** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

 

**FORM10-KSB/A**

 

**ý**** ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

 

**For thefiscal year ended June 30, 2004**

 

**o**** TRANSITION REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIESEXCHANGE ACT OF 1934**

 

**Commissionfile number 0-29478**

 

**PRECISIONAUTO CARE, INC.**(Name of small business issuer in its charter)

 
| **Virginia**                                                     | ** ** | **54-1847851**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification Number) |

 

**748 Miller Drive, S.E., Leesburg,Virginia 20175**

(Address of principalexecutive offices)

(Zip Code)

 

**703-777-9095**

(Issuer’stelephone number, including area code)

 

Securitiesregistered pursuant to Section 12(b) of the Act:

**None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**CommonStock, par value $.01 per share**

 

Check whether the issuer(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.    ý Yes  o No

 

Check if no disclosure ofdelinquent filers in response to Item 405 of Regulation S-B is contained inthis form, and no disclosure will be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  o

 

The issuer’s revenues forits most recent fiscal year were: $11,773,853.

 

The aggregate marketvalue of Common Stock held by persons not “affiliated” with the issuer atAugust 12, 2004 was $11,708,816 based on the closing price of $0.60 per share.  As of August 12, 2004, 23,808,602 of CommonStock were issued and outstanding.

 

Transitional SmallBusiness Disclosure Format:             o Yes   ý No

 

**DOCUMENTSINCORPORATED BY REFERENCE:**

Certain portions ofRegistrant’s definitive proxy statement, to be filed with the Securities andExchange Commission pursuant to Regulation 14A not later than 120 days afterthe close of the Corporation’s fiscal year, are incorporated by reference underPart III.

 

 

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**EXPLANATORY NOTE**

 

This Amendment No. 1 onForm 10-KSB/A to our Annual Report on Form 10-KSB for the fiscal year endedJune 30, 2004, initially filed with the Securities and Exchange Commission (the“SEC”) on September 28, 2004 (the “Original Filing”) is being filed to reflectthe restatement of our consolidated financial statements at June 30, 2004 andJune 30, 2003.

 

The Company hadoriginally reported the difference between the fair value of the equityexchanged and the carrying value of the Precision Funding debt and accruedinterest as a gain on debt restructuring in the statement of operations for theyear ending June 30, 2003.  Since Precision Funding was controlled byshareholders of the Company who were considered related parties, the Companyhas restated the consolidated financial statements to report such difference asa capital contribution.  The effect of the restatement reduced net incomeand increased additional paid in capital and accumulated deficit by $9.7million and reduced net income applicable to common stock per common share- Basicand Diluted from $0.72 to $0.08 for the period ending June 30, 2003 andincreased additional paid in capital and accumulated deficit by $9.7 millionfor the period ending June 30, 2004.

 

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**TABLE OFCONTENTS**

 
| PART I    | Item 1.   | Business                                                                                                          |   |
|-----------|-----------|-------------------------------------------------------------------------------------------------------------------|--------|
|      | Item  2.  | Properties                                                                                                        |   |
|      | Item 3.   | Legal Proceedings                                                                                                 |   |
|      | Item 4.   | Submission of  Matters to a Vote of Security Holders                                                              |   |
|      |      |                                                                                                              |   |
| PART II   | Item 5.   | Market for  Common Equity and Related Stockholder Matters                                                         |   |
|      | Item 6.   | Management’s  Discussion and Analysis or Plan of Operation                                                   |   |
|      | Item  7.  | Financial  Statements                                                                                             |   |
|      | Item 8.   | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                             |   |
|      | Item  8A. | Controls  and Procedures                                                                                          |   |
|      |      |                                                                                                              |   |
| PART  III | Item  9.  | Directors,  Executive Officers, Promoters and Control Persons; Compliance With Section  16(a) of the Exchange Act |   |
|      | Item  10. | Executive  Compensation                                                                                           |   |
|      | Item  11. | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                  |   |
|      | Item  12. | Certain  Relationships and Related Transactions                                                                   |   |
|      | Item  13. | Exhibits  and Reports on Form 8-K                                                                                 |   |
|      | Item  14. | Principal  Accountant Fees and Services                                                                           |   |

 

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**FORWARD-LOOKINGSTATEMENTS**

 

This report includesforward-looking statements within the meaning of the Securities Act of 1933(the “Securities Act”) and the Securities Exchange Act of 1934. When used inthis report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend”and “plan” as they relate to Precision Auto Care, Inc. or its management areintended to identify such forward-looking statements. All statements regardingPrecision Auto Care, Inc. or Precision Auto Care, Inc.’s expected futurefinancial position, business strategy, cost savings and operating synergies,projected costs and plans, and objectives of management for future operationsare forward-looking statements. Although Precision Auto Care, Inc. believes theexpectations reflected in such forward-looking statements are based onreasonable assumptions, no assurance can be given that such expectations willprove to have been correct.  Importantfactors that could cause actual results to differ materially from theexpectations reflected in the forward-looking statements herein include, amongothers, the factors set forth under the caption “Business—Risk Factors,”general economic and business and market conditions, changes in federal andstate laws, and increased competitive pressure in the automotive aftermarketservices business.

 

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**PART I**

 

**Item 1.   *Busines******s***

 

**OVERVIEW**

 

Precision Auto Care, Inc.(“PACI” or the “Company”) is a franchisor of automotive service centers locatedin the United States and in certain foreign countries.  At June 30, 2004, the Company had 31 totalemployees of which 30 are full time employees. Through its franchised centers, services are provided to automobileowners and focus on those high-frequency items required on a periodic basis tomaintain the vehicle properly.

 

The Company wasincorporated as a Virginia corporation in April 1997, but its predecessors havebeen in the automotive maintenance services business since 1976.  The first Precision Tune was established in1976 to provide quick, convenient and inexpensive engine tune-ups.  Franchising of Precision Tune centers beganthe next year.  As automotive technologychanged, Precision Tune expanded its menu of offered automotive maintenance andrepair services to include oil changes, fuel injection service, airconditioning service, cooling system service, brake service and more diagnosticservices.  In September 1996, thePrecision Tune brand name was changed to Precision Tune Auto Care to reflectthe shift in emphasis.

 

The Company is the resultof the November 1997 combination of WE JAC Corporation (the owner of PrecisionTune Auto Care) and nine other automotive maintenance services companies inconnection with its initial public offering. In March 1998, the Company acquired the holder of the master franchiseagreement for Precision Tune Auto Care in Mexico and Puerto Rico.  The Company’s Mexican assets were sold inJanuary 2002.  In March and April 2003,the Company disposed of its manufacturing operations.  See Notes to Financial Statements forfinancial information regarding the disposal of the Company’s Manufacturing andDistribution business segment.

 

The Company has oneremaining business segment, Automotive Care Franchising.  The Automotive Care Franchising businesssegment, which is comprised of Precision Tune Auto Care (“PTAC”) and PrecisionLube Express, provides automotive services primarily through franchisedoperations located in the United States and in certain foreign countries.

 

•                  Through its franchisees, PTACprovides automotive maintenance and repair services, such as engineperformance, oil change and lubrication and brake services, which requirerelatively short service times.  At June30, 2004, these services were provided at 413 Precision Tune Auto Care centersowned and operated by franchisees.

 

•                  Precision Lube Express franchiseesand licensees provide convenient fast oil change and lube services.  At June 30, 2004, there was 1 Precision LubeExpress center owned and operated by a franchisee.  In the future, the Company will not beselling Precision Lube Express franchises.

 

**OPERATIONS**

 

*PrecisionTune Auto Care*

 

PrecisionTune Auto Care is a franchisor of automotive service centers that providespecialized quality maintenance and repair services that require relativelyshort service times.  The automotive careservices provided by Precision Tune Auto Care centers include the diagnosis,maintenance and repair of ignition systems, fuel systems, computerized enginecontrol systems, cooling systems, starting/charging systems, emissions controlsystems, engine drive train systems, electrical systems, air conditioningsystems, oil and other fluid systems, and brake systems.

 

*PrototypeCenter.*  The currentprototype Precision Tune Auto Care center is a free-standing building with sixto eight service bays, of which two to four are drive-through and include pitsto facilitate fast oil change and lubrication services.  Franchisees typically develop Precision TuneAuto Care centers either by entering into a build-to-suit lease, under whichthe landlord constructs the center and leases it to the franchisee, or bypurchasing land and building the facility. The Company typically seeks sites in commercial areas with a minimumpopulation of 50,000 people within a five mile radius.   Exclusive of real estate, the estimated capitalrequired to open a prototype Precision Tune Auto Care center ranges from$123,000 to $208,075.

 

*RetailMarketing.*  PrecisionTune Auto Care’s marketing objectives at the retail level are to increasefranchisee sales, enhance first-time customers’ experiences, and bolster eachfranchisee’s customer retention efforts. To further these objectives, Precision Tune Auto Care has developed andimplemented a marketing plan containing programs and materials for use byPrecision Tune Auto Care centers.  Theplan includes targeted marketing programs designed to reach key marketsegments, in-store merchandising materials designed to enhance retail sales andfirst time customer trials, and other local marketing materials (e.g., secondcar discounts, service reminder cards, and ATM receipt coupons) designed togenerate customers and improve customer retention.

 

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*Trainingand Operational Support.* A significant element of Precision Tune Auto Care’s commitment to serviceis its training program for franchisees. New franchisees are required to successfully complete over 40 hours ofinitial training at its national training center in Leesburg, Virginia.  The Company also offers a full line oftechnical training, including courses on engine performance, fuel systems andemissions, automotive electronics, fuel injection, and brakecertification.  These courses, whichinclude both classroom and hands-on training, are designed to allow franchiseesand service center technicians to maintain and update their technicalcapability to service today’s more complex vehicles.

 

*FranchiseMarketing.*  The Company(through a predecessor company) has marketed franchises for Precision Tune AutoCare centers since 1977.  Its franchisesales process includes advertising in appropriate franchise and businesspublications, establishing relationships and working with sales brokers,conducting franchise sales seminars, maintaining a home page on the Internetthrough which interested parties may submit a franchise inquiry, andadvertising on several franchise sales orientated web sites.  Prospective franchisees are asked to completea Confidential Qualifications Report, which serves as the initial screening to determinewhether a prospect is qualified.  TheCompany seeks individuals with management experience who will make a full-timecommitment to the operation of their franchise and who have a minimum of$70,000 and $200,000 in liquid assets and net worth, respectively.

 

PrecisionTune Auto Care’s area-development system has played a significant role in itsfranchise development efforts.  Underthis system, Precision Tune Auto Care has entered into area-developmentagreements that grant area developers the right and obligation to developfranchises within specific geographic regions for stated periods of time.  Franchise agreements within the area arebetween the Company and the franchisee. The area developer typically receives up to one-half of the initialfranchise fee, one-half of the subsequent royalty revenues and one-half offranchise renewal and transfer fees. After the creation of a franchise, the area developer performs many ofPrecision Tune Auto Care’s franchise support obligations. As of June 30, 2004,19 area developers and their affiliates had an ownership interest inapproximately 29% of the total number of Precision Tune Auto Care centers.

 

*Open AreaDevelopment.*  PrecisionTune Auto Care’s current strategy is also to pursue new area developers todevelop open areas in which current area developers have not been grantedrights.  To attract new area developers,the company employs strategies similar to those used in marketing unitfranchises.  However, the net worthrequirements for prospective area developers are greater than those requiredfor a unit franchisee.  Theserequirements range from $250,000 to $1,000,000 net worth, depending upon thesize of the particular area.

 

**FRANCHISING ACTIVITIES**

 

*PrecisionTune Auto Care*.  As ofJune 30, 2004, all of Precision Tune Auto Care domestic and internationalcenters were owned and managed by franchisees. Precision Tune Auto Care’s franchises have been sold during thepreceding years under franchise agreements that vary in detail as the PrecisionTune Auto Care’s franchise program has evolved. Royalty rates in existing franchise agreements are 7.5%.  Currently, Precision Tune Auto Care’sstandard franchise agreement requires payment to the Company of an initialfranchise fee of $25,000 and a continuing royalty of 7.5% of weekly grossreceipts.  In addition, the franchisee isrequired to contribute to or expend up to 9% of weekly gross receipts onadvertising, of which 1.5% is currently paid into the national marketing fundand up to 7.5% of which is spent locally. The current standard form franchise agreement has an initial term of tenyears and provides for five-year renewal options.

 

TheCompany has implemented a program under which qualified franchisees areeligible to have their royalty rate reduced to as low as 6% if they satisfycertain criteria.  Under the program,franchisees are also provided with an incentive to purchase additionalPrecision Tune Auto Care franchises.  Anyfranchisee that has owned and operated a center for at least one year inaccordance with this program will be charged an initial franchise fee of$15,000 for a second franchise and $10,000 for each additional franchisepurchased, provided certain conditions are met.

 

Underits current form of franchise agreement, the Company has a continuingobligation to make technical and administrative support available, centralizedmarketing support, and training and related support available to itsfranchisees.  In areas where there arearea developers, the Company has delegated most of these duties to areadevelopers under its area developer system.

 

Uponnon-renewal and transfer, the Company has the first right to purchase theoperating assets and obtain an assignment of leased facilities in certaincases.  In certain situations, theCompany will repurchase franchise rights. The decision to repurchase is made solely at its discretion and is not acontractual obligation.  The Company alsoperiodically obtains possession of some franchisees’ franchise rights byexchanging for such rights notes payable or other consideration, or by exercisingrights outlined in the franchise agreements.

 

TheCompany also enters into master franchise agreements to develop internationalmarkets.  At the present time, theCompany has master franchise agreements in Taiwan, Indonesia, United ArabEmirates, the Bahamas, the Dominican Republic, Peru, Brazil, El Salvador,Ecuador, Guatemala, Honduras, Saudi Arabia, and Portugal.  Generally, the master franchisee pays alicense fee and is required to develop Precision Tune Auto Care centers inaccordance with an agreed upon schedule within the defined area. Franchiseagreements within the area are between the master franchisee and the unitfranchisee.  The master franchisee isrequired to perform all

 

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ofthe obligations of the franchisor including training, administrative andoperational support, and the Company generally receives 20% of the initialfranchise fee and up to one-third of ongoing royalty fees.

 

**CO-BRANDING**

 

On March 20, 2000, theCompany entered into an agreement with Petro USA, Inc., a subsidiary of GettyPetroleum Marketing, Inc., to provide Getty’s dealers with the opportunity tohost a Precision Tune Auto Care franchise or Precision Lube Expressfranchise.  This co-branding programinvolves a planned association of two distinct brands, which are typicallyassociated with different business concepts. ** **AtJune 30, 2004, there were seven Getty stores that were hosting Precision TuneAuto Care centers and one Getty store that was hosting a Precision Lube Expresscenter.

 

TheCompany is seeking to enter into other similar alliance agreements or otherrelated agreements, where its franchised businesses will be the secondarytenant at the primary tenant’s location. The co-branding program may have separate agreements with the primarytenant’s organization or its affiliates to assist Precision Tune Auto Care inthe offer of franchises to the primary tenants and the provision ofservices.  The Company expects that theseco-branding opportunities will be with other providers of automotive servicesnot similar to its own, like gasoline stations, detail, paint and body workstations, tire shops, glass shops, and muffler shops.  Due to the nature of these co-branding relationships,the Company expects to modify its standard form of franchise agreement toreflect the differences or similarities between its businesses.  Some of these primary tenants may be indirect competition with the Company and may choose not to franchise theirparticular location.  Additionally, theCompany makes the final decision as to entering into a franchise agreement witha primary tenant.

