UNITED STATES
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) November 10, 1995
National Capital Management Corporation
(Exact name of registrant as specified in its charter)
Delaware 0-16819 94-3054267
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
50 California Street, San Francisco, CA 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 989-2661
(Former name or former address, if changed from last report.)
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FORM 8-K
Item 4. Changes in Registrant's Certifying Accountant
Regulation S-K Item 304
(a)(1):
(i) Registrant's principal accountant, Ernst &
Young, resigned on November 10, 1995.
(ii) Ernst & Young has not issued a report on
Registrant's financial statements during the past two
years that contained an adverse opinion, disclaimer
of opinion, modification or qualification.
(iii) N/A.
(iv) None.
(v) (A) Ernst & Young issued a letter to the
Registrant with respect to its audit of the
Registrant's financial statements for the year
ended December 31, 1994 which contained
reportable conditions regarding two of the
Registrant's subsidiaries, National Capital
Benefits Corporation ("NCBC") and Jensen
Corporation ("Jensen"). The Registrant believes
it has implemented measures that will prevent
the recurrence of such conditions at NCBC and
that prevented such conditions at Jensen until
it was sold on November 10, 1995.
(B) None.
(C) See (A) above.
(D) None.
Item 7. Financial Statements and Exhibits
The following documents is filed as part of this report:
(c) Exhibits:
(16) Accountant's letter will be filed
with amended Form 8-K.
(99) Accountant's letter of reportable
conditions dated March 24, 1995.
Signature
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 hereunto duly
authorized.
NATIONAL CAPITAL
MANAGEMENT CORPORATION
Date: November 16, 1995 By:/s/ Leslie A. Filler
Leslie A. Filler
Principal Financial Officer and
Principal Accounting Officer
Ernst & Young LLP Suite 1700 Phone 415 951 3000
555 California Street
San Francisco, California 94104
March 24, 1995
The Audit Committee of the Board of Directors
National Capital Management Corporation
We have completed our audit of the consolidated financial
statements of National Capital Management Corporation (the
"Company") for the year ended December 31, 1994, and have
issued our report thereon, dated March 24, 1995. We have
summarized the following matters which we believe should be
communicated to the Audit Committee of the Board of
Directors of the Company as required by AICPA Statement on
Auditing Standards No. 61.
The Auditor's Responsibility Under Generally Accepted
Auditing Standards
The consolidated financial statements are the responsibility
of the Company's management. Our audit was performed in
accordance with generally accepted auditing standards and,
as such, was designed to obtain reasonable, but not
absolute, assurance about whether the financial statements
are free from material misstatement. The financial
statements are also included in the Company's Form 10-KSB
filed with the Securities and Exchange Commission. Our
responsibility with respect to other information contained
in the Form 10-KSB, including Management's Discussion and
Analysis of Financial Condition and Results of Operations
and Selected Financial Data, is limited to reading such
other information and determining that it is materially
consistent with information appearing in the financial
statements.
Significant Accounting Policies--Initial Selections and
Changes
There were no significant changes in accounting policies
during 1994, other than the adoption of those policies
related to the viatical business of its subsidiary, National
Capital Benefits Corporation ("NCBC"). During the year,
NCBC, a subsidiary of the Company, adopted policies related
to revenue recognition of its viatical business, as well as
policies related to capitalization of the cost of insurance
policies purchased. Refer to the notes to the audited
consolidated financial statements for a summary of the
significant accounting policies followed by the Company and
its subsidiaries.
Sensitive Accounting Estimates
Accounting estimates are an integral part of the financial
statements and are based upon management's current
judgments. We reviewed with management the formulation
process for such estimates. Significant judgments and
estimates include the determination of the allowance for
uncollectible receivables, the carrying values of property,
equipment and intangible assets, and the related
depreciation and amortization periods. We reviewed
management's judgments and estimates in the above areas in
connection with our audit and determined that such judgments
and estimates were reasonable, when considered as part of
the consolidated financial statements taken as a whole.
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The Audit Committee of the Board of Directors
National Capital Management Corporation
Page 2
Significant Recorded and Unrecorded Adjustments
A. Significant adjustments made:
There were numerous adjustments and financial
statement reclassifications recorded. Accordingly,
we have not included all adjustments or financial
statement reclassifications made through both the
audit process and other post-closing adjustments
but have only included adjustments significant to
the Company's 1994 consolidated net loss.
