##### Table of Contents



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:March 31, 2006
    
    0-11582
 Auto Underwriters of America, Inc.
  California
    
    94-2915849(State or other jurisdiction of incorporation or organization)
    
    (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
    
    May 15, 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 March 31, 2006 and June 30, 2005
    
    
    3Statements of Operations for the Three and Nine Months Ended March 31, 2006 and 2005
    
    
    4Statements of Cash Flows for the Nine Months Ended March 31, 2006 and 2005
    
    
    5Notes to Financial Statements
    
    
    6  7Item 2.
    
    Managements Discussion and Analysis of Financial Condition
    
    
    8Item 3.
    
    Controls and Procedures
    
    
    12PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    13Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    13Item 3.
    
    Default Upon Senior Securities
    
    
    13Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    13Item 5.
    
    Other Information
    
    
    13Item 6.
    
    Exhibits
    
    
    13EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 Auto Underwriters of America, Inc.
 
 Balance Sheets
 March 31, 2006
    
    
    June 30, 2005Assets:Cash and cash equivalents
    
    $
    19,810
    
    
    $
    68,112Finance receivables, net of allowance $2,380,906 and $2,323,089, respectively
    
    
    9,440,802
    
    
    
    10,322,936Other receivables
    
    
    1,210,196
    
    
    
    1,166,730Inventory
    
    
    1,004,406
    
    
    
    661,352Fixed assets, net of accumulated depreciation $33,668 and $16,360, respectively
    
    
    148,042
    
    
    
    177,874Prepaid and other assets
    
    
    80,757
    
    
    
    51,861Deferred
financing costs
    
    
    348,794
    
    
    
    $
    12,252,807
    
    
    $
    12,448,865Liabilities
and stockholders equity/(deficit):Accounts payable and accrued liabilities
    
    $
    868,375
    
    
    $
    777,469Funding payable
    
    
    
    
    
    
    769,886Income taxes payable
    
    
    
    
    
    
    121,676Short term debt
    
    
    2,000,452
    
    
    
    61,742Senior debts  revolving line of credit
    
    
    8,779,329
    
    
    
    8,145,528Deferred sales tax
    
    
    842,905
    
    
    
    732,420Advances from related parties
    
    
    675,832
    
    
    
    668.86713,166,893
    
    
    
    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
    
    
    5,758,220
    
    
    
    5,453,878Deferred compensation
    
    
    
    
    
    
    (230,175
    )Retained deficit
    
    
    (6,672,306
    )
    
    
    (4,052,426
    )Total stockholders equity/(deficit)
    
    
    (914,086
    )
    
    
    1,171,277Total liabilities and stockholders equity/(deficit)
    
    $
    12,252,807
    
    
    $
    12,448,865
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Auto Underwriters of America, Inc.
 
 Statements of Operations
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Sales
    
    $
    2,814,314
    
    
    $
    4,446,818
    
    
    $
    10,073,274
    
    
    $
    8,787,892Interest income
    
    
    480,703
    
    
    
    409,819
    
    
    
    1,549,299
    
    
    
    1,280,440Other
    
    
    47,912
    
    
    
    
    
    
    
    302,043
    
    
    
    3,342,929
    
    
    
    4,856,637
    
    
    
    11,924,616
    
    
    
    10,068,332Costs and expenses:Cost of sales
    
    
    1,863,911
    
    
    
    2,704,700
    
    
    
    7,254,413
    
    
    
    5,247,552Selling, general and administrative
    
    
    979,359
    
    
    
    1,001,910
    
    
    
    2,870,622
    
    
    
    2,499,622Provision for credit losses
    
    
    752,916
    
    
    
    475,396
    
    
    
    3,234,742
    
    
    
    1,306,624Discount on sales of receivables
    
    
    
    
    
    
    
    
    
    
    83,744
    
    
    
    48,740Interest expense
    
    
    372,219
    
    
    
    196,529
    
    
    
    987,015
    
    
    
    674,381Depreciation and amortization
    
    
    91,560
    
    
    
    5,806
    
    
    
    198,549
    
    
    
    11,5804,059,965
    
    
    
    4,384,341
    
    
    
    14,629,085
    
    
    
    9,788,499Income/(loss) before income taxes
    
    
    (717,036
    )
    