 

**COMPETITION**

 

The Company’s franchisees and licensees encountercompetition in all aspects of their business, including the sale by PrecisionTune Auto Care and Precision Lube Express centers of automotive maintenance andrepair services and fast oil and lubrication services.  The Company believes that automobiledealerships, including recently emerging national and regional new and usedauto dealerships, represent Precision Tune Auto Care’s principalcompetitors.  Other Precision Tune AutoCare competitors include tire companies and regional under-the-hood servicespecialists.  National competitors withinPrecision Tune Auto Care’s market include Sears Auto Center and the automotivemaintenance centers operated by Goodyear and Firestone, among others.  Its regional competitors include All Tune andLube (East Coast), Econo Lube N’ Tune (West Coast), Tunex International,Inc.  (Rocky Mountain region), Tune-UpMasters, and Speedee Oil Change and Tune-Up (Southern region).  The Company believes that the greatertechnical complexity of today’s vehicles provides a substantial barrier toentry for competitors in the “under-the-hood” segment of the automotive careservices industry.

 

TheCompany believes that the Precision Tune Auto Care centers all compete on thebasis of customer awareness through advertising, service, convenience andlocation and, to a lesser extent, on price. The Company believes that the potential ability to offer all of theservices provided by each of the operations at one center or in centers inclose proximity to one another will be a significant competitive advantage.

 

**GOVERNMENT REGULATION**

 

*FranchisingRegulation*.  TheCompany is subject to federal, international and state laws and regulations,including the regulations of the Federal Trade Commission as well as similarauthorities in individual states, in connection with the offer, sale andtermination of franchises and the regulation of the franchisor/franchiseerelationship.  From time to time, theCompany experiences periods during which sales are restricted while itregisters updates of its disclosure material with various states.  Such delays may have an adverse effect on itsability to offer and sell franchises.  Inaddition, the Company may become subject to litigation with, or other claimsfiled with state, federal or international authorities by, franchisees or areadevelopers based on alleged unfair trade practices, implied covenants of goodfaith and fair dealing or express violations of agreements.  The failure by the Company to comply withthese laws could subject the Company to liability to franchisees and to finesor other penalties imposed by governmental authorities and could have amaterial adverse effect on its financial condition and results of operations.

 

*EnvironmentalRegulation*.  PrecisionTune Auto Care and Precision Lube Express centers store new oil and handlelarge quantities of used automotive oils and fluids.  As a result of these activities, the Company,its franchisees and area developers are subject to various federal, state andlocal environmental laws and regulations dealing with the transportation,storage, presence, use, disposal and handling of hazardous materials andhazardous wastes, and underground fuel storage tanks.  If any such substances were improperlyreleased or improperly stored on the property of any franchisee, includingleased properties, or if the Company were found to be in violation of applicableenvironmental laws and regulations, the Company could be responsible forclean-up costs, property damage and fines or other penalties, any one of whichcould have a material adverse effect on its financial condition and results ofoperations.

 

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**TRADEMARKS**

 

TheCompany has registered a number of trademarks and service marks with the UnitedStates Patent and Trademark Office, including “Precision Tune Auto Care.”  Its failure to obtain and maintain trademarkand service mark registration could have a material adverse effect on itsoperations.  The Company has alsoregistered or made application to register trademarks in foreign countrieswhere master franchise licenses have been granted.

 

**SEASONALITY**

 

Seasonalchanges may impact various sectors of the Company’s businesses and,accordingly, its operations may be adversely affected by seasonal trends incertain periods.  In particular, severeweather in winter months may make it difficult for consumers in affected partsof the country to travel to Precision Tune Auto Care and Precision Lube Expressand obtain services.

 

**RISK FACTORS**

 

TheCompany’s business and investment in its Common Stock are subject to certainrisks, including the following:

 

*Stock Listing. *The Company’s common stocktrades on the National Association of Securities Dealers, Inc.’s OTC BulletinBoard.  Like other stocks traded overthis quotation system, its common stock is thinly traded, highly volatile andnot followed by analysts.

 

*PennyStock Regulations. *TheCompany’s common stock is subject to the rules promulgated under the SecuritiesExchange Act of 1934, as amended, relating to “penny stocks.”  These rules require brokers sellingsecurities subject to these rules to persons other than established customersand institutional accredited investors to complete certain documentation, makesuitability inquiries of investors and provide investors with certaininformation concerning the risks of trading in the security.  These rules may restrict the ability ofbrokers to sell the Company’s common stock and thus may have an adverse effecton the liquidity and market price of its common stock.

 

*ResaleRestrictions on Common Stock. *Becauseof large broker-dealer spreads, investors may be unable to sell the stockimmediately back to the broker-dealer at the same price the broker-dealer soldthe stock to the investor.  In somecases, the stock may fall quickly in value. The market among broker-dealers may not be active, making it more difficultfor investors to sell this stock. Investors in a penny stock often are unable to sell stock back to thedealer that sold them the stock.  Themark-ups or commissions charged by the broker-dealers may be greater than anyprofit a seller may make.

 

*PennyStock Market.* Shareholders should be aware that, according to Securities and ExchangeCommission Release No.34-29093, the market for penny stocks has suffered in recent years frompatterns of fraud and abuse which could cause investors to lose their entireinvestment.  Such patterns include:

•                  control of the market for thesecurity by one or a few broker-dealers that are often related to the promoteror issuer;

•                  manipulation of prices throughprearranged matching of purchases and sales and false and misleading pressreleases;

•                  “boiler room” practices involvinghigh pressure sales tactics and unrealistic price projections by inexperiencedsales persons;

•                  excessive and undisclosed bid-askdifferentials and mark-ups by selling broker-dealers; and

•                  the wholesale dumping of the samesecurities by promoters and broker-dealers after prices have been manipulatedto a desired level, along with the inevitable collapse of those prices withconsequent investor losses.

 

The Company’s managementis aware of the abuses that have occurred historically in the penny stockmarket.  Although it does not expect tobe in a position to dictate the behavior of the market or of broker-dealers whoparticipate in the market, it will strive within the confines of practicallimitations to prevent the described patterns from being established withrespect to its securities.

 

*Competition*.  The automotive services industry is highlycompetitive.  The Company believes thatautomobile dealerships, including recently emerging national and regional newand used auto dealerships, represent the principal competitors for PrecisionTune Auto Care and Precision Lube Express service centers; however, theseservice centers also compete with national and regional fast oil change andlube companies, major oil manufacturers, local service stations and local,regional and national automobile maintenance and repair service providers.

 

TheCompany believes the principal competitive factors in the markets serviced byeach of its business units are location, name recognition and reputation, andquality of service and price.

 

TheCompany also competes with some of those noted above and with other parties inthe sale of franchises.  Competitivefactors include startup costs, royalty rates, franchisee support and thefinancial performance of existing centers. With respect to the sales of supplies and equipment for franchisees,competition is based on availability, price, ability to provide prompt deliveryand the quality of support services.

 

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Certain competitorsdiscussed above have greater financial resources than the Company does.  There can be no assurance that the Company orindividual Precision centers will be able to compete effectively.  *See “Business**3⁄4Competition.”*

 

*Relianceon Franchising.* Franchise royalties are a significant component of its revenuebase.  Therefore, the Company dependsupon the ability of its franchisees to promote and capitalize upon the “Precision”brand and the reputation the Company believes the Company enjoys for qualityand value.  There can be no assurancethat the Company or our area developers will be able to recruit and retainfranchisees with the business abilities or financial resources necessary toopen Precision Tune Auto Care centers on schedule or that the franchisees willconduct operations profitably.  Inaddition, to the extent that franchisees finance their operations with securedindebtedness, the Company’s rights to receive franchise royalties would beeffectively subordinated to the rights of franchisees’ lenders.  *See “Business**3⁄4Operations.”*

 

*AutomotiveTechnology Advances.* The demand for the services offered by its Precision Tune Auto Care andPrecision Lube Express centers could be adversely affected by continuingdevelopments in automotive technology. Automotive manufacturers are producing cars that last longer and requireservice and maintenance at less frequent intervals.  For example, some manufacturers now recommendthat consumers change oil at 10,000 mile intervals and replace spark plugs andother engine components at 100,000 miles, a significant increase from themileage intervals recommended for earlier models and those currentlyrecommended by most manufacturers.  Thedemand for its services also could be adversely affected by longer and morecomprehensive warranty programs offered by automobile manufacturers and otherthird parties.  The Company believes thata majority of new automobile owners have their cars serviced by a dealer duringthe period the car is under warranty.  Inaddition, advances in automotive technology may require the Company to incuradditional costs to update its technical training program and upgrade thediagnostic capabilities of its centers.

 

*LaborAvailability.* The provision of high quality maintenanceservices by Precision Tune Auto Care centers requires an adequate supply ofskilled labor.  In addition, theoperating costs and operating revenues of such centers may be adverselyaffected by high turnover in skilled technicians.  Trained and experienced automotivetechnicians are in high demand. Accordingly, a center’s ability to increase productivity and revenuescould be affected by its inability to maintain the employment of skilledtechnicians necessary to provide the center’s services.  There can be no assurance that Precision TuneAuto Care or its franchisees will be able to attract and maintain an adequateskilled labor force necessary to operate these centers efficiently or that laborexpenses will not increase as a result of a shortage in the supply of skilledtechnicians, thereby adversely impacting its financial performance.

 

*Dependenceon Management and Key Personnel.*  The Company’s success depends to asignificant extent on the performance and continued services of seniormanagement and certain key personnel. The Company believes these individuals possess the necessary experiencein financing, operating and managing a company intent on improving itsfinancial performance.  The loss of theservices of one or more of these key employees could have a material adverseimpact on its financial condition and results of operations.

 

*SeasonalNature of Portions of the Business.*  Seasonal changes may impact various sectorsof its businesses and, accordingly, its operations may be adversely affected byseasonal trends in certain periods.  Inparticular, severe weather in winter months may make it difficult for consumersin affected parts of the country to travel to Precision Tune Auto Care andPrecision Lube Express centers and obtain services.

 

*Controlby Management and Principal Shareholders.* As of August 12, 2004, its directors,executive officers and shareholders beneficially owning more than 5% of itsoutstanding common stock, in the aggregate, beneficially owned approximately18% of its outstanding common stock. Accordingly, these persons have substantial influence over its affairs,including the ability to influence the election of directors and appointment ofmanagement, the outcome of votes by its shareholders on major corporatetransactions, including mergers and the sales of substantial assets and othermatters requiring shareholder approval.

 

*FranchisingRegulations.*  TheCompany is subject to federal, international and state laws and regulations,including the regulations of the Federal Trade Commission as well as similarauthorities in individual states, in connection with the offer, sale andtermination of franchises and the regulation of the franchisor/franchiseerelationship.  *See “Business**3⁄4Government Regulation.”*  Its failure to comply with these laws couldsubject the Company to liability to franchisees and to fines or other penaltiesimposed by governmental authorities. From time to time, the Company experiences periods during which salesare restricted while the Company registers updates of its disclosure materialwith various states.  Such delays mayhave an adverse effect on its ability to offer and sell franchises.  In addition, the Company may become subjectto litigation with, or other claims filed with state, federal or internationalauthorities by, franchisees or area developers based on alleged unfair tradepractices, implied covenants of good faith and fair dealing or expressviolations of agreements.  Accordingly,its failure to comply with applicable franchise laws and regulations could havea material adverse effect on its financial condition and results of operations.

 

*EnvironmentalRegulation.*  PrecisionTune Auto Care and Precision Lube Express centers store new oil and handlelarge quantities of used automotive oils and fluids.  Precision Auto Wash centers (which wereformerly franchise operations under the PACI umbrella) used chemicals in thewashing process.  These chemicals, alongwith oils, fluids and other chemicals washed off of the vehicle were collectedwith the waste water from the car wash process. As a result of these activities, the Company, its franchisees and areadevelopers are subject to various federal, state and local environmental lawsand regulations dealing with the transportation,

 

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storage, presence, use,disposal and handling of hazardous materials and hazardous wastes, discharge ofstorm water, and underground fuel storage tanks.  If any such substances were improperlyreleased or improperly stored on its property or the property of anyfranchisee, including leased properties, or the Company were found to be inviolation of applicable environmental laws and regulations, the Company couldbe responsible for clean-up costs, property damage and fines or otherpenalties, any one of which could have a material adverse effect on itsfinancial condition and results of operations. *See “Business**3⁄4Government Regulation.”*

 

**EXECUTIVE OFFICERS OF PRECISIONAUTO CARE, INC.**

 

*Louis M.Brown, Jr.*, age 61 became Chairman of the Board in October2003.  He also remains Chief ExecutiveOfficer.  He is Vice Chairman of MicrosSystems, Inc. since April 2003 and was Chairman of the Board from January 1987to April 2003.

 

*Robert R.Falconi,*age 50, became President in October 2003. He alsoremains Chief Operating Officer and Chief Financial Officer.  From March 2002 to October 2003, he wasExecutive Vice President and Chief Operating Officer/Chief Financial Officer.From September 2000 to February 2002, he was the Company’s Vice President –Finance, Administration and Chief Financial Officer.  From August 1998 until September 2000, he wasChief Financial Officer of Apptis, Inc.

 

*FrederickF. Simmons*, age 42, became Senior Vice President, GeneralCounsel and Secretary in March 2001. From December 1995 to February 2001, hewas Assistant General Counsel and Assistant Secretary of Advantica RestaurantGroup, Inc.

 

*John T.Wiegand*, age 42, became Senior Vice President – OperationalPrograms and Training in March 2002. From August 2000 to March 2002, he was Senior Vice president ofFranchise Operations and from June 1998 to August 2000, he was Vice Presidentof North American Operations. Mr. Wiegand joined WE JAC Corporation, theCompany’s predecessor, as Director of Field Operations in August 1996.

 

*KevinBates*, age 42, became Vice President - Marketing andAdvertising in October 1999. From January 1998 until October 1999, he was ourDirector of Field Operations.

 

*JoelBurrows*, age 47, became Vice President - Training/Researchand Development in September 1999. From December 1997 until September 1999, hewas the PTAC Director of Training/Research and Development.

 

*Glyn D.Massingill*, age 58, became Vice President - FranchiseServices in January 2000.  From September1990 through December 1999, Mr. Massingill was Vice President and GeneralManager of Precision Automotive Components Manufacturing and Distribution(PAC), a division of the Company.

 

*DouglasV. Krueger*, age 33, became Controller in January 2003.  From September 2001 until January 2003, Mr.Krueger was the Assistant Controller of the Company.  From September 2000 until September 2001, Mr.Krueger was a financial analyst of the Company. From September 1998 until September 2000, he was a financial analyst ofApptis, Inc.

 

**Item 2.   *Propertie******s***

 

The Company’s corporateheadquarters are located in approximately 18,000 square feet of leased officespace in Leesburg, Virginia pursuant to a lease that expires in 2009.

 

In the opinion ofmanagement, the Company’s current space is adequate for its operating needs.

 

###### **Item3.  *Legal Proceedin****gs*

###### ** **

From time to time, theCompany and its subsidiaries are subject to litigation in the ordinary courseof business, including contract, franchisee and employment-related litigation.In the course of enforcing its rights under existing and former franchiseeagreements, the Company is subject to complaints and letters threateninglitigation concerning the interpretation and applicability of these agreements,particularly in cases involving defaults and terminations of franchises.  As of the date hereof, there are no suchlawsuits pending against the Company.

