When I started law school 25 years ago, my goal was to become a trial lawyer. I assumed that any courses having to do with federal taxation, mergers, acquisitions, and financial reporting would be unnecessary. After all, what do balance sheets or profit and loss statements have to do with presenting a case to a jury? Truth be told, I have difficulty balancing my own checkbook, much less reviewing the financials of multi-million dollar companies. I have just finished reviewing the 2012 audited financials of Aamco Transmissions, Inc. All I can say is that someone as clueless as me can see that something stinks. In the words of Ricky Ricardo of I Love Lucy fame, “Aamco has some ‘splaining to do.”

As most of you know, we filed suit against Aamco Transmission and its parent companies on behalf of several current and former franchisees. That suit was filed on November 22, 2013. At the time the suit was filed, Aamco was 11 months late in submitting its 2013 Franchise Disclosure Document (FDD). Coincidentally, Aamco finally submitted its 2013 FDD on November 22, 2013. For the sake of argument, I will assume it was just coincidence, and nothing more, even though Aamco had known for several weeks prior that we intended to file suit on that date. Paragraph 171 of our lawsuit states:

AAMCO has violated the FTC rule with regard to Item 21 of the FDD in that it has provided consolidated financial statements which contain statements of income and expenses which are inaccurate and false and misrepresent the true financial condition of the franchisor. Upon information and belief, AAMCO is currently conducting an audit to determine the extent of the misstatements contained in the financial statements previously provided in its FDD’s and, as of this date, have not completed a 2013 FDD thereby rendering it unable to sell franchises.

The 2012 audited financials just released prove that our claims contained in Paragraph 171 of the lawsuit are completely accurate. Below are links to the 2011 and 2012 audited financials. I could go in depth to point out line by line how the financials differ. However, I will simply hit the highlights. The balance sheet from the 2011 financials indicates assets of $161 million in 2010 and $159 million in 2011. However, the 2012 financials indicate that on March 25, 2013, the board of directors decided to revise their accounting practices. As a result, the 2012 financial statements indicate assets of $89 million in 2010, $84 million in 2011, and $66 million in 2012. The 2011 Balance Sheet indicates that in 2010 there was $64 million due Aamco from its parent and $67 million due from the parent in 2011. In the 2012 Balance Sheet, there is no amount indicated as being due from the parent company in 2010 or 2011. In fact, the 2012 Balance Sheet indicates that Aamco owes its parent $35 million in 2010, $28 million in 2011 and $21 million in 2012. The 2011 Consolidated Statements of Operations indicate a net loss of $ 177,720 in 2010 and a net loss of $703,376 in 2011. However, in the 2012 Consolidated Statements of Operations, the net loss for 2010 jumps to $394,785 and for 2011 the loss is now $799,195. The loss for 2012 is a staggering $12,856,210. The other item I found interesting in the 2012 audited financial statements concerns the long-term liabilities. According to the Note 5 to the 2012 audited financial statements, Aamco was jointly and severally liable with Cottman and American Driveline for debts totally $100,204,978 in 2010, $96,793,173 in 2011 and $109,570,974 in 2012. The note indicates that on some undisclosed date, Aamco was in default but that on November 6, 2013, an amendment was executed which basically excused the default. The terms of that Amendment are not disclosed.

What I find extremely interesting is that the CEO and CFO were shown the door in June of 2013, just a few months after the board of directors determined that the accounting practices needed to be revised. It certainly leads to the inference that there was some cooking of the books. I can guarantee that the first documents we request in our lawsuit will be the meeting minutes of the March 25th meeting of the board of directors. It should certainly be enlightening. Now, I’m sure, Aamco will have perfectly valid excuses for its failure to provide accurate financials. Maybe it was the rogue CEO and/or CFO. Maybe it was just a bad audit for at least 3 consecutive years. They certainly have MBA’s and attorneys on staff who actually paid attention in school to financial reporting requirements and who will justify these changes. However, the one thing that cannot be justified or excused is that the financial picture given to the potential franchisees prior to November 22, 2013, was far from accurate. The financial viability of the franchisor is certainly a very material consideration when a potential franchisee looks to invest their life savings into a system. The reason that the FTC requires audited financials is that it gives the potential franchisee a glimpse at the financial condition of the franchisor. If it wasn’t a material factor, the FTC wouldn’t require that the financials be disclosed. Aamco and its parent, American Capital, cannot reasonably expect that such a massive restatement of its financials will retroactively make all the problems faced by their franchisees go away.

I like to keep a positive outlook on life. Maybe these companies finally realized that what its franchisees had been saying for so long was actually true. If that’s the case, these companies must now step up to the plate and admit that its franchisees have been harmed. Who should bear the burden of the hundreds of franchisees who lost everything because this system was not portrayed in its true light? The answer is obvious.

Aamco 2011 Audited Financials

Aamco 2012 Audited Financials

Jonthan E. Fortman

Attorney at Law