UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
 
FORM 10-Q
_________________________
 
 
ý                                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2009
 
OR
 
 
¨                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to _________
 
Commission File No.: 1-33640
 
AMERICAN INTERNATIONAL INDUSTRIES, INC.
 
(Exact Name Of Registrant As Specified In Its Charter)
 
Nevada
88-0326480
(State of Incorporation)
(I.R.S. Employer Identification No.)
 
 
601 Cien Street, Suite 235, Kemah, TX
77565-3077
(Address of Principal Executive Offices)
(ZIP Code)
 
 Registrant's Telephone Number, Including Area Code: (281) 334-9479
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨
Accelerated filer ¨ 
 
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
  
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
 

At May 8, 2009, the Registrant had 8,503,615 shares of common stock outstanding.

TABLE OF CONTENTS
 
Item
Description
Page
 
PART I - FINANCIAL INFORMATION
  
 
    
ITEM 1.
3
ITEM 2.
24
ITEM 3.
27
ITEM 4.
27
 
    
 
PART II - OTHER INFORMATION
  
 
    
ITEM 1.
28
ITEM 1A.
28
ITEM 2.
28
ITEM 3.
28
ITEM 4.
28
ITEM 5.
28
ITEM 6.
28
 
 
2
PART I - FINANCIAL INFORMATION
 
 
ITEM 1. FINANCIAL STATEMENTS
 
Consolidated Financial Statements
  
4
5
6
8
   
 
 
 
 
 
 
 
3
Consolidated Balance Sheets
(Unaudited)
  
   
March 31, 2009
    
December 31, 2008
  
Assets
            
Current assets:
            
   Cash and cash equivalents
  
$
1,912,918
    
$
3,114,575
  
   Certificate of deposit
    
4,015,000
      
4,315,000
  
   Trading securities
    
636,872
      
718,442
  
   Accounts receivable, less allowance for doubtful accounts
    
 
         
     of $138,217
    
4,603,318
      
4,956,941
  
   Current portion of notes receivable
    
4,667,737
      
4,392,211
  
   Accounts and notes receivable from related parties
    
339,806
      
98,606
  
   Inventories
    
4,809,556
      
3,889,052
  
   Real estate held for sale
    
2,449,066
      
2,449,066
  
   Deposits for pipe inventory purchases     1,569,644       2,221,932  
   Prepaid expenses and other current assets
    
156,036
      
205,096
  
     Total current assets
    
25,159,953
      
26,360,921
  
  
                
Long-term notes receivable, less current portion
    
86,690
      
95,522
  
Property and equipment, net of accumulated depreciation and amortization
    
7,700,201
      
7,769,833
  
Goodwill
    
674,539
      
674,539
  
Intangible assets, net of amortization
    
691,231
      
717,817
  
Other assets
     169,550       359,312  
       Total assets
  
$
34,482,164
    
$
35,977,944
  
Liabilities and Stockholders' Equity
                
Current liabilities:
                
   Accounts payable and accrued expenses
  
$
2,539,831
    
$
2,395,721
  
   Short-term notes payable
    
131,287
      
1,213,332
  
   Current installments of long-term capital lease obligations     74,138       71,680  
   Current installments of long-term debt     729,022       4,484,161  
     Total current liabilities
    
3,474,278
      
8,164,894
  
                 
Long-term debt, less current installments
    
13,210,772
      
9,653,598
  
Long-term capital lease obligations, less current installments      147,319       166,762  
Minority interest
     1,935,804       2,085,573  
     Total liabilities
    
18,768,173
      
20,070,827
  
                 
Commitments and contingencies      -        -  
                 
Stockholders' equity:
                
   Preferred stock, $0.001 par value, 1,000,000 authorized: none issued
     -        -  
   Common stock, $0.001 par value, 50,000,000 authorized: 
                
       8,763,771 and 8,738,771 shares issued, respectively
                
       8,668,429 and 8,676,461 shares outstanding, respectively
    
8,668
      
8,676
  
   Additional paid-in capital
    
33,105,008
      
33,063,750
  
   Accumulated deficit
    
(17,104,897
) 
    
(16,911,758
) 
   Less treasury stock, at cost
               
       95,342 and 62,310 shares, respectively
    
(294,788
) 
    
(253,551
) 
     Total stockholders' equity
    
15,713,991
      
15,907,117
  
     Total liabilities and stockholders' equity
  
 $
34,482,164
    
$
35,977,944
  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended March 31,
   
