American Underwriters, Inc. - Page 11

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          It reported the following unappropriated retained earnings at the           
          beginning and end of each taxable year:                                     
                              Beginning      End                                      
               Taxable Year    of year         of year                                
             1985        $168,435            $165,535                                 
          1986                165,535        400,485                                  
             1987       400,485        (971,002)                                      
          1988           (971,002)     (6,858,975)                                    
               Petitioner reported negative taxable income on each of its             
          1985 through 1988 Federal income tax returns.  Petitioner also              
          reported the following "gross receipts" and "cost of goods sold":           
               Taxable Year   Gross receipts      Cost of goods                       
               1985           $307,524,610        $307,404,014                        
               1986           521,391,751         520,838,947                         
               1987           369,142,037         367,746,493                         
               1988           175,924,620         175,473,765                         
               On November 16, 1987, petitioner and the related entities              
          signed a settlement agreement with Bear Stearns, in which the               
          parties agreed to resolve all of their differences by                       
          Kenilworth's paying Bear Stearns a $2.5 million debt owed to Bear           
          Stearns.  Pursuant to this settlement agreement, all of the other           
          claimants paid or received nothing.                                         
               On April 29, 1988, Kenilworth filed a claim for arbitration            
          against Prudential Bache with the New York Stock Exchange, Inc.,            
          in which it alleged that Prudential Bache owed it over $3 million           
          as a result of transactions occurring in October 1987.                      
          Petitioner and the other related entities later joined the claim            
          on the side of Kenilworth, and Prudential Bache filed a                     





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