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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal quarter ended:
    
    Commission file number:December 31, 2005
    
    0-11582
 Auto Underwriters of America, Inc.
  California
(State or other jurisdiction of incorporation or organization)
    
    94-2915849
(I.R.S. Employer Identification No.)
 2755 Campus Drive, Suite 155, San Mateo, California
 94403
 (650) 377-4381
 þ o
  o o þ
  o þ
  Outstanding atTitle of Each Class
    
    March 22, 2006Common Stock, no par value
    
    6,018,570




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AUTO UNDERWRITERS OF AMERICA, INC.
 TABLE OF CONTENTS
  PAGEPART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsBalance Sheets as of December 31, 2005 and June 30, 2005
    
    3Statements of Operations for the Three and Six Months Ended December 31
2005 and 2004
    
    4Statements of Cash Flows for the Six Months Ended December 31 2005 and 2004
    
    5Notes to Financial Statements
    
    6  7Item 2.
    
    Managements Discussion and Analysis of Financial Condition
    
    8  12Item 3.
    
    Controls and Procedures
    
    13PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    14Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    14Item 3.
    
    Default Upon Senior Securities
    
    14Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    14Item 5.
    
    Other Information
    
    14Item 6.
    
    Exhibits
    
    14
 2




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Part I. Financial Information
 
 Item 1. Financial Statements
 Auto Underwriters of America, Inc.
 
 Balance Sheets
 December 31, 2005
    
    
    June 30, 2005Assets:Cash and cash equivalents
    
    $
    15,403
    
    
    $
    68,112Finance receivables, net of allowance $2,533,923 and $2,323,089, respectively
    
    
    9,386,876
    
    
    
    10,322,936Other receivables
    
    
    1,352,727
    
    
    
    1,166,730Fixed assets, net of accumulated depreciation $39,866 and $16,360, respectively
    
    
    157,932
    
    
    
    177,874Inventory
    
    
    1,126,703
    
    
    
    661,352Prepaid and other assets
    
    
    75,236
    
    
    
    51,861Deferred financing cost
    
    
    292,192
    
    
    
    Total assets
    
    $
    12,407,069
    
    
    $
    12,448,865Liabilities and stockholders equity (deficit):Accounts payable and accrued liabilities
    
    $
    775,977
    
    
    $
    777,469Funding payable
    
    
    959,917
    
    
    
    769,886Income taxes payable
    
    
    
    
    
    
    121,676Convertible notes payable
    
    
    998,490
    
    
    
    61,742Senior debts
 revolving line of credit
    
    
    8,492,131
    
    
    
    8,145,528Deferred sales tax
    
    
    877,380
    
    
    
    732,420Advances from related parties
    
    
    668,467
    
    
    
    668,867Total liabilities
    
    
    12,772,362
    
    
    
    11,277,588Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity/(deficit):Preferred stock: no par value: 10,000,000 authorized
None issued or outstanding
    
    
    
    
    
    
    Common stock: no par value: 100,000,000 authorized
Issued and outstanding: 6,018,570 and 6,020,053 respectively
    
    
    5,711,654
    
    
    
    5,453,878Deferred compensation
    
    
    
    
    
    
    (230,175
    )Retained deficit
    
    
    (6,076,947
    )
    
    
    (4,052,426
    )Total stockholders equity/(deficit)
    
    
    (365,293
    )
    
    
    1,171,277Total liabilities and stockholders equity/(deficit)
    
    $
    12,407,069
    
    
    $
    12,448,865
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Auto Underwriters of America, Inc.
 
 Statements of Operations
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Sales
    
    $
    1,768,682
    
    
    $
    2,497,811
    
    
    $
    7,258,960
    
    
    $
    4,341,074Interest income
    
    
    532,647
    
    
    
    411,999
    
    
    
    1,068,596
    
    
    
    870,621Other
    
    
    69,034
    
    
    
    
    
    
    
    254,131
    
    
    
    2,370,363
    
    
    
    2,909,810
    
    
    
    8,581,687
    
    
    
    5,211,695Costs and expenses:Cost of sales
    
    
    1,863,788
    
    
    
    1,449,626
    
    
    
    5,390,502
    
    
    
    2,509,028Selling, general and administrative
    
    
    792,753
    
    
    
    856,152
    
    
    
    2,012,941
    
    
    
    1,580,275Provision for credit losses
    
    
    1,359,447
    
    
    
    461,056
    
    
    
    2,481,826
    
    
    
    831,228Discount on sales of receivables
    
    
    5,289
    
    
    
    
    
    
    
    83,744
    
    
    
    33,823Interest expense
    
    
    324,847
    
    
    
    223,798
    
    
    
    614,796
    
    
    
    444,029Depreciation and amortization
    
    
    91,185
    
    
    
    5,774
    
    
    
    106,989
    
    
    
    5,7744,437,309
    
    
    
    2,996,406
    
    
    
    10,690,798
    
    
    
    5,404,157Loss before income taxes
    
    
    (2,066,946
    )
    
    
    (86,596
    )
    
    
    (2,109,111
    )
    
    
    (192,462
    )Provision for income tax benefit
    
    
    121,676
    
    
    
    29,500
    
    
    
    121,676
    
    
    
    65,500Net loss
    
    $
    (1,945,270
    )
    
    $
    (57,096
    )
    
    $
    (1,987,435
    )
    
    $
    (126,962
    )Basic and diluted net loss per share
    
    $
    (0.32
    )
    
    $
    (0.03
    )
    
    $
    (0.33
    )
    
    $
    (0.06
    )Weighted average shares outstanding
    
    
    6,020,021
    
    
    
    2,200,053
    
    
    
    6,020,037
    
    
    
    2,200,053
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Auto Underwriters of America, Inc.
 
