February 25, 2005
Mail Stop 03-05
Via US Mail and Facsimile
Mr. Robert R. Falconi
President and Chief Operating Officer
748 Miller Drive, S.E.
Leesburg, Virginia 20175
Re: Precision Auto Care, Inc.
Form 10-KSB for the fiscal year ended June 30, 2004
Form 10-Q for the quarter ended September 30, 2004
Commission file #: 000-29478
Dear Mr. Falconi:
We have reviewed the above referenced filing and have the
following
comments. Where indicated, we think you should revise your
document
in response to these comments. If you disagree, we will consider
your explanation as to why our comment is inapplicable or a
revision
is unnecessary. Please be as detailed as necessary in your
explanation. In some of our comments, we may ask you to provide
us
with supplemental information so we may better understand your
disclosure. After reviewing this information, we may or may not
raise additional comments.
Please understand that the purpose of our review process is to
assist
you in your compliance with the applicable disclosure requirements
and to enhance the overall disclosure in your filing. We look
forward to working with you in these respects. We welcome any
questions you may have about our comments or any other aspect of
our
review. Feel free to call us at the telephone numbers listed at
the
end of this letter.
* * * * * * * * * * * * * * * * * * * * * * *
Form 10-KSB for the fiscal year ended June 30, 2004
Management`s Discussion and Analysis or Plan of Operation
Results of Operations
Comparison of the year ended June 30, 2004 to the year ended June
30,
2003
Gain on Debt Restructuring
1. We note from the discussion included on page 14 that the
Company
has included a reduction of approximately $659,000 in accrued
expenses associated with its Mexican subsidiary in "gain on debt
restructuring" in its consolidated statement of operations for the
year ended June 30, 2003. Please tell us in further detail the
nature
and timing of the events or circumstances which resulted in the
reduction of these accrued expenses during 2003. As part of your
response, please indicate when and why the accruals were initially
established and explain why management no longer believes they are
required. Additionally, please explain why the Company believes
the
classification of this reduction in accrued expenses should be
reflected in "gain on debt restructuring" in the Company`s
consolidated statement of operations.
Notes to the Financial Statements
Note 2. Summary of Significant Accounting Policies
- - Segment Reporting
2. We note from page 4 that you provide automotive services
primarily
through franchised operations located in the United States and in
certain foreign countries. In future filings, please include a
disclosure of revenues from external customers (1) attributed to
the
enterprise`s country of domicile and (2) attributed to all foreign
countries in total from which the enterprise derives revenues. If
revenues from external customers attributed to an individual
foreign
country are material, those revenues should be disclosed
separately.
See paragraph 38 of SFAS 131.
- - Goodwill and Intangible Assets
3. Your current disclosures in Note 2 only address the Company`s
accounting policy for evaluating and measuring potential
impairments
in the recorded values of the Company`s long-lived assets with
definitive useful lives. As goodwill represents a significant
portion
of the Company`s total assets, please revise future filings to
disclose the Company`s accounting policy and methodology for
evaluating and measuring potential impairments in the recorded
values
of the Company`s goodwill and indefinite lived intangible assets.
As
part of your revised disclosure, explain the methods and
significant
assumptions used to determine the fair value of your reporting
units
and explain how the Company`s operations are organized into
reporting
units for purposes of performing the goodwill impairment analysis.
The discussion of goodwill and intangible assets included in your
discussion of critical accounting policies on pages 12 and 13 of
MD&A
should be similarly revised.
Note 6. Income Taxes
4. We note that the Company had established deferred tax asset
valuation allowances of $6,425,000 and $7,054,000 at June 30, 2004
and 2003, respectively. We also note from the disclosure in Note 6
that the valuation allowances established related to net operating
losses which expire from 2014 through 2017. As the Company
generated
positive net earnings during both fiscal 2004 and fiscal 2003, and
has continued to generate positive earnings during interim periods
in
fiscal 2005, please tell us and revise future filings to explain
in
further detail why management believes that it is more likely than
not, that a significant portion of its deferred tax assets will
not
be realized and that a valuation allowance is therefore required
at
June 30, 2004. Also, explain in further detail how management
determined the $629,000 that was released from the deferred tax
asset
valuation allowance during 2004. We may have further comment upon
receipt of your response.
