10-Q 1 amin10q2q2010.htm 2ND QUARTER 2010 10-Q

 
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 June 30, 2010
 
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨ 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 ¨
 
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 August 16, 2010, the Registrant had 10,073,069 shares of common stock outstanding.

TABLE OF CONTENTS
 
Item
Description
Page
 
PART I - FINANCIAL INFORMATION
  
 
    
ITEM 1.
3
ITEM 2.
20
ITEM 3.
24
ITEM 4.
24
 
    
 
PART II - OTHER INFORMATION
  
 
    
ITEM 1.
24
ITEM 1A.
24
ITEM 2.
24
ITEM 3.
24
ITEM 4.
25
ITEM 5.
25
ITEM 6.
25
 
 
2
PART I - FINANCIAL INFORMATION
 
 
ITEM 1. FINANCIAL STATEMENTS
 
Consolidated Financial Statements
  
4
5
6
8
   
 
 
 
 
 
 
 
3


 
 
 
Consolidated Balance Sheets
(Unaudited)
   
   
June 30, 2010
    
December 31, 2009
  
Assets
            
Current assets:
            
   Cash and cash equivalents
  
$
1,933,931
    
$
1,727,388
  
   Certificates of deposit
    
1,386,888
      
1,199,187
  
   Trading securities
    
1,664,120
      
1,490,472
  
   Accounts receivable, less allowance for doubtful accounts
                
     of $244,121 and $244,121, respectively
    
3,845,201
      
3,268,141
  
   Current portion of notes receivable
    
337,559
      
1,173,334
  
   Accounts receivable from related parties
    
262,745
      
194,609
  
   Inventories
    
5,086,598
      
4,446,215
  
   Real estate held for sale
    
6,980,680
      
7,060,299
  
   Deposits for pipe inventory purchases
    
-
      
1,336,244
  
   Prepaid expenses and other current assets
    
445,177
      
247,304
  
     Total current assets
    
21,942,899
      
22,143,193
  
  
                
Long-term notes receivable, less current portion
    
395,145
      
259,252
  
Property and equipment, net of accumulated depreciation and amortization
    
6,453,139
      
7,144,218
  
Goodwill
    
674,539
      
674,539
  
Intangible assets, net of amortization
    
558,302
      
611,474
  
Marketable securities - available for sale      1,550,000        -  
Other assets
    
175,527
      
179,493
  
       Total assets
  
$
31,749,551
   
$
31,012,169
  
Liabilities and Equity
                
Current liabilities:
                
   Accounts payable and accrued expenses
  
$
3,644,933
    
$
2,300,007
  
   Short-term notes payable
    
1,666,202
      
1,881,908
  
   Accounts payable to related parties      80,000        -  
   Accounts and notes payable to related parties
    
-
      
296,300
  
   Current installments of long-term capital lease obligations
    
118,978
      
81,819
  
   Current installments of long-term debt
    
3,900,759
      
4,441,708
  
     Total current liabilities
    
9,410,872
      
9,001,742
  
                 
Long-term debt, less current installments
    
6,932,564
      
7,264,562
  
Long-term capital lease obligations, less current installments 
    
151,261
      
85,004
  
     Total liabilities
    
16,494,697
      
16,351,308
  
                 
Commitments and contingencies 
    
-
      
 -
  
                 
Equity:
                
   Preferred stock, $0.001 par value, 1,000,000 authorized; none issued
    
-
      
 -
  
   Common stock, $0.001 par value, 50,000,000 authorized;
                
       10,347,325 and 9,191,325 shares issued, respectively
                
       10,025,069 and 8,871,369 shares outstanding, respectively
    
10,347
      
9,192
  
   Additional paid-in capital
    
33,836,713
      
33,571,064
  
   Accumulated deficit
    
(19,455,237
) 
    
(19,863,846
) 
   Accumulated other comprehensive income     180,000        -  
   Less treasury stock, at cost
                
       322,256 and 319,956 shares, respectively
    
(509,048
) 
    
(505,774
) 
   Total American International Industries, Inc. equity
    
14,062,775
      
13,210,636
  
       Noncontrolling interest
    
1,192,079
      
1,450,225
  
   Total equity
    
15,254,854
      
14,660,861
  
   Total liabilities and equity
  
 $
31,749,551
    
$
31,012,169
  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
 
Consolidated Statements of Operations
(Unaudited)
   