 

Rebecca Abdallahv. Volkswagen of America, Inc., et al., District Court of Webb County, Texas,Case No. 2003-CVE-00798-D2

 

On September 8, 2003,Precision Franchising LLC (“PFL”) was served with Plaintiff’s First AmendedPetition seeking damages in excess of $75,000 from the manufacturer of avehicle purchased by her husband, the seller of the vehicle, a franchisedPrecision Tune Auto Care center which conducted a pre-purchase inspection ofthe vehicle, and against PFL.  With respect to PFL, Plaintiff alleges thatshe suffered personal injuries as a result of PFL’s inadequate policies andprocedures regarding the pre-purchase inspection; failure to adequately hire,train and supervise employees; failure to investigate the vehicle’s history offuel leaks and ongoing recall investigations; failure to investigate thevehicle’s fuel system; and negligent misrepresentations about the condition ofthe vehicle.  In

 

10

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June 2004, the Companyfiled a motion to dismiss the lawsuit, and in July 2004, the plaintiffvoluntarily dismissed the lawsuit against the Company without prejudice.

 

Previously ReportedCases:

 

Lumnivision, S.A.de C.V. v. Praxis Afinaciones, S.A. de C.V., Third Civil Court, First Judicial District,Monterrey, Nuevo Laredo, Mexico.

 

Lumnivision filed suitagainst Praxis Afinaciones, an indirect wholly owned subsidiary of PACI,seeking payment of 766,000 Mexican Pesos, plus interest at the rate of 5% permonth, for services under a contract.  Praxis Afinaciones denies theallegations and is defending the allegations in the lawsuit.

 

United Bank, NA v.C. Eugene Deal, Miracle Partners, Inc., Star Auto Center, Inc., Common Pleas Court of Cuyahoga County,Ohio, Case No. 01-CV0019, Filed January 11, 2001

 

Miracle Partners, Inc., awholly-owned subsidiary of the Company, is party to a confessed judgment ofapproximately $1.3 million.  The subsidiary is currently inactive and hasno assets.  As such, management believes this judgment will have nomaterial impact on the Company’s consolidated results of operations. Furthermore, the Company believes that it has a meritorious claim against Mr.Deal, former President of Miracle Partners, for misrepresentations made inconnection with PACI’s acquisition of Miracle Partners, Inc. in 1997 for allamounts covered by the judgment.

 

Threatened Litigation:

 

Puyallup Auto StopAssociates, Inc. v. PTW, Inc.

 

By letter dated July 1,2003, a former landlord has asserted a claim against PTW, Inc. forreimbursement of the costs of remediating environmental contamination to theleased premises during the term of the lease, which costs allegedly exceed $250,000. Investigation into the Company’s liability is ongoing.

 

The Company does notbelieve that any of the above claims or proceedings will result in a materialjudgment against the Company.  There can be no assurance, however, thatthese suits will ultimately be decided in its favor.  Any one of theseclaims or proceedings may result in a material judgment against the Company,which could cause material adverse consequences to its operations.

 

**Item 4.   *Submissionof Matters to******a Vote of Security Holders***

 

None.

 

11

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**PART II**

 

**Item 5.   *Market for Common Equityand Rel******ated Stockholder Matters***

 

The Company’s commonstock, par value $.01 per share (“Common Stock”) is publicly traded on theNational Association of Security Dealers Inc.’s OTC Bulletin Board and isquoted under the symbol “PACI.”

 

The following table setsforth the high and low sales prices on NASD OTC Bulletin Board for the CommonStock during the fiscal years ended June 30, 2004, and June 30, 2003,respectively. To date, the Company has not paid any Common Stock dividends anddoes not anticipate paying any Common Stock dividends in the foreseeablefuture, however dividends are currently being paid on the Company’s Series Aredeemable preferred stock (see “Management’s Discussion and Analysis or Planof Operation – Liquidity and Capital Resources” and Note 7 to the Consolidated Financial Statements).

 

These over the countermarket quotations reflect inter-dealer prices, without retail mark-up, markdown,or commission, and may not necessarily represent actual transactions.

 

**Fiscal Year Ended June 30, 2004**

 
| **Quarter** | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------|------------|----------|------------|---------|------------|
| First       |       | $        | 0.85       |    | $          | 0.55 |   |
| Second      |       | 1.25     |       | 0.68    |       |
| Third       |       | 0.91     |       | 0.60    |       |
| Fourth      |       | 0.95     |       | 0.60    |       |
|             |            |          |            |         |            |  |  |

 

**Fiscal Year Ended June 30, 2003**

 
| **Quarter** | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------|------------|----------|------------|---------|------------|
| First       |       | $        | 0.31       |    | $          | 0.16 |   |
| Second      |       | 0.42     |       | 0.17    |       |
| Third       |       | 0.32     |       | 0.20    |       |
| Fourth      |       | 1.01     |       | 0.23    |       |
|             |            |          |            |         |            |  |  |

 

As of September 1, 2004,there were approximately 200 record holders of Common Stock and approximately1,200 beneficial owners of the Company’s Common Stock.

 

**Equity Compensation PlanInformation**

 
| **Plan category**                                           | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted average exercise  price of outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
|                                                        |       | **(a)**                                                                                            | ** ** | **(b)**                                                                           | ** ** | **(c)**                                                            | ** ** |
| Equity compensation  plans approved by security holders     |       | 1,739,200                                                                                          |       | 0.74                                                                              |       | 674,497                                                            |       |
| Equity compensation  plans not approved by security holders |       | 0                                                                                                  |       | 0                                                                                 |       | 0                                                                  |       |
| Total                                                       |       | 1,739,200                                                                                          |       | 0.74                                                                              |       | 674,497                                                            |       |

 

12

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# **Item6.  *Management’s Discussionand****Analysis or Plan of Operation*

# ** **

**Introduction**

 

The following discussionshould be read in conjunction with the Financial Statements of the Company andrelated notes thereto included elsewhere herein.

 

**Overview**

 

Precision Auto Care is aglobal franchisor of auto care and quick-lube centers. Company revenues arederived from three primary areas: franchise development, royalties, anddistribution. Franchise development revenues include sales of franchises andmaster licenses. Royalty revenues are derived from royalty fees paid byindividual franchisees to the Company based on qualified retail sales by thefranchisee. Distribution revenues are derived from the sale of automotiverelated supplies to individual franchisees.

 

Direct costs consist offees paid to area developers for the sale of new franchises and for supportingfranchisees on an ongoing basis, other costs associated with directlysupporting the franchise system, and the cost of automotive related supplies.General and administrative expenses include all legal, accounting, generaloverhead, information technology and corporate staff expenses. Other income andexpense items include interest income and expense which are included within thenon-operating income/expense category on the Statement of Operations.  Severances, abandoned acquisitions, earlybuyout of lease obligations, and sale of assets are included in the operating expenseson the Statement of Operations.

 

The Company has oneremaining business segment, Automotive Care Franchising, due to the disposal ofits manufacturing operations in March and April 2003.  See Notes to Financial Statements forfinancial information regarding the disposal of the Company’s Manufacturing andDistribution business segment.  Thisdisposal was accounted for as a discontinued operation resulting in thereclassification of amounts associated with the manufacturing business in itshistorical financial statements.  TheAutomotive Care Franchising business segment, which is comprised of PrecisionTune Auto Care (“PTAC”) and Precision Lube Express, provides automotiveservices primarily through franchised operations located in the United Statesand in certain foreign countries.

 

The Company’s core autocare and franchising business continues to benefit from an improved focus onunit economics, and in the field training programs. Additionally, the Companyis seeking growth through co-branding. This strategy is designed to permit theCompany to partner with other retailers and service providers who are alsoseeking to improve cash flows through complementary brands.

 

**Critical Accounting Policies**

 

The following is asummary of the Company’s critical accounting policies.  For a full description of these and otheraccounting policies, see Note 1 of the Notes to the Consolidated FinancialStatements.  These critical accountingpolicies require estimates and assumptions that affect the amounts of assets, liabilities,revenues and expenses reported in the consolidated financial statements.  Due to their nature, estimates involvejudgments based on available information. Actual results or amounts could differ from estimates and the differencecould have a material impact on the consolidated financial statements.  Therefore, understanding these policies isimportant in understanding the reported results of operations and the financialposition of the Company.

 

*Revenue Recognition*

 

The Company’s royaltyrevenue is recognized as earned in accordance with the specific terms of eachagreement and to the extent no known issues involving collection exist.  In the case when revenues are not likely tobe collected, the Company provides for estimated losses.  This estimate is based upon our historicalexperience as well as a detailed review of our receivable balances.

 

Revenue from the sale ofa franchise is recognized upon the opening of the franchised center.

 

The Company enters intodomestic Area Development agreements and international Master License agreements(Agreements) which grant the area developer and master licensor, respectively,the right to sell, on the Company’s behalf, Precision Tune Auto Care franchisesand Precision Lube Express franchises within a specific geographic region.  Revenue from the sale of Area Developmentagreements is recognized as all material services or conditions related to thesale are satisfied.  Revenue from thesale of master licenses is recognized upon signing the Agreement since theCompany is not required to support the international franchises as there is nocontractual agreement between the Company and the international franchisees.

 

*Goodwill and Intangible Assets*

 

Statement of FinancialAccounting Standards (SFAS) No. 142, “Goodwill and Intangible Assets”, requiresthat goodwill no longer be amortized, but instead be tested for impairment atleast annually.  Historically, managementhas performed its impairment analysis

 

13

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in the first quarter ofeach fiscal year.  Goodwill impairmenttesting for the period ending June 30, 2004, did not result in the impairmentof recorded goodwill of approximately $8.7 million.  Subsequent to year-end, the Company obtaineda current business enterprise valuation for purposes of supporting itsimpairment analysis for fiscal year 2005. Such analysis further affirmed management’s conclusion that goodwill wasnot impaired at June 30, 2004.

 

*Deferred Tax Valuation Allowance*

 

The Company recognizesdeferred income tax liabilities and assets for the expected future taxconsequences of events that have been included in the financial statements ortax returns.  Deferred tax liabilitiesand assets reflect the effects of tax losses and the future income tax effectsof temporary differences between the consolidated financial statement carryingamounts of existing assets and liabilities and their respective tax bases andare measured using enacted tax rates that apply to taxable income in the yearsin which those temporary differences are expected to be recovered orsettled.  The Company recognizes deferredtax assets if it is more likely than not that the asset will be realized infuture years.

 

The Company regularlyreviews the recoverability of its tax deferred assets and establishes avaluation allowance as deemed appropriate. As of June 30, 2004, the Company had a valuation allowance of $6.4million against deferred tax assets. Given the Company’s current operating performance, management releasedapproximately $629,000 of the valuation allowance during 2004.  This adjustment was based upon management’sassessment of the recoverability of deferred taxes which included projectionsof future pretax earnings.

 

###### **Results of Operations**

###### ** **

**Comparisonof the year ended June 30, 2004 to the year ended June 30, 2003**

 

Summary (in thousands)

 
| ** **                                    | ** ** | **Twelve Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **2004**                         | ** ** | **%** | ** ** | **2003** | ** ** | **%** | ** ** |
| Automotive care  franchising revenue          |       | $                                | 11,116     |   | 94 |   | $ | 11,320 |   | 95 |   |
| Other                                         |       | 658                              |       | 6 |   | 617 |   | 5 |   |
| Total revenues                                |       | $                                | 11,774     |   | 100 | % | $ | 11,937 |   | 100 | % |
| Automotive care  franchising direct cost      |       | 6,616                            |       | 56 |   | 6,457 |   | 54 |   |
| Other                                         |       | 611                              |       | 5 |   | 613 |   | 5 |   |
| Total direct  cost                            |       | 7,227                            |       | 61 |   | 7,070 |   | 59 |   |
| General and  administrative                   |       | 3,290                            |       | 28 |   | 3,467 |   | 29 |   |
| Depreciation  expense                         |       | 318                              |       | 3 |   | 410 |   | 3 |   |
| Other operating  expense                      |       | —                           |       | 0 |   | 11 |   | 0 |   |
| Operating income                              |       | 939                              |       | 8 |   | 979 |   | 9 |   |
| Gain on debt  restructuring                   |       | 193                              |       | 2 |   | 660 |   | 5 |   |
| Other income  (expense)                       |       | 47                               |       | 0 |   | (664 | ) | (6 | ) |
| Gain from  discontinued operations            |       | 18                               |       | 0 |   | 254 |   | 2 |   |
| Earnings before  taxes                        |       | 1,197                            |       | 10 |   | 1,229 |   | 10 |   |
| Income taxes                                  |       | (473                             | )          | (4 | ) | — |   | 0 |   |
| Net income                                    |       | 1,670                            |       | 14 |   | 1,229 |   | 10 |   |
| Preferred stock  dividends                    |       | 80                               |       | — |   | 43 |   | — |   |
| Net income  applicable to common shareholders |       | $                                | 1,590      |   | 14 | % | $ | 1,186 |   | 10 | % |

 

*Revenue.* Totalrevenue for the year ended June 30, 2004 was $11.8 million, a decrease ofapproximately $100,000, or 1%, compared with total revenue of $11.9 million forthe year ended June 30, 2003.

 

Automotive carefranchising revenue for the year ended June 30, 2004 was $11.1 million, adecrease of approximately $204,000, or 2%, compared with automotive carerevenues of $11.3 million for the year ended June 30, 2003.  This decrease was the result of a decrease inroyalty revenues of $470,000. This decrease was offset by an increase infranchise development revenues of $112,000, and an increase in printing revenuerelated to franchise operations of $154,000. The decrease in royalty revenues was driven by the result of system widestore sales being lower than last year and due to the fact that there were norevenues received from the discontinued operation in Mexico.  The increase in franchise development is dueto the Company’s improved financial condition and increased sales efforts.  Subsequent to fiscal year end, in August2004, the Company signed an area development agreement with North PacificPrecision, Inc. for the area rights for the Seattle market.  Under the agreement, North Pacific Precision,Inc. paid $500,000 for the area developer rights for the Seattle market, andthe Company will receive fifty percent of the income from the sale offranchises and from

 

14

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royalties fromfranchisees in the area (see Note 13 of the Consolidated FinancialStatements).  The increase in printingrevenue is due to new programs offered to franchisees that enable them topurchase more products from the company’s printing subsidiary.

 

Other revenue for theyear ended June 30, 2004 was $658,000, an increase of approximately $41,000, or7%, compared to $617,000 for the year ended June 30, 2003.   This increase was driven by an increase inrevenues derived from training and rebate programs.

 

*Direct Cost.*Total direct costs for the year ended June 30, 2004 totaled $7.2 million, anincrease of approximately $157,000 or 2%, compared with $7.1 million for theyear ended June 30, 2003.

 

Automotive carefranchising direct costs for the year ended June 30, 2004 totaled $6.6 million,an increase of $159,000 or 2%, compared with $6.5 million for the year endedJune 30, 2003.  This increase is directlyattributable to the fact that printing revenue comprised a greater percentageof the total revenue mix than it did in fiscal year 2003.  The increased printing revenues have a lowermargin compared to the revenues associated with royalties, which decreasedduring the current year.

 

Other direct costs forthe year ended June 30, 2004 totaled $611,000, a decrease of $2,000, comparedwith $613,000 for the year ended June 30, 2003.

 

*General and AdministrativeExpense.* General and administrative expense was $3.3 millionfor the year ended June 30, 2004, a decrease of $177,000 or 5%, compared with$3.5 million for the year ended June 30, 2003. This decrease was primarily the result of management’s cost reductioninitiatives in general and administrative costs.  Specifically, legal and personnel costs werereduced.  The general and administrativeexpenses also include a charge of $127,000 and $40,000, respectively, due tovariable accounting for certain employee stock options in 2004 and 2003 (seeNote 10 of the Consolidated Financial Statements).