Jensen
Audit adjustments were made which increased the
1994 net loss by $316,000. The primary accounts
affected were inventory and inventory related cost
of sales accounts.
B. Significant audit differences not posted as
adjustments: None
Disagreements With Management
None
Major Issues Discussed With Management Prior to
Retention
None
Consultations With Other Accountants
None
Serious Difficulties Encountered in Performing the
Audit
We encountered serious difficulties in performing our audit
procedures at Jensen Corporation (Jensen) and NCBC.
Jensen experienced turnover during 1994 in its chief
financial position. At the commencement of our audit
procedures, we noted numerous deficiencies in Jensen's
accounting and financial reporting (see Attachment A). This
required us to significantly expand our audit procedures
which required more time than anticipated for us to complete
our audit procedures and resulted in delays in the Company's
financial reporting. In addition, obtaining the necessary
information from Jensen personnel was difficult.
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The Audit Committee of the Board of Directors
National Capital Management Corporation
Page 3
NCBC's internal accounting systems, which were new in 1994,
did not result in an accurate or timely accounting for its
financial transactions. The initial accounting policies,
tentatively adopted during the year, were changed subsequent
to year end. Also, numerous audit adjustments were required
subsequent to year end to account for revisions in policies,
along with matters not previously considered, i.e.
management fees, etc. The lack of adequate policies and
procedures at NCBC resulted in expanded audit procedures and
significant involvement by Company financial personnel.
Also, NCBC did not timely or accurately provide financial
projections to the Company which, given the lack of
financial resources at NCBC and the Company, is critical to
the management of NCBC and the Company and their required
financial statement disclosures. In addition, NCBC personnel
were not aware of a need to comply with certain requirements
of its line-of-credit until it was pointed out to them. All
of these factors delayed the required financial reporting of
the Company.
Internal Control Findings
Material Weaknesses in Internal Control Structure
See Attachment A
Reportable Conditions in Internal Control
Structure
See Attachment A
Communications of Total Fees for Management Consulting
Services and a Description of the Types of Services
Rendered
None
* * * * * * * *
This report is intended solely for the information and use
of the Audit Committee, management, and others within the
Company.
<PAGE>
Ernst & Young LLP Suite 1700 Phone 415 951 3000
555 California Street
San Francisco, California 94104
Attachment A
The Audit Committee of the Board of Directors
National Capital Management Corporation
In planning and performing our audit of the consolidated
financial statements of National Capital Management
Corporation (NCMC) and subsidiaries (collectively, the
Company) for the year ended December 31, 1994, we considered
its internal control structure to determine our auditing
procedures for the purpose of expressing our opinion on the
consolidated financial statements and not to provide
assurance on the internal control structure. However we
noted certain matters involving the internal control
structure and its operation that we consider to be
reportable conditions under standards established by the
American Institute of Certified Public Accountants.
Reportable conditions involve matters coming to our
attention relating to significant deficiencies in the design
or operation of the internal control structure that, in our
judgment, could adversely affect the organization's ability
to record, process, summarize, and report financial data
consistent with the assertions of management in the
consolidated financial statements.
A material weakness is a reportable condition in which the
design or operation of one or more of the specific internal
control structure elements does not reduce to a relatively
low level the risk that errors or irregularities in amounts
that would be material in relation to the consolidated
financial statements being audited may occur and not be
detected within a timely period by employees in the normal
course of performing their assigned functions.
Our consideration of the internal control structure would
not necessarily disclose all matters in the internal control
structure that might be reportable conditions and,
accordingly, would not necessarily disclose all reportable
conditions that are also considered to be material
weaknesses as defined above. However, we noted the following
matters involving the internal control structure and its
operation that we consider to be material weaknesses as
defined above. These conditions were considered in
determining the nature, timing, and extent of the procedures
performed in our audit of the Company's consolidated
financial statements, and this does not affect our report
dated March 24, 1995 on those financial statements.
NCMC in San Francisco maintains the records for its real
estate division and relies on accounting personnel at other
locations to maintain the records for its other
subsidiaries. The comments that follow relate to these
subsidiaries.
