Auto Underwriters of America 10QSB 2008 Q2 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark one)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2007

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ___________ to ____________

Commission File Number: 0-11582

AUTO UNDERWRITERS OF AMERICA, INC. (Exact Name of Small Business Issuer as Specified in its Charter)

California (State or Other Jurisdiction of Incorporation or Organization)	94-2915849 (IRS Employer Identification No.)

2670 South White Road Suite 241 San Jose, CA 95148 (Address of Principal Executive Offices)	(408) 270-3587 (Issuer’s Telephone Number)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Check whether the issuer (1) filed all reports required to be filed by section 13 or 15(d) of the Exchange Act during the past 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 No 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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 7,400,575 shares as of May 12, 2008.

Transitional Small Business Disclosure Format (check one):

Yes No X

AUTO UNDERWRITERS OF AMERICA, INC.

TABLE OF CONTENTS

		PAGE

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Balance Sheets as of December 31, 2007 and June 30, 2007	3

	Statements of Operations for the Three and Six Months Ended December 31 2007 and 2006	4

	Statements of Cash Flows for the Six Months Ended December 31 2007 and 2006	5

	Notes to Financial Statements	6 – 7

Item 2.	Management’s Discussion and Analysis of Financial Condition	8 – 12

Item 3.	Controls and Procedures	12

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	13

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13

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

Part I. Financial Information

Item 1. Financial Statements

Auto Underwriters of America, Inc.

Consolidated Balance Sheets

December 31, 2007 and June 30, 2007

(Unaudited)

		December 31, 2007		June 30, 2007
Assets:
Cash and cash equivalents	$	560,190	$	1,671,430
Finance receivables, net		9,348,252		8,932,091
Refund receivables		964,000		-
Fixed assets, net		85,200		111,408
Inventory		1,126,363		1,507,276
Prepaid and other assets		87,104		-
Deferred financing cost		-		-
Total assets	$	12,171,109	$	12,285,675

Liabilities and stockholders’ deficit:
Accounts payable and accrued liabilities	$	1,522,244	$	989,818
Drafts payable and floor plan liabilities		660,735		1,103,250
Dividends payable		398,225		187,749
Other notes payable		1,145,364		961,198
Senior debts - revolving line of credit		11,650,086		10,086,070
Deferred sales tax		929,331		892,763
Advances from related parties		673,846		673,846
Total liabilities		16,979,831		14,894,694

Commitments and contingencies

Stockholders’ deficit:
Series A convertible preferred stock: no par value: 10,000,000 authorized 2,426,420 and 1,280,020 respectively, issued and outstanding. Liquidation preference of $5,058,050	896,806			4,253,735
Series B convertible preferred stock: no par value, 4,800,000 authorized, 0 issued and outstanding.	-			-
Common stock: no par value: 100,000,000 authorized issued and outstanding: 7,400,575 and 6,018,570 respectively	8,468,273			8,450,586
Retained deficit	(18,173,801	)		15,313,340	)
Total stockholders’ deficit	(4,808,722	)		(2,609,019	)

Total liabilities and stockholders’ deficit	12,171,109		$	12,285,675

Auto Underwriters of America, Inc.

Consolidated Statements of Operations

For the three months and six months ended December 31, 2007 and 2006

(Unaudited)

	Three Months Ended December 31,						Six Months Ended December 31,
	2007			2006			2007			2006

Revenues:
Sales	$	2,280,153		$	1,808,605		$	6,152,006		$	2,671,595
Interest income		436,516			349,578			854,180			740,015
Other		154,081			23,652			185,368			43,624
		2,870,750			2,181,835			7,191,554			3,455,234

Costs and expenses:
Cost of sales		1,355,358			972,743			4,226,650			1,539,140
Selling, general and administrative		1,350,689			1,383,928			2,764,614			2,099,266
Provision for credit losses		557,012			549,963			1,560,281			763,230
Interest expense		548,644			368,574			1,471,416			1,317,377
Depreciation and amortization		13,104			97,088			26,208			200,191
		3,824,807			3,372,296			10,049,169			5,919,204

Loss before income taxes		(954,057	)		(1,190,461	)		(2,857,615	)		(2,463,970	)


Net loss		(954,057	)		(1,190,461	)		(2,857,615	)		(2,463,970	)
Preferred dividends		(109,314	)		(1,093,555	)		(210,473	)		(2,056,629	)
Net loss available to common stockholders	$	(1,063,371	)	$	(2,284,016	)	$	(3,068,088	)	$	(4,520,599	)

Basic and diluted net loss per share	$	(.15	)	$	(0.36	)	$	(.44	)	$	(0.72	)

Weighted average shares outstanding		7,040,575			6,418,570			7,040,575			6,302,723

Auto Underwriters of America, Inc.

