Auto Underwriters of America (ADWT) 10QSB 2006 Q2 Quarterly report (small business)

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.

(Exact name of registrant as specified in its charter)

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
(Address of principal executive offices)

94403
(Zip Code)

(650) 377-4381
(Registrant’s telephone number, including area code)

     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. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filero Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Outstanding at
Title of Each Class	March 22, 2006
Common Stock, no par value	6,018,570

AUTO UNDERWRITERS OF AMERICA, INC.

TABLE OF CONTENTS

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

2

Part I. Financial Information

Item 1. Financial Statements

Auto Underwriters of America, Inc.

Balance Sheets
(Unaudited)

	December 31, 2005			June 30, 2005
Assets:
Cash and cash equivalents	$	15,403		$	68,112
Finance receivables, net of allowance $2,533,923 and $2,323,089, respectively		9,386,876			10,322,936
Other receivables		1,352,727			1,166,730
Fixed assets, net of accumulated depreciation $39,866 and $16,360, respectively		157,932			177,874
Inventory		1,126,703			661,352
Prepaid and other assets		75,236			51,861
Deferred financing cost		292,192			—
Total assets	$	12,407,069		$	12,448,865
Liabilities and stockholders’ equity (deficit):
Accounts payable and accrued liabilities	$	775,977		$	777,469
Funding payable		959,917			769,886
Income taxes payable		—			121,676
Convertible notes payable		998,490			61,742
Senior debts — revolving line of credit		8,492,131			8,145,528
Deferred sales tax		877,380			732,420
Advances from related parties		668,467			668,867
��
Total liabilities		12,772,362			11,277,588
Commitments 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			5,453,878
Deferred compensation		—			(230,175	)
Retained deficit		(6,076,947	)		(4,052,426	)
Total stockholders’ equity/(deficit)		(365,293	)		1,171,277
Total liabilities and stockholders’ equity/(deficit)	$	12,407,069		$	12,448,865

3

Auto Underwriters of America, Inc.

Statements of Operations
(Unaudited)

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
Revenues:
Sales	$	1,768,682		$	2,497,811		$	7,258,960		$	4,341,074
Interest income		532,647			411,999			1,068,596			870,621
Other		69,034			—			254,131			—
		2,370,363			2,909,810			8,581,687			5,211,695
Costs and expenses:
Cost of sales		1,863,788			1,449,626			5,390,502			2,509,028
Selling, general and administrative		792,753			856,152			2,012,941			1,580,275
Provision for credit losses		1,359,447			461,056			2,481,826			831,228
Discount on sales of receivables		5,289			—			83,744			33,823
Interest expense		324,847			223,798			614,796			444,029
Depreciation and amortization		91,185			5,774			106,989			5,774
		4,437,309			2,996,406			10,690,798			5,404,157
Loss before income taxes		(2,066,946	)		(86,596	)		(2,109,111	)		(192,462	)
Provision for income tax benefit		121,676			29,500			121,676			65,500
Net 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

4

Auto Underwriters of America, Inc.

Statements of Cash Flows
(Unaudited)

	Six Months Ended
	December 31,
	2005			2004
Operating 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			5,774
Discount on sale of finance receivables		83,744			33,823
Changes in finance receivables, net:
Finance receivable		(3,465,895	)		(1,759,304	)
Provision for credit losses		2,481,826			831,228
Inventory acquired in repossession		1,771,860			1,414,547
Subtotal finance receivables		787,791			486,471
Changes 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			131,559
Net 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		—			1,315,085
Purchase of loan portfolio		64,526			—
Net cash provided by investing activities		60,962			1,315,085
Financing 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	)		94,403
Net 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			101,019
Cash at end of period	$	15,403		$	85,772
Cash paid for:
Income tax	$	—		$	—
Interest		597,314			444,029
Non-cash transaction:
Shares issued for accounts payable		237,776			—

5

Auto Underwriters of America, Inc.

Notes to Financial Statements
(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of Auto Underwriters of America, Inc. (“Auto Underwriters”) 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 (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in Auto Underwriters’ Annual Report filed with the SEC on Form 10-KSB. 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 the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal 2005 as reported in the 10-KSB have been omitted.

