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New CEO Facing Proxy Fight at Data Company

Lawrence Firestone, who takes over this week as chief executive of Simi Valley data storage and power supply company Qualstar Corp., won’t have much time to convince shareholders to let him keep his board seat, let alone his new job.

That’s because a proxy fight has broken out over the company’s direction. BKF Capital Group Inc., a Florida investment firm, has pressured Qualstar’s board into calling a shareholder special meeting June 20. The annual meeting was in March. BKF is Qualstar’s second largest shareholder. On the agenda is a vote on whether to retain current directors – including Firestone.

Qualstar shares closed at $1.94 on May 31, and haven’t closed above $3 in about four years. Analyst Gil Luria of Wedbush Securities in downtown Los Angeles said a major problem with the company’s stock price is that investors are only valuing the company based on its assets and not prospects for the business.

“Overall the company isn’t making money and that’s what investors are interested in,” said Luria.

Wedbush has maintained a neutral rating on shares for several years. Wedbush’s separate investment management arm is the ninth largest shareholder.

Steven Bronson, chairman and controlling shareholder of BKF Capital of Boca Raton, contends management and directors have not been maximizing shareholder value. Firestone is one of five directors he believes should be replaced with a slate that includes himself and associates he says have more experience turning around a struggling tech company.

Firestone had been an independent director for about a year before being tapped by his fellow directors to succeed 69-year-old co-founder and Chief Executive William Gervais, who retired effective last week.

Gervais remains the largest single shareholder, controlling 27 percent of shares, but opted to leave the board. He and Firestone were among three of six directors to receive a majority of investor votes at the annual meeting.

Firestone, 54, joined Qualstar’s board in May of last year. He most recently was chief financial officer of Xiotech Corp., a Colorado Springs, Colo., supplier of enterprise storage systems. When Qualstar announced Firestone’s hiring, it noted that he has more than 30 years of operations and financial management experience in global public and private companies, including significant turnaround and mergers and acquisition expertise.

Bronson said he decided to launch the proxy battle when he learned Gervais was retiring. He argues that without Gervais, the rest of the board combined only owns about 1.3 percent of the company. That puts it out of alignment with investor priorities.

“At the time we first began investing in this company, I saw an opportunity in a company that was undervalued but had fundamentals that appeared to be starting to improve,” Bronson said.

He controls about 19 percent of Qualstar shares, mostly through BKF, which began acquiring them in October 2010.

“We are not looking to take over the company. I just want to protect my investment. This is really a last resort,” he said.

Qualstar executives contend otherwise.

“We believe BFK and Mr. Bronson are only interested in securing a quick opportunistic gain,” Firestone said in press release last week. Both he and Gervais declined to be interviewed for this article.

Qualstar makes tape-based data storage devices and power supply products, but said it has plans under Firestone to make acquisitions and take other steps to turn the company around.

Last year it introduced a product called Topo Jojo, an electronic frame that serves as a touchless mouse. Doctors and nurses can put their hands through the frame to control computer functions without risk of contamination. The device would be used in operating rooms, dental offices and other health care settings.

Its legacy tape-based data storage division is the company’s largest business, generating $18.3 million in revenue in 2011, up 20 percent from a year earlier.

Tape-based data storage is an aging technology, but still popular with large companies, governments and other organizations that need to archive huge amounts of information but want to save energy compared with that needed to operate more modern disk-storage systems.

Qualstar’s smaller power supply business, while it has many competitors, is based on energy-conserving technologies that led to 46 percent revenue growth to $8.46 million in its last fiscal year, which ended June 30.

The company reported a net loss of $680,000 last year, and last month reported a $553,000 loss in its third quarter.

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