2009
    
2008
  
             
Revenues
  
$
6,195,014
    
$
3,510,905
  
Costs and expenses:
                
   Cost of sales
    
3,994,002
      
2,124,749
  
   Selling, general and administrative
    
2,653,086
      
2,813,000
  
     Total operating expenses
    
6,647,088
      
4,937,749
  
                 
Operating loss
    
(452,074
)
    
(1,426,844
)
  
                
Other income (expenses):
                
   Interest and dividend income
    
131,438
      
176,450
  
   Realized gains (losses) on the sale of trading securities
    
(82,941
)
    
44,573
  
   Unrealized gains (losses) on trading securities
    
96,815
      
(1,376,539
)
   Interest expense
    
(218,608
)
    
(113,030
)
   Texas Emissions Reduction Plan Grant
    
-
      
57,589
  
   Other income
    
195,146
      
21,438
  
     Total other income (expense)
    
121,850
      
(1,189,519
 ) 
  
                
     Net loss before income tax
    
(330,224
)
    
(2,616,363
 ) 
     Income tax expense
    
12,684
 
    
14,132
  
     Net loss from operations before minority interest
    
(342,908
)
    
(2,630,495
 ) 
     Minority interest
    
149,769
      
248,242
  
     Net loss from continuing operations
  
$
(193,139
)
  
$
(2,382,253
 ) 
     Net loss from discontinued operations, net of taxes    
 -
      
  (798,559
 ) 
Net loss
     $
(193,139
)
     $
(3,180,812
 ) 
  
                
Net loss per common share - basic and diluted:                 
  Continuing operations
   $ 
  (0.02
 )    $ 
  (0.33
 ) 
  Discontinued operations
  
$
-
 
  
$
(0.11
 ) 
Total
   $ 
(0.02
 )    $ 
  (0.45
 ) 
 
                
Weighted average common shares - basic and diluted
    
8,689,074
      
7,112,258
  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Consolidated Statements of Cash Flows
(Unaudited)
 
    Three Months Ended March 31,
   
2009
    
2008
  
Cash flows from operating activities:
                
   Net loss
  
$
(193,139
)
  
$
(3,180,812
 ) 
   Net loss from discontinued operations      -       (798,559 ) 
   Net loss from continuing operations      (193,139 )     (2,382,253 ) 
   Adjustments to reconcile net loss from continuing operations to net cash provided (used in) operating activities from continuing operations:
                
       Depreciation and amortization
    
293,557
      
115,722
  
       Share-based compensation
    
41,250
      
139,833
  
       Realized (gains) losses on the sale of trading securities
    
82,941
      
(44,573
)
       Unrealized (gains) losses on trading securities
    
(96,815
)
    
1,376,539
  
       Texas Emissions Reduction Plan Grant
    
-
 
    
  (57,589
 )
       Minority interest in net loss of consolidated subsidiary
    
(149,769
)
    
(483,442
)
       Change in operating assets and liabilities:
                
       Accounts receivable
    
353,624
      
1,288,312
 
       Trading securities
    
95,443
 
    
(225,479
 ) 
       Inventories
    
(268,216
)
    
(672,872
)
       Deposits for pipe inventory purchases     -        -  
       Prepaid expenses and other current assets
    
49,060
      
98,893
 
       Other assets
    
17,970
 
    
9,861
  
       Accounts payable and accrued expenses
    
144,109
 
    
(61,340
)
             Net cash provided by (used in) operating activities from continuing operations
    
370,015
 
    
(898,388
)
                 
Cash flows from investing activities from continuing operations:
                
   Purchase of property and equipment
    
(25,546
)
    
(61,025
)
   Proceeds from sale of drilling rigs
    
-
      
200,000
  
   Investment in rigs held for sale      -        (14,123 ) 
   Redemption of certificate of deposit
    
1,000,000
      
1,500,000
  
   Investment in certificate of deposit
    
(700,000
)
    
(244,800
)
   Purchase of note receivable from bank
    
(300,000
)
    
-
  
   Proceeds from notes receivable
    
33,306
      
61,815
  
   Loans to related parties
    
(241,200
)
    
(3,277
)
            Net cash provided by (used in) investing activities from continuing operations
    
(233,440
 )     
1,438,590
  
  
                
Cash flows from financing activities from continuing operations:
                
   Principal payments under capital lease obligations
    
(16,985
 )     
-
  
   Payments on margin loans
    
-
      
(149,836
)
   Net borrowings under lines of credit agreements and short-term notes
    
3,112
 
    
598,000
 
   Principal payments on debt
    
(1,283,122
)
    