 

*Operating Income From ContinuingOperations. *TheCompany recorded operating income for the year ended June 30, 2004 ofapproximately $939,000, a decrease of $40,000, or 4%, compared with anoperating income of $979,000 for the year ended June 30, 2003.

 

*Gain onDebt Restructuring. *The Company recognized a gain from debtrestructuring in the amount of $193,000 for the year ended June 30, 2004, as aresult of restructuring the Board LLC debt. During January 2003, the Company recognized a gain of approximately$660,000 due to a reduction in accrued expenses associated with its Mexicansubsidiary based on management’s determination, upon consultation with legalcounsel, that the Company would not be obligated to pay such expenses on behalfof the Mexican subsidiary as a result of such entity’s insolvency.

 

*OtherIncome (Expense).* The Company recorded Other Income of$47,000 for the year ended June 30, 2004, compared with Other Expense of$664,000 for the year ended June 30, 2003. The Other Income in 2004 represents interest income derived from notesreceivable with franchisees.  The OtherExpense from 2003 was primarily interest expense on the Precision Funding andBoard LLC debt.

 

*Gain From DiscontinuedOperations. *The Companyrecorded a gain from discontinued operations for the year ended June 30, 2004of $18,000 compared with a gain from discontinued operations of $254,000 forthe year ended June 30, 2003 relating to the disposal of its manufacturing anddistribution operations (see Note 4 of the Consolidated Financial Statements).

 

*NetIncome Applicable to Common Shareholders and Earnings Per Share*.The Company recorded Net Income Applicable to Common Shareholders of $1.6million, or $0.08 per share, for the year ended June 30, 2004 compared to $10.9million, or $0.72 per share, for the year ended June 30, 2003. The decrease innet income is primarily attributable to the gain that was recognized on thedebt restructuring in 2003.

 

Liquidity and CapitalResources

 

Sources and Uses of Cash

 

Cash atJune 30, 2004 was $1.6 million.  Duringthe period, cash provided by operations was $837,000.  The Company generated operating profit infiscal year 2004 and expects to do so in fiscal year 2005.

 

Cash used in investing activities for the twelve months endedJune 30, 2004 was $100,000 resulting primarily from the purchase of propertyand equipment.

 

Cash used in financing activities for the twelvemonths ended June 30, 2004 was $727,000. Cash used in financing activitiesduring the period consisted of repayments of the subordinated debt and othernotes payable.

 

15

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Management believes that the Company’s current cashbalance, cash generated from operations, and available credit line will besufficient to meet the Company’s working capital needs, capital expenditures,and contractual obligations for fiscal year 2005.

 

Debt Transactions

 

On October 30, 2002, the Company reached an agreementwith Precision Funding, L.L.C. and a former board member to convertapproximately $17.6 million of outstanding debt and accrued interest due tothem to equity.  In exchange for theextinguishment of the approximately $17.6 million in outstanding debt andaccrued interest due, the Company issued Precision Funding, L.L.C. and theformer board member the following:

 

•                  2.5million shares of the Company’s common stock valued at $500,000.

•                  500,000shares of Series A redeemable preferred stock of the Company with a statedvalue of $5,180,000 or $10.36 per share. These shares are redeemable by the shareholder at any time after the 3rdanniversary of the Issue Date, October 30, 2002 on 30 days prior written noticefor an aggregate value of $5,180,000 plus any unpaid dividends.  The holders of these shares are also entitledto receive, when and as declared by the Board of Directors, cumulativepreferential cash dividends at the rate of 2% of the liquidation preference ofthe Series A preferred stock, $10.36 per share, per annum payable quarterly inarrears in cash on the last day, or the next succeeding business day, ofJanuary, April, July, and October in each year, beginning January 31,2003.  Accrued dividends wereapproximately $4,000 and $9,000 at June 30, 2004 and 2003, respectively.

•                  Warrantsto purchase 11,472,039 shares of the Company’s common stock with an exerciseprice of $0.44 per share and a fair value of approximately $2.3 million.

 

Issuance of the warrantswas subject to shareholder approval as part of a proposal to amend the Articlesof Incorporation to increase the Company’s authorized shares of commonstock.  Such approval was granted at the annual shareholder meeting heldon January 15, 2003 and as a result, the Company exchanged common stock,preferred stock and warrants with an aggregate fair value of $7.9 million insatisfaction of debt and accrued interest of approximately $17.6 million.  The difference in the carrying value of debtand accrued interest and the fair value of the common stock, preferred stockand warrants of $9.7 million was recorded as a capital contribution.

 

In October 1998, a subordinated debenture in theamount of $2.0 million was executed with an LLC composed of certain members ofthe Company’s board of directors (Board LLC). On July 17, 2003, the Company reached an agreement to restructure theremaining $633,000 due to the Board LLC. The terms of the agreement called for the following:

 

•                  Paymentof $200,000 within 3 days of receipt of approval by the Company’s Board ofDirectors.

•                  Issuanceof a non-interest bearing note payable in the amount of $50,000, payable in tenmonthly installments of $5,000 each, commencing one month after the date ofapproval by the Company’s Board of Directors.

•                  Issuanceof warrants to purchase 400,000 shares of the Company’s common stock with anexercise price of $0.44 per share having a fair value of approximately$222,000.

 

The Company recognized a gain of approximately $160,000 fromthis debt restructuring in the first quarter of fiscal year 2004.

 

InDecember 2003, the Company paid approximately $169,000 in full satisfaction ofthe $201,000 of debt owed to Radiant Systems, Inc.  The Company recognized a gain ofapproximately $32,000 from this transaction in the second quarter of fiscalyear 2004.

 

InJanuary 2004, 2,469,600 warrants were exercised pursuant to an agreement theCompany reached with Precision Funding, L.L.C. and a former board member inOctober 2002.  Upon the exercise of thesewarrants at the previously agreed to exercise price of $0.44 per share, theholder purchased 2,469,600 restricted shares of common stock in exchange forsurrendering 104,885 shares of Series A Preferred Stock to the Company,therefore, there were no cash proceeds received by the Company from thistransaction.

 

In February 2004, 4,530,169 warrants were exercisedpursuant to an agreement the Company reached with Precision Funding, L.L.C. anda former board member in October 2002. Upon the exercise of these warrants at the previously agreed to exerciseprice of $0.44 per share, the holder purchased 4,530,169 restricted shares ofcommon stock in exchange for surrendering 192,401 shares of Series A PreferredStock to the Company, therefore, there were no cash proceeds received by theCompany from this transaction.

 

Seasonality and QuarterlyFluctuations

 

Seasonal changes mayimpact various sectors of the Company’s business differently and, accordingly,the Company’s operations may be affected by seasonal trends in certain periods.In particular, severe weather in winter months can adversely affect the Companybecause such weather makes it difficult for consumers in affected parts of thecountry to travel to Precision Auto Care and Precision Lube Express centers.

 

16

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**Item 7.  *Financial St******atements***

 

17

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**Report of IndependentRegistered Public Accounting Firm**

 

 

To the Board of Directors and

Stockholders of Precision Auto Care, Inc.

 

 

We have audited the accompanying consolidatedbalance sheets of Precision Auto Care, Inc. (the Company) and subsidiaries asof June 30, 2004 and 2003, and the related consolidated statements ofoperations, stockholder’s equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audits toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe that our audits provide a reasonablebasis for our opinion.

 

In our opinion, the financial statementsreferred to above, present fairly, in all material respects, the consolidatedfinancial position of Precision Auto Care, Inc. and subsidiaries as of June 30,2004 and 2003, and the consolidated results of its operations and its cashflows for the years then ended in conformity with accounting principlesgenerally accepted in the United States of America.

 

Asdiscussed in Note 7, the accompanying 2004 consolidated balance sheet andconsolidated statement of stockholders’ equity and 2003 consolidated financialstatements have been restated.

 
| /s/ GRANT THORNTON LLP                                                                                           |   |
|------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                             |
| Vienna,  Virginia                                                                                                |
| September  10, 2004, except with respect to the matter discussed in Note 7 as to which  the date is July 5, 2005 |

 

18

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**PRECISIONAUTO CARE, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                           | ** ** | **June 30,**                  | ** ** | **June 30,**                  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2004**                      | ** ** | **2003**                      | ** ** |
| ** **                                                                                                                           | ** ** | **(As restated  see Note 7)** | ** ** | **(As restated  see Note 7)** | ** ** |
| **ASSETS**                                                                                                                           | ** ** | ** **                    | ** ** | ** **                    | ** ** |
| Current assets:                                                                                                                      |       |                          |       |                          |       |
| Cash and cash  equivalents                                                                                                           |       | $                             | 1,573,368  |                          | $          | 1,564,110 |   |
| Restricted cash                                                                                                                      |       | 50,200                        |       | —                        |       |
| Accounts  receivable, net of allowance of $72,815 and $184,607, respectively                                                         |       | 620,761                       |       | 756,565                       |       |
| Notes receivable                                                                                                                     |       | 294,243                       |       | 160,352                       |       |
| Deferred tax  asset                                                                                                                  |       | 473,000                       |       | —                        |       |
| Other assets                                                                                                                         |       | 283,244                       |       | 240,727                       |       |
| Assets of  discontinued operations                                                                                                   |       | —                        |       | 16,759                        |       |
| Total current assets                                                                                                                 |       | 3,294,816                     |       | 2,738,513                     |       |
|                                                                                                                                 |       |                          |       |                          |       |
| Property, plant  and equipment, at cost                                                                                              |       | 4,147,329                     |       | 4,092,222                     |       |
| Less:  Accumulated depreciation                                                                                                      |       | (3,982,924                    | )          | (3,664,823                    | )          |
|                                                                                                                                 |       | 164,405                       |       | 427,399                       |       |
|                                                                                                                                 |       |                          |       |                          |       |
| Goodwill                                                                                                                             |       | 8,711,744                     |       | 8,711,744                     |       |
| Notes  receivable, net of allowance of $254,832 and $178,796, respectively                                                           |       | 161,685                       |       | 106,334                       |       |
| Deposits and  other                                                                                                                  |       | 27,914                        |       | 24,314                        |       |
|                                                                                                                                 |       |                          |       |                          |       |
| Total assets                                                                                                                         |       | $                             | 12,360,564 |                          | $          | 12,008,304 |   |
|                                                                                                                                 |       |                          |       |                          |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                        | ** ** | ** **                    | ** ** | ** **                    | ** ** |
| Current  liabilities:                                                                                                                |       |                          |       |                          |       |
| Accounts payable  and accrued liabilities                                                                                            |       | $                             | 1,942,650  |                          | $          | 2,543,945 |   |
| Board LLC note                                                                                                                       |       | —                        |       | 116,163                       |       |
| Other notes  payable- current                                                                                                        |       | 75,240                        |       | 174,267                       |       |
| Line-of-credit                                                                                                                       |       | —                        |       | —                        |       |
| Deferred revenue                                                                                                                     |       | 396,150                       |       | 307,500                       |       |
| Liabilities from  discontinued operations                                                                                            |       | 12,780                        |       | 73,443                        |       |
| Total current  liabilities                                                                                                           |       | 2,426,820                     |       | 3,215,318                     |       |
|                                                                                                                                 |       |                          |       |                          |       |
| Board LLC note                                                                                                                       |       | —                        |       | 516,365                       |       |
| Other notes  payable- non-current                                                                                                    |       | 13,770                        |       | 222,357                       |       |
| Deferred revenue  and other                                                                                                          |       | —                        |       | 210,000                       |       |
| Total  liabilities                                                                                                                   |       | 2,440,590                     |       | 4,164,040                     |       |
|                                                                                                                                 |       |                          |       |                          |       |
| Commitments and  contingencies                                                                                                       |       | —                        |       | —                        |       |
|                                                                                                                                 |       |                          |       |                          |       |
| Series A  redeemable preferred stock, $.01par value; 1,000,000 shares authorized;  202,714 and 500,000 shares issued and outstanding |       | 2,100,117                     |       | 5,180,000                     |       |
|                                                                                                                                 |       |                          |       |                          |       |
| Stockholders’  equity:                                                                                                          |       |                          |       |                          |       |
| Common stock,  $.01 par value; 39,000,000 shares authorized; 23,808,602 and 16,558,833  shares issued and outstanding                |       | 238,086                       |       | 165,588                       |       |
| Additional  paid-in capital                                                                                                          |       | 65,619,904                    |       | 62,126,581                    |       |
| Accumulated  deficit                                                                                                                 |       | (58,038,133                   | )          | (59,627,905                   | )          |
| Total stockholders’  equity                                                                                                     |       | 7,819,857                     |       | 2,664,264                     |       |
| Total liabilities  and stockholders’ equity                                                                                     |       | $                             | 12,360,564 |                          | $          | 12,008,304 |   |

 

Seeaccompanying notes.

 

19

----

 

**PRECISIONAUTO CARE, INC. AND SUBSIDIARIES**

## **CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                       | ** ** | **For The Years Ended** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | **June 30,**            | ** ** |
| ** **                                                       | ** ** | **2004**                | ** ** | **2003** | ** ** |
| ** **                                                       | ** ** | ** **              | ** ** | **(As restated  see Note 7)** | ** ** |
| Revenues:                                                        | ** ** | ** **              | ** ** | ** ** | ** ** |
| Franchise  royalties                                             |       | $                       | 10,624,998 |   | $ | 10,941,143 |   |
| Franchise  development                                           |       | 490,826                 |       | 379,097 |   |
| Company owned  centers                                           |       | —                  |       | 73,763 |   |
| Other                                                            |       | 658,029                 |       | 542,881 |   |
|                                                             |       |                    |       |   |   |
| Total revenues                                                   |       | 11,773,853              |       | 11,936,884 |   |
|                                                             |       |                    |       |   |   |
| Direct cost:                                                     |       |                    |       |   |   |
| Franchise  support and other                                     |       | 7,227,399               |       | 7,070,492 |   |
|                                                             |       |                    |       |   |   |
| Contribution                                                     |       | 4,546,454               |       | 4,866,392 |   |
|                                                             |       |                    |       |   |   |
| General and  administrative expense                              |       | 3,289,797               |       | 3,466,837 |   |
| Depreciation  expense                                            |       | 318,101                 |       | 409,840 |   |
| Other operating  expense                                         |       | —                  |       | 11,300 |   |
|                                                             |       |                    |       |   |   |
| Operating income                                                 |       | 938,556                 |       | 978,415 |   |
|                                                             |       |                    |       |   |   |
| Gain on debt  restructuring                                      |       | 192,875                 |       | 659,893 |   |
| Interest expense                                                 |       | (19,611                 | )          | (754,073 | ) |
| Other income                                                     |       | 66,777                  |       | 98,214 |   |
|                                                             |       |                    |       |   |   |
| Total other  income                                              |       | 240,041                 |       | 4,034 |   |
|                                                             |       |                    |       |   |   |
| Income before  income tax expense                                |       | 1,178,597               |       | 982,449 |   |
| Provision for  income taxes                                      |       | (473,000                | )          | 7,500 |   |
| Income from  continuing operations                               |       | 1,651,597               |       | 974,949 |   |
|                                                             |       |                    |       |   |   |
| Discontinued  operations:                                        |       |                    |       |   |   |
| Income (loss)  from discontinued operations                      |       | 18,302                  |       | (647,545 | ) |
| Gain on disposal                                                 |       | —                  |       | 901,508 |   |
|                                                             |       |                    |       |   |   |
| Net income                                                       |       | 1,669,899               |       | 1,228,912 |   |
| Preferred stock  dividends                                       |       | 80,127                  |       | 43,167 |   |
| Net income  applicable to common shareholders                    |       | $                       | 1,589,772  |   | $ | 1,185,745 |   |
|                                                             |       |                    |       |   |   |
| Income from  continued operations per common share- Basic        |       | $                       | 0.08       |   | $ | 0.06 |   |
| Gain from  discontinued operations per common share- Basic       |       | —                  |       | 0.02 |   |
| Net income  applicable to common stock per common share- Basic   |       | $                       | 0.08       |   | $ | 0.08 |   |
|                                                             |       |                    |       |   |   |
| Income from  continued operations per common share- Diluted      |       | $                       | 0.07       |   | $ | 0.06 |   |
| Gain from  discontinued operations per common share- Diluted     |       | —                  |       | 0.02 |   |
| Net income  applicable to common stock per common share- Diluted |       | $                       | 0.07       |   | $ | 0.08 |   |
|                                                             |       |                    |       |   |   |
| Weighted average  common shares outstanding—Basic           |       | 19,392,950              |       | 15,152,379 |   |
| Weighted average  common shares outstanding—Diluted         |       | 22,549,311              |       | 15,188,186 |   |

 

See accompanyingnotes.