    
    472,296
    
    
    
    (2,704,469
    )
    
    
    279,833Provision for income tax (income tax benefit)
    
    
    
    
    
    
    160,500
    
    
    
    (121,676
    )
    
    
    95,000Net income/(loss)
    
    $
    (717,036
    )
    
    $
    311,796
    
    
    $
    (2,582,793
    )
    
    $
    184,833Basic and diluted net income/(loss) per share:
    
    $
    (0.12
    )
    
    $
    0.14
    
    
    $
    (0.43
    )
    
    $
    0.08Weighted average shares outstanding:
    
    
    6,020,053
    
    
    
    2,306,942
    
    
    
    6,019,555
    
    
    
    2,235,162
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Auto Underwriters of America, Inc.
 
 Statements of Cash Flows
(Unaudited)
 Nine Months EndedMarch 31,2006
    
    
    2005Operating activities:Net income/(loss)
    
    $
    (2,582,793
    )
    
    $
    184,833Adjustments to reconcile net income(loss)
to net cash (used in) operating activities:Stock compensation expense
    
    
    20,000
    
    
    
    Depreciation and amortization
    
    
    198,549
    
    
    
    11,580Discount on sale of finance receivables
    
    
    83,744
    
    
    
    48,740Imputed interest
    
    
    30,256
    
    
    
    Changes in finance receivables, net:Finance receivable
    
    
    (4,134,310
    )
    
    
    (5,209,636
    )Provision for credit losses
    
    
    3,234,742
    
    
    
    1,306,624Inventory acquired in repossession
    
    
    1,633,432
    
    
    
    2,147,940Subtotal finance receivables
    
    
    733,864
    
    
    
    (1,755,072
    )Changes in operating assets and liabilities:Deferred financing cost
    
    
    (283,500
    )Other receivables
    
    
    (43,466
    )
    
    
    (528,488
    )Inventory
    
    
    (343,054
    )
    
    
    (1,115,327
    )Prepaid and other assets
    
    
    (28,896
    )
    
    
    (21,594
    )Accounts payable and accrued liabilities
    
    
    328,682
    
    
    
    239,724Income tax payable
    
    
    (121,676
    )
    
    
    95,000Funding payable
    
    
    (769,886
    )
    
    
    (59,107
    )Deferred sales tax
    
    
    73,398
    
    
    
    212,016Net cash used in operating activities
    
    
    (2,704,778
    )
    
    
    (2,687,695
    )Investing activities:Purchase of property and equipment
    
    
    (3,564
    )
    
    
    Proceeds from sale of finance receivables
    
    
    64,526
    
    
    
    1,961,140Net cash (used in) provided by investing activities
    
    
    60,962
    
    
    
    1,961,140Financing activities:Repayments of other debt, net
    
    
    (35,252
    )
    
    
    (66,857
    )Proceeds from convertible note payable
    
    
    990,000
    
    
    
    Proceeds
from secured notes payable
    
    
    1,000,000
    
    
    
    Borrowings under senior credit facility, net
    
    
    633,801
    
    
    
    638,399Advances from related parties, net
    
    
    6,965
    
    
    
    88,946Net cash provided by financing activities
    
    
    2,595,514
    
    
    
    660,488Decrease in cash and cash equivalents
    
    
    (48,302
    )
    
    
    (66,067
    )Cash at: Beginning of period
    
    
    68,112
    
    
    
    101,019Cash at: End of period
    
    $
    19,810
    
    
    $
    34,952Cash paid for:Income taxInterest
    
    
    934,775
    
    
    
    674,381Non-cash transaction:Shares issued for accounts payable
    
    
    75,000
    
    
    
    Discount
on notes payable
    
    
    16,310
    
    
    
    Shares
issued to purchase receivables
    
    
    162,776
    
    
    
    
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Auto Underwriters of America, Inc.
 