NOTE 2 — FINANCE RECEIVABLES

Auto Underwriters originates installment sale contracts from the sale of used vehicles at its dealerships. These installment sale contracts typically include interest rates ranging from approximately 12% to 27% per annum and provide for payments over periods ranging from 18 to 60 months. The components of finance receivables as of December 31, 2005 and June 30, 2005 are as follows:

	December 31,			June 30,
	2005			2005
Finance receivables	$	11,920,799		$	12,646,025
Allowance for credit losses		(2,533,923	)		(2,323,089	)
	$	9,386,876		$	10,322,936

Changes in the finance receivables allowance for credit losses for the six months ended December 31, 2005 and 2004 are as follows:

	Six Months Ended
	December 31,
	2005			2004
Balance at beginning of period	$	2,323,089		$	2,007,982
Provision for credit losses		2,481,826			831,228
Net charge offs		(4,042,852	)		(2,620,382	)
Net recoveries		1,771,860			1,414,547
Balance at end of period	$	2,533,923		$	1,633,375

NOTE 3 — REVOLVING CREDIT FACILITIES

Auto Underwriters has a $8,500,000 revolving line of credit (“LOC”) with Oak Rock Financial, LLC, bearing interest at the greater of prime+7% or 13.75% and expires on March 31, 2006. The LOC is secured by all of Auto Underwriters’ assets and a personal validity guarantee by our President. At December 31, 2005, the LOC balance outstanding was $8,492,131.

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NOTE 4 — CONVERTIBLE NOTES PAYABLE

During the first six months of fiscal 2006, Auto Underwriters borrowed $970,000 from several investors. These loans are unsecured, bear interest at 9.25%, and are due February 28, 2007. These loans are convertible into 646,667 shares of common stock at conversion price of $1.50 per share. Auto Underwriters analyzed these instruments for derivative accounting consideration under SFAS 133 and EITF 00-19. Auto Underwriters determined the convertible notes were conventional and met the criteria for classification in stockholders equity under SFAS 133 and EITF 00-19. Therefore, derivative accounting is not applicable for these convertible notes payable. Auto Underwriters also analyzed these instruments for Beneficial Conversion Feature under EITF 98-5 and EITF 00-27. Because the conversion prices exceed the market trading price of Auto Underwriters’ common stock when the loans were issued, a Beneficial Conversion Feature was not created.

NOTE 5 — COMMON STOCK

During the six months ended December 31, 2005:

- 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

On January 31, 2006, Auto Underwriters of America issued and sold $20,000 in unsecured convertible promissory notes in a private placement to a limited number of accredited investors. The notes bear interest at the rate of 9.25 % per annum, payable semi-annually on February 28, 2006, August 31, 2006 and February 28, 2007. The notes will mature on February 28, 2007 and the unpaid principle balance due on the notes is convertible at the option of the holder into the Company’s common stock at $1.50 per share. Interest due on the notes is not convertible and must be paid in cash. The Company paid the placement agent a sales commission 8%, an investment banking and marketable fee of 2% and a nonaccountable expense allowance of 5% of the gross proceeds of $20,000. This was the final closing of the Company’s private placement of unsecured convertible promissory notes and total gross proceeds including proceeds from the sale of the convertible notes identified in Note 4 above, was $990,000.

Between February 21, 2006 and March 7, 2006, Auto Underwriters issued and sold an aggregate of 10 units of the Company’s securities (the “Units”) pursuant to a private placement to a limited number of accredited investors. The Units were sold at a price of $100,000 per Unit, with each Unit consisting of one six month secured 10% promissory note and one warrant to purchase 20,000 shares of the Company’s common stock, exercisable for a period of five years, at an exercise price of $1.50 per share. The offer and sales were conducted on behalf of the Company by a NASD-licensed broker-dealer who served as managing dealer and received a sales commission of 7%, and investment banking and marketing fee of 2%, and a nonaccountable expense allowance of 2% of the gross proceeds of $1,000,000. For every Unit sold, the managing dealer also received a warrant to purchase 5,000 shares of the Company’s common stock, exercisable for a period of 5 years at $1.50 per share.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.