(130,530
)
   Payments for acquisition of treasury stock
    
(41,237
)
    
(19,790
 ) 
            Net cash provided by (used in) financing activities from continuing operations
    
(1,338,232
 )    
297,844
  
  Three Months Ended March 31,
   
2009
    
2008
  
Net increase (decrease) in cash and cash equivalents from continuing operations
  
$
(1,201,657
 )   
$
838,046
  
Cash and cash equivalents at beginning of period from continuing operations
    
3,114,575
      
2,293,795
  
Cash and cash equivalents at end of period from continuing operations
  
$
1,912,918
    
$
3,131,841
  
  
                
Discontinued operations:                 
   Net cash used in operating activities    $
-
      $
(1,076,236
 ) 
   Net cash used in investing activities    
-
      
(137,221
 ) 
   Net cash used in financing activities    
-
      
(32,124
 ) 
Net increase in cash and cash equivalents from discontinued operations     
-
      
(1,245,581
 ) 
Cash and cash equivalents at beginning of period from discontinued operations    
-
      
1,597,361
  
Cash and cash equivalents at end of period from discontinued operations    $
-
      $
351,780
  
                 
Supplemental schedule of cash flow information:
                
   Interest paid
  
$
185,076
    
$
122,336
  
   Taxes paid
  
$
-
    
$
-
  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
Notes to Unaudited Consolidated Financial Statements
 
 
Note 1 - Summary of Significant Accounting Policies
 
The accompanying unaudited interim consolidated financial statements of American International Industries, Inc. (“American”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in American's latest Annual Report filed with the SEC on Form 10-K for the year ended December 31, 2008. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year as reported in the Form 10-K have been omitted.
 
Organization, Ownership and Business
 
American International Industries, Inc. ("American"), a Nevada corporation, operates as a diversified holding company with a number of wholly-owned subsidiaries and one majority-owned subsidiary. American is a diversified corporation with interests in industrial/commercial companies and an oil and gas service business. American's business strategy is to acquire controlling equity interests in businesses that it considers undervalued. American's management takes an active role in providing its subsidiaries with access to capital, leveraging synergies and providing management expertise in order to improve its subsidiaries' growth.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of American and its wholly-owned subsidiaries, Northeastern Plastics, Inc. and Shumate Energy Technologies, Inc., and its majority owned subsidiary, Delta Seaboard Well Service, Inc.  All significant intercompany transactions and balances have been eliminated in consolidation.
 
Certain reclassifications have been made to amounts in prior periods to conform with the current period presentation.  All reclassifications have been applied consistently to the periods presented.
 
Revenue Recognition
 
Revenue is recognized when the earning process is completed, the risks and rewards of ownership have transferred to the customer, which is generally the same day as delivery or shipment of the product, the price to the buyer is fixed or determinable, and collection is reasonably assured. Delta receives purchase orders for all of its service work and related pipe sales. All sales are recorded when the work is completed or when the pipe is sold.  SET receives purchase orders for machining of oil field drilling parts, components and tools.  Customers have the right to inspection and acceptance for generally up to five days after taking delivery.  Returns are not accepted due to the custom specifications of each product, but rework on items is necessary if the product was not within the original order specifications.  Customer requests for rework and customer rejection of shipments has been historically low.  NPI has purchase orders for all sales, of which many of the items are requested to be container shipped and shipped directly to the end users. All sales are recorded when the inventory items are shipped. Taxes assessed by a governmental authority that are incurred as a result of a revenue transaction are not included in revenues. American has no significant sales returns or allowances.
 
Net Loss Per Share
 
The basic net loss per common share is computed by dividing the net loss by the weighted average number of shares outstanding during a period. Diluted net loss per common share is computed by dividing the net loss, adjusted on an as if converted basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the three months ended March 31, 2009 and 2008, potential dilutive securities that had an anti-dilutive effect were not included in the calculation of diluted net loss per common share. These securities include options to purchase shares of common stock that were not "in the money".