   
Three Months Ended
    
Six Months Ended
  
  
  
June 30, 2010
    
June 30, 2009
    
June 30, 2010
    
June 30, 2009
  
                         
Revenues
   $ 6,424,554     $
6,232,115
     $ 11,421,067     $
12,427,129
  
Costs and expenses:
                                
   Cost of sales
     4,616,897      
4,004,522
       8,177,068      
7,998,524
  
   Selling, general and administrative
     2,451,615      
2,746,616
       5,875,994      
5,399,702
  
     Total operating expenses
     7,068,512      
6,751,138
       14,053,062      
13,398,226
  
                                 
Operating loss
     (643,958 )     (519,023 )      (2,631,995 )      (971,097 )
  
                                
Other income (expenses):
                                
   Interest and dividend income
     17,360      
111,136
       37,771      
242,575
  
   Gain on sale of assets     781,204       -       781,204        -  
   Delta lawsuit settlement     -       -       700,000       -  
   Consulting service income      1,370,000        -       1,370,000       -  
   Realized gains (losses) on the sale of trading securities     214,003       (266,289 )      318,314       (349,231 ) 
   Unrealized gains (losses) on trading securities     (139,975 )      302,060       (202,056 )      398,874  
   Interest expense
     (197,880 )      (263,672 )     (418,396 )      (482,279 )
   Other income
     81,617      
3,201
       95,998      
198,347
  
     Total other income (expense)
     2,126,329      
(113,564
 )      2,682,835      
8,286
  
  
                                
     Income (loss) before income tax
     1,482,371      
(632,587
 )      50,840      
(962,811
 )
        Income tax expense
     39,220       12,546       55,432       25,230  
     Income (loss) from continuing operations, net of income taxes
     1,443,151      
(645,113
 )      (4,592 )     
(988,041
 ) 
     Loss from discontinued operations, net of income taxes
     -      
(350,000
 )      -       (350,000 ) 
     Net income (loss)
     1,443,551      
(995,133
 )      (4,592 )      (1,338,041 )
     Net loss attributable to the noncontrolling interest     69,867       142,885       413,201       292,654  
     Net income (loss) attributable to American International Industries, Inc.   $ 1,513,018     $  (852,248 )    $ 408,609     $ (1,045,387 ) 
Net income (loss) per common share - basic and diluted:                                
     Continuing operations   $  0.15     $ (0.06 )   $ 0.04     $  (0.08 ) 
     Discontinued operations   $  -     $ (0.04 )    $ -     $ (0.04 ) 
     Total
   $  0.15     $  (0.10 )    $ 0.04     $ (0.12 )
  
                                
Weighted average common shares - basic and diluted
     10,005,069      
8,530,865
       9,622,579      
8,609,530
  
                                 
Comprehensive income (loss)                                
     Net income (loss)   $  1,443,151     $   (995,133 )   $  (4,592 )    $   (1,338,041 ) 
     Unrealized gain on marketable securities      180,000       -        180,000        -  
Total comprehensive income (loss)      1,623,151        (995,133 )      175,408        (1,338,041 ) 
     Comprehensive loss attributable to the noncontrolling interest       69,867        142,885        413,201        292,654  
Comprehensive income (loss) attributable to American International Industries, Inc.      1,693,018        (852,248 )       588,609        (1,045,387 ) 
   
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
Consolidated Statements of Cash Flows
(Unaudited)
 
 
Six Months Ended June 30,
   
2010
    
2009
  
Cash flows from operating activities:
                
   Net loss
  
$
(4,592
)
  
$
(1,338,041
)
   Loss from discontinued operations      -        (350,000 )
   Net loss from continuing operations     (4,592 )       (988,041 ) 
   Adjustments to reconcile net loss from continuing operations to net cash used in operating activities from continuing operations:
                
       Depreciation and amortization
    
571,356
      
591,485
  
       Share-based compensation
    
1,037,610
      
41,250
  
       Shares received for consulting services     (1,370,000 )      -   
       Gain on sale of assets      (781,204 )      -   
       Realized (gains) losses on the sale of trading securities
    
(318,314
)
    
349,231
  
       Unrealized (gains) losses on trading securities
    
202,056
      
(398,874
) 
       Change in operating assets and liabilities:
                