 Statements of Cash Flows
(Unaudited)
 Six Months EndedDecember 31,2005
    
    
    2004Operating activities:Net Loss
    
    $
    (1,987,435
    )
    
    $
    (126,962
    )Adjustments to reconcile net loss from continuing operations
to net cash used in provided by operating activities:Stock compensation expense
    
    
    20,000
    
    
    
    Depreciation and amortization
    
    
    106,989
    
    
    
    5,774Discount on sale of finance receivables
    
    
    83,744
    
    
    
    33,823Changes in finance receivables, net:Finance receivable
    
    
    (3,465,895
    )
    
    
    (1,759,304
    )Provision for credit losses
    
    
    2,481,826
    
    
    
    831,228Inventory acquired in repossession
    
    
    1,771,860
    
    
    
    1,414,547Subtotal finance receivables
    
    
    787,791
    
    
    
    486,471Changes in operating assets and liabilities:Deferred financing cost
    
    
    (145,500
    )
    
    
    Other receivables
    
    
    (185,997
    )
    
    
    (763,306
    )Inventory
    
    
    (465,351
    )
    
    
    (902,566
    )Prepaid and other assets
    
    
    (23,375
    )
    
    
    (18,594
    )Accounts payable and accrued liabilities
    
    
    426,315
    
    
    
    (41,306
    )Income tax payable
    
    
    (121,676
    )
    
    
    (65,500
    )Deferred sales tax
    
    
    107,873
    
    
    
    131,559Net cash used in operating activities
    
    
    (1,396,622
    )
    
    
    (1,260,607
    )Investing activities:Purchase of property and equipment
    
    
    (3,564
    )
    
    
    Proceeds from sale of finance receivables
    
    
    
    
    
    
    1,315,085Purchase of loan portfolio
    
    
    64,526
    
    
    
    Net cash provided by investing activities
    
    
    60,962
    
    
    
    1,315,085Financing activities:Repayments of other debt
    
    
    (33,252
    )
    
    
    (41,959
    )Proceeds from convertible note payable
    
    
    970,000
    
    
    
    Borrowings under senior credit facility, net
    
    
    346,603
    
    
    
    (122,169
    )Advances from related parties, net
    
    
    (400
    )
    
    
    94,403Net cash (used in) provided by financing activities
    
    
    1,282,951
    
    
    
    (69,725
    )Decrease in cash and cash equivalents
    
    
    (52,709
    )
    
    
    (15,247
    )Cash at beginning of period
    
    
    68,112
    
    
    
    101,019Cash at end of period
    
    $
    15,403
    
    
    $
    85,772Cash paid for:Income tax
    
    $
    
    
    
    $
    Interest
    
    
    597,314
    
    
    
    444,029Non-cash transaction:Shares issued for accounts payable
    
    
    237,776
    
    
    
    
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Auto Underwriters of America, Inc.
 
 Notes to Financial Statements
(Unaudited)
 NOTE 1
 BASIS OF PRESENTATION
  NOTE 2
 FINANCE RECEIVABLES
  December 31,
    
    
    June 30,2005
    
    
    2005Finance receivables
    
    $
    11,920,799
    
    
    $
    12,646,025Allowance for credit losses
    
    
    (2,533,923
    )
    
    
    (2,323,089
    )$
    9,386,876
    
    
    $
    10,322,936
  Six Months EndedDecember 31,2005
    
    
    2004Balance at beginning of period
    
    $
    2,323,089
    
    
    $
    2,007,982Provision for credit losses
    
    
    2,481,826
    
    
    
    831,228Net charge offs
    
    
    (4,042,852
    )
    
    
    (2,620,382
    )Net recoveries
    
    
    1,771,860
    
    
    
    1,414,547Balance at end of period
    
    $
    2,533,923
    
    
    $
    1,633,375
 NOTE 3
 REVOLVING CREDIT FACILITIES
  6




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NOTE 4
 CONVERTIBLE NOTES PAYABLE
  NOTE 5
 COMMON STOCK
  -
    
    Auto Underwriters issued 40,000 shares of its common stock to one consultant for his
services. These shares were recorded at fair value of $20,000.-
    
    300,000 shares of Auto Underwriters common stock previously issued to a consultant
were cancelled.-
    
    Auto Underwriter issued 150,000 shares of its common stock to an individual to repay
the payable in the amount of $75,000. These shares were recorded at fair value of
$225,000.-
    
    Auto Underwriter issued 108,517 shares of its common stock to two individuals in
connection with purchase of finance receivables. These shares were recorded at fair value
of $162,776.
 NOTE 6
 SUBSEQUENT EVENTS
   7




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Cautionary Statement Regarding Forward-looking Information
  
    
    The creditworthiness of contract obligors;
    
    Economic factors affecting delinquencies;
    
    Our ability to retain and attract experienced and knowledgeable
personnel;
    
    Our ability to purchase installment contracts; and
    
    Our ability to compete in the consumer finance industry.
   Business Overview
    8




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
    
    Our ability to procure suitable real estate at reasonable costs. Real
estate acquisition will be an increasing challenge as we enter large,
multi-store markets.
    