Statements of Cash Flows

For the six months ended December 31, 2007 and 2006

(Unaudited)

	2007			2006
Operating activities:
Net Loss	$	(2,857,615	)	$	(2,463,970	)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Imputed interest		17,688			20,030
Warrant expense		-			561,045
Bad debt expense		-			35,000
Depreciation and amortization		26,208			200,191
Amortization of loan discounts		546,151			-
Changes in finance receivables, net:
Finance receivables originations and purchased, net of payments		(3,401,857	)		(493,473	)
Provision for credit losses		1,560,281			763,230
Inventory acquired in repossession		1,425,415			821,291
Subtotal finance receivables		(416,161	)		1,091,048
Changes in operating assets and liabilities:
Deferred financing cost		-			(52,361	)
Accounts receivable and other receivables		-			(13,419	)
Inventory		380,914			(825,614	)
Prepaid and other assets		(24,369	)		4,912
Accounts payable and accrued liabilities		532,426			(201,039	)
Drafts payable		(442,515	)		698,616
Deferred sales tax		36,568			4,470
Net cash used in operating activities		(2,199,970	)		(941,091	)

Investing activities:
Purchase of property, equipment and leasehold improvements		-			(11,380	)
Purchase of finance receivable		(964,000	)		-
Net cash used in investing activities		(964,000	)		(11,380	)

Financing activities:
Proceeds from sale of Series A convertible preferred stock		850,698			2,727,205
Repayments on other notes payable		(361,985	)		(334,766	)
Proceeds from revolving credit facilities, net		1,564,017			(757,658	)
Proceeds from (repayments to) related party		-			(3,948	)
Net cash provided by financing activities		2,052,730			1,630,833

Increase (Decrease) in cash and cash equivalents		(1,111,240	)		678,362
Cash at beginning of period		1,671,430			4,161

Cash at end of period	$	560,190		$	682,523

Cash paid for:
Interest	$	851,327		$	736,302

Non-cash supplemental disclosures:
Preferred dividend	$	210,473		$	2,020,074
Common stock issued to repay debt	$	-		$	700,000
Common stock issued for convertible preferred stock sale offering costs	$	720,000		$	-

Auto Underwriters of America, Inc.

Notes to Financial Statements

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements of Auto Underwriters of America, Inc. 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 Auto Underwriters' Annual Report filed with the SEC on Form 10-KSB/A. 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 consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal 2007 as reported in the 10-KSB/A have been omitted.

NOTE 2 – GOING CONCERN

As shown in the accompanying consolidated financial statements, Auto Underwriters has incurred recurring losses from operations in 2008 and 2007 and has an accumulated deficit of $18,173,801 as of December 31, 2007. These conditions raise substantial doubt as to Auto Underwriters’ ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE 3 – 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 18% 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, 2007 are as follows:

Finance receivables	$	12,199,179
Allowance for credit losses		(2,850,927	)

Finance receivables, net	$	9,348,252

Changes in the finance receivables allowance for credit losses for the three months ended December 31, 2007 are as follows:

Balance at beginning of period	$	2,505,938
Provision for credit losses		1,560,281
Net charge offs		(2,640,708	)
Net recoveries		1,425,416

Balance at end of period	$	2,850,927

NOTE 4 – REVOLVING CREDIT FACILITIES

Auto Underwriters has a $12,000,000 revolving line of credit with Oak Rock Financial, LLC, bearing interest at the greater of prime+7% and expires on March 31, 2009. The LOC is secured by all of Auto Underwriters’ assets and a personal validity guarantee by our President. At December 31, 2007, the balance outstanding on this LOC was $11,650,086.

