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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 12, 1995
PRESIDENTIAL MORTGAGE COMPANY
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
California 2-94289 95-3611304
(State or other Commission (IRS Employer
Jurisdiction File Number Identification No.)
of Incorporation
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21031 Ventura Boulevard
Woodland Hills, California 91364
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (818) 992-8999
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Item 4. Changes in Registrant's Certifying Accountant
On September 12, 1995, the Registrant dismissed Ernst & Young, LLP ("E&Y"),
as independent accountants of the Registrant and its subsidiaries, and engaged
BDO Seidman, LLP, as independent accountants of the Registrant and its
subsidiaries.
E&Y's report for the year ended December 31, 1994 did not contain an adverse
opinion or a disclaimer of an opinion, and was not qualified or modified as to
audit scope or accounting principles. The report for the year ended December
31, 1994 contained an explanatory paragraph concerning a substantial doubt
about the ability of the Company to continue as a going concern due to losses
from nonperforming loans that resulted in significant recurring losses from
operations, substantial debt service and other requirements of the note payable
to the Registrant's lender, and the regulatory capital classification of
Pacific Thrift and Loan Company ("Pacific Thrift"), the Registrant's wholly
owned subsidiary. In addition, the report for 1994 contained an explanatory
paragraph concerning certain securities litigation containing allegations of
securities fraud and aiding and abetting a breach of fiduciary duty relating to
the Registrant and its Chief Executive Officer.
The report of Kenneth Leventhal & Co. ("KL&Co.," which was merged into E&Y in
1995) for the year ended December 31, 1993, did not contain an adverse opinion
or a disclaimer of opinion, and was not qualified or modified as to audit scope
or accounting principles. The report for the year ended December 31, 1993
contained an explanatory paragraph concerning the securities litigation
referred to in the report for 1994 and an explanatory paragraph concerning the
Company's liability for environmental remediation of two properties acquired in
foreclosure and possible government action if the Company did not comply with a
consent agreement regarding one of the properties. The environmental
remediation matter was not referred to in the report for the year ended
December 31, 1994, as there was no material uncertainty regarding any further
liability as of that date.
As of the date hereof, Pacific Thrift has been reclassified as "adequately
capitalized" by the FDIC, and no action has occurred since 1993 with respect to
the securities litigation referred to in the explanatory paragraphs contained
in the 1994 and 1993 reports.
During the Registrant's two most recent fiscal years and subsequent interim
period, there were disagreements between the Registrant and its accountants.
The disagreements were as follows:
There was a disagreement concerning the scope of the work necessary to be
performed by E&Y in connection with a proposed restructuring of the Registrant,
including procedures and issues raised with respect to the allowance for loan
losses, deferred tax asset and other transactions recorded by the Registrant in
its unaudited financial information as of June 30, 1995. Prior to resolving
the disagreement, the client-auditor relationship was terminated by the
Registrant.
There were disagreements regarding the amount of the provision and allowance
for loan losses for the fiscal years ended December 31, 1994 and 1993, which
were resolved by the Registrant recording an additional provision for each
year.
There were disagreements about the scope of audit procedures to be performed
to ascertain the status of certain regulatory matters concerning Pacific and
the ability of the Registrant to continue as a going concern for the fiscal
year ended December 31, 1994, which were resolved by E&Y performing the
additional procedures.
There was a disagreement about the need to add an explanatory paragraph to
the report of E&Y for the year ended December 31, 1994 concerning the
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ability of the Registrant to continue as a going concern, which was resolved by
the Registrant accepting such explanatory paragraph.
There were disagreements regarding the interpretation of regulatory
accounting principles applicable to sales of senior loan participation
interests to third parties by Pacific Thrift, in part due to preliminary advice
received from FDIC examiners and others, which were resolved by Pacific Thrift
requesting an opinion of the FDIC and revising its regulatory reports to
conform to the FDIC's interpretation of such principles.
