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the formula prescribed in the stock option agreement for deter-
mining the final purchase price for petitioner and instead agreed
on a final purchase price for petitioner of $2,045,520. After
November 1988, the Ruf family trust owned 100 percent of peti-
tioner's outstanding stock.6
At the time that the stock option agreement was exercised,
Stanislaus issued petitioner's former shareholders notes in the
total principal amount of $5,150,000 (original notes).7 The
original notes provided, inter alia, that Stanislaus was not to
allow petitioner to:
pay total compensation (including bonuses) or fees or
make loan repayments or other distributions to Jesse
Ruf or any affiliate thereof * * * that in the aggre-
gate exceed $125,000 ("Base Amount") plus 10% of the
first Five Hundred Thousand Dollars ($500,000) of net
profits of Neiman-Reed * * *, 15% of the next Five
Hundred Thousand Dollars ($500,000) of such net prof-
its, 20% of the next One Million Dollars ($1,000,000)
of such net profits, and 25% of the excess over Two
Million Dollars ($2,000,000) of such net profits, but
5(...continued)
as petitioner's former shareholders.
6 Although the parties stipulated that the Ruf family trust
owned 100 percent of petitioner's stock after November 1988, it
is unclear when the Ruf family trust acquired that stock. Both
parties refer to Mr. Ruf as the sole shareholder of petitioner
throughout the years at issue. We presume that this is because
he was in control of petitioner indirectly through the Ruf family
trust. Since the parties refer to Mr. Ruf as petitioner's sole
shareholder, we shall also refer to him herein as its sole
shareholder.
7 In addition, Stanislaus entered into a stock pledge agreement
and an indemnity agreement, petitioner and MFC entered into a
security agreement, and Mr. Ruf and his wife entered into a
guaranty agreement.
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