NOTE 5 – SHORT TERM DEBTS

In June 2007, Auto Underwriters borrowed $1,100,000 from 8 investors under secured promissory notes. The principal amount of these notes plus 10% interest thereon, plus $110,000 in loan fees, became due on October 15, 2007. We have re-paid $300,000 out of the total of $1,210,000 due to the note holders thus far.

NOTE 6 – PAYROLL TAX LIABILITIES

Auto Underwriters is delinquent in the payment of its payroll tax liabilities with the Internal Revenue Service. As of December 31, 2007, unpaid payroll taxes total approximately $836,000 plus estimated related penalties and interest which are included in current liabilities. The final amount due will be subject to negotiations with the Internal Revenue Service. Auto Underwriters intends to pay these delinquent taxes as soon as possible.

NOTE 7 – EQUITY

During the three months ended December 31, 2007, Auto Underwriters sold 151,600 units at $5.00 per unit. Each unit consists of two shares of Series A Convertible Preferred Stock, convertible into common stock at $2.50 per share, and one warrant to purchase one common share exercisable for five years at $5.00.

Auto Underwriters analyzed these instruments for derivative accounting consideration under SFAS 133 and EITF 00-19. Auto Underwriters determined the convertible securities were conventional and the warrants met the criteria for classification in stockholders equity under SFAS 133 and EITF 00-19. Therefore, derivative accounting is not applicable for these instruments. Auto Underwriters also analyzed these instruments for Beneficial Conversion Features under EITF 98-5 and EITF 00-27. Because the conversion price exceeds the market trading price of Auto Underwriters’ common stock when the loans were issued, a Beneficial Conversion Feature was not created.

NOTE 8 – REFUND RECEIVABLE

In July 2007, Auto Underwriters entered into the Escrow, Servicing and Consignment Sale Agreement with AGM, LLC. Auto Underwriters has agreed to purchase from AGM, and AGM has agreed to sell to Auto Underwriters, the Loans and Motor Vehicle Inventory set forth in the agreement for a purchase price of $16,357,376 and Auto Underwriters paid to AGM the purchase price with an amount of cash on hand equal to $964,000 and the remainder of the purchase price with the proceeds of loans under a separate loan agreement, pursuant to which AGM has agreed to provide certain loans and other financial accommodations pursuant to the terms of the loan agreement, including, without limitation, Term Loans in an amount equal to $14,719,897 and an Inventory Loan Advance in an amount equal to $673,479.

Auto Underwriters filed litigation against AGM in December 2007 in the U.S. District Court for the Northern District of Illinois alleging that AGM materially breached the Escrow, Servicing and Consignment Sales Agreement dated July 19, 2007. Specifically, AGM terminated the Escrow Agreement, but failed and refused to refund down payment funds in the amount of $964,000. Further, Auto Underwriters alleges that AGM failed to pay Auto Underwriters the amounts due and owing for services rendered under the terms of the Escrow Agreement, totaling approximately $155,000. As a result, Auto Underwriters and its subsidiaries have been damaged cumulatively in an amount totaling approximately $1,119,000, exclusive of prejudgment interest, attorneys’ fees and/or additional costs related to bringing this action.

NOTE 9 - - LITIGATION

Mid-Atlantic

Mid-Atlantic Finance Company, Inc. filed a lawsuit against us on December 13, 2006 in the 6th Judicial Circuit of Pinellas County, Florida, seeking damages in excess of $450,000 concerning a dispute over certain non-prime installment contracts. Mid-Atlantic alleged that the Company failed to repurchase certain finance contracts that were in default. We counter clamed and alleged that Mid-Atlantic breached its agreement by not remitting to us certain amounts due in relation to a hold back under the installment contracts. As a result of this dispute, we charged-off our receivable balance due from this finance company of approximately $1,100,000 during fiscal 2006 and have maintained a payable of approximately $152,000 for future repurchase obligations. On December 12, 2007, we settled this matter and agreed to make periodic payments totaling $175,000.