Management's Estimates and Assumptions
 
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses. Actual results could differ from these estimates.
Fair Value of Financial Instruments
 
Effective January 1, 2008, American adopted SFAS 157 for financial assets and liabilities. SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements by establishing a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under SFAS 157 are described below:
 
Basis of Fair Value Measurement
 
Level 1
  
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
     
Level 2
  
Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
     
Level 3
  
Unobservable inputs reflecting American's own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
 
American believes that the fair value of its financial instruments comprising cash, certificates of deposit, accounts receivable, notes receivable, accounts payable, and notes payable approximate their carrying amounts.  The interest rates payable by American on its notes payable approximate market rates.  The fair values of American's Level 1 financial assets, trading securities that primarily include shares of common stock in various companies, are based on quoted market prices of the identical underlying security.  As of March 31, 2009, American did not have any significant Level 2 or 3 financial assets or liabilities.  The following table provides fair value measurement information for American's trading securities:
 
   
As of March 31, 2009
  
                Fair Value Measurements Using:  
   
Carrying
Amount
    
Total
Fair Value
    
Quoted Prices
in Active Markets
(Level 1)
    
Significant Other
Observable Inputs
(Level 2)
    
Significant
Unobservable Inputs
(Level 3)
  
Financial Assets:
                              
  Trading Securities
   $ 636,872     $ 636,872     $ 636,872     $ -     $ -  
 
Recent Accounting Pronouncements
 
In addition to the pronouncements noted above, there were various other accounting standards and interpretations issued recently, none of which are expected to a have a material impact on our consolidated financial position, operations or cash flows.
 
Note 2 - Trading Securities
 
Investments in marketable securities primarily include shares of common stock in various companies that are bought and held principally for the purpose of selling them in the near term with the objective of generating profits on short-term differences in price. These investments are classified as trading securities and, accordingly, any unrealized changes in market values are recognized in the consolidated statements of operations.  For the three months ended March 31, 2009 and 2008, American had unrealized trading gains of $96,815 and losses of $1,376,539, respectively, related to securities held on those dates.  American recorded realized losses of $82,941 for the three months ended March 31, 2009 and realized gains of $44,573 on the sales of trading securities and for the three months ended March 31, 2008.
 
On November 27, 2007, American acquired 1,000,000 restricted shares, or approximately 9% of Rubicon Financial Incorporated’s (OTCBB: RBCF.OB) common stock for a $1,000,000 cash payment and the issuance of 200,000 restricted shares of American's common stock, valued at $4.90 per common share based upon the closing market price on that date, for a total purchase price of $1,980,000. The closing market price on the date of this transaction for RBCF was $2.87 per common share. During 2008, American purchased an additional 38,900 shares at an average purchase price of $0.17 per share. During the three months ended March 31, 2009, American purchased an additional 28,000 shares at an average purchase price of $0.12 per share.  At March 31, 2009, our investment in the 1,066,900 shares of RBCF common stock is classified as trading securities on the balance sheet and was valued at $277,394, or $0.26 per share, based upon the closing market price on that date. At December 31, 2008, our investment in the 1,038,900 shares of RBCF common stock is classified as trading securities on the balance sheet and was valued at $311,670, or $0.30 per share, based upon the closing market price on that date. Rubicon Financial Incorporated is a development stage company, operating as a full service insurance agency offering personal and commercial lines, health, and life insurance products to individuals and companies in California.
Equity markets can experience significant volatility and therefore are subject to changes in value. Based upon the current volatile nature of the U.S. securities markets and the decline in the U.S. economy, we believe that it is possible, that the market values of our marketable equity securities could decline in the near term. We have a policy in place to review our equity holdings on a regular basis. Our policy includes, but is not limited to, reviewing each company’s cash position, earnings/revenue outlook, stock price performance, liquidity and management/ownership. American seeks to manage exposure to adverse equity returns in the future by pursuing to increase the diversity our securities portfolios.
 
Note 3 - Acquisition of the assets of Shumate Machine Works by Shumate Energy Technologies
 
On October 8, 2008, a subsidiary of American completed the purchase of 100% of the assets and assumed certain liabilities of Shumate Machine Works Corporation, a subsidiary of Shumate Industries, Inc. ("SHMT").  The terms of the agreement provided for a purchase price of $5.0 million funded by the simultaneous closing of a $5.0 million term note by Shumate Machine Works and the receipt of SHMT common stock with a value equivalent to any negative working capital at the closing date of the transaction.  In connection with the negative working capital provision of the agreement, American received 1,401,170 restricted shares of SHMT common stock valued at $0.30 per share for a total value of $420,351.  These shares represented approximately 6.4% of SHMT’s outstanding shares as of October 8, 2008.   The assets are now owned by a wholly-owned American subsidiary, Shumate Energy Technologies, Inc.