 

20

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**PRECISIONAUTO CARE, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

 
| ** **                           | ** ** | **Common  Shares** | ** ** | **Common  Stock** | ** ** | **Additional Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total**  | ** **  |
|--------------------------------------|------------|--------------------|------------|-------------------|------------|---------------------------------|------------|--------------------------|------------|------------|-------------|
|                                 |       |               |       |              |       |                            |       |                     |       |       |        |
| Balance  at June 30, 2002            |       | 13,318,030         |       | $                 | 133,180    |                            | $          | 49,327,613               |       | $          | (60,817,895 | ) | $ | (11,357,102 | ) |
| Issuance  of common stock            |       | 2,500,000          |       | 25,000            |       | 475,000                         |       | —                   |       | 500,000    |        |
| Common  stock issued as compensation |       | 741,303            |       | 7,413             |       | 248,087                         |       | —                   |       | 255,500    |        |
| Debt  to equity conversion           |       | —             |       | —            |       | 12,040,508                      |       | —                   |       | 12,040,508 |        |
| Stock  option compensation           |       | —             |       | —            |       | 39,868                          |       | —                   |       | 39,868     |        |
| Retirement  of treasury stock        |       | (500               | )          | (5                | )          | (4,495                          | )          | 4,245                    |       | (255       | )           |
| Net  income                          |       | —             |       | —            |       | —                          |       | 1,185,745                |       | 1,185,745  |        |
| Balance  at June 30, 2003 (1)        |       | 16,558,833         |       | $                 | 165,588    |                            | $          | 62,126,581               |       | $          | (59,627,905 | ) | $ | 2,664,264 |   |
| Issuance  of common stock            |       | 6,999,769          |       | 69,998            |       | 3,009,885                       |       | —                   |       | 3,079,883  |        |
| Common  stock issued as compensation |       | 250,000            |       | 2,500             |       | 130,000                         |       | —                   |       | 132,500    |        |
| Debt  to equity conversion           |       | —             |       | —            |       | 222,175                         |       | —                   |       | 222,175    |        |
| Stock  option compensation           |       | —             |       | —            |       | 131,263                         |       | —                   |       | 131,263    |        |
| Net  income                          |       | —             |       | —            |       | —                          |       | 1,589,772                |       | 1,589,772  |        |
| Balance  at June 30, 2004 (1)        |       | 23,808,602         |       | $                 | 238,086    |                            | $          | 65,619,904               |       | $          | (58,038,133 | ) | $ | 7,819,857 |   |

 

----

(1) – (As restated see Note 7)

 

See accompanyingnotes.

 

21

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**PRECISIONAUTO CARE, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                                              | ** ** | **For The Years Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                              | ** ** | **2004**                          | ** ** | **2003** | ** ** |
| ** **                                                                                              | ** ** | ** **                        | ** ** | **(As restated  see Note 7)** | ** ** |
| Operating  activities:                                                                                  |       |                              |       |   |   |
| Net  income applicable to common shareholders                                                           |       | $                                 | 1,589,772  |   | $ | 1,185,745 |   |
| Net  gain from discontinued operations                                                                  |       | (18,302                           | )          | (253,963 | ) |
| Adjustments  to reconcile net income to net cash provided by operating activities:                      |       |                              |       |   |   |
| Depreciation  and amortization                                                                          |       | 318,101                           |       | 409,840 |   |
| Decrease  in valuation allowance                                                                        |       | (629,000                          | )          | — |   |
| Amortization  of debt discount                                                                          |       | —                            |       | 76,196 |   |
| Gain  on debt restructuring                                                                             |       | (192,875                          | )          | (659,893 | ) |
| Gain  on sale of assets                                                                                 |       | (25,000                           | )          | — |   |
| Stock  issued for compensation                                                                          |       | 132,500                           |       | 255,500 |   |
| Stock  option compensation                                                                              |       | 131,263                           |       | 39,868 |   |
| Cancellation  of treasury stock                                                                         |       | —                            |       | 4,245 |   |
| Changes  in assets and liabilities from continuing operations:                                          |       |                              |       |   |   |
| Restricted  cash                                                                                        |       | (50,200                           | )          | — |   |
| Accounts  and notes receivable                                                                          |       | 16,562                            |       | 32,593 |   |
| Prepaid  expenses, deposits and other                                                                   |       | 19,323                            |       | (291,475 | ) |
| Accounts  payable and accrued liabilities                                                               |       | (464,379                          | )          | (1,221,636 | ) |
| Deferred  revenue and other                                                                             |       | (121,350                          | )          | (319,196 | ) |
| Deferred  taxes                                                                                         |       | 156,000                           |       | — |   |
| Changes  in assets and liabilities of discontinued operations                                           |       | (25,602                           | )          | 857,753 |   |
|                                                                                                    |       |                              |       |   |   |
| Net  cash provided by operating activities                                                              |       | 836,813                           |       | 115,577 |   |
| Investing  activities:                                                                                  |       |                              |       |   |   |
| Purchases  of property and equipment                                                                    |       | (100,107                          | )          | (14,741 | ) |
| Proceeds  from sale of Mexican subsidiary and related technical services Agreement                      |       | —                            |       | 175,000 |   |
| Proceeds  from sale of assets of manufacturing operations                                               |       | —                            |       | 966,000 |   |
|                                                                                                    |       |                              |       |   |   |
| Net  cash (used in) provided by investing activities                                                    |       | (100,107                          | )          | 1,126,259 |   |
| Financing  activities:                                                                                  |       |                              |       |   |   |
| Retirement  of treasury stock                                                                           |       | —                            |       | (500 | ) |
| Payment  of preferred stock dividends                                                                   |       | (85,560                           | )          | (34,029 | ) |
| Repayment  of subordinated debt and other notes payable                                                 |       | (641,888                          | )          | (672,840 | ) |
|                                                                                                    |       |                              |       |   |   |
| Net  cash used in financing activities                                                                  |       | (727,448                          | )          | (707,369 | ) |
|                                                                                                    |       |                              |       |   |   |
| Net  change in cash and cash equivalents                                                                |       | 9,258                             |       | 534,467 |   |
| Cash  and cash equivalents at beginning of year                                                         |       | 1,564,110                         |       | 1,029,643 |   |
|                                                                                                    |       |                              |       |   |   |
| Cash  and cash equivalents at end of period                                                             |       | $                                 | 1,573,368  |   | $ | 1,564,110 |   |
|                                                                                                    |       |                              |       |   |   |
| Supplemental  schedule of non cash investing and finance activities:                                    |       |                              |       |   |   |
| Carrying  value of debt cancelled in exchange for issuance of common and preferred  stock, and warrants |       | $                                 | —     |   | $ | 17,720,508 |   |
| Fair  value of preferred stock exchanged for issuance of common stock                                   |       | $                                 | 3,079,883  |   | $ | — |   |
| Fair  value of common and preferred stock, and warrants issued in exchange for  cancellation of debt    |       | $                                 | 272,175    |   | $ | 7,974,408 |   |
| Property  and equipment acquired under capital lease                                                    |       | $                                 | —     |   | $ | 79,459 |   |

 

See accompanyingnotes.

 

22

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Precision AutoCare, Inc. and Subsidiaries

Notes toConsolidated Financial Statements

 

Note 1 - BusinessDescription and Financial Statement Presentation

 

Precision AutoCare, Inc. (the “Company”) is a franchisor of automotive maintenance servicecenters which provide specialized automotive care services, and fast oil changeand lube services.  These franchiseeowned centers operate primarily under the Precision Tune Auto Care andPrecision Lube Express brand names. The Company disposed of its manufacturingand distribution business in March and April 2003 (see Note 4).

 

Note 2 – Summary ofSignificant Accounting Policies

 

*Principlesof Consolidation*

 

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries.

 

*RevenueRecognition*

 

The Company’s royaltyrevenue is recognized as earned in accordance with the specific terms of eachagreement and to the extent no issues involving collection exist.  In the case when revenues are not likely tobe collected, the Company provides for an estimate of bad debt expense.  This estimate is based upon our historicalexperience as well as a detailed review of our receivable balances.

 

Revenue from the sale ofa franchise is recognized upon the opening of the franchised center.

 

The Company enters intodomestic Area Development agreements and international Master Licenseagreements (Agreements) which grant the area developer and master licensor,respectively, the right to sell, on the Company’s behalf, Precision Tune AutoCare franchises and Precision Lube Express franchises within a specificgeographic region.  Revenue from the saleof Area Development agreements is recognized as all material services orconditions related to the sales are satisfied, which is typically upon signingas there are very minimal services provided. Revenue from the sale of master licenses is recognized upon signing theAgreement since the Company is not required to support the internationalfranchises as there is no contractual agreement between the Company and theinternational franchisees.

 

*Cash andCash Equivalents*

 

Cash and cash equivalentsare comprised of highly liquid debt instruments with original maturities ofthree months or less.  Cash balances mayexceed insured amounts.

 

*Property,Plant and Equipment*

 

Property, plant andequipment are stated at cost and depreciated on a straight-line basis for bookpurposes and accelerated methods for tax purposes over the estimated usefullives of the related assets. The estimated useful lives are as follows:

 
| ** **                           | ** ** | **Years** | ** ** |
|--------------------------------------|------------|-----------|------------|
| Building and  leasehold improvements |       | 11-30     |       |
| Furniture and  fixtures              |       | 5-7       |       |
| Equipment                            |       | 3-10      |       |
| Other items                          |       | 3-7       |       |

 

*IncomeTaxes*

 

The Company recognizesdeferred income tax liabilities and assets for the expected future taxconsequences of events that have been included in the financial statements ortax returns.  Deferred tax liabilitiesand assets reflect the effects of tax losses and the future income tax effectsof temporary differences between the consolidated financial statement carryingamounts of existing assets and liabilities and their respective tax bases andare measured using enacted tax rates that apply to taxable income in the yearsin which those temporary differences are expected to be recovered or settled.  A valuation allowance is established whenmanagement is not able to conclude more likely than not that the assets will berealized in future years.

 

23

----

 

*Impairmentof Long-Lived Assets*

 

The Company evaluates thecarrying amount of long-lived assets to be held and used, including goodwilland other intangible assets, when events and circumstances warrant such areview. The carrying amount of a long lived asset is considered impaired whenthe estimated undiscounted cash flow from each asset is less than its carryingamount. In that event, the Company would record a loss equal to the amount bywhich the carrying amount exceeds the fair market value of the long-livedasset.  Assets to be disposed of are measuredat the lower of carrying amount or fair value less cost to sell.

 

*Concentrationof Credit Risk*

 

Financial instrumentsthat potentially subject the Company to significant concentrations of creditrisk consist primarily of cash, trade accounts receivable and notes receivable.The Company’s cash is held at FDIC insured financial institutions. The tradereceivable balances are dispersed among a wide customer and franchisee base.The Company routinely assesses the financial strength of its franchises.  The Company maintains reserves for credit losses,and such losses have been within management’s expectations.

 

*AdvertisingCosts*

 

The Company expenses alladvertising costs as incurred. The Company incurred $85,000 and $136,000 inadvertising costs for the years ended June 30, 2004 and 2003, respectively.

 

*Use ofEstimates in the Preparation of Financial Statements*

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates.

 

*Goodwilland Intangible Assets*

 

Statement of FinancialAccounting Standards (SFAS) No. 142, “Goodwill and Intangible Assets”, requiresthat goodwill no longer be amortized, but instead be tested for impairment atleast annually.  Historically, managementhas performed its impairment analysis in the first quarter of each fiscalyear.  Goodwill impairment testing forthe period ending June 30, 2004, did not result in the impairment of recordedgoodwill of approximately $8.7 million. Subsequent to year-end, the Company obtained a current businessenterprise valuation for purposes of supporting its impairment analysis forfiscal year 2005.  Such analysis furtheraffirmed management’s conclusion that goodwill was not impaired at June 30,2004.

 

*SegmentReporting*

 

The Companyadopted the provisions of SFAS No. 131, “Disclosures about Segments of anEnterprise and Related Information”, in the quarter ended September 30,2001.  As a result, the Company evaluatedits operations along two business lines: Automotive Care Franchising andManufacturing and Distribution. In March and April 2003, the Manufacturing andDistribution segment was disposed of as a result of management’s decision todiscontinue this business line (see Note 4).

 

*StockOptions*

 

The Company appliesAccounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issuedto Employees”, and related interpretations in accounting for stock basedcompensation and presents pro forma net income and earnings per share data asif the accounting prescribed by Statement of Financial Accounting Standards No.123, “Accounting for Stock Based Compensation” had been applied.  The Company also applies the provisions ofFIN 44, “Accounting for Certain Transactions Involving Stock Compensation”, asrequired when modifications and other provisions cause the application ofvariable accounting which calls for the periodic measurement of compensationexpense based on the difference in the exercise price and the underlying valueof the related stock.

 

Historically, nostock-based compensation was reflected in net income, as all options grantedhad an exercise price equal to the market value of the underlying common stockon the date of grant.  However, theCompany issued 65,000 options in the during fiscal year 2004 which had anexercise price below the fair market value of the underlying common stock onthe date of grant.  As a result,approximately $15,000 of compensation expense will be recognized over thevesting period of these options.  TheCompany granted stock to an officer with a fair value of $212,500 during fiscalyear 2003, and recognized compensation expense of $132,500 and $80,000 as ofJune 30, 2004 and 2003, respectively. The Company also repurchased certain options from employees and issuednew options exercisable at an exercise price of $0.44 in fiscal year 2003,resulting in the newly issued options being treated as a repricing under FIN44, which triggered variable accounting. As a result, the Company recorded compensation expense of approximately$127,000 and $40,000 associated with these options as of June 30, 2004 and2003, respectively.