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 Quarterly Report on Form 10-QSB contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 about Auto Underwriters of America, Inc. (the “Company”) that are subject to risks and uncertainties. Forward-looking statements include information concerning future financial performance, business strategy, projected plans and objectives. Statements preceded by, followed by or that otherwise include the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “may increase,” “may fluctuate” and similar expressions of future or conditional verbs such as “will,” “should,” “would,” and “could” are generally forward-looking in nature and not historical facts. Actual results may differ materially from those projected, implied, anticipated or expected in the forward-looking statements. Readers of this quarterly report should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report. The statements are representative only as of the date they are made. The Company (sometimes referred to herein as we, us, or similar phrasing) undertakes no obligation to update any forward-looking statement.

These forward-looking statements, implicitly and explicitly, include the assumptions underlying the statements and other information with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates, financial condition, results of operations, future performance and business, including management's expectations and estimates with respect to revenues, expenses, return on equity, return on assets, efficiency ratio, asset quality and other financial data and capital and performance ratios.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, these statements involve risks and uncertainties that are subject to change based on various important factors, some of which are beyond the control of the Company. The following factors, among others, could cause the Company's results or financial performance to differ materially from its goals, plans, objectives, intentions, expectations and other forward-looking statements:

our ability to continue operating as a going concern;

resolution and payment of unpaid federal and state taxes;

unfavorable outcome with respect to pending litigation;

general economic and industry conditions;

our capital requirements and dependence on the sale of our equity securities;

the liquidity of the Company’s common stock will be affected by the lack of or limited trading market;

intense industry competition;

our ability to purchase installment contracts;

the creditworthiness of contract obligors;

shortages in availability of qualified personnel;

legal and financial implications of unexpected catastrophic events;

regulatory or legislative changes effecting the automobile finance industry; and

reliance on, and the ability to attract, key personnel.

For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s Annual Report for the fiscal year ended June 30, 2007 filed on Form 10-KSB/A with the SEC, which is available on the SEC’s website at www.sec.gov. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Quarterly Report on Form 10-QSB to reflect events or circumstances after the date hereof. New factors emerge from time to time, and it is not possible for us to

predict which factors, if any, will arise. In addition, the Company cannot assess the impact of each factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any 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.

We use AutoUnderwriter.com credit decision software to finance the sale of used vehicles by our four automotive sales locations in Houston, Texas and by selected third-party dealers. We target a selected customer credit profile. Such purchasers 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. Our borrowers have short or impaired credit histories. In making decisions regarding the purchase of a particular contract, we consider the following factors related to the borrower: place and length of residence, current and prior job status, history in 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.

Our operations in Houston purchase, recondition, sell and finance used vehicles under the name Affordable Cars & Trucks. These four stores also use AutoUnderwriter.com, which aids in the analysis of the credit worthiness and develops proper deal structure for each customer contract financed.

We are still developing our financing programs and retail concept. The primary drivers for future earnings growth will be vehicle unit sales growth from geographic expansion, comparable same store sales increases to maximize our maturity levels at each lot, and interest income from growth in our contract portfolio. During the next two years, we plan to focus our growth primarily on adding stores to new markets in the state of Texas. We also expect used unit comparable store sales increases, reflecting the ramp up in sales of newly opened stores as they mature and continued market share gains at stores that have reached mature sales levels.

The principal challenges we face in expanding our contract volume growth target include:

Our ability to procure suitable lot locations at reasonable costs.

Our ability to build our management strength to support the store growth.

Our ability to maintain competitive direct retail and direct lending operations.

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.

Escrow, Servicing and Consignment Sale Agreement

On July 20, 2007, we entered into both a Loan and Security Agreement and also a Escrow, Servicing and Consignment Sale Agreement with AGM, LLC, as Administrative Agent and Initial Lender. The Loan and Security Agreement provided for a series of term loans to Auto Underwriters Portfolio Acquisition Company, Inc., totaling an amount equal to $14,719,987 which was used to purchase automobile inventory and automobile loans from the seller/lender, AGM, LLC. Although executed, the documents were being held in escrow contingent upon the issuance by the State of Texas of certain vehicle dealer and vehicle financing licenses and permits to our subsidiary AUPAC. AUPAC received the required licenses from the State of Texas on December 12, 2007 but the agreements were terminated by AGM on December 4, 2007. As more fully described in this quarterly report under “Part II, Item 1. Legal Proceedings,” we are currently involved in litigation against AGM, LLC.

