BKF Capital Group, Inc. (OTCQB: BKFG), the second largest
shareholder of Qualstar Corporation (NASDAQ: QBAK), today commented
on the real facts and issues in BKF’s contest to replace the Board
of Directors of Qualstar and elect BKF’s highly experienced, highly
qualified and highly motivated nominees at the Qualstar Annual
Meeting of Shareholders on June 28, 2013.
Steven Bronson, BKF’s chief executive officer, remarked: “As the
contest for the future of Qualstar approaches its final stages,
shareholders should focus on the real facts and issues, and not be
swayed by the Company’s assurances of recovery at some unspecified
future time, or the formulaic analyses of the proxy advisory
services which we believe are simply wrong.”
“The facts are that the Company is burning through its cash and
does not have a large runway for recovery. Qualstar’s results for
the nine months ended March 31, 2013, under the Company’s new CEO
Lawrence Firestone, were the worst ever. Unlike BKF, the current
Board has only a nominal investment in Qualstar. Its strategy is to
throw money at a problem—the continuing drain of the tape storage
business—that cannot be solved by money alone.”
“BKF’s nominees are highly skilled and experienced and are
incentivized to run the Company for its owners, because BKF is a
substantial owner. We want what you want—prudent cash management, a
strategy for the tape storage business that is based on market
realities and a return to profitability in the very near turn.”
Mr. Bronson concluded: “We ask our fellow shareholders to read
this release in full, together with BKF’s other materials, and vote
to elect BKF’s nominees on the GOLD proxy card.”
Money: The Board is Spending the Company’s Money Like It
Belongs to Somebody Else
As BKF has been saying for well over a year, there are serious
challenges facing Qualstar, particularly in its tape storage
business. The solution of the Board and CEO Lawrence Firestone has
been to throw money at the problem, substantially increasing
G&A, increasing Sales and Marketing costs, and increasing
Engineering costs. The consequence of this strategy has been a
staggering cash burn of over $6 million in the past nine months,
even with the Board’s highly touted outsourcing of manufacturing
operations.
The Company’s approach to this proxy contest is just one example
of the disregard that the Board and Mr. Firestone have for
shareholder money. After spending over $600,000 to thwart BKF’s
non-coercive partial tender offer in January, the Company says it
will be spending $500,000 in this proxy contest. That’s a total of
over $1.1 million!
In this proxy contest, BKF sent out one mailing. The Company
sent out three. BKF did a simple homegrown investor presentation.
The Company posted two versions of a graphically enhanced,
professionally designed presentation. And why not? It’s not their
money.
Is Qualstar a Start-Up Company? The Current Chairman
of the Board Seems to Think So
On the Company’s investor call this week, the current Chairman
of the Board, Allen Ally said “Qualstar has the feeling of a very
exciting startup company.” What does that mean? It means a company
that can run through its cash, with the anticipation that somebody,
somehow is going to come up with more. It means a company that’s
under no pressure to earn a profit. It means a company that expects
its stock price to be buoyed by promises of future success and is
not grounded in current performance.
If that’s what the Company’s current Chairman believes, then
shareholders can begin to understand why Qualster is headed in a
direction of unconstrained spending, no profitability and promises
instead of performance.
Of course, Qualstar is not a startup. It has been in business
for almost 30 years. The markets and shareholders rightfully want
to see profits and performance now.
Unfortunately, ISS Got It Wrong—Shareholders Should Not Make
the Same Mistake
The Company is touting its ISS recommendation. Unfortunately,
ISS is wrong in its analysis, and were shareholders to make the
same mistake, BKF believes they will see the value of their
investment in the Company continue to erode.
ISS looked at TSR (Total Shareholder Return) for the 12 month
period ending June 2012, noted that the Company’s TSR rose from
November 2012 to May 2013 and attributed this to the actions of the
current Board. But of course on May 14, 2013—when the Company
released its third quarter and nine month numbers with record
losses—the Company’s stock price plummeted to its November 2012
levels.
ISS says “There is little doubt the company’s restructuring
efforts combined with uncertainty surrounding a myriad of events,
particularly, BKF’s tender offer and the ensuing proxy contest,
were distractions that may have impacted negatively on the
company’s TSR since May 2013.”
Really? This is the Company’s story. The abysmal nine month
numbers are the fault of BKF. Shareholders should be the judge of
whether this makes any sense. In the view of BKF—and BKF believes
that other shareholders agree—it does not. The Company’s stock
price simply reflects the fundamental flaws in the overdrive
spending strategy of the current Board that was revealed in the
Company’s third quarter results.
So What Is the Fundamental Flaw in the Strategy of the
Current Board?
As BKF has repeatedly explained, no matter how much of the
Company’s remaining cash—which has already been substantially
depleted—the Board throws at the tape storage business, it will not
cure the basic problem. The Company cannot go it alone in this
business. Technology is moving away from tape storage, customers
are bundling their tape storage with other hardware purchases and
other players in this space—think for example IBM and Oracle—are
far larger and have many times the resources of the Company. That
is why the Company’s most direct competitors—Overland Storage and
Quantum Corp., which are larger than Qualstar—are hurting.
To compound the issue, according to the Company’s recent
investor presentation, Qualstar is now proposing to move to the
higher end tape storage market where it would be competing directly
with the likes of IBM and Oracle. This, we believe, is a recipe for
disaster.