<PAGE>
The Audit Committee of the Board of Directors
National Capital Management Corporation
Page 2
Jensen Corporation
The following material weaknesses were noted:
Overall lack of controls over the recording and reconciling
of transactions affecting cash from July 1994 through year
end;
The general lack of controls to ensure reconciliations of
the general ledger balances are completed and differences
are resolved on a timely basis;
The lack of timely adjustment and analysis of inventory
standards and reserves.
Because of the weaknesses in the internal control structure
noted above, errors in the financial information reported to
NCMC were only detected through the audit process and were
required to be adjusted subsequent to year end. This lack
of a general control environment hinders Jensen's and the
Company's cash management on a day-to-day basis and prevents
the Company's management from making a timely and accurate
assessment of Jensen' s operational performance.
The lack of these controls also resulted in expanded audit
procedures and more time expended by Company management
correcting and reporting on the historical financial
information.
The controls, such as timely, accurate reconciliations,
should immediately be put in place and appropriate,
qualified financial personnel should be hired to ensure that
such controls are operating and that material errors and
irregularities do not go undetected and the Company's
financial reporting is not compromised.
National Capital Benefits Corporation (NCBC)
NCBC's internal accounting systems, which were new in 1994,
did not result in an accurate or timely accounting for its
financial transactions. Specifically, the initial
accounting policies, tentatively adopted during the year,
related to the costs of insurance policies purchased and
revenue recognition were changed subsequent to year end.
Also, numerous audit adjustments were required subsequent to
year end to account for revisions in policies, along with
matters not previously considered, in management fees, etc.
NCBC did not timely or accurately provide financial
projections to the Company which, given the lack of
financial resources at NCBC and the Company, are critical to
the management of NCBC and the Company and their required
financial statement disclosures. In addition, NCBC personnel
were not aware of a need to comply with certain requirements
of its line-of-credit until it was pointed out to them.
<PAGE>
The Audit Committee of the Board of Directors
National Capital Management Corporation
Page 3
The lack of established policies and procedures over NCBC's
internal accounting and reporting resulted in expanded audit
procedures and more time spent by Company management to
correct and report on NCBC's historical financial
information. Separate financial statements are required by
NCBC's lenders and the timely and accurate financial
reporting is important. Timely and accurate financial
projections are also important given NCBC's cash
requirements.
Controls should be put in place immediately ensuring that
there are the appropriate segregation of duties, review
procedures and standardized, timely reporting to NCMC.
In addition, we noted the following other matters that we
consider to be reportable conditions.
Jensen Corporation
Payroll tax filings were not made on a timely basis
during 1994;
Sales were recorded when the goods had not been shipped
and there was no documentation with the customer
supporting this transaction as a sale. This deviated
from the Company's revenue recognition policy.
Due to the small size of the accounting department,
there exists an inappropriate segregation of duties.
Duties should be evaluated and reassigned or an
appropriate level of independent review should be
established. For example:
* the controller or a person acting in that capacity
approves customer credit and authorizes write-offs of
uncollectible accounts;
* the accounts receivable clerk initiates credit memos
and accounts for the numerical sequence of credit
memos;
* the accounts receivable clerk opens mail and lists
checks, prepares bank deposits and maintains the cash
receipts journal. The cash receipts journal is not
reviewed by anyone else;
* the controller or his equivalent prepares checks,
maintains the cash disbursements journal and reconciles
the bank accounts.
<PAGE>
The Audit Committee of the Board of Directors
National Capital Management Corporation
Page 4
As discussed above, these reportable conditions occurred
because of the lack of qualified, financial personnel at
Jensen and the lack of adequate policies and procedures. The
financial personnel at Jensen should be accountable to the
chief financial officer of the Company as the Company has
the responsibility to accurately report the financial
results of Jensen. Additionally, Company executives are
responsible to ensure Company assets are appropriately
safeguarded and accounted for, and transactions are
appropriately authorized. Adequate segregation of duties
within the internal accounting system needs to be maintained
if the Company's control objectives are to be met. Adequate
segregation of duties lessens the possibility of undetected
errors or irregularities by providing accounting checks.
The Company needs to employ experienced and qualified
accounting personnel to restore the control environment that
has been damaged due to turnover of personnel and lack of a
good "local" oversight by those management personnel located
at Jensen.
This report is intended solely for the information and use
of the Audit Committee, management and others within the
Company.
/s/ERNST & YOUNG LLP
March 24, 1995