 

24

----

 

Had compensationexpense for all options been determined based on the fair value at the grantdates during the years ending June 30, 2004 and 2003 consistent with the fairvalue method of SFAS No. 123, the pro forma net income and income per sharewould have been as follows:

 
| ** **                                                                                                | ** ** | **Year ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                | ** ** | **2004**                | ** ** | **2003** | ** ** |
| ** **                                                                                                | ** ** | ** **              | ** ** | **(As restated  see Note 7)** | ** ** |
| Net income  applicable to common shareholders                                                             |       | $                       | 1,589,772  |   | $ | 1,185,745 |   |
| Add: Total  stock-based compensation expense reported in net income                                       |       | 263,763                 |       | 295,368 |   |
| Deduct: Total  stock-based compensation expense determined under fair value based method for  all awards* |       | 243,500                 |       | 383,500 |   |
| Pro forma net  income                                                                                     |       | $                       | 1,610,035  |   | $ | 1,097,613 |   |
| Earnings per  share:                                                                                      |       |                    |       |   |   |
| Basic- as  reported                                                                                       |       | $                       | 0.08       |   | $ | 0.08 |   |
| Diluted- as  reported                                                                                     |       | $                       | 0.07       |   | $ | 0.08 |   |
| Basic- pro forma                                                                                          |       | $                       | 0.08       |   | $ | 0.07 |   |
| Diluted- pro forma                                                                                        |       | $                       | 0.07       |   | $ | 0.07 |   |
| Weighted average  shares:                                                                                 |       |                    |       |   |   |
| Weighted average  common shares outstanding—Basic                                                    |       | 19,392,950              |       | 15,152,379 |   |
| Weighted average  common shares outstanding—Diluted                                                  |       | 22,549,311              |       | 15,188,186 |   |

 

----

*  *All awards*refersto awards granted, modified, or settled in fiscal periods beginning afterDecember 15, 1994 – awards for which the fair value was required to be measuredunder Statement 123.

 

*Earnings Per Share*

 

TheCompany reports earnings per share (“EPS”) in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 128, “Earnings per Share” whichspecifies the methods of computation, presentation, and disclosure. SFAS No.128 requires the presentation of basic EPS and diluted EPS. Basic EPS iscalculated by dividing net income available to common shareholders by theweighted average number of shares outstanding during the period. Diluted EPS iscalculated by dividing net income available to common shareholders by theweighted average number of shares outstanding during the period plus thedilutive effect of common stock equivalents. The weighted average number of shares outstanding related to stockoptions and warrants at June 30, 2004 and 2003 was 6,811,470 and 13,346,239,respectively.  Only stock options andwarrants with exercise prices lower than the average market price of the commonshares were included in the diluted EPS calculation for fiscal year 2004 and2003.  For the years ended June 30, 2004and 2003, 182,950 and 1,734,200 shares attributable to outstanding stockoptions, and 0 and 11,472,039 shares attributable to outstanding warrants were notincluded in the computation of diluted income per share as they wereanti-dilutive.

 

The following table sets forth thecomputation of basic and diluted net loss per share.

 
| ** **                                                  | ** ** | **For The Years Ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                  | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| ** **                                                  | ** ** | ** **                       | ** ** | **(As restated  see Note 7)** | ** ** |
| Numerator:                                                  |       |                             |       |   |   |
| Income from  continuing operations                          |       | $                                | 1,651,597  |   | $ | 974,949 |   |
| Gain from  discontinued operations                          |       | 18,302                           |       | 253,963 |   |
| Preferred stock  dividends                                  |       | (80,127                          | )          | (43,167 | ) |
| Net income  applicable to common Shareholders               |       | $                                | 1,589,772  |   | $ | 1,185,745 |   |
| Denominator:                                                |       |                             |       |   |   |
| Denominator for  basic EPS weighted- Average-shares         |       | 19,392,950                       |       | 15,152,379 |   |
| Common stock  equivalents                                   |       | 3,156,361                        |       | 35,807 |   |
| Denominator for  diluted EPS weighted- Average-shares       |       | 22,549,311                       |       | 15,188,186 |   |
| Basic income  from continued operations per share           |       | $                                | 0.08       |   | $ | 0.06 |   |
| Basic income  from discontinued operations per share        |       | 0.00                             |       | 0.02 |   |
| Basic income  applicable to Common shareholders per share   |       | 0.08                             |       | 0.08 |   |
| Diluted income  from continued operations per share         |       | 0.07                             |       | 0.06 |   |
| Diluted income  from discontinued operations per share      |       | 0.00                             |       | 0.02 |   |
| Diluted income  applicable to Common shareholders per share |       | $                                | 0.07       |   | $ | 0.08 |   |

 

25

----

 

*Reclassifications*

 

Certain amounts on theprior period financial statements have been reclassed to be in conformity withthe current period financial statements. Due to the disposal of its manufacturing and distribution operations inApril 2003, the Company has one remaining business segment, Automotive CareFranchising.  Accordingly, the printingrevenue and direct costs associated with the Company’s franchising activitieshave been reclassified to its Automotive Care Franchising segment for fiscalyears 2004 and 2003.

 

Note 3 - New AccountingPronouncements

 

In January 2003, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 46,“Consolidation of Variable Interest Entities” (FIN 46), which was amended by FIN46R issued in December 2003. This interpretation of Accounting ResearchBulletin No. 51, “Consolidated Financial Statements,” addresses consolidationby business enterprises of variable interest entities (VIEs) that either: (1)do not have sufficient equity investment at risk to permit the entity tofinance its activities without additional subordinated financial support, or(2) for which the equity investors lack an essential characteristic of acontrolling financial interest. This Interpretation applies immediately to VIEscreated after January 31, 2003. It also applies in the first fiscal year orinterim period ending after March 15, 2004, to VIEs created before February 1,2003 in which an enterprise holds a variable interest. FIN 46 requires disclosureof VIEs in financial statements issued after January 31, 2003, if it isreasonably possible that as of the transition date: (1) the company will be theprimary beneficiary of an existing VIE that will require consolidation or, (2)the company will hold a significant variable interest in, or have significantinvolvement with, an existing VIE.  Theadoption of FIN 46R did not have a material effect on the Company’s financialstatements.

 

In April 2003, theFASB issued SFAS No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities.” SFAS No. 149 amends and clarifiesaccounting and reporting for derivative instruments and hedging activitiesunder SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”SFAS No. 149 is effective for derivative instruments and hedgingactivities entered into or modified after June 30, 2003, except forcertain forward purchase and sale securities. For these forward purchase andsale securities, SFAS No. 149 is effective for both new and existingsecurities after June 30, 2003. The adoption of this standard did not havea material impact on the Company’s financial statements.

 

In May 2003, the FASBissued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of Both Liabilities and Equity.” SFAS No. 150establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity. Itrequires that an issuer classify a financial instrument that is within itsscope as a liability. The provisions of SFAS No. 150 are effectivefor financial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginning afterJune 15, 2003.  The adoption of thisstandard did not have a material impact on the Company’s financialstatements.  The Company’s redeemablepreferred stock will continue to be presented in the mezzanine section of thebalance sheet since it falls outside the scope of this standard.

 

Note 4 – DiscontinuedOperations

 

The Company disposed ofits manufacturing and distribution operating segment as a result of the sale ofsubstantially all of the assets of Worldwide Drying Systems (Worldwide) andHydro Spray Car Wash Equipment Co. (Hydro Spray) in March 2003 and April 2003,respectively.  The sale of Worldwide for$300,000 in cash included inventory and manufacturing equipment with a carryingvalue of $93,000.  The resulting gain of$144,000, which included $63,000 in selling expenses associated with this sale,was recognized in March 2003. Substantially all of the assets of Hydro Spray were sold in April 2003for $900,000 to a group led by Ernest Malas, a former director and consultantof the Company’s manufacturing division. The Company received $450,000 in cash and a note for $450,000, payableto the Company in 75 monthly payments of $6,000. On June 17, 2003, thepurchaser of Hydro Spray purchased the note from the Company for $204,000.  The Company recorded a gain of $758,000 fromthe sale of Hydro Spray in the fourth quarter of fiscal year 2003.

 

As a result of the saleof Hydro Spray and Worldwide, the Company retained the following assets andliabilities.  These assets andliabilities are included in the assets and liabilities from discontinuedoperations at June 30, 2004 and 2003:

 

26

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| ** **                                    | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|--------------------|------------|
| Assets of  discontinued operations:           |       |               |       |               |       |
| Accounts  receivable, net                     |       | $                  | —     |               | $          | 16,759 |   |
| Total assets of  discontinued operations      |       | $                  | —     |               | $          | 16,759 |   |
|                                          |       |               |       |               |       |
| Liabilities of  discontinued operations:      |       |               |       |               |       |
| Accounts payable  and accrued liabilities     |       | $                  | 12,780     |               | $          | 45,230 |   |
| Note payable                                  |       | —             |       | 24,998             |       |
| Other                                         |       | —             |       | 3,215              |       |
| Total  liabilities of discontinued operations |       | $                  | 12,780     |               | $          | 73,443 |   |

 

The following amountsrelated to the Company’s manufacturing and distribution operations have beensegregated from continuing operations and reflected as discontinued operationsfor the years ended June 30, 2004 and 2003:

 
| ** **                                  | ** ** | **For The Years Ended  June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **2004**                          | ** ** | **2003** | ** ** |
|                                        |       |                              |       |   |   |
| Revenues                                    |       | $                                 | —     |   | $ | 3,894,506 |   |
|                                        |       |                              |       |   |   |
| Expenses:                                   |       |                              |       |   |   |
| Direct costs                                |       | —                            |       | 3,208,197 |   |
| General and  administrative expense         |       | 7,017                             |       | 1,243,179 |   |
| Depreciation  expense                       |       | —                            |       | 67,448 |   |
| Other (income)  expense                     |       | (25,319                           | )          | 23,227 |   |
| Income (loss)  from discontinued operations |       | 18,302                            |       | (647,545 | ) |
| Gain on sale of  discontinued operations    |       | —                            |       | 901,508 |   |
| Net gain from  discontinued operations      |       | $                                 | 18,302     |   | $ | 253,963 |   |
|                                             |            |                                   |            |  |  |  |  |  |  |

 

Note 5 - Property, Plant and Equipment

 

The components ofproperty, plant and equipment are as follows:

 
| ** **                           | ** ** | **June 30,** | ** ** |
|--------------------------------------|------------|--------------|------------|
| ** **                           | ** ** | **2004**     | ** ** | **2003** | ** ** |
| Building and  leasehold improvements |       | $            | 46,809     |   | $ | 46,809 |   |
| Furniture and  fixtures              |       | 1,052,854    |       | 1,047,558 |   |
| Equipment                            |       | 2,498,685    |       | 2,463,324 |   |
| Equipment under  capital lease       |       | 79,459       |       | 79,459 |   |
| Other items                          |       | 469,522      |       | 455,072 |   |
|                                 |       | 4,147,329    |       | 4,092,222 |   |
| Accumulated  depreciation            |       | (3,982,924   | )          | (3,664,823 | ) |
| Property, plant  and equipment, net  |       | $            | 164,405    |   | $ | 427,399 |   |

 

Note 6 - Income Taxes

 

The provision for income taxes consistedof the following items:

 
| ** **                                                       | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                       | ** ** | **2004**                 | ** ** | **2003** | ** ** |
| Current tax  expense —federal, foreign and state            |       | $                        | —     |   | $ | 7,500 |   |
| Deferred tax  (benefit) expense —federal, foreign and state |       | 156,000                  |       | 4,037,000 |   |
| Change in  valuation allowance                                   |       | (629,000                 | )          | (4,037,000 | ) |
| Total income tax  (benefit) expense                              |       | $                        | (473,000   | ) | $ | 7,500 |   |

 

The effective tax ratediffered from the statutory rate as follows:

 

27

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| ** **                        | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------|------------|--------------------------|------------|
| ** **                        | ** ** | **2004**                 | ** ** | **2003** | ** ** |
| ** **                        | ** ** | ** **               | ** ** | **(As restated  see Note 7)** | ** ** |
| Statutory  federal rate           |       | 34                       | %          | 34 | % |
| State taxes                       |       | 5                        |       | 5 |   |
| Nondeductible  expenses           |       | 5                        |       | — |   |
| Adjustment of  net operating loss |       | (31                      | )          | 306 |   |
| Change in  valuation allowance    |       | (51                      | )          | (345 | ) |
| Effective tax  rate               |       | (38                      | )%         | 0 | % |

 

Deferred tax assets and liabilitiesreflect the effects of tax losses and the future income tax effects oftemporary differences between the consolidated financial statement carryingamounts of existing assets and liabilities and their respective tax bases andare measured using enacted tax rates that apply to taxable income in the yearsin which those temporary differences are expected to be recovered orsettled.  During fiscal year 2004, theCompany made an adjustment of $974,000 to the deferred tax assets primarily toadjust the accrued commissions and the net operating loss carryforwards.  This adjustment had no effect on the incomestatement as the valuation allowance was adjusted by the same amount.  As discussed in Note 7, during fiscal year2003 the Company converted approximately $17.6 million of debt and accruedinterest in exchange for common stock, preferred stock and warrants to purchaseadditional shares of common stock.  ForUS tax purposes, this transaction caused the Company to realize cancellation ofindebtedness (“COD”) income of approximately $9.7 million.  Accordingly, the Company reduced its US taxattributes by approximately $9.7 million.

 

Significant components ofthe Company’s deferred tax liabilities and assets are as follows:

 
| ** **                                   | ** ** | **June 30,** | ** ** |
|----------------------------------------------|------------|--------------|------------|
| ** **                                   | ** ** | **2004**     | ** ** | **2003** | ** ** |
| Deferred tax  assets:                        |       |         |       |   |   |
| Net operating  loss                          |       | $            | 6,824,000  |   | $ | 6,971,000 |   |
| Other                                        |       | 74,000       |       | 83,000 |   |
|                                         |       | 6,898,000    |       | 7,054,000 |   |
| Valuation  allowance for deferred tax assets |       | (6,425,000   | )          | (7,054,000 | ) |
| Net deferred  taxes                          |       | $            | 473,000    |   | $ | — |   |

 

As of June 30, 2004, theCompany had net operating loss carryforwards for federal tax purposes ofapproximately $18 million, which expire from 2014 through 2017.  The Company regularly reviews therecoverability of its tax deferred assets and establishes a valuation allowanceas deemed appropriate.  As of June 30,2004, the Company had a valuation allowance of $6.4 million against deferredtax assets.  Given the Company’s currentoperating performance, management released approximately $629,000 of thevaluation allowance during 2004.  Thisadjustment was based upon management’s assessment of the recoverability ofdeferred taxes which included projections of future pretax earnings.

 

Note 7 - Debt (Restated)

 

*Line ofCredit*

 

On March 9, 2004, the Company executed a line of creditfor $250,000 with Chevy Chase Bank bearing an initial interest rate of 4% andmaturing on March 1, 2005.  The interestrate on this line of credit is indexed to the Prime Rate as published in *The Wall Street Journal* and the Company has pledged all of itswholly-owned subsidiaries as collateral. As of June 30, 2004, the Company has not borrowed against this line ofcredit.  Under this agreement, theCompany must meet financial covenants relating to profitability, debt servicecoverage and a maximum leverage ratio. The Company was in compliance with all such covenants as of June 30,2004.

 

*DebtRestructuring*

 

On October 30,2002, the Company reached an agreement with Precision Funding, L.L.C. and aformer board member to convert approximately $17.6 million of outstanding debtand accrued interest due to them to equity. In exchange for the extinguishment of the approximately $17.6 million inoutstanding debt and accrued interest due, the Company issued Precision Funding,L.L.C. and the former board member the following:

 

•                  2.5million shares of the Company’s common stock valued at $500,000.