Note 7. Debt Restructuring
5. We note that in 2003 you recognized a gain on the
extinguishment
of debt held with Precision Funding LLC and a former board member,
Arther Keller who also owns 33% of the Company`s outstanding
shares.
As this debt is due from a related party, please supplementally
tell
us your basis for recognizing a gain on the extinguishment of this
debt. It appears that this "gain" should be reflected as a
capital
transaction in your financial statements. See paragraph 20,
footnote
1 of APB 26. Additionally, please tell us how you determined fair
value of the common stock, Series A redeemable preferred stock and
the warrants that were issued in connection with the restructuring
transaction.
6. We note that during 2004 you recognized a gain of $160,000 due
to
extinguishment of debt with Board LLC, an entity composed of
certain
members of your board of directors. As the board of directors is
a
related party to the Company, it may be inappropriate to recognize
a
gain on the extinguishment of debt. Please supplementally tell us
your basis for accounting for the extinguishment of the debt with
Board LLC as a gain rather than a capital transaction. See
paragraph
20, footnote 1 of APB 26. Additionally, please tell us how you
determined the fair value of the warrants issued to Board LLC as
part
of the restructuring transaction.
Note 9. Related Party Transactions
7. We note the disclosure in Note 9 indicating that the Company
received a $450,000 note in connection with the sale of Hydro
Spray
in April 2003. We further note that on June 17, 2003, the
purchaser
of Hydro Spray bought the note back from the Company for $204,000.
Please explain how the purchase price for the note compared to the
carrying value of the note at the date it was repurchased. If an
amount less than the carrying amount was received by the Company,
please explain why the Company agreed to this arrangement and
explain
how any resultant loss was reflected in the Company`s financial
statements.
Form 10-Q for the period ended December 31, 2004
Note 3. Master License Agreement
8. We note from the disclosure provided in Note 3 that the Company
plans to use the installment method for amounts due under the
master
franchise agreement with Hung Yue Holdings (Hong Kong) Ltd. due to
the extended payment terms associated with this arrangement. We
also
note that although no centers had been opened under the agreement
as
of December 31, 2004, the Company had recognized $130,000 of
revenues
in connection with this arrangement during the six months ended
December 31, 2004. Given that no centers had yet been opened under
the arrangement, please explain why the Company believed it was
appropriate to recognize $130,000 of revenues under this
arrangement
and explain in further detail how the amount recognized as revenue
was determined. We note from the discussion on page 14 of MD&A
that
the Company had received $150,000 of advance payments under the
terms
of the agreement upon signing but do not understand why the
receipt
of "advance payments" would results in recognition of revenue.
Please
advise or revise as appropriate.
General
9. Comply with the comments on the Form 10-KSB for the year ended
June 30, 2004 as they apply to filings on Form 10-QSB.
* * * * * * * * * * * * * * * * * * * * * * *
As appropriate, please respond to these comments within 10
business
days or tell us when you will provide us with a response. Please
furnish a cover letter that keys your responses to our comments
and
provides any requested supplemental information. Please
understand
that we may have additional comments after reviewing your
responses
to our comments.
We urge all persons who are responsible for the accuracy and
adequacy
of the disclosure in the filings reviewed by the staff to be
certain
that they have provided all information investors require for an
informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please provide, in
writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filings;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of Enforcement
has
access to all information you provide to the staff of the Division
of
Corporation Finance in our review of your filing or in response to
our comments on your filing.
You may contact Claire Lamoureux at 202-824-5663 or me at 202-942-
1936 if you have questions.
Sincerely,
Linda Cvrkel
Branch Chief
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Precision Auto Care, Inc.
February 25, 2005
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