment for the alleged
understatement of reserves, that analysis provides some
indication of the fair market value of HII stock. Mr. Heebink’s
analysis was thorough, and his investigation leading up to that
analysis included a site visit and interviews with HII personnel.
Mr. Heebink prepared additional reports to supplement his
principal report.
Further, Mr. Heebink’s valuation analysis, unlike Mr.
Engstrom’s analysis, gave consideration to an income-based
method, the discounted cashflow method. Generally, in valuing
the shares of an operating company such as HII, primary
consideration should be given to earnings. See Rev. Rul. 59-60,
21(...continued)
HII’s 1995 financial statement had been restated to correct these
errors and to account for the understatement of reserves, HII’s
pretax income would have been reduced by approximately $3.5
million. Petitioners fail to convince us that there was a
premature booking of income or that the premature booking of
income was known or reasonably foreseeable on the valuation date.
Further, it does not appear that these alleged errors were
identified until trial, and Mr. Heebink did not make any
adjustments with respect to any premature booking of income in
his reports. These alleged errors were not discovered by Mr.
Gaynor. HII’s financial statement for 1995 was not restated, and
its income tax return for 1995 was not amended to reflect these
errors.
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