Results of Operations

Three months ended December 31, 2007 compared to the three months ended December 31, 2006

Revenues

Total sales revenues increased to $2,280,153 for the three month period ended December 31, 2007 compared to the corresponding period ended December 31, 2006 of $1,808,605, principally as a result of the Company using its newly acquired floor plan facility through Got Cars and the direct inventory purchasing program with area wholesalers. The increased inventory has resulted in increased sales.

Cost of Sales

Cost of sales as a percentage of automobile and light truck sales was 59% or $1,355,358 for the three month period ended December 31, 2007 compared to 53.8% or $972,743 for the corresponding prior period ended December 31, 2006. The cost of sales decreased primarily as a result of better inventory purchases from the auctions and from wholesalers via our floor plan. Our buyer was able to purchase more competitively priced inventory, better condition inventory which directly reduced the reconditioning cost of the inventory prior to sale and subsequent service of the vehicle after the sale.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $33,239 for the three month period ended December 31, 2007 compared to the corresponding prior period. Selling, general and administrative expenses as a percentage of total income was 47.2% for the three month period ending December 31, 2007 compared to 58.4 % for the same corresponding prior period.

Interest Expense

Interest expense increased to $548,644 for the three month period ended December 31, 2007 as compared to $368,574 for the corresponding prior period. The increase in interest expense was primarily due to the increase in borrowings.

Six months ended December 31, 2007 compared to the six months ended December 31, 2006

Revenues

Total sales revenues increased to $6,152,006 for the six month period ended December 31, 2007 compared to $2,671,595 for the corresponding prior period principally as a result of a the use of the floor plan and the direct wholesale inventory purchase program which allowed the Company to purchase more vehicles for sale.

Cost of sales as a percentage of automobile and light truck sales was 68.7% or $4,226,650 for the six month period ended December 31, 2007. During the corresponding period ended December 31, 2006, cost of sales as a percentage of automobile and light truck sales was 57.6% or $1,539,140.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $665,348 for the six month period ended December 31, 2007 compared to the corresponding period ended December 31, 2006. This increase was due primarily to increased sales volume and staffing.

Interest Expense – Warrants

In 2006, the interest expense warrants represents the fair value of warrants to purchase 150,000 shares of common stock at $1.75 per share to holders of the $700,000 Secured Notes. The warrants were issued as incentive to convert the Secured Notes into 400,000 shares of the Company’s common stock. See Note 7 to the financial statements. These warrants were recognized at the fair value, as calculated by the Black-Scholes pricing model, on the date of issuance in the amount of $561,045. The warrants vested immediately resulting in the non-cash interest expense of $561,045 on the date of issuance.

Interest Expense

Interest expense, other, increased to $1,471,416 for the six month period ended December 31, 2007 as compared to $1,317,377 for the corresponding period ended December 31, 2006. The increase in interest expense was primarily due to the increase in borrowings as we financed 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, 2007 and 2006.

		Six Months Ended December 31,
		2007			2006
Operating activities:
Net loss	$	(2,857,615	)	$	(2,463,970	)
Imputed interest		17,688			20,030
Stock compensation expense					-
Depreciation and amortization		572,359			200,191
Warrant expense		-			561,045
Bad debt expense		-			35,000
Changes in finance receivables, net:		(416,161	)		1,091,048
Changes in operating assets and liabilities:		483,759			(384,435	)
Net cash used in operating activities		(2,199,970	)		(941,091	)

Cash used in investing activities:		(964,000	)		(11,380	)
Cash provided by financing activities:		2,052,730			1,630,833
Increase (decrease) in cash	$	(1,111,240	)	$	(678,362	)

The Company purchases vehicles from auctions and wholesalers. After these vehicles are reconditioned, they are placed at our stores and sold. Our inventory is primarily financed by two floor plan financing facilities totaling $1,100,000. When a vehicle is sold, an installment contract is executed with our customer and pledged as collateral on our line of credit. The funds that are advanced on the installment contract is used to pay off the floor plan financing for the particular vehicle and the title is transferred into our customers name with the Company and our lender as lien holders.