Cautionary Statement Regarding Forward-looking Information

     This Form 10-QSB for the quarter ended December 31, 2005 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding, among other items, our growth strategies, anticipated trends in our business and our future results of operation, market conditions in the automobile finance industry and the impact of governmental regulation. These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, many of which are beyond our control. Actual results could differ materially from these forward-looking statements as a result of, among other things:

• 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.

     In addition, the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions, as they relate to us, our business or our management, are intended to identify forward-looking statements.

     We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Form 10-QSB. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this Form 10-QSB may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

Business Overview

     Auto Underwriters of America, Inc. began operations in August 1983 under the name Advanced Cellular Technology, Inc. and developed and marketed cellular mobile telephone control units and resold used PBX telecommunications equipment. On December 31, 1990, we suspended operations and remained inactive until December 2002, when we adopted our current name and began our principal operations as a specialty finance company and specialty retailer of used cars and light trucks.

     During the three month period ended December 31, 2005, many of our customers and our Company were affected by macroeconomic factors which had a decidedly negative effect on our results for the period. These factors consisted of: a) the impact of rising energy prices which peaked during the period placing a strain on our customers’ ability to meet all of their financial obligations and created a difficult environment for vehicle sales; b) hurricane Rita created significant disruptions to our customers’ lives, as many people were affected and businesses were shut down for various periods of time; and c) hurricane Rita and Katrina created a relatively tight supply of vehicle inventory. We expect some lingering effects of the hurricanes on sales and supply of vehicle inventory in our next quarter.

     We began our specialty finance company operations in December 2002 to engage in the purchasing and servicing of non-prime installment contracts (“Contracts”) generated by automobile dealers in the sale of new and used automobiles and light trucks. We provide financing programs to automobile dealers through our website Autounderwriters.com which allows the dealer to input various fields of information into an online financing application and obtain an automatic credit decision within 30 seconds. Generally our target customers do not meet the credit standards of traditional lenders, such as banks and credit unions, because of the age of the vehicle being financed or the customer’s credit history. Unlike traditional lenders, which look primarily to the credit history of the borrower in making lending decisions and typically finance new automobiles, we are willing to provide financing for purchases made by our customers who have short or impaired credit histories and for used automobiles. In making decisions regarding the financing of a particular contract, we consider several factors related to the borrower: place and length of residence, current and prior job status, history in

8

making installment payments for automobiles, current income and credit history. In addition, we examine the value of the automobile in relation to the purchase price and the term of the contract.

     We began our specialty automotive retailing operations which focuses on the “Buy Here/Pay Here” segment of the used car market in January 2004. We purchase, recondition, sell and finance used vehicles from three dealerships in Houston, Texas that operate under the name Affordable Cars & Trucks. We advertise extensively on television and in auto sales magazines emphasizing our multiple locations, wide selection of vehicles, and ability to provide financing to a wide array of customers.

     We are still at an early stage in the rollout of our financing programs and retail concept. The primary drivers for future earnings growth will be vehicle unit sales growth from geographic expansion, comparable store sales increases, and interest income from growth in our finance receivable portfolio. During the next two years, we plan to focus our growth primarily on adding stores to new markets in the state of Texas. In addition, in fiscal 2006 we plan to expand our network of automobile dealers that utilize our financing programs in the states we currently service. Over the three-year period, we plan to open new used car stores. We also expect used unit comparable store sales increases, reflecting the multi-year ramp up in sales of newly opened stores as they mature and continued market share gains at stores that have reached mature sales levels. On a combined basis, we expect that new store openings and comparable store used unit increases will drive total used unit growth.

     The principal challenges we face in expanding our store and dealer base and meeting our growth targets include:

• 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.

     We staff each newly opened store with an experienced management team, including the general manager, purchasing manager, and business office manager, as well as a number of experienced sales managers and account servicing personnel. We must therefore be continually recruiting, training, and developing managers to support future store openings. If at any time we believe that the rate of store growth is causing our performance to falter, we will slow the growth rate.

Results of Operations

     The following table summarizes our results of operations for the three and six months ended December 31 2005 and 2004.