          Accounts receivable
    
(778,652
 )     
564,466
  
          Trading securities
    
(57,389
 )     
124,148
  
          Inventories
    
695,861
      
(797,874
) 
          Prepaid expenses and other current assets
    
(197,874
 )     
(188,401
 ) 
          Other assets
    
3,965
      
38,830
  
          Accounts payable and accrued expenses
    
584,702
 
    
659,580
  
             Net cash used in operating activities
    
(412,475
 )     
(4,200
 ) 
                 
Cash flows from investing activities from continuing operations:
                
   Proceeds from sale of equity investment      42,100        -  
   Proceeds from sale of real estate held for sale      943,500        -  
   Proceeds from sale of property and equipment      340,445        -  
   Purchase of property and equipment
    
(105,843
)
    
(133,821
)
   Purchase of real estate held for resale     (29,557 )       -  
   Redemption of certificate of deposit
    
325,000
      
4,000,000
  
   Investment in certificate of deposit
    
(512,701
)
    
(2,450,000
)
   Purchase of note receivable from bank
    
-
      
(300,000
)
   Proceeds from notes receivable
    
17,818
      
69,836
  
   Loans to related parties
    
(284,435
)
    
(221,939
)
            Net cash provided by investing activities from continuing operations
    
736,327
 
    
964,076
 
  
                
Cash flows from financing activities from continuing operations:
                
   Proceeds from issuance of common stock
    
1,015,200
      
-
  
   Net borrowings (repayments) under lines of credit agreements and short-term notes
    
354,966
 
    
(28,382
 ) 
   Proceeds from issuance of debt      250,753        283,851  
   Principal payments on debt
    
(1,694,371
)
    
(1,695,306
)
   Principal payments under capital lease obligations
    
(40,583
)
    
(34,600
) 
   Payments for acquisition of treasury stock
    
(3,274
)
    
(192,675
) 
            Net cash used in financing activities from continuing operations
    
(117,309
 )     
(1,667,112
) 
                 
Net increase (decrease) in cash and cash equivalents from continuing operations
  
 
206,543
    
 
(707,236
) 
Net decrease in cash and cash equivalents from discontinued operations
      -        (350,000 ) 
Cash and cash equivalents at beginning of period
    
1,727,388
      
3,114,575
  
Cash and cash equivalents at end of period
  
 $
1,933,931
   
 $
2,057,339
  
 
6
 
 
Six Months Ended June 30,
   
2010
    
2009
  
Supplemental schedule of cash flow information:                
   Interest paid    $   419,434     $  494,059  
   Taxes paid   $   48,148      $  -  
                 
Non-cash transactions:
                
   Note receivable issued for common stock of DCP   $  55,000     $  -  
   Unrealized gain on available for sale securities   $  180,000     $  -  
   Acquisition of fixed assets under capital lease obligations   $ 144,000     $  -  
   Real property received in foreclosure on note receivable   $  66,304     $ -  
   Receipt of common stock to convert promissory note due from Delta
  
$
   872,352    
 $
   -  
   Accounts payable and dividends payable assumed in Delta reverse merger transaction   $ 597,131     $  -  
   Adjustment to noncontrolling interest in Delta, DCP, and BOG   $ 305,197     $  -  
   Delta dividends declared and unpaid
  
$
 120,000    
$
   -  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
7
American International Industries, Inc.
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, 2009. 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, a Nevada corporation, operates as a diversified holding company with a number of wholly-owned subsidiaries and some partially owned subsidiaries. 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 International Industries, Inc. ("American") and its wholly-owned subsidiaries, Northeastern Plastics, Inc. ("NPI") and Shumate Energy Technologies, Inc. ("SET"), and Delta Seaboard International, Inc. ("Delta"), in which American holds a 48.1% shareholder interest, Brenham Oil & Gas (“BOG”), in which American holds a 54.7% interest, and Downhole Completion Products, Inc. (“DCP”), in which American holds an 80% shareholder interest.  All significant intercompany transactions and balances have been eliminated in consolidation.
 