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 our 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 secured and unsecured notes.

We believe we will be able to continue the line of credit with our existing lender as well as continuing the search for additional lines of credit from other financial institutions. However, we cannot provide any assurance for the success of acquiring an additional line of credit. If necessary, we could issue additional subordinated debt, or sell our existing finance receivable portfolio at a discount to third party finance companies to meet our short-term funding needs. However, we cannot provide any assurance for the success of acquiring any additional working capital from these potential funding sources. 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.

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/A for the year ended June 30, 2007.

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.

Item 3. Controls and Procedures

Conclusion Regarding Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer (PEO) and principal financial officer (PFO), we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, our management, including our PEO and our PFO, concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our PEO and our PFO, as appropriate, to allow timely decisions regarding required disclosure.

We, along with our independent auditors, have identified several “significant deficiencies” that collectively constituted a "material weakness" in our internal control over financial reporting under standards established by the Public Company Accounting Oversight Board.

A SIGNIFICANT DEFICIENCY is a control deficiency, or combination of control deficiencies, that adversely affects the Company's ability to initiate, authorize, record, process or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the Company's annual or interim financial statements that is more than inconsequential and will not be prevented or detected.

A MATERIAL WEAKNESS is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

The following conditions were identified:

The current organization of the accounting department does not provide the Company with the adequate skills to accurately account for and disclose significant transactions or disclosures within the time periods as specified by SEC rules and forms.

Substantive matters are not being addressed appropriately by the Board resulting in inadequate oversight from the Board.

The process that the Company is currently using to monitor the ongoing quality of internal controls performance, identify deficiencies and trigger timely corrective action is not working effectively.

There is no adequate means of accurately capturing and recording certain significant and complex business transactions.

Accordingly, the Company's internal controls over financial reporting are not effective.

Based upon the Company's evaluation, which considered the above findings of our independent auditors, the Company’s management, including the PEO and PFO, concluded that, as of December 31, 2007, the Company's internal controls over financial reporting were not effective.

In response to these deficiencies, the Company has interviewed three public accounting firms and narrowed the search down to one such firm who will be contracted, beginning March 2008, The firm will be engaged to assist the Company in establishing additional financial and disclosure controls. They will also help ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules. Lastly, they will assist in a search for a qualified CFO. Additionally, we are in the process of improving our internal control over financial reporting in an effort to remediate other deficiencies 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 these deficiencies and we are continuing our efforts to improve and strengthen our control processes and procedures.

Changes In Internal Control Over Financial Reporting

Other than as described above, there were no changes in our internal control over financial reporting during the quarter ended December 31, 2007 that materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

ITEM 1. LEGAL PROCEEDINGS

Set forth below are the material pending legal proceedings as of the filing of this report.

Mid-Atlantic

Gunnels Interests

On October 18, 2007, AUA was sued in the 190th Judicial Court of Harris County, Texas, by Gunnels Interests, Inc., Advantage Autoplex, Inc., TAB Enterprises, Inc., and Lawrence E. Gunnels in the state court of Harris County, Texas. Case No. 2007-51824, Gunnels Interests, Inc., Advantage Autoplex, Inc., TAB Enterprises, Inc., and Lawrence E. Gunnels v. Auto Underwriters of America, Inc., f/k/a Advanced Cellular Technology, Inc., d/b/a Affordable Cars and Trucks, Dean P. Antonis, and William J. Kellagher. The lawsuit relates to the purchase of certain assets by AUA from Gunnels Interests, Inc. in March 2004 and vehicle wholesaling and flooring services provided by Gunnels Interests, Inc. to AUA. Plaintiffs allege, among other things, fraud and breach of contract, and Plaintiffs seek money damages, including exemplary and mental anguish damages. The Company is currently defending the lawsuit. As of December 31, 2007, the Company’s books reflect a payable due to Gunnels Interests, Inc. of approximately $352,000. The Plaintiffs have not specified any damages, but the estimated contingent liability ranges from $800,000 to $1,000,000, should they be successful. The Company is vigorously defending its position and believes the case is without merit. Mr. Gunnels is currently an 8.8% shareholder.

