Auditors, Appalled at Kaypro Records, Disclaim Responsibility for Report : DIEGO COUNTY

SAN DIEGO-Kaypro’s financial records for its 1989 fiscal year were so poorly kept that its outside auditors have disclaimed responsibility for their report, Kaypro’s management said in an 8-K statement filed Monday with the Securities and Exchange Commission.

The lack of adequate accounting records was just one of a laundry list of woes catalogued in the SEC filing by Kaypro management, which is locked in a fight for control of the company with Andrew Kay, the company’s founder and largest shareholder. Kaypro filed for protection under Chapter 11 of the U.S. bankruptcy code on March 1.

In the filing, Kaypro chief executive Roy Salisbury also claimed that the company and Kay are being investigated for possible violations by the Securities and Exchange Commission, the Internal Revenue Service and the San Diego County Sheriff’s Department. Once traded over the counter, the company’s shares have been delisted by NASDAQ.

Kay, who was terminated as an employee of the company on April 2 but remains board chairman, could not be reached for comment at his Del Mar home on Monday.

The statement’s filing came two days before a hearing scheduled before U.S. Bankruptcy Judge James W. Meyers at which the judge is expected to choose a fifth Kaypro board member or trustee to help manage the troubled company. Both Kay and Kaypro management have proposed their own board nominees, Salisbury said.

The Kaypro board is currently made up of Kay, his wife Mary, Salisbury and Mark Seaver. Salisbury and Seaver, who is vice president of operations, are part of a “work-out team” hired by Kay in February to resurrect the floundering personal computer company. The Kays and the Salisbury-led management team have since become bitter enemies.

Once a leading manufacturer of portable and desktop personal computers, Kaypro has in recent months suspended manufacturing, laid off all but 10 of its employees and moved its offices from Kaypro’s leased Solana Beach plant to a facility in Carlsbad.

Despite the company’s problems, Kaypro has a “viable future” if it can successfully deploy its remaining assets, which Salisbury said are its brand-name recognition, its $50 million in tax loss carryforwards, a kind of tax credit, and its status as a public company.

In the 8-K filing, Kaypro also said that the SEC has requested documents pertaining to its 1988 and 1989 fiscal years. In an interview, Salisbury said that Kaypro is being investigated by the San Diego County Sheriff’s Department fraud and forgery unit in connection with $365,000 in allegedly bad checks written by Kaypro.

In addition, Kaypro owes the IRS about $1 million in unpaid employee withholding taxes, Salisbury said.