    Our ability to build our management team to support the store growth.
    
    Our ability to maintain a competitive indirect finance program for
franchise and independent dealers.
  Results of Operations
  Auto Underwriters of America, Inc(Unaudited)Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Sales
    
    $
    1,768,682
    
    
    $
    2,497,811
    
    
    $
    7,258,960
    
    
    $
    4,341,074Interest income
    
    
    532,647
    
    
    
    411,999
    
    
    
    1,068,596
    
    
    
    870,621Other
    
    
    69,034
    
    
    
    
    
    
    
    254,131
    
    
    
    2,370,363
    
    
    
    2,909,810
    
    
    
    8,581,687
    
    
    
    5,211,695Costs and expenses:Cost of sales
    
    
    1,863,788
    
    
    
    1,449,626
    
    
    
    5,390,502
    
    
    
    2,542,851Selling, general and administrative
    
    
    792,753
    
    
    
    856,152
    
    
    
    2,012,941
    
    
    
    1,580,275Provision for credit losses
    
    
    1,359,447
    
    
    
    461,056
    
    
    
    2,481,826
    
    
    
    831,228Discount on sale of loans
    
    
    5,289
    
    
    
    
    
    
    
    83,744
    
    
    
    Interest expense
    
    
    324,847
    
    
    
    223,798
    
    
    
    614,796
    
    
    
    444,029Depreciation and amortization
    
    
    91,185
    
    
    
    5,774
    
    
    
    106,989
    
    
    
    5,7744,437,309
    
    
    
    2,996,406
    
    
    
    10,690,798
    
    
    
    5,404,157Loss before income taxes
    
    $
    (2,066,946
    )
    
    $
    (86,596
    )
    
    $
    (2,109,111
    )
    
    $
    (192,462
    )
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Three months ended December 31, 2005 compared to the three months ended December 31, 2004
         Six months ended December 31, 2005 compared to the six months ended December 31, 2004
    10




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Liquidity and Capital Resources
  Six Months EndedDecember 31,2005
    
    
    2004Operating activities:Net income (loss)
    
    $
    (1,987,435
    )
    
    $
    (126,962
    )Stock compensation expense
    
    
    20,000Depreciation and amortization
    
    
    106,989
    
    
    
    5,774Discount on sale of loans
    
    
    83,744
    
    
    
    33,823Changes in finance receivables, net:
    
    
    787,791
    
    
    
    486,471Changes in operating assets and liabilities:
    
    
    (407,711
    )
    
    
    (1,659,713
    )Net cash used in operating activities
    
    
    (1,396,622
    )
    
    
    (1,260,607
    )Cash provided by investing activities:
    
    
    60,962
    
    
    
    1,315,085Cash provided by financing activities:
    
    
    1,282,951
    
    
    
    (69,725
    )Increase (decrease) in cash
    
    $
    (52,709
    )
    
    $
    (15,247
    )
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Critical Accounting Policies
   Seasonality
  12




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Item 3. Controls and Procedures
    13




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PART II. OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGSNot Applicable
 
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.On December 30, 2005, we issued a total of 298,517 shares of
common stock to three investors in separate private transactions
pursuant to Section 4(2) of the Securities Act of 1933, as
amended. The transactions are as follows: (i) we issued 40,000
shares of common stock to our former chief financial officer as
partial payment for services; (ii) we issued 150,000 shares of
common stock to Lawrence Gunnels, an individual who provides us
with a floor plan for our automobile inventory, in consideration
for the settlement of approximately $75,000 owed to Mr. Gunnels;
and (iii) we issued 108,517 shares of common stock to an
unaffiliated third party automobile dealer in consideration for
the purchase of certain finance receivables and other assets
valued at approximately $66,000.
 
 ITEM 3.
    
    DEFAULT UPON SENIOR SECURITIESNot Applicable
 
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNot Applicable
 
 ITEM 5.
    
    OTHER INFORMATIONNot Applicable
 
 ITEM 6.
    
    EXHIBITS31.1
    
    Principal Executive Officer Certification under Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Principal Financial Officer Certification under Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Principal Executive Officer Certification under Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Principal Financial Officer Certification under Section 906 of the
Sarbanes-Oxley Act of 2002
 14




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SIGNATURES
  Auto Underwriters of America, Inc.By:
    /s/ Dean AntonisDean AntonisPresident and Treasurer (Principal Executive,
Financial and Accounting Officer)  15