•                  500,000shares of Series A redeemable preferred stock of the Company with a statedvalue of $5,180,000 or $10.36 per share. These shares are redeemable by the shareholder at any time after the 3rdanniversary of the Issue Date, October 30, 2002 on 30 days prior written noticefor an aggregate value of $5,180,000 plus any unpaid dividends.  The holders of these shares are also entitledto receive, when and as declared by the Board of Directors, cumulativepreferential cash dividends at the rate of 2% of the liquidation preference ofthe Series A redeemable preferred stock, $10.36 per share, per annum payablequarterly in

 

28

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arrears in cash on thelast day, or the next succeeding business day, of January, April, July, andOctober in each year, beginning January 31, 2003.  Accrued dividends were approximately $4,000and $9,000 at June 30, 2004 and 2003, respectively.

•                  Warrants to purchase 11,472,039shares of the Company’s common stock with an exercise price of $0.44 per shareand a fair value of approximately $2.3 million.

 

Issuance of thewarrants was subject to shareholder approval as part of a proposal to amend theArticles of Incorporation to increase the Company’s authorized shares of commonstock.  Such approval was granted at the annual shareholder meeting heldon January 15, 2003 and as a result, the Company exchanged common stock,preferred stock, and warrants with an aggregate value of $7.9 million insatisfaction of debt and accrued interest of approximately $17.6 million.  The difference in the carrying value of debtand accrued interest and the fair value of the common stock, preferred stockand warrants of $9.7 million was recorded as a capital contribution.

 

The Company hadoriginally reported the difference between the fair value of the equityexchanged and the carrying value of the Precision Funding debt and accruedinterest as a gain on debt restructuring in the statement of operations for theperiod ending June 30, 2003.  SincePrecision Funding was controlled by shareholders of the Company who wereconsidered related parties, the Company has restated the consolidated financialstatements to report such difference as a capital contribution.  The effect of the restatement was as follows:

 
| ** **                                                       | ** ** | **June 30,  2004**            | ** ** | **June 30,  2004** | ** ** | **June 30,  2003**            | ** ** | **June 30,  2003** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------|------------|--------------------|------------|-------------------------------|------------|--------------------|------------|
| ** **                                                       | ** ** | **(As originally  reported)** | ** ** | **(As restated)**  | ** ** | **(As originally  reported)** | ** ** | **(As restated)**  | ** ** |
| Additional  paid-in capital                                      |       | $                             | 55,873,804 |               | $          | 65,619,904                    |       | $                  | 52,380,481 |   | $ | 62,126,581 |   |
| Accumulated  deficit                                             |       | (48,292,033                   | )          | (58,038,133        | )          | (49,881,805                   | )          | (59,627,905        | )          |
| Net income applicable  to common shareholders                    |       | $                             | 1,589,772  |               | N/A        |                          | $          | 10,931,845         |       | $ | 1,185,745 |   |
| Net income  applicable to common stock per common share- Basic   |       | $                             | 0.08       |               | N/A        |                          | $          | 0.72               |       | $ | 0.08 |   |
| Net income  applicable to common stock per common share- Diluted |       | $                             | 0.07       |               | N/A        |                          | $          | 0.72               |       | $ | 0.08 |   |
|                                                                  |            |                               |            |                    |            |                               |            |                    |            |  |  |  |  |  |  |  |  |  |  |

 

In October 1998, asubordinated debenture in the amount of $2.0 million was executed with an LLCcomposed of certain members of the Company’s board of directors (BoardLLC).  On July 17, 2003, the Companyreached an agreement to restructure the remaining $633,000 due to the BoardLLC.  The terms of the agreement calledfor the following:

 

•                  Payment of $200,000 within 3 days ofreceipt of approval by the Company’s Board of Directors.

•                  Issuance of a non-interest bearingnote payable in the amount of $50,000, payable in ten monthly installments of$5,000 each, commencing one month after the date of approval by the Company’sBoard of Directors.

•                  Issuance of warrants to purchase400,000 shares of the Company’s common stock with an exercise price of $0.44per share having a fair value of approximately $222,000.

 

The Company recognized a gain ofapproximately $160,000 from this debt restructuring in the first quarter offiscal year 2004.

 

In December 2003, the Company paidapproximately $169,000 in full satisfaction of the $201,000 of debt owed toRadiant Systems, Inc.  The Companyrecognized a gain of approximately $32,000 from this transaction in the secondquarter of fiscal year 2004.

 

In January 2004, 2,469,600 warrantswere exercised pursuant to an agreement the Company reached with PrecisionFranchising, L.L.C. and a former board member in October 2002.  Upon the exercise of these warrants at thepreviously agreed to exercise price of $0.44 per share, the holder purchased2,469,600 restricted shares of common stock in exchange for surrendering 104,885shares of Series A Preferred Stock to the Company, therefore, there were nocash proceeds received by the Company from this transaction.

 

In February 2004, 4,530,169 warrantswere exercised pursuant to an agreement the Company reached with PrecisionFranchising, L.L.C. and a former board member in October 2002.  Upon the exercise of these warrants at thepreviously agreed to exercise price of $0.44 per share, the holder purchased4,530,169 restricted shares of common stock in exchange for surrendering192,401 shares of Series A Preferred Stock to the Company, therefore, therewere no cash proceeds received by the Company from this transaction.

 

During the years endedJune 30, 2004 and 2003, the Company incurred interest expense of approximately$20,000 and $754,000, respectively.

 

Long-term debt consistsof the following:

 
| ** **                                                     | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------|------------|--------------|------------|
| ** **                                                     | ** ** | **2004**     | ** ** | **2003** | ** ** |
| Various notes  and obligations payable in monthly installments |       | $            | 62,117     |   | $ | 345,056 |   |
| Lease  obligations                                             |       | 26,893       |       | 51,568 |   |
| Board LLC note                                                 |       | —       |       | 632,528 |   |
|                                                           |       | 89,010       |       | 1,029,152 |   |
| Less: current maturities                                       |       | (75,240      | )          | (290,430 | ) |
| Long-term  portion                                             |       | $            | 13,770     |   | $ | 738,722 |   |

 

The future debtobligations with maturities in excess of one year as of June 30, 2004 are asfollows:

 
| ** ** | ** ** | **Future  Debt Maturities** | ** ** |
|------------|------------|-----------------------------|------------|
| 2005       |       | 75,240                      |       |
| 2006       |       | 5,779                       |       |
| 2007       |       | 6,758                       |       |
| 2008       |       | 1,233                       |       |
|       |       | $                           | 89,010     |   |
|            |            |                             |            |  |

 

29

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Note 8 - LeaseCommitments

 

At June 30, 2004, theCompany has lease commitments for office space, a training center, and a numberof service center locations as well as office equipment under operating andcapital leases. These leases expire between 2005 and 2009, with renewal optionsin certain of the leases. Most of the service center location leases aresubleased to franchisees. Rent expense for office space and warehouse facilitiesof approximately $290,000 and $385,000 is included in operating expenses forthe year ended June 30, 2004 and 2003 respectively. Rent expense for servicecenter locations of approximately $6,000 and $70,000 is recorded net ofsublease income of $0 and $40,000 for the years ended June 30, 2004 and 2003,respectively.

 

The future minimum leasepayments and related sublease payments for operating leases with terms inexcess of one year as of June 30, 2004, are as follows:

 
| ** ** | ** ** | **Future Minimum  Lease Payments** | ** ** | **Sublease  Income** | ** ** | **Net** | ** ** |
|------------|------------|------------------------------------|------------|----------------------|------------|---------|------------|
| 2005       |       | $                                  | 574,000    |                 | $          | 223,000 |       | $ | 351,000 |   |
| 2006       |       | 576,000                            |       | 232,000              |       | 344,000 |       |
| 2007       |       | 564,000                            |       | 239,000              |       | 325,000 |       |
| 2008       |       | 570,000                            |       | 235,000              |       | 335,000 |       |
| 2009       |       | 245,000                            |       | 47,000               |       | 198,000 |       |
| Thereafter |       | —                             |       | —               |       | —  |       |
|       |       | $                                  | 2,529,000  |                 | $          | 976,000 |       | $ | 1,553,000 |   |

 

The future minimum leasepayments for capital leases with terms in excess of one year as of June 30,2004, are as follows:

 
| ** **                           | ** ** | **Future Minimum  Lease Payments** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|
| 2005                                 |       | $                                  | 15,991     |   |
| 2006                                 |       | 7,543                              |       |
| 2007                                 |       | 7,543                              |       |
| 2008                                 |       | 1,258                              |       |
| Total lease  payments                |       | $                                  | 32,335     |   |
| Less amounts  representing interest  |       | 5,442                              |       |
| Present value of  net lease payments |       | $                                  | 26,893     |   |

 

Note 9 - Related PartyTransactions

 

The Company manages theoperation of PTAC Marketing Fund, Inc. (“PMF”), the national advertising fundfor Precision Tune Auto Care Centers, pursuant to a Management Agreementapproved by the Board of Directors of PMF, which is comprised of franchisee andCompany personnel. The Company charged PMF $741,000 and $669,000 foradministrative and other expenses incurred on behalf of PMF, for the yearsended June 30, 2004 and 2003, respectively. Based on the timing of receipts and disbursements, it is common foramounts to be due to and from the Company and PMF. At June 30, 2004 and 2003,the net amounts due from PMF were $61,417 and $0 respectively. These amountsare included in accounts receivable.

 

InJanuary 1999, a subordinated debenture in the amount of $5.0 million wasexecuted directly with Mr. Kellar, a former member of the Company’s board ofdirectors.  $1.4 million of the originalprincipal amount had been repaid. Originally due May 25, 1999, the term of this subordinated debenture wasextended to September 30, 2003. The holder has waived all debt covenantsthrough September 30, 2003.  Thisdebenture and related accrued interest was converted to equity as a result ofthe agreement reached on October 30, 2002 (see Note 7).

 

Another subordinated debenture in theamount of $2.0 million was executed in October 1998 with an LLC composed ofcertain current and former members of the Company’s board of directors (BoardLLC).  On July 17, 2003, the Companyreached an agreement with the Board LLC to restructure this debt obligation(see Note 7).

 

BassamN. Ibrahim, a director of the Company, is a partner in Burns, Doane, Swecker& Mathis LLP, an Alexandria, Virginia law firm that performs legal servicesfor the Company related to intellectual property protection. Fees paid in theamount of approximately $23,000 to the firm by the Company in the fiscal year endedJune 30, 2004 did not exceed five percent of the firm’s gross revenues.

 

The Company disposed ofits manufacturing and distribution operating segment as a result of the sale ofsubstantially all of the assets of Worldwide Drying Systems (Worldwide) and HydroSpray Car Wash Equipment Co. (Hydro Spray) in March 2003 and April 2003,respectively.  Substantially all of theassets of Worldwide were sold in March 2003 for $300,000 to a group led by arelative of

 

30

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an officer of the Company.  Thesale of Worldwide for $300,000 in cash included inventory and manufacturingequipment with a carrying value of $93,000. The resulting gain of $144,000, which included $63,000 in sellingexpenses associated with this sale, was recognized in March 2003.  Substantially all of the assets of HydroSpray were sold in April 2003 for $900,000 to a group led by Ernest Malas, aformer director and consultant of the Company’s manufacturing division.  The Company received $450,000 in cash and anote for $450,000, payable to the Company in 75 monthly payments of $6,000. OnJune 17, 2003, the purchaser of Hydro Spray bought the note back from theCompany for $204,000.  The Companyrecorded a gain of $758,000 from the sale of Hydro Spray in the fourth quarterof fiscal year 2003.

 

Note 10 - Stockholders’Equity

 

During the year endedJune 30, 2003, approximately 741,000 shares of common stock were issued toofficers of the Company as bonus compensation totaling $175,500.  In addition, 250,000 shares of common stockwere issued to an officer of the Company in September 2003.  Compensation expense of $132,500 and $80,000was recorded for the earned portion of these shares for the fiscal years endedJune 30, 2004 and June 30, 2003, respectively.

 

*CommonStock Option Plan*

 

In 1999, the Company’sBoard of Directors and the Company’s stockholders approved the 1999 EmployeeStock Option Plan (the “Option Plan”) and reserved 600,000 shares for issuanceunder the Plan. On March 21, 2001 the Company’s stockholders approved anamendment to increase the authorized shares under this plan to 1,600,000.  On January 15, 2003 the Company’sstockholders approved an amendment to increase the authorized shares under thisplan to 2,600,000.  Options available forfuture grants under this plan were 560,000 at June 30, 2004.

 

Options reserved forissuance under predecessor plans consist of 400,000 related to the 1997Employee Stock Option Plan, 175,000 related to the 1996 Employee Stock OptionPlan, and 75,000 related to the 1998 Director’s Stock Option Plan.  Options available for future grant at June30, 2004, under these plans were 2,500, 0, and 75,000 respectively.  The Compensation Committee of the Company’sBoard of Directors determines the recipients of the award to be granted,exercise price, vesting period, and number of shares underlying the options.

 

The Company repurchased704,000 shares of common stock options (exercise prices of these options rangefrom $0.75 to $1.00 per share) for $0.001 per share in the first quarter offiscal year 2003.  The Company in turngranted the same participants options for the purchase of 704,000 shares.  These options are exercisable at an exerciseprice of $0.44 per share at the same vesting schedule as the participant’s repurchasedoptions.  The repurchase of such shareswas deemed a repricing under FIN 44 and as such, the Company applies variableaccounting during the remaining life of these options and in doing so, measurescompensation expense periodically based upon the change in the fair marketvalue of the underlying common stock.  Asa result, the Company recorded compensation expense of approximately $127,000and $40,000 associated with these options as of June 30, 2004 and 2003,respectively.

 

A summary of theCompany’s stock option activity for the years ended June 30, are as follows:

 
| ** **         | ** ** | **Shares  Under Option** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
|--------------------|------------|--------------------------|------------|--------------------------------------|------------|
| June 30, 2002      |       | 1,717,325                |       | 0.99                                 |       |
| Options granted    |       | 465,000                  |       | 0.44                                 |       |
| Options  exercised |       | —                   |       | —                               |       |
| Options  forfeited |       | (308,125                 | )          | 0.46                                 |       |
| June 30, 2003      |       | 1,874,200                |       | 0.75                                 |       |
| Options granted    |       | 65,000                   |       | 0.44                                 |       |
| Options  exercised |       | —                   |       | —                               |       |
| Options  forfeited |       | —                   |       | —                               |       |
| June 30, 2004      |       | 1,939,200                |       | 0.74                                 |       |

 

At June 30, 2004 and 2003, optionsfor 1,438,000 and 938,000 shares, respectively, were exercisable.  The weighted average grant date fair valueper option for options granted in 2004 and 2003 was $0.66 and $0.25,respectively.  The exercise price ofoptions outstanding at June 30, 2004 ranged from $0.22 to $10.00 per share.

 

The Company appliesAccounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issuedto Employees”, and related interpretations in accounting for stock basedcompensation and presents pro forma net income and earnings per share data asif the accounting prescribed by Statement of Financial Accounting Standards No.123, “Accounting for Stock Based Compensation” had been applied (see Note 2).

 

Thefollowing table summarizes the assumptions used by the Company in estimatingcompensation expense as of the date the options 

 

31

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weregranted using a binomial model.

 
| ** **                                            | ** ** | **2004** | ** ** | **2003**     | ** ** |
|-------------------------------------------------------|------------|----------|------------|--------------|------------|
| Risk free  interest rate                              |       | 2.19     | %          | 2.61 to 2.98 | %          |
| Volatility  factors                                   |       | 283.52   | %          | 230.74       | %          |
| Weighted-average  expected life of the option (years) |       | 3        |       | 4            |       |
| Dividend yield                                        |       | 0.00     | %          | 0.00         | %          |

 

Because option valuationmodels require the input of highly subjective assumptions, such as expectedvolatility, and because changes in these subjective input assumptions canmaterially affect the fair value estimate, the existing model may notnecessarily provide a reliable single measure of the fair value of its stockoptions.