On February 3, 2010, Hammonds Industries Inc. ("Hammonds") and Delta Seaboard Well Service, Inc. ("Delta Seaboard"), a Texas corporation, completed a reverse merger ("Reverse Merger"). In connection with the reverse merger, Hammonds changed its name to Delta Seaboard International, Inc. and effected a one-for-ten (1:10) reverse stock split ("Reverse Split") of its common stock.  Following the effective date of the Reverse Split, Delta issued shares of common stock to the existing stockholders of Delta Seaboard as follows: (i) 22,186,572 post-Reverse Split shares in consideration for American’s 51% equity ownership of Delta Seaboard, and 10,000,000 post-Reverse Split shares in consideration for American converting $872,353 in principal and accrued interest of debt payable by Delta to American; (ii) a total of 21,316,510 shares to Robert W. Derrick, Jr., a newly appointed director of Delta as well as Delta Seaboard’s president and a director of American and Ron Burleigh, a newly-appointed director of Delta as well as Delta Seaboard’s vice president, in consideration for their 49% equity ownership of Delta Seaboard; and (iii) 9,607,843 post-Reverse Split shares in consideration for Messrs. Derrick and Burleigh extending their employment agreements for five years in addition to the balance of their current employment agreements. Following the Reverse Split and Reverse Merger, American owns 32,859,935 shares of common stock, representing 48.1% of Delta's total outstanding shares and Messrs. Derrick and Burleigh, the owners of the noncontrolling interest in Delta Seaboard, own 30,924,353 shares of common stock, representing 45.2% of Delta's total outstanding shares. All other stockholders of Delta own 4,557,962 shares of common stock, representing 6.7% of Delta's total 68,342,250 outstanding shares. As part of the Reverse Merger, Delta assumed $709,552 in liabilities from Hammonds, including $615,000 in preferred dividends payable in shares of Delta's common stock.
 
Currently, corporate overhead includes BOG, a division that owns an oil, gas and mineral royalty interest in Washington County, Texas, which is carried on the Company's balance sheet at $0.  Through Brenham Oil & Gas, the Company is engaged in negotiations with financial institutions for the purpose of financing potential acquisitions of existing oil and gas properties and reserves.  The Company is seeking to acquire a portfolio of oil and gas assets in North America and West Africa and large oil concessions in West Africa. In July 2010, American’s shareholders of record on June 16, 2010 were issued one share of BOG common stock for each share of American’s common stock owned and held on that date. The BOG shares distributed to the non-affiliated shareholders of American represent approximately 10% of the 100,000,000 shares outstanding of BOG after the distribution. American sold 13,000,000 shares of BOG common stock for $22,100. American recorded a $20,662 sale of assets for this transaction. Additionally, 35,000,000 shares of BOG common stock were issued to employees of American and BOG as an employment incentive. American owns 54,680,074 shares of common stock, representing 54.7% of BOG’s total outstanding shares. American has engaged counsel to prepare a registration statement on Form S-1 in order to register the BOG shares being distributed to American’s shareholders. Assuming the effectiveness of the registration statement, these shareholders will have registered free-trading shares. BOG will then be a separate reporting company, and we plan to take action in the future to quote BOG's common stock on the Over-The-Counter Bulletin Board.
 
8
On June 23, 2010, Joe Hoover, President of DCP, purchased 20% of the 1,000 shares of Common Stock of DCP for $20,000 in cash and a $55,000 promissory note.  American recorded a $74,814 sale of assets for this transaction.
 
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 Income (Loss) Per Share
 
The basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of shares outstanding during a period. Diluted net income (loss) per common share is computed by dividing the net income (loss), adjusted on an as if converted basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the three and six months ended June 30, 2010 and 2009, potential dilutive securities that had an anti-dilutive effect were not included in the calculation of diluted net income (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 the framework for measuring fair value that establishes 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 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, 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 and marketable securities - available for sale that primarily include shares of common stock in various companies, are based on quoted market prices of the identical underlying security.  As of June 30, 2010, 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 and marketable securities - available for sale:
 
9
 
   
As of June 30, 2010
  
               
 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
  
$
1,664,120
    
$
1,664,120
   
$
1,664,120
   
$
-
    
$
-
  
  Marketable Securities - available for sale   $ 1,550,000     $ 1,550,000     $  1,550,000     $   -     $   -  
 
Subsequent Events
 
American has evaluated all transactions through the financial statement issuance date for subsequent event disclosure consideration.
 
New Accounting Pronouncements
 
There were various accounting standards and interpretations issued recently, none of which are expected to have a material impact on our consolidated financial position, operations or cash flows.
 
