SecProbe.io

CORRESP
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April 13, 2005

  United States Securities and Exchange
  Commission

  Washington D.C.

  20549

  ATTN:

  Linda Cvrkel

  Branch Chief

  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 Ms. Cvrkel:

We have received your letter dated February 25, 2005 relating to
your review of the above referenced filings. The following is a response to
each of the nine comments.

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.

Response:

 The
Company’s subsidiary, Praxis
Autopartes, S.A. de C.V, had been operating at a deficit since it was
acquired by the Company in November 1997, until January 2001, when
substantially all of the assets were sold to Shell Oil-Mexico (Shell Oil).  As a result, Praxis had accumulated over $1
million in accrued liabilities, approximately $350,000 related to tax
obligations and $659,000 related to trade payables. These obligations remained
with Praxis subsequent to the transaction with Shell Oil.  After a significant amount of time had passed
from the transaction with Shell Oil, management consulted with legal counsel as
to

whether Praxis’ obligations would ever have
to be repaid since it was insolvent and the Company had not received any
communication from Praxis outstanding creditors regarding repayment of
obligations due.  Based upon consultation
with legal counsel, it was determined that the reduction in trade payables
would be appropriate, however, it was counsel’s belief that the tax obligations
could ultimately become a liability to the Company.  As such, the trade payables were credited to
earnings and the tax obligations continue to be carried as a liability on the
Company’s consolidated balance sheet.

The reduction in accrued expenses was
classified as a gain on debt restructuring because these were obligations that
were disposed of subsequent to the sale of Praxis and were appropriately
excluded from operations. In retrospect, we could have established another
category of cost in the “Other” section of the income statement that would
have better described this adjustment as opposed to putting it in “Debt
Restructuring” but given that it had been fully disclosed, we did not believe that
including the adjustment in “Debt Restructuring” was inappropriate.

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 (l) 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.

Response:

As requested, in future filings, the Company
will include a disclosure of revenues from external customers attributed to the
enterprise’s country of domicile and attributed to all foreign countries in
total from which the company receives revenue. If revenues from an individual
foreign country are material, those revenues will also be disclosed separately.

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

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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.

Response:

There is currently a disclosure in Note 2,
which addresses the Company’s accounting policy for evaluating and measuring
potential impairments in the recorded values of the Company’s goodwill and
indefinite lived intangible assets. Per your request, this policy will be
expanded to include a discussion of the methods and significant assumptions
used to determine the fair value of the reporting units. Furthermore, the
discussion of critical accounting policies in the MD&A will also be
revised. For your review, below is a sample of the disclosure language that we
intend to use:

Statement of Financial Accounting Standards (SFAS)
No. 142, “Goodwill and Intangible Assets”, requires that goodwill no longer be
amortized, but instead be tested for impairment at least annually.  The
Company engages a valuation expert to assist in estimating the Company’s fair
value utilizing a discounted future cash flow approach that estimates revenue,
driven by assumed market growth rates and appropriate discount rates.
These estimates are consistent with the plans and estimates we use to manage
the underlying business.  In conjunction with management’s analysis, it
determined that the Company has one reporting unit, which is the same as its
reporting segment; Automotive Care Franchising.   Historically,
management has performed its impairment analysis in the first quarter of each
fiscal year.  The Company obtained a current business enterprise valuation
for purposes of supporting its impairment analysis for fiscal year 2005.
Based upon this analysis, management determined that goodwill of approximately
$8.7 million was not impaired.

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

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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
comments upon receipt of your response.

Response:

The Company sustained substantial losses
prior to 2003 and had an accumulated deficit of $61 million. Although the
company has been profitable since October 1, 2002, given the relatively
limited history of profits and the fact that there is approximately $18 million
in unused NOLS, the Company is evaluating the recovery of the deferred tax
asset quarterly and reducing the valuation allowance as appropriate based upon
its determination of the recovery of the deferred tax allowance. The $629,000
represented the change in the valuation allowance from 2003 to 2004 and was
comprised of $156,000 representing the utilization of net operating loss
carry-forwards in 2004 and $473,000 representing the release of the valuation
allowance based on management’s assessment of the recoverability of deferred
taxes, which included projections of 2005 pretax earnings.

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, Arthur 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

Response:

On August 3, 2000, the Board of
Directors entered into an agreement with Precision Funding, an entity owned by
Arthur Kellar, and Desarollo Integrado, S.A. de C.V., of which a principal is
Mauricio Zambrano, whereby Precision Funding provided $11.25 million in
financing in order for the Company to refinance certain bank debt and have
funding for working capital needs.

During fiscal years 2001 and 2002, management
carried out a plan to sell off all owned and operated car care centers, dispose
of the manufacturing and distribution business unit, refocus on the core
franchising business and return the Company to profitable operations and cash
flows.  Cash proceeds from the sale of

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such assets were used to pay debt and fund
operations; however, the Company continued to experience declining revenue from
franchise operations and remained cash constrained.  As such, the Company was unable to make
principal and interest payments on the debt with Precision Funding.

In 2003, management determined that in order
for the Company to continue as a going concern, management would have to
restructure the debt with Precision Funding.
The Company entered into negotiations with Messr. Kellar and Zambrano
offering them a combination of common and preferred stock and warrants in
exchange for restructuring the debt.  At
the time of the negotiations, Messr. Kellar and Zambrano collectively only
owned approximately 37% of the Company and therefore did not have a controlling
interest.

Messr. Kellar and Zambrano
agreed to take equity in exchange for the debt. The fair value of the preferred
stock was determined by the agreement between Messr. Kellar and Zambrano and
the Company, which fixed the price at $10.36/share. The fair value of the
warrants was calculated using the Black-Scholes methodology. The fair value of
the common stock was based on the market value at the time that the agreement
was executed.

Summing up, the loan was never
made with the intent of later being converted to stock or any other form of
equity. The deal that was struck with Messr. Kellar and Zambrano was truly
viewed by management as a debt restructuring and in our view was accounted for appropriately.

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.

Response:

The Board LLC that is referenced in this
question consists primarily of former board members, none of which had a
controlling interest in the Company. All but 2 of the 9 members of the Board
LLC were former members of the Board as of the time that this debt was
extinguished and therefore, this entity is not considered a related party. The
fair value of the warrants was determined by the Black-Scholes methodology.
Consistent with our response to the previous comment, we viewed this as a debt
restructuring and believe the accounting to be appropriate.

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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.

Response:

Although the Company received a $450,000 note
in connection with the sale of Hydro Spray, management determined that cost
recovery accounting was appropriate for the note since it was issued by an
entity, owned by Ernie Malas, a former employee of HydroSpray, which had
limited operating history. Additionally, the original terms of the Note
permitted it to be repaid over 7.5 years. Accordingly, management made the
decision to fully reserve for the note at the time of sale. The plan was to
recognize any gain from the note as the loan was paid. Therefore, when the note
was sold at a discount, a gain was recognized for the cash proceeds received. Additionally,
because the Company’s cash position was constrained, management determined it
was in the best interest of the Company to negotiate an arrangement with Mr.
Malas for a discount on the note in return for prompt payment.

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 result in recognition of
revenue. Please advise or revise as appropriate.

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Response:

In August 2004, the Company signed a
master franchise agreement with Hung Yue Holdings (Hong Kong) Co., Ltd. giving
that firm’s affiliate, Precision Tune Auto Care (China) Company Limited, a
license to open and operate at least 330 Precision Tune Auto Care (PTAC) car
care centers in China over the nex