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Because of restricted voting rights associated with many of
the above shares, JC Investors controlled the board of directors
of petitioner. Also, after the LBO and consistent with
JC Investors’ practice, petitioner's management team and senior
employees were asked to and did remain with petitioner.
Further, consistent with JC Investors’ practice in acquiring
companies, Cruze, as key employee of petitioner, was requested to
enter into a covenant not to compete. Under the covenant not to
compete that Cruze entered into with petitioner, for an
additional $5 million that was paid to Cruze in 1989 upon closing
of the LBO, Cruze was obliged for a 3-year period of time from
the date of the LBO not to enter into any business contract that
would compete directly or indirectly with petitioner’s business.
JC Investors likely would not have agreed to the purchase of the
stock in petitioner if Cruze had not signed this covenant not to
compete.
On August 25, 1989, an additional $2,589,759 was paid to
Cruze to enable him to pay certain Federal income taxes that were
owed by petitioner and that related to years prior to the LBO
when petitioner had constituted an S corporation.
The following schedule reflects total funds received by
Cruze on August 25, 1989, in connection with the LBO:
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