	Auto Underwriters of America, Inc
	(Unaudited)
	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
Revenues:
Sales	$	1,768,682		$	2,497,811		$	7,258,960		$	4,341,074
Interest income		532,647			411,999			1,068,596			870,621
Other		69,034			—			254,131			—
		2,370,363			2,909,810			8,581,687			5,211,695
Costs and expenses:
Cost of sales		1,863,788			1,449,626			5,390,502			2,542,851
Selling, general and administrative		792,753			856,152			2,012,941			1,580,275
Provision for credit losses		1,359,447			461,056			2,481,826			831,228
Discount on sale of loans		5,289			—			83,744			—
Interest expense		324,847			223,798			614,796			444,029
Depreciation and amortization		91,185			5,774			106,989			5,774
		4,437,309			2,996,406			10,690,798			5,404,157
Loss before income taxes	$	(2,066,946	)	$	(86,596	)	$	(2,109,111	)	$	(192,462	)

9

Three months ended December 31, 2005 compared to the three months ended December 31, 2004

Revenues

     Total revenues decreased $539,447 for the three month period ended December 31, 2005 compared to the corresponding prior period. Revenues decreased principally as a result of the significant slow-down in vehicle sales during the period. A couple of factors combined to produce a decidedly negative effect on our sales for the period. These factors consisted of: a) the impact of rising energy prices which peaked during the period placing a strain on our customers’ ability to meet all of their financial obligations and created a difficult environment for vehicle sales, and b) hurricane Rita created significant disruptions to our customers’ lives, as many people were affected and businesses were shut down for various periods of time. We expect some lingering effects of the hurricane on sales, including a tight supply of vehicle inventory.

Cost of Sales

     Cost of sales as a percentage of automobile and light truck sales was 105.4% or $1,863,788 for the three month period ended December 31, 2005 compared to 58.0% or $1,449,626 for the corresponding prior period ended December 31, 2004. Our gross margin percentages were negatively affected during the period by short-term supply shortages brought on by Hurricanes Katrina and Rita, which contributed to the significant slow-down in new car sales in the Houston area which provide a source of trade-ins, increased vehicle repair expenses, and by increased fuel costs. We expect our gross margin to be negatively affected because of used vehicle supply shortages to linger through the next period.

Selling, General and Administrative Expenses

     Selling, general and administrative expenses decreased by $63,399 for the three month period ended December 31, 2005 compared to the corresponding prior period. This decrease was primarily attributable to decreased general operating expenses. Selling, general and administrative expenses as a percentage of total income was 33.4% for the three month period ending December 31, 2005 compared to 29.4% for the same corresponding prior period.

Interest Expense

     Interest expense increased to $324,847 for the three month period ended December 31, 2005 as compared to $223,798 for the corresponding prior period. The indebtedness as of December 31, 2005 increased to $8,492,131 compared to $6,363,089 as of December 31, 2004. The increase in interest expense was primarily due to the increase in borrowings from a line of credit as we financed our increase in the receivable base through the purchase of a loan portfolio and loan originations from our direct and indirect lending operations.

Six months ended December 31, 2005 compared to the six months ended December 31, 2004

Revenues

     Total revenues increased to $8,581,687 for the six month period ended December 31, 2005 compared to $5,211,695 for the corresponding prior period principally as a result of increase unit sales from our automotive specialty retailing operations during the first three months of the period and an increase in interest income due to an increase in the outstanding loan portfolio .

     Cost of sales as a percentage of automobile and light truck sales was 74.3% or $5,390,502 for the six month period ended December 31, 2005. During the corresponding period ended December 31, 2004, cost of sales as a percentage of automobile and light truck sales was 57.8% or $2,509,028. Our gross margin percentages were negatively affected during the last three months of the period by short-term supply shortages brought on by Hurricanes Katrina and Rita, which contributed to the significant slow-down in new car sales in the Houston area which provide a source of trade-ins, increased vehicle repair expenses, and by increased fuel costs. We expect our gross margin to be negatively affected because of used vehicle supply shortages to linger through the next quarter.

