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acquisition in exchange for control of Wehr--which petitioner
opposed. Throughout the discussions with the investment banks,
petitioner informed the bankers of the pending lawsuit because of
its impact on cash-flows; the lawsuit also appeared in Wehr's
financial reports. Petitioner believed Wehr would receive between
$2 million and $10 million from the lawsuit against Xerox.
Ultimately, petitioner proposed that Mr. Manegold finance the
deal as part of a leveraged buy out (in which petitioner would
pledge his shares and use the cash-flows from the corporation to
repay the debt and interest). In evaluating the financing
possibilities, petitioner analyzed Wehr's cash-flow potential, and
included the lawsuit against Xerox in that analysis. Mr. Manegold
based the $100 million asking price on a multiple of earnings
analysis.
On December 30, 1986, petitioner and Mr. Manegold reached an
agreement for the acquisition of Wehr. Petitioner organized two S
corporations (hereinafter referred together as the S corporations),
Venturedyne, Ltd. (Venturedyne), and Carnes Company, Inc. (Carnes),
for the purpose of acquiring Wehr. Pursuant to the acquisition
agreement, Venturedyne purchased all the assets and assumed all the
liabilities of Wehr, other than those related to the Carnes
division of Wehr. All the assets and liabilities of the Carnes
division of Wehr were acquired and assumed by Carnes. Through
1992, petitioner owned 97.624190 percent of each of the S
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