There was a disagreement regarding the scope of audit procedures necessary
and the necessity of footnote disclosure concerning certain litigation in which
allegations of securities fraud and aiding and abetting in the breach of
fiduciary duty were made against the Registrant and its Chief Executive Officer
by investors in companies affiliated with the Registrant until 1984. The
disagreement was resolved by the Registrant adding footnote disclosure in its
financial statements for the fiscal years ended December 31, 1994 and 1993.
There was a disagreement concerning the disclosure required in connection
with the Registrant's liability for remediation of environmental contamination
of two properties acquired in foreclosure in 1993. At the time the audit of
the Registrant's 1993 financial statements was completed there existed
potential civil or criminal claims against the Registrant, and the Registrant
was engaged in negotiations with governmental authorities to settle any
potential claims. Until the settlement agreement was completed, the
Registrant's counsel was unable to provide an opinion as to whether civil or
criminal liability was probable or remote. The Registrant delayed issuance of
the financial statements until the settlement agreement was entered and an
opinion of counsel was obtained to the effect that the possibility of criminal
liability was remote. The disagreement was resolved by the Registrant
increasing the disclosure in its financial statement footnotes in 1993,
including the disclosure that, in the opinion of its legal counsel, the
likelihood of criminal action was remote if the terms of a settlement agreement
reached with regulatory authorities were complied with. As of the date hereof,
the Registrant is in full compliance with the terms of the Settlement
Agreement.
There was a disagreement regarding the accounting and footnote disclosure of
certain related party transactions, which was resolved by adjustments to the
accounting and by additional disclosures for the related party transactions.
The Registrant's former accountants have advised it that there are certain
deficiencies in its lending and credit administration procedures and its
procedures for determination of its allowance for loan losses that, taken as a
whole, constitute a material weakness in its internal controls and a
"reportable event" pursuant to Item 304 of Rule S-K. The Registrant has taken
or is in the process of taking the necessary steps to improve each of the
procedures identified by its former accountants as requiring improvement.
The managing officers of the Registrant's general partner discussed the
subject matter of each disagreement with the Registrant's former accountants.
The Registrant has authorized its former accountants to respond fully to all
inquiries of the Registrant's successor accountants concerning the subject
matter of each disagreement.
Prior to the engagement of BDO Seidman, LLP as the independent accountants
for the Registrant and its subsidiaries, the Registrant did not consult
BDO Seidman, LLP concerning the application of accounting principles to any
specified transaction or any matter that was the subject of a disagreement
with E&Y or a reportable event.
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Item 7. Financial Statements and Exhibits
The required letter of E&Y regarding its dismissal as independent accountants
for the Registrant is filed as an exhibit hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on September 27, 1995.
PRESIDENTIAL MORTGAGE COMPANY
(Registrant)
By: /s/ Joel R. Schultz
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Joel R. Schultz, President of
Presidential Services
Corporation, General Partner
of Presidential Management
Company, a California limited
partnership, general partner
of the Registrant
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[ERNST & YOUNG LLP LETTERHEAD]
September 27, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
Ladies and Gentlemen:
We have read Item 4 of Form 8-K dated September 27, 1995 of Presidential
Mortgage Company and believe it is complete and accurate as to its description
of disagreements between the Registrant and us.
We have no basis to agree or disagree with the Registrant's statement about the
engagement of BDO Seidman, LLP and date of engagement of BDO Seidman, LLP in the
first paragraph under Item 4.
We have no basis to agree or disagree with the Registrant's statements about
the current status of the regulatory capital situation of Pacific Thrift and the
current status of the compliance with the regulatory order by Pacific Thrift in
the fourth paragraph under Item 4. We have no basis to agree or disagree with
the Registrant's statement about the current status of the litigation and
unasserted claims in the fourth paragraph under Item 4.
We have no basis to agree or disagree with the Registrant's statement about
advice received from FDIC examiners in the tenth paragraph of Item 4.
We have no basis to agree or disagree with the Registrant's statement about the
absence of certain consultations between the Registrant and BDO Seidman, LLP
in the sixteenth paragraph of Item 4.
Very truly yours,
/s/ Ernst & Young LLP