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Selling, General and Administrative Expenses

     Selling, general and administrative expenses increased by $432,666 for the six month period ended December 31, 2005 compared to the corresponding period ended December 31, 2004. This increase was primarily attributable to additional staffing, increased general operating expenses and the opening of automotive retailing facilities.

Interest Expense

     Interest expense increased to $614,796 for the six month period ended December 31, 2005 as compared to $444,029 for the corresponding period ended December 31, 2004. The increase in interest expense was primarily due to the increase in borrowings from a line of credit as we financed our increase in the receivable base through the purchase of loan portfolios and loan originations from our direct and indirect lending operations.

Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources for the six months ended December 31, 2005 and 2004.

	Six Months Ended
	December 31,
	2005			2004
Operating activities:
Net income (loss)	$	(1,987,435	)	$	(126,962	)
Stock compensation expense		20,000
Depreciation and amortization		106,989			5,774
Discount on sale of loans		83,744			33,823
Changes in finance receivables, net:		787,791			486,471
Changes 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			1,315,085
Cash provided by financing activities:		1,282,951			(69,725	)
Increase (decrease) in cash	$	(52,709	)	$	(15,247	)

     Our primary use of working capital was the funding of the origination and purchase of contracts and inventory. The contracts were financed substantially through borrowings on the revolving line of credit. The line of credit is secured primarily by contracts, and available borrowings are based on a percentage of qualifying contracts. We have also funded a portion of our working capital needs through the issuance of subordinated notes.

     We believe that borrowings available under the line of credit as well as cash flow from operations and, if necessary, the issuance of additional subordinated debt, or the sale of additional securities, will be sufficient to meet our short-term funding needs.

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Critical Accounting Policies

     The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires us to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from our estimates. We believe the most significant estimate made in the preparation of the accompanying consolidated financial statements relates to the determination of our allowance for credit losses. Below is a discussion of our accounting policy concerning such allowance. Other accounting policies are disclosed in the footnotes of our consolidated financial statements which are included in our annual report on Form 10-KSB for the year ended June 30, 2005.

     We maintain an allowance for credit losses at a level we consider sufficient to cover anticipated losses in the collection of our finance receivables. The allowance for credit losses is determined based upon a review of historical, recent credit losses, and the finance receivable portfolio. The allowance for credit losses is periodically reviewed by management with any changes reflected in current operations. It is at least reasonably possible that actual credit losses may be materially different from the recorded allowance for credit losses.

Seasonality

     Our automobile sales and finance business is seasonal in nature. In such business, the second fiscal quarter (October through December) is historically the slowest period for vehicle sales. The third fiscal quarter (January through March) is historically the busiest time for vehicle sales as many of our customers use income tax refunds as a down payment on the purchase of a vehicle.

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Item 3. Controls and Procedures

          We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the required time periods, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding disclosure.

          As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2005. Based upon that evaluation and for the reason described below, our principal executive officer and principal financial officer concluded that as of the end of the period covered by this quarterly report on Form 10-QSB, our disclosure controls and procedures were not effective to enable us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period. In connection with the delay in filing our Form 10-QSB, we identified the following issue: As a result of converting our account servicing and accounting system to a new software platform and not having sufficient accounting staff trained on the new software, we were not able to timely prepare our financial statements and file our Form 10-QSB. We are in process of improving our internal control over financial reporting in an effort to remediate this deficiency through improved supervision and training of our accounting staff. This deficiency has been disclosed to our Board of Directors. Additional effort is needed to fully remedy this deficiency and we are continuing our efforts to improve and strengthen our control processes and procedures.

          Except as otherwise noted above, there has been no change in our internal control over financial reporting during the quarter ended December 31, 2005 that has materially affected, or is reasonably to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS
	Not 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 SECURITIES
	Not Applicable

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	Not Applicable

ITEM 5.	OTHER INFORMATION
	Not Applicable

ITEM 6.	EXHIBITS
31.1	Principal Executive Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Principal Financial Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Principal Executive Officer Certification under Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Principal Financial Officer Certification under Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Auto Underwriters of America, Inc.
By:	/s/ Dean Antonis
	Dean Antonis
	President and Treasurer (Principal Executive, Financial and Accounting Officer)

Dated: March 22, 2006

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