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In 1985, Mr. Rosi drafted an incentive compensation plan
(the plan), applicable only to Messrs. Blazick and Richter, which
was approved by the board of directors on October 7, 1985. The
plan provided for the payment, after the close of the fiscal
year, of compensation in cash and/or promissory notes.
Pursuant to the terms of the plan, the first step is to
calculate the "Adjusted Industry Gross Margin". The adjusted
industry gross margin, or hypothetical gross profit, is the gross
profit petitioner would have made on its sales if its gross
profit margin had equaled the printing industry's average gross
profit margin (i.e., petitioner's sales x industry average gross
profit percentage = hypothetical gross profit). This
hypothetical gross profit is then compared to petitioner's actual
gross profit for the year. The amount by which petitioner's
actual gross profit exceeds the hypothetical gross profit
constitutes the incentive compensation pool. The plan allocates
the incentive compensation pool to Messrs. Blazick and Richter
"According to Stock Ownership" (i.e., 90 percent to Mr. Blazick
and 10 percent to Mr. Richter).
Under the plan, each allocation is reduced if certain
contingencies occur. Mr. Blazick's allocation is reduced by
inventory shortages in excess of $100,000 and by bad debts. Mr.
Richter's allocation is reduced by inventory spoilage in excess
of $100,000 and production rerun costs in excess of $100,000.
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