Note 2 - Trading Securities and Marketable Securities - available for sale
 
Investments in equity 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 June 30, 2010 and 2009, American had unrealized trading losses of $139,975 and gains of $302,060, respectively, related to securities held on those dates.  American recorded realized gains of $214,003 and realized losses of $266,289 for the three months ended June 30, 2010 and 2009, respectively.  For the six months ended June 30, 2010 and 2009, American had unrealized trading losses of $202,056 and gains of $398,874, respectively, related to securities held on those dates.  American recorded realized gains of $318,314 and realized losses of $349,231 for the six months ended June 30, 2010 and 2009, respectively.

On June 21, 2010, American received as compensation for consulting services 1,000,000 restricted shares of ADB International Group, Inc. ("ADBI") common stock valued at $1,370,000, based on the closing market price of $1.37 per share on that date.  This investment is classified as marketable securities - available for sale and, accordingly, any unrealized changes in market values are recognized as other comprehensive income in the consolidated statements of operations.  At June 30, 2010, this investment was valued at $1,550,000, based on the closing market price of $1.55 per share on that date.  American recognized other comprehensive income of $180,000 for the unrealized gain on this investment.
 
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 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 potentially increasing the diversity of our securities portfolios.
 
Note 3 - Inventory and Deposits for Pipe Inventory Purchases
 
Inventories consisted of the following:
   
June 30, 2010
    
December 31, 2009
 
Work in process
   $ 471,203     $ 171,506  
Finished goods
     4,664,434       4,370,730  
Less reserve
     (49,039 )     (96,021 )
    $ 5,086,598     $ 4,446,215  
 
Periodically, American enters into agreements to purchase pipe inventory from vendors.  At December 31, 2009, American had cash deposits of $1,336,244 for inventory purchases under these agreements that had not been received.  At June 30, 2010, these pipe purchases are included in inventory.
 
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Note 4 - Real Estate Transactions

 
During the fourth quarter of 2009, American foreclosed on real property which was security for a note receivable owed to American, which was in default.  At December 31, 2009, American was carrying this property on the balance sheet for $4,611,233, which represented $3,332,543 in principal and accrued interest allocated to the property received at the time of default and the assumption of a $1,278,690 note payable secured by the property by another lien holder, see Note 8.  This property consisted of seven tracts, of which several are under contract for sale and the remainder are listed for sale with a broker.  During the three months ended June 30, 2010, American sold an 8 acre tract recorded at $175,480 for $340,445, which was used to reduce the note payable balance to $938,245.  American recognized in the consolidated statements of operations a $164,965 gain on sale of assets for this transaction.
 
During the third quarter of 2009, and in connection with the guarantor’s fee described below, American has pledged $250,000 in certificates of deposit for a $3,850,000 loan to Southwest Gulf Coast Properties, Inc. at Texas Community Bank.  Additionally, this loan is secured by American's 287 acres on Dickinson Bayou and the Dawn Condominiums with an appraised value of over $3,900,000.

During the fourth quarter of 2008, American received a 1.705 acre tract of land in Galveston County valued at $540,000 as a guarantor's fee. In connection with this fee, American pledged $1,750,000 in certificates of deposit for a $4,000,000 loan to Dawn Condominiums L.P. at Texas Community Bank. During the third quarter of 2009, the principal balance of the loan was repaid and the bank released the pledged certificates of deposit to American.  This property is listed for sale with a broker.
 
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 also owns 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.  These properties are listed for sale with a broker.
 
American reviewed the accounting standards Real Estate - General (ASC 970-10) and Property, Plant, and Equipment (ASC 360-10) to determine the appropriate classification for these properties.  According to ASC 970-10, real estate that is held for sale in the ordinary course of business is classified as inventory, which is a current asset.  ASC 360-10 provides the following criteria for property to be classified as held for sale:
  • Management with the appropriate authority commits to a plan to sell the asset;
  • The asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets;
  • An active program to locate a buyer and other actions required to complete the plan of sale have been initiated;
  • The sale of the property or asset within one year is probable and will qualify for accounting purposes as a sale;
  • The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
  • Actions required to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Management consulted with the real estate brokers for these properties and reviewed the recent interest for each property.  Based on our consultations and review, we believe that the sale of these properties within one year is probable.  We concluded that all of these criteria have been met for these properties and that they are appropriately classified as held for sale in current assets.
 
 
 
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