April 19, 2005
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 and
December
31, 2004
Commission file #: 000-29478
Dear Mr. Falconi:
We have reviewed your April 13, 2005 response letter and have the
following comments. Please file an amended Form 10-K in response
to
our request for expanded or revised disclosure. If you disagree,
we
will consider your explanation as to why our comments are
inapplicable or a revision is unnecessary. We also ask you to
provide us with supplemental information so we may better
understand
your disclosure. Please be as detailed as necessary in your
explanation. We look forward to working with you in these
respects
and welcome any questions you may have about any aspects of our
review.
* * * * * * * * * * * * * * * * * * * * * * *
Form 10-KSB for the year ended June 30, 2004
Gain on Debt Restructuring
1. We note from your response to comment 1 that your determination
of
the appropriateness of the reduction in trade payables related to
Praxis was based on the advice of legal counsel. Please
supplementally tell us how you met the criteria necessary to
consider
a liability extinguished, as set forth in paragraph 16 of SFAS
140.
Note 7. Debt Restructuring
2. We note from your response to comment 5 that the deal was
viewed a
debt restructuring and in your view accounted for appropriately
since
the loan was never made with the intent of being converted to
stock
or any other form of equity. However, we continue to believe that
gains on extinguishment of debt with related parties, in this
case,
principal shareholders, should be classified as an equity
transaction
based on paragraph 20, footnote 1 of APB 26, irrespective of
whether
these shareholders own less than controlling interests. Please
revise your financial statements to reflect the gain on this
transaction as an equity transaction in your financial statements.
Additionally, please tell us how the $10.36/share "fair value" per
share for the preferred stock was calculated or determined.
3. We note from your response to comment 6 that you do not believe
Board LLC is a related party because all but 2 of the 9 members
were
former board members. Please supplementally tell us about the
other
2 members, their position in Board LLC, and if they have the
ability
to indirectly or directly control or significantly influence the
Company. Please refer to the definition of related party in the
glossary to SFAS 57. Also, tell us the nature and terms of any
ownership interests in the Company that were held by the 9 members
at
the time of the debt restructuring transaction. We may have
further
comment upon receipt of your response.
Form 10-Q for the period ended December 31, 2004
Note 3. Master License Agreement
4. We note from your response to comment 8 that the $130,000 of
revenue relates to the majority of the initial non-refundable fee
paid by Hung Yue Holdings. Although your accounting for this non-
refundable fee is consistent with your policy disclosed in Note 2
to
your Form 10-KSB, it is not installment method accounting as
disclosed in Note 3 of your Form 10-QSB. Please supplementally
tell
us what part of the master franchise agreement will be accounted
for
using the installment method of accounting and what extended
payment
terms are involved in the agreement. If the installment method
will
only be used for the individual future franchises, revise your
disclosure in future filings to clarify that the revenue
recognized
at December 31, 2004 related to the signing of the area
development
agreement which is a non-refundable fee, of which you have
fulfilled
substantially all required obligations, and that future franchises
under the master license agreement will be accounted for using the
installment method of accounting due to extended payment terms.
* * * * * * * * * * * * * * * * * * * * * * *
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.
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.
April 19, 2005
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