As required by SFAS No. 141, American's subsidiary has recorded the acquisition using the purchase method of accounting with the purchase price allocated to the acquired assets and liabilities based on their respective estimated fair values at the acquisition date. The purchase price of $5,000,000 has been allocated at follows:
 
Current assets
  
$
1,066,864
  
Property and equipment, net
    
4,472,130
  
Intangible assets
    
744,403
  
Trading securities - Restricted common shares of Shumate Industries, Inc. received for negative working capital assumed
    
420,351
  
  Total assets acquired
    
6,703,748
  
         
Current liabilities
    
(1,487,215
)
Equipment notes payable 
    
 (216,533
)
  Total liabilities acquired
    
(1,703,748
 )
         
Net assets acquired
  
$
5,000,000
  
 
The  $744,403 of acquired intangible assets includes $729,000 assigned to CNC programs and $15,403 assigned to the acquired name and logo.  These intangible assets have a weighted average useful life of 7 years.
 
Revenues and expenses of Shumate Energy Technologies, Inc. are included in American's statement of operations from October 8, 2008 through March 31, 2009.
 
Note 4 - Inventory and Deposits for Pipe Inventory Purchases
 
Inventories consisted of the following:
 
   
March 31, 2009
    
December 31, 2008
  
Work in process
   $ 623,130     $ 549,954  
Finished goods
     4,281,659       3,434,361  
Less reserve
     (95,233 )     (95,263 )
    $ 4,809,556     $ 3,889,052  
 
During the year ended December 31, 2008, American entered into various agreements to purchase pipe inventory from vendors.  At December 31, 2008 and March 31, 2009, American had cash deposits of $2,221,932 and $1,569,644, respectively, for inventory purchases under these agreements that had not been received.
10
Note 5 - Real Estate Transactions
 
During the fourth quarter of 2008, American received a 1.705 acre tract of land in Galveston County appraised at $540,000 as a guarantor's fee.  In connection with this fee, American has pledged $1,750,000 in certificates of deposit for a $4,000,000 loan to Dawn Condominiums L.P. at Texas Community Bank.  As the principal of the loan is reduced, the bank will release portions of the pledged certificates of deposit until the loan is paid in full.
 
During 2007, American purchased for investment a 174 acre tract of land in Waller County, Texas for $1,684,066. This property is listed for sale with a real estate broker.  American continues to own 287 undeveloped acres of waterfront property on Dickinson Bayou and Galveston Bay in Galveston County, Texas. American is carrying this property on the balance sheet at its historical book value of $225,000.  American has engaged an independent broker on an exclusive basis to sell the property.  These properties are not going to be developed by nor are they being held as inventory by American.
 
Note 6 - Long-term Notes Receivable
 
Long-term notes receivable consists of the following:
 
   
March 31, 2009
    
December 31, 2008
  
Net note receivable from sale of real estate, principal balance due on or before July 30, 2009, secured by property lien (a)
  
$
3,020,044
    
$
3,020,044
  
Unsecured note receivable for sale of former subsidiary, Marald, Inc., principal and interest due monthly through June 5, 2012
    
121,111
      
126,617
  
Unsecured note receivable for sale of former subsidiary, Marald, Inc., principal and interest due monthly through July 2012 (b)
    
200,000
      
200,000
  
Unsecured note receivable for sale of drilling rig, principal and interest due monthly through December 31, 2009
    
86,209
      
114,009
  
Unsecured note receivable, principal balance due on April 30, 2008, interest at 6% through maturity and at 10% thereafter (c)    
552,063
      
552,063
  
Unsecured note receivable, principal balance due on December 31, 2008, interest at 10% through maturity and at 15% thereafter (c)    
250,000
      
250,000
  
Note secured by property and shares of stock, interest due monthly at 18%, principal payment due on or before May 9, 2009    
225,000
      
225,000
  
Unsecured note receivable purchased from Texas Community Bank, interest at 8% due monthly, principal due January 2009 (d)    
300,000
        -  
Notes receivable
    