 

*OutsideDirector’s Stock Plan*

 

In 2000, the Company’sBoard of Directors and the Company’s stockholders approved the 2000 OutsideDirectors’ Stock Plan and reserved 50,000 shares for issuance under thePlan.  Shares available for future grantsat June 30, 2004, under this plan were 37,000.

 

Note 11 - Employees’Savings Plan

 

The Company maintains a401(k) plan under which the Company may contribute up to 25% of an employee’sfirst 6% of compensation deferred under the plan. Employees become eligibleafter attaining the age of 21 and completing six months of employment with theCompany. The employees may elect to contribute up to 15% of their annualcompensation subject to limitations set forth in the Internal Revenue Code.Employees’ contributions vest immediately. The employee matching contributionis discretionary and vests 20% after one year and in increments of 20% eachadditional year.  The employee matchingcontributions for each of the years ended June 30, 2004 and 2003 were $28,500and $32,500, respectively.

 

Note 12 – Contingencies

 

The Company is currentlysubject to litigation that could have a material adverse impact on its liquidityas follows:

 

Lumnivision, S.A.de C.V. v. Praxis Afinaciones, S.A. de C.V., Third Civil Court, First Judicial District,Monterrey, Nuevo Laredo, Mexico.

 

Lumnivision filed suitagainst Praxis Afinaciones, an indirect wholly owned subsidiary of PACI, seekingpayment of 766,000 Mexican Pesos, plus interest at the rate of 5% per month,for services under a contract.  Praxis Afinaciones denies the allegationsand is defending the allegations in the lawsuit.

 

United Bank, NA v.C. Eugene Deal, Miracle Partners, Inc., Star Auto Center, Inc., Common Pleas Court of Cuyahoga County,Ohio, Case No. 01-CV0019, Filed January 11, 2001

 

Miracle Partners, Inc., awholly-owned subsidiary of the Company, is party to a confessed judgment ofapproximately $1.3 million.  The subsidiary is currently inactive and hasno assets.  As such, management believes this judgment will have nomaterial impact on the Company’s consolidated results of operations. Furthermore, the Company believes that it has a meritorious claim against Mr.Deal for misrepresentations made in connection with PACI’s acquisition ofMiracle Partners, Inc. in 1997 for all amounts covered by the judgment.

 

Threatened Litigation:

 

Puyallup Auto StopAssociates, Inc. v. PTW, Inc.

 

By letter dated July 1,2003, a former landlord has asserted a claim against PTW, Inc. forreimbursement of the costs of remediating environmental contamination to theleased premises during the term of the lease, which costs allegedly exceed$250,000.  Investigation into the Company’s liability is ongoing.

 

The Company does notbelieve that any of the above claims or proceedings will result in a materialjudgment against the Company.  There can be no assurance, however, thatthese suits will ultimately be decided in its favor.  Any one of theseclaims or proceedings may result in a material judgment against the Company,which could cause material adverse consequences to its operations.

 

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Note 13 – SubsequentEvents

 

On August 9, 2004, theCompany signed an area development agreement with North Pacific Precision, Inc.(“NPPI”) for the area rights for the Seattle market.  Under the agreement, NPPI paid $500,000 forthe area developer rights for the Seattle market, and the Company will receivefifty percent of the income from the sale of franchises and from royalties fromfranchisees in the area.  The entireamount paid by NPPI will be recognized as revenue in the first quarter of 2005as the Company has no significant obligations remaining under this agreement.

 

On August 31, 2004, theCompany signed a master franchise agreement with senior executives of Hung YueHoldings (Hong Kong) Co., Ltd. giving that firm’s affiliate, Precision TuneAuto Care (China) Company Limited, a license to open and operate at least 330Precision Tune Auto Care (PTAC) car care centers in China over the next sevenyears.  Upon execution of the agreement,the Company has received advanced payments totaling $150,000.

 

**Item 8.   *Changes In******AndDisagreements With Accountants On Accounting And Financial Disclosures***

 

None.

 

**Item 8A.  *****Controls and Procedures***

 

Under the supervision and with the participation ofour management, including the Chief Executive Officer and Chief FinancialOfficer, we have evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c) asof the end of the period covered by this report. Based on that evaluation, theChief Executive Officer and Chief Financial Officer have concluded that thesedisclosure controls and procedures are effective. There were no changes in ourinternal control over financial reporting during the year ended June 30, 2004that have materially affected, or are reasonably likely to materially affect,our internal controls over financial reporting.

 

33

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**PART III**

 

**Item 9.   *D******irectors, ExecutiveOfficers, Promoters and Control Persons; Compliance with Section 16(a) of theExchange Act.***

 

The required information on directorswill be contained in the Company’s Proxy Statement, and reference is expresslymade to the Proxy Statement for the specific information incorporated in theForm 10-KSB.  The required information onexecutive officers is set forth in Part I of this Form 10-KSB under anunnumbered item captioned “Executive Officers of Precision Auto Care, Inc.”

 

The code of ethics that applies tothe Company’s Chief Executive Officer, Chief Financial Officer, CorporateController and all other employees is attached as an exhibit in Item 13 of thisreport.  If the Company makes anysubstantive amendments to the code of ethics or grant any waiver, including anyimplicit waiver, from a provision of the code to our Chief Executive Officer,Chief Financial Officer or Corporate Controller, the Company will disclose thenature of such amendment or waiver in a report on Form8-K.

 

**Item 10.  *****Executive Compensation***

 

The required informationwill be set forth under “Executive Compensation” and  “Report of the Organization and CompensationCommittee on Executive Compensation” in the Company’s Proxy Statement, andreference is expressly made to the Proxy Statement for the specific informationincorporated in the Form 10-KSB.

 

**Item 11.  *****Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters***

 

The required informationwill be set forth under “Security Ownership of Certain Beneficial Owners andManagement” in the Company’s Proxy Statement, and reference is expressly madeto the Proxy Statement for the specific information incorporated in the Form10-KSB. Except as otherwise stated in the Proxy Statement, the address of eachof the persons owning more than 5% of the Company’s Common Stock is 748 MillerDrive, S. E., Leesburg, VA 20175.

 

**Item 12.   *C******ertain Relationships andRelated Transactions***

 

The required informationwill be set forth under “Certain Relationships and Related Transactions” in theCompany’s Proxy Statement, and reference is expressly made to the ProxyStatement for the specific information incorporated in the Form 10-KSB.

 

**Item 13.   *E******xhibits and Reports On Form 8-K***

 

(a)        Thefollowing documents are filed as part of this report:

 

1.   Financial Statements

 

The followingfinancial statements appear in Part II, Item 7 of this report:

 
| Report  of Independent Auditors |                                                  |
|---------------------------------|-------------------------------------------------------|
| Audited  Financial Statements   |                                                  |
|                            | Consolidated Balance Sheets                           |   |
|                            | Consolidated  Statements of Operations                |   |
|                            | Consolidated  Statements of Stockholders’ Equity |   |
|                            | Consolidated  Statements of Cash Flows                |   |
|                            | Notes to  Consolidated Financial Statements           |   |

 

 

(b)       Reportson Form 8-K

 

(i)             None.

 

(c) Exhibits

 
| 2.1 |   | Plan of Reorganization  and Agreement for Combination of Business dated as of August 27, 1997, by and  among the Company, WE JAC Corporation, Miracle Industries, Inc., Lube  Ventures, Inc., Rocky Mountain Ventures, Inc., Rocky Mountain Ventures II,  Inc., Miracle Partners, Inc., Prema Properties, LLC, Ralston Car Wash, LLC  and KBG LLC, included as an Exhibit to the Company’s Registration Statement  on Form S-1 (No. 333-34439) filed August 27, 1997, is incorporated herein by  reference. |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| 3.1    |   | Articles of  Incorporation of the Company included as an exhibit to the Company’s  Registration Statement on Form S-1 (No. 333-34439) filed August 27, 1997, are  incorporated herein by reference.                                                                                                                                                                                                 |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 3.2*   |   | By-laws of the Company  as amended August 18, 2004.                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 3.3    |   | Articles of Amendment  to the Articles of Incorporation of Precision Auto Care, Inc. dated October  28, 2002 to create a new series of preferred stock designated as Series A  Cumulative Redeemable Preferred Stock, included as an exhibit to the  Company’s Quarterly Report on Form 10-QSB, filed November 14, 2002, is  incorporated herein by reference.                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 3.4    |   | Articles of Amendment  to the Articles of Incorporation of Precision Auto Care, Inc. dated January  15, 2003 to increase the number of authorized shares, amend the required  number of Board of Directors, and amend the terms of the Board of Directors,  included as an exhibit to the Company’s Quarterly Report on Form 10-QSB,  filed February 14, 2003, is incorporated herein by reference. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.1    |   | Warrant to Purchase  Shares of Common Stock of Precision Auto Care, Inc. dated October 30, 2002  (Warrant No. 2002-01) between the Company and Desarollo Integrado, S. A. de  C. V., included as an exhibit to the Company’s Quarterly Report on Form  10-QSB, filed November 14, 2002, is incorporated herein by reference.                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.2    |   | Warrant to Purchase  Shares of Common Stock of Precision Auto Care, Inc. dated October 30, 2002  (Warrant No. 2002-02) between the Company and Arthur C. Kellar, included as  an exhibit to the Company’s Quarterly Report on Form 10-QSB, filed November  14, 2002, is incorporated herein by reference.                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1   |   | Precision Auto Care,  Inc. 1998 Employee Stock Purchase Plan, included as an exhibit to the  Company’s Registration Statement on Form S-8 (No. 333-49097), filed April 1,  1998, is incorporated herein by reference.                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2   |   | Precision Auto Care  Inc. 2000 Outside Directors’ Stock Plan, included as an exhibit to the  Company’s Registration Statement on Form S-8 (No. 333-39226), filed June 14,  2000, is incorporated herein by reference.                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3   |   | Precision Auto Care,  Inc. 1998 Outside Directors’ Stock Option Plan, included as an exhibit to the  Company’s Registration Statement on Form S-8 (No. 333-85877), filed August  25, 1999, is incorporated herein by reference.                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4   |   | Precision Auto Care,  Inc. 1999 Employee Stock Option and Restricted Stock Plan, included as an  exhibit to the Company’s Registration Statement on Form S-8 (No. 333-85879),  filed August 25, 1999, is incorporated herein by reference.                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5   |   | Precision Tune Stock  Option Plan, included as an exhibit to the Company’s Registration Statement  on Form S-8 (No. 333-47165), filed March 2, 1998, is incorporated herein by  reference.                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6   |   | Precision Auto Care  Employee Stock Option Plan, included as an exhibit to the Company’s  Registration Statement on Form S-8 (No. 333-47169), filed March 2, 1998, is  incorporated herein by reference.                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7   |   | Precision Auto Care,  Inc. Director Stock Option Plan, included as an exhibit to the Company’s  Registration Statement on Form S-8 (No. 333-47171), filed March 2, 1998, is  incorporated herein by reference.                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.8   |   | Subordinated Debenture  Agreement with Board LLC, dated October 15, 1998, included as an exhibit to  the Company’s Amended Quarterly Report on Form 10-Q/A, filed November 20,  1998, is incorporated herein by reference.                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.9   |   | Agreement dated August  3, 2000 between the Company and Louis M. Brown, Jr., included as an Exhibit  to the Company’s Annual Report on Form 10-K, filed October 13, 2000, is  incorporated herein by reference.                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.10  |   | Lease dated December 3,  2001 between Leesburg Airpark III, LLC and Precision Tune Auto Care, Inc.,  included as an Exhibit to the Company’s Annual Report on Form 10-K, filed  October 15, 2002, is incorporated herein by reference.                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.11  |   | Agreement dated July  17, 2003 between the Company and Board L.L.C. terminating the Subordinated  Debenture dated October 15, 1998 between the Company and Board L.L.C.                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.12  |   | Promissory Note dated  March 9, 2004 between Precision Auto Care, Inc. and Chevy Chase Bank, F.S.B.                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 14*    |   | Code of Ethics                                                                                                                                                                                                                                                                                                                                                                                           |

 

35

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| 21*    |   | Significant  Subsidiaries of the Company.                                                                                             |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                  |
| 23.1*  |   | Consent of Grant  Thornton LLP, Independent Auditors.                                                                                 |
|   |   |                                                                                                                                  |
| 31.1*  |   | Written statement of  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                             |
|   |   |                                                                                                                                  |
| 31.2*  |   | Written statement of  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                             |
|   |   |                                                                                                                                  |
| 32.1*  |   | Written statement of  Chief Executive Officer and Chief Financial Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |

 

----

*                    Filedherewith

 

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**Item 14. Pri****ncipal Accountant Fees andServices**

 

The required informationwill be set forth under “Principal Accountant Fees and Services” in theCompany’s Proxy Statement, and reference is expressly made to the ProxyStatement for the specific information incorporated in the Form 10-KSB.

 

37

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**SIGNATURES**

 

**Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized, on July 13, 2005.**

 
|       |       | PRECISION AUTO CARE,  INC. |
|------------|------------|----------------------------|
|       |       |                       |   |
|       |       |                       |   |
|       |       |                       | By | :  /s/ Louis M. Brown, Jr. |   |
|       |       |                       | ** Louis  M. Brown, Jr.** |
| ** ** | ** ** | ** **                 | **Chief  Executive Officer and Chairman of the Board** |
| ** ** |       |                       | **(Duly Authorized Officer)** |
|            |            |                            |  |  |  |  |

 

**Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.**

** **
| **Signature**            | ** ** | **Title**                                | ** ** | **Date**      | ** ** |
|--------------------------|------------|------------------------------------------|------------|---------------|------------|
| ** **               | ** ** | ** **                               | ** ** | ** **    | ** ** |
| /s/ Louis M.  Brown, Jr. |       | Chief Executive Officer and Chairman     |       | July 13, 2005 |       |
| **Louis M. Brown, Jr.**  |       | of the Board                             |       |          |       |
| ** **               |       |                                     |       |          |       |
| ** **               |       |                                     |       |          |       |
| /s/ Robert R.  Falconi   |       | President and Chief Operating Officer    |       | July 13, 2005 |       |
| **Robert R. Falconi**    |       | (Principal Financial Accounting Officer) |       |          |       |
| ** **               |       |                                     |       |          |       |
| ** **               |       |                                     |       |          |       |
| /s/ Woodley A.  Allen    |       | Director                                 |       | July 13, 2005 |       |
| **Woodley A. Allen**     |       |                                     |       |          |       |
| ** **               |       |                                     |       |          |       |
| ** **               |       |                                     |       |          |       |
| /s/ Bassam N.  Ibrahim   |       | Director                                 |       | July 13, 2005 |       |
| **Bassam N. Ibrahim**    |       |                                     |       |          |       |
| ** **               |       |                                     |       |          |       |
| ** **               |       |                                     |       |          |       |
| /s/ John D.  Sanders     |       | Director                                 |       | July 13, 2005 |       |
| **John D. Sanders**      |       |                                     |       |          |       |
| ** **               |       |                                     |       |          |       |
| ** **               |       |                                     |       |          |       |
| /s/ Peter C.  Keefe      |       | Director                                 |       | July 13, 2005 |       |
| **Peter C. Keefe**       |       |                                     |       |          |       |

 

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