 Notes to Financial Statements
(Unaudited)
 NOTE 1  BASIS OF PRESENTATION
  NOTE 2  FINANCE RECEIVABLES
  March 31,
    
    
    June 30,2006
    
    
    2005Finance receivables
    
    $
    11,821,708
    
    
    $
    12,646,025Allowance for credit losses
    
    
    (2,380,906
    )
    
    
    (2,323,089
    )$
    9,440,802
    
    
    $
    10,322,936
  Nine Months EndedMarch 31,2006
    
    
    2005Balance at beginning of period
    
    $
    2,323,089
    
    
    $
    2,007,982Provision for credit losses
    
    
    3,234,742
    
    
    
    1,306,624Net charge offs
    
    
    (4,810,357
    )
    
    
    (3,471,482
    )Net recoveries
    
    
    1,633,432
    
    
    
    2,147,940Balance at end of period
    
    $
    2,380,906
    
    
    $
    2,055,765
 NOTE 3  REVOLVING CREDIT FACILITIES
  6




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NOTE 4
 SHORT TERM DEBTS
  NOTE 5
 EQUITY
  
    
    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 Underwriters 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.
    
    Auto Underwriters granted 250,000 units of five year warrants
to the investors and broker from the $1,000,000 financing to purchase
the Companys common stock at $1.50 per share, these warrants
have a relative fair value of $16,310.
 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.
  9




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Results of Operations
  Auto Underwriters of America, Inc(Unaudited)Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    

    2005Revenues:Sales
    
    $
    2,814,314
    
    
    $
    4,446,818
    
    
    $
    10,073,274
    
    
    $
    8,787,892Interest income
    
    
    480,703
    
    
    
    409,819
    
    
    
    1,549,299
    
    
    
    1,280,440Other
    
    
    47,912
    
    
    
    
    
    
    
    302,043
    
    
    
    3,342,929
    
    
    
    4,856,637
    
    
    
    11,924,616
    
    
    
    10,068,332Costs and expenses:Cost of sales
    
    
    1,863,911
    
    
    
    2,704,700
    
    
    
    7,254,413
    
    
    
    5,247,552Selling, general and administrative
    
    
    979,359
    
    
    
    1,001,910
    
    
    
    2,870,622
    
    
    
    2,548,362Provision for credit losses
    
    
    752,916
    
    
    
    475,396
    
    
    
    3,234,742
    
    
    
    1,306,624Discount on sale of loans
    
    
    
    
    
    
    
    
    
    
    83,744
    
    
    
    Interest expense
    
    
    372,219
    
    
    
    196,529
    
    
    
    987,015
    
    
    
    674,381Depreciation and amortization
    
    
    91,560
    
    
    
    5,806
    
    
    
    198,549
    
    
    
    11,5804,059,965
    
    
    
    4,384,341
    
    
    
    14,629,085
    
    
    
    9,788,499Income/(loss) before income taxes
    
    $
    (717,036
    )
    
    $
    472,296
    
    
    $
    (2,704,469
    )
    
    $
    279,833
 Three months ended March 31, 2006 compared to the three months ended March 31, 2005
         10




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Nine months ended March 31, 2006 compared to the nine months ended March 31, 2005
        Liquidity and Capital Resources
  Nine Months EndedMarch 31,2006
    
    
    2005Operating activities:Net income (loss)
    
    $
    (2,582,793
    )
    
    $
    184,833Stock compensation expense
    
    
    20,000
    
    
    
    Depreciation and amortization
    
    
    198,549
    
    
    
    11,580Discount on sale of finance receivables
    
    
    83,744
    
    
    
    48,740Imputed interest
    
    
    30,256
    
    
    
    Changes in finance receivables, net:
    
    
    733,864
    
    
    
    (1,755,072
    )Changes in operating assets and liabilities:
    
    
    (1,188,398
    )
    
    
    (1,177,776
    )Net cash used in operating activities
    
    
    (2,704,778
    )
    
    
    (2,687,695
    )Cash provided by investing activities:
    
    
    60,962
    
    
    
    1,961,140Cash provided by financing activities:
    
    
    2,595,514
    
    
    
    660,488Decrease in cash
    
    $
    (48,302
    )
    
    $
    (66,067
    )
 11




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Critical Accounting Policies
   Seasonality
  
 Item 3. Controls and Procedures
     12




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULT UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 31.1
    
    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
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SIGNATURES
  Auto Underwriters of America, Inc.By:
    
    /s/ Dean AntonisDean AntonisPresident and Treasurer (Principal Executive,Financial and Accounting Officer)Dated: May 15, 2006
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31.1
    
    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