4,754,427
      
4,487,733
  
Less current portion
    
(4,667,737
 )     
(4,392,211
 ) 
Notes receivable, less current portion
  
$
86,690
    
$
95,522
  
 
(a) Net note receivable from sale of real estate, principal payment due on or before July 30, 2009.  On July 30, 2004, American sold real estate to an unaffiliated third party for a cash payment equal to the first lien and $250,000 owed to Orion HealthCorp, Inc. and a note receivable in the amount of $5,000,000 secured by a lien on the real estate. The note is being amortized over a 20 year period, with a balloon payment at the end of five years in the amount of $4,012,084, and bears interest of 3% per annum. The note was discounted by $1.6 million to the present value of the lowest level of annual payments required by the sales contract, or $3.4 million, over the maximum period specified by SFAS No. 66.  Principal payments have reduced the note balance to $3.0 million as of March 31, 2009.  American recorded a gain, using the reduced profit method for recording the sale of land, in the amount of $1,815,070 on the sale of this real estate based on discounting the $5,000,000 note at a 7.6% interest rate (approximating the market rate for real estate transactions by the buyer).  The borrower is in the process of refinancing this note with a new lender.  The property securing this note was appraised for $9,175,000 by an independent appraiser.
(b) Sale of former subsidiary, Marald, Inc., principal and interest due monthly through July 2012.  The original note was for $300,000 and was discounted to $200,000 for the receipt of full payment on or before October 25, 2007.  New payment terms are being negotiated for this note receivable.  Since the loan is reflected at a $100,000 discount to the original note face value and payments are currently being made on the other note receivable with Marald in accordance with note terms, American believes payment terms will be successfully negotiated and no further discounting of the loan was deemed necessary as of March 31, 2009.

(c) Unsecured notes receivable due April 30 and December 31, 2008.  These delinquent notes were due from Hammonds Industries, Inc.  Since the assets of the Hammonds' companies were sold on April 16, 2009 (see note 20), several alternatives are being pursued for the use of the public company.  The adoption of any of these alternatives is contingent upon the new entity assuming the public company's liabilities.  Management has assessed these notes for impairment and feels that collectability is reasonably possible based on the alternatives being pursued for the public company.
 
(d) Note purchased from Texas Community Bank with a face amount of $300,000.  This delinquent note was purchased on March 31, 2009 and new payment terms are being negotiated for this note receivable with the debtors, Las Vegas Premium Gold.  This note was purchased as an investment to receive the interest income from the note.  Management has assessed this note for impairment and feels that collectability is reasonably possible based on the personal guarantees of the principals.
 
Interest income on notes receivable is recognized principally by the simple interest method.  During the three months ended March 31, 2009 and 2008, American recognized interest income of $72,812 and $81,357, respectively.
 
Note 7 - Property and Equipment
 
Major classes of property and equipment together with their estimated useful lives, consisted of the following:
 
 
Years
  
March 31, 2009
    
December 31, 2008
  
Land
    
$
892,945
    
$
892,945
  
Building and improvements
20
    
943,200
      
933,200
  
Machinery and equipment
7-15
    
7,570,619
      
7,386,789
  
Office equipment and furniture
7
    
388,402
      
384,893
  
Automobiles
5
    
768,151
      
768,151
  
       
10,563,317
      
10,365,978
  
Less accumulated depreciation and amortization
      
  (2,863,116
) 
    
(2,596,145
) 
Net property and equipment
    
$
7,700,201
    
$
7,769,833
  
 
During the three months ended March 31, 2009, $171,793 of equipment that was classified as other assets as of December 31, 2008, was placed in service and reclassified to property and equipment.

Depreciation expense for the three months ended March 31, 2009 and 2008 was $266,971 and $115,722, respectively.
 
SET has entered into a capital lease agreement for the acquisition of machinery and equipment.  The asset acquired under such financing arrangement included in property and equipment is as follows:
 
   
March 31, 2009
  
Machinery and equipment
  
$
301,000
  
Less accumulated depreciation and amortization
    
(15,050
) 
Net property and equipment
  
$
285,950
  
 
Principal repayment provisions of this long-term capital lease are as follows at March 31, 2009:
 
2009
   $
54,695
  
2010
    
81,758
  
2011
    
85,004
  
Total
  
$
221,457
  
Note 8 - Intangible Assets
 
Intangible assets at March 31, 2009 consisted of the following:
 
   
Gross Carrying Amount
    
Accumulated Amortization
      
Intangibles, net
  
Average Weighted Lives
Goodwill                   $   674,539   N/A 
                           
CNC Programs
  
$
729,000
    
$
52,072
    
$
676,928
  
7 years
Name and logo
    
15,403
      
1,100
      
14,303
  
7 years
Intangible assets
  
$
744,403
    
$
53,172
    
$
691,231
  
7 years
 
Intangible assets at December 31, 2008 consisted of the following:
 
   
Gross Carrying Amount
    
Accumulated Amortization
      
Intangibles, net
  
Average Weighted Lives
Goodwill                   $   674,539   N/A 
                           
CNC Programs
  
$
729,000
    
$
26,036
    
$
702,964
  
7 years
Name and logo
    
15,403
      
550
      
14,853