Qualstar Corp., a Simi Valley data storage and power products manufacturer, may be facing an uncertain future as its second-largest investor wages a proxy battle to remove all members of the company’s board of directors, including newly-appointed CEO Lawrence Firestone, and install five of its own representatives. BKF Capital Group Inc., headquartered in Boca Raton, Fla., and its controlling shareholder Steven N. Bronson, said the company’s management team has failed to increase profitability and drive up the stock price. BKF and Bronson, which together hold more than 2.1 million shares, or a 17.3 percent stake, now are making a bid to take control of the company. In response to the shareholder’s April 30 request, Qualstar’s board this month scheduled a special meeting for an election of its board members, slated for June 20. The company is urging shareholders not to vote in the election, or if they cast a proxy ballot, to vote down the shareholder’s proposal. Qualstar, which employs about 70 workers at its single site in Simi Valley, makes tape-based data storage devices and its N2Power division makes power supply products. In 2011, the company introduced Topo Jojo, a touchless mouse used in the health care industry. However, Qualstar’s financial performance has struggled in recent years, in part as changing market demands have resulted in decreasing sales of its tape-based data storage devices and an uptick in sales of the power supply products. Qualstar’s stock price has hovered below $3 a share for almost four years, and since the quarter ended Dec. 31, 2009, the company consecutively reported net losses except for two quarterly periods. While public companies such as Qualstar may be taken to task by activist shareholders who attempt to persuade shareholders to use their proxy votes to install new management, often these efforts fail. Incumbent directors and management have the odds stacked in their favor and sometimes use a variety of corporate governance tactics to maintain control of the company. Still, even the threat of a proxy fight can spark major changes at a company. Fight for control Qualstar’s proxy contest comes as leadership at the ailing company is in a state of transition. Qualstar’s largest shareholder, with about 27 percent of the shares outstanding, is Co-founder, President and CEO William Gervais, who retires next month. Firestone, his replacement and a board director since May 2011, has been charged with implementing growth initiatives designed to turn around the company’s financial performance; he assumes his post in early June. In a May 21 proxy filing, the company’s board said reiterated its goal to maximize shareholder investment over the long term. “We believe the steps we are initiating and are committed to taking will protect and enhance shareholder value both now and in the future,” the board said. “We are receptive to new ideas and are willing to pursue new initiatives. We believe, however, that an abrupt change in Qualstar’s board or its strategic direction would only jeopardize Qualstar’s growth opportunities and put shareholder value at risk.” In that filing, the company cited Bronson as stating that if BKF should succeed, “Bronson and BKF will proceed to divest Qualstar’s tape library business and distribute the majority of its cash.” Such a move would “for all practical purposes, leave Qualstar without the financial or managerial resources needed to grow and increase the value of its business for the benefit of all of our shareholders.” BKF is pushing for a comprehensive review of Qualstar’s operations with an eye on maximizing shareholder value, said Greg Heller, senior vice president with BFK Capital. “It is not about breaking up the company,” Heller said. “It is about (implementing) a strategy of returning (the company) to profitability or selling it to someone who can.” As part of its proposal, BKF is recommending to reduce the board to five members from six upon Gervais’s retirement on June 15. The board noted that it has agreed to this provision in its May 21 filing. Heller said BKF Capital wants a change in the board make up, not just to change company strategy, but also because three of the directors failed to get a majority of shareholder support at the Qualstar annual meeting in March. Additionally, the current directors, with the exception of Gervais, have a very small financial stake in the company, he said. “We are not asking to be treated differently than (Gervais),” Heller said. “It is as good for him as it is for us.” Changing markets During much of its 28 year history, Qualstar brought in much of its revenue from the data tape libraries and services business. Even in the digital age, tape storage remains a $600 million industry, according to industry statistics Gervais cited. The tape storage business remains stable, and the company been successful in serving that market for nearly three decades, he said. “There is a movement to pretend that tape does not exist,” Gervais said. “Our primary supplier is IBM and they are smarter than the disc-based bigots.” However, the power supply business — switches used in industrial automation, gaming systems, telecommunications, security and surveillance systems, and network servers — has eclipsed data storage as the company’s sales leader. That business increased sales from $1.3 million in the fiscal year ended June 30, 2005 to $8.5 million in the fiscal year ended June 30, 2011, and it has been profitable in each fiscal year since 2008. In the May 21 filing, the Qualstar board outlined the steps taken to grow the tape library business and the company’s plans for the future. Qualstar will develop improvements for the RLS 8350 and RLS 8500 Series tape libraries to stimulate sales and fill the vacant director of North American sales position with an experienced person with a proven track record, the filing said. Additionally, the board said it seeks to grow Qualstar’s business through both the expansion of its current product lines and through strategic acquisitions. Tape storage is not obsolete, Heller said, but it is a business segment that management needs to review closely. “That is for the company to determine if they can have a profitable business in that space or do they need to change their strategy,” he said. The board said Firestone, who starts his post in early June, intends to review all aspects of the business upon his placement. In a proxy filing this month, Firestone said, “We believe that BKF is seeking to take control of Qualstar in order to secure a quick, opportunistic gain…We look forward to the Special Meeting, which will provide our shareholders an important opportunity to support our directors and management and to putting this wasteful proxy contest behind us, so that we can focus our efforts and Qualstar’s resources on running the Company and creating shareholder value.”