AGM, LLC

Auto Underwriters of America, Inc. and its subsidiaries filed litigation against AGM, LLC on or about December 20, 2007 in the U.S. District Court for the Northern District of Illinois alleging that AGM materially breached the Escrow, Servicing and Consignment Sales Agreement dated July 19, 2007. Specifically, AGM terminated the Escrow Agreement, but failed and refused to refund down payment funds in the amount of $964,000. Further, we allege that AGM failed to pay Plaintiffs the amounts due and owing for services rendered under the terms of the Escrow Agreement, totaling approximately $155,000. As a result, Auto Underwriters and its subsidiaries have been damaged cumulatively in an amount totaling approximately $1,119,000, exclusive of prejudgment interest, attorneys’ fees and/or additional costs related to bringing this action. Plaintiffs believe that by its improper actions at the expense of Auto Underwriters and its subsidiaries, AGM has been unjustly enriched with monies rightfully belonging to Auto Underwriters and subsidiaries. Further, AGM’s willful and wanton disregard for the rights of Auto Underwriters and subsidiaries constitute an unlawful conversion of monies to which Auto Underwriters and subsidiaries are entitled to immediate possession. Finally, by falsely and materially misrepresenting the financial bases and prospects for completing this Escrow Agreement, Defendant AGM fraudulently induced Auto Underwriters and subsidiaries into entering the Escrow Agreement and related agreements thereto. Auto Underwriters and its subsidiaries hope that the court will grant these monies owed to them along with damages. AGM, LLC filed a counter claim on December 28, 2007 in Circuit Court, Cook County, Illinois to keep the $964,000 cash payment and recover other payments of approximately $3,000,000. Auto Underwriters and its subsidiaries believe they have no liability in this claim.

Other

In the normal course of business we may become involved with various other litigation. Other than as described above, we know of no pending or threatened legal proceedings to which we are or will be a party which, if successful, might result in a material adverse change in our business, properties or financial condition.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Set forth below are the sales of unregistered securities that occurred during the quarter ended December 31, 2007. Other than as described below, during the quarter ended December 31, 2007, we did not have any sales of securities in transactions that were not registered under the Securities Act of 1933, as amended, that have not been reported in a Form 8-K.

During the quarter ended December 31, 2007, Auto Underwriters sold an aggregate of 151,600 units of the Company’s securities (the “Units”) in a private placement to a limited number of accredited investors for gross proceeds of $758,000. The Units were sold at a price of $5.00 per Unit, with each Unit consisting of two shares of the Company’s Series A Convertible Preferred Stock and one warrant to purchase one share of the Company’s common stock, exercisable for a period of five years, at an exercise price of $5.00 per share (the “Investor Warrants”). The offer and sale was conducted on behalf of the Company by a NASD-licensed broker-dealer who served as placement agent (the “Placement Agent”) and received a sales commission of 7%, and investment banking and marketing fee of 4% and a nonaccountable expense allowance of 3% of the gross proceeds of the offering. The Placement Agent will also receive (i) a cash commission equal to 7% of the proceeds received by the Company upon exercise of any Investor Warrants and (ii) upon final closing of the offering, will be issued a warrant to purchase a number of shares of common stock equal to 14% of the gross proceeds received by the Company in the offering, exercisable for a period of 5 years at an exercise price of $2.50 per share. These securities were offered and sold without registration under the Securities Act of 1933 in reliance upon the exemption provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

In June 2007, Auto Underwriters issued $1,100,000 worth of secured promissory notes to eight investors. The principal amount of these notes plus 10% interest thereon, plus $110,000 in loan fees, became due on October 15, 2007. The Company has re-paid $300,000 out of the total of $1,210,000 due to the note holders thus far. Auto Underwriters is in default on these notes and any one or more of the note holders could bring a lawsuit against Auto Underwriters for this default and obtain judgments against us and our assets, including imposition of attorneys’ fees and court costs which could increase the amount Auto Underwriters owes to the note holders.

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

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant 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: May 20, 2008

Auto Underwriters of America (ADWT) Inactive 10QSB2008 Q2 Quarterly report (small business)