Why Did BKF Decline Mr. Firestone’s Offer to Join the Current
Board?
The Company has faulted BKF for refusing to accept its offer of
two Board seats. First, BKF needs to set the record straight.
- Before the special meeting in June of
last year, BKF approached Mr. Firestone with a fair proposal for
equal representation on the board, a mutual agreement on the fifth
seat and a modification of Mr. Firestone’s employment agreement to
reduce his egregious compensation package. Mr. Firestone never
responded to the offer despite giving his word to get back to BKF
within two weeks.
- Mr. Firestone then reached out to BKF
at the end of 2012 to get BKF to register, and perhaps sell its
shares, as part of a shelf registration paid for with the Company’s
money. BKF declined.
- BKF didn’t hear from Mr. Firestone
again until April 2013, when it was clear that BKF was following
through on its previously disclosed intentions of running a slate
for the annual meeting.
- Mr. Firestone did not, as the Company
claims, offer BKF two Board seats. He offered BKF one Board seat,
with a second Board seat for Alan Howe. BKF is proud to have Mr.
Howe, with his reputation and experience, on its slate, but Mr.
Howe is independent of BKF. As Mr. Firestone well knew, Mr. Howe
was suggested to BKF by another major Qualstar shareholder and has
no prior relationship with Steven Bronson, BKF’s CEO.
Second, BKF took Mr. Firestone’s offer of Board representation
under careful consideration but decided to wait until the Company
announced its third quarter and nine month results. When BKF saw
those results, with record losses and cash burn, it determined that
working to change the direction of the Company with the existing
Board would be futile. Moreover, BKF was concerned with the fact
that on May 8, 2013, Qualstar increased the size of its Board to 7
members and appointed Bud Lahber, a friend of Mr. Firestone, as a
new member of the Board.
Why Does BKF Lack Confidence in Current Management?
Mr. Firestone, who was named CEO in June 2012 and has presided
over the Company’s abysmal performance in the first nine months of
fiscal 2013, has no prior experience as a CEO.
The other current members of the Board that the Company has
nominated for re-election have long standing relationships with Mr.
Firestone—they are handpicked, as the Company likes to say. For
example, on the recent investor call, Bud Lahber explained the
reason he joined the Board was his personal relationship with Mr.
Firestone.
In June 2012, Mr. Firestone committed the Company to breakeven
or profitable operations by June 2013. That of course has not
happened, and the Company is not even close to achieving this
milestone. In the recent investor presentation, Mr. Firestone made
no commitment as to when the Company will be profitable and has
established unquantifiable “mid-term” and “long-term” targets, so
as to not be held accountable
What is the Strategy of the BKF Nominees?
If elected, the BKF nominees will run a lean organization. Our
nominees realize that the Company’s resources are limited and that
every dollar must be spent prudently.
Our nominees will reward management, but executive compensation
will principally be performance based.
Our nominees realize that the only way for the Company to
extricate itself from the problems that are plaguing the tape
storage business will be to partner with another strategic player
to leverage resources and increase market penetration.
Our nominees will thoroughly review all strategic options, from
continuing to operate as a standalone company to a business
combination or reorganization. There will be only one objective,
and that is to maximize value for all shareholders in which BKF
will share proportionately.
Why Should Shareholders Trust the BKF Nominees?
The current Board still has only a nominal financial investment
in the Company. In contrast, BKF is the Company’s second largest
shareholder, with millions of dollars invested in Qualstar. The
interests of BKF are directly aligned with the interests of all
other shareholders, and its fortunes will rise or fall with the
fortunes of everyone else.
What Should Shareholders Do?
BKF has determined that the only way to fix Qualstar is to
replace the Board with new independent directors. BKF is therefore
asking for the help of all shareholders to elect the directors
nominated by BKF on the GOLD proxy card.
Therefore no matter how many or how few shares a shareholder
owns, it is important to return the GOLD proxy card and vote
FOR the election of the five nominees of BKF, and as
recommended by BKF on the other proposals at the 2013 Annual
Meeting.
Do not return the WHITE proxy card or any other card
furnished by or on behalf of the Company. Remember that only
the last vote will count. Even if a shareholder has voted on the
Company’s WHITE proxy card, that vote may be revoked by returning a
later dated GOLD proxy card in favor of the BKF nominees and
as recommended by BKF on the other proposals.
If shareholders have any questions, require assistance in voting
their shares, or need additional copies of BKF’s Proxy Statement,
please contact BKF’s proxy advisors—
AST PHOENIX ADVISORS
6201 15th AVENUE
3RD FLOOR
BROOKLYN, NY 11219
CALL TOLL FREE: (877) 478-5038
BANKS AND BROKERS CALL COLLECT: (212)
493-3910
About BKF Capital Group
Inc.
BKF Capital Group Inc. is a publicly traded company that intends
to create an asset management platform with investment vehicles
that focus on areas of portfolio management that typically receive
less attention from investors but also present unique investment
opportunities. BKF is also engaged in seeking to arrange an
acquisition, with an operating business with revenues, at least
three years of operating history and unique value opportunities.
For additional information please visit: www.bkfcapital.com.
BKF Capital Group, Inc.Maria Fregosi, 561-362-4199 x
209mfregosi@bkfcapital.com
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