QUALSTAR CORP - Annual Report: 2007 (Form 10-K)
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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FOR
THE FISCAL YEAR ENDED JUNE 30, 2007
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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FOR
THE TRANSITION PERIOD
FROM TO
_______________
COMMISSION
FILE NUMBER 000-30083
QUALSTAR
CORPORATION
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CALIFORNIA
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95-3927330
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(STATE
OF INCORPORATION)
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(I.R.S.
EMPLOYER ID NO.)
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3990-B
HERITAGE OAK COURT, SIMI VALLEY, CA 93063
(805) 583-7744
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class:
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Name
of Each Exchange on Which Registered:
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Common
Stock
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The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark whether the registrant is well-known seasoned issuer, as defined
in Rule 405 of the Securities Act of 1933. Yes o No þ
Indicate
by check mark whether the registrant is not required to file reports required
to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934. Yes o No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes o No þ
As
of
December 31, 2006, the aggregate market value of the common equity held by
non-affiliates of the registrant was approximately $24,478,000.
The
total
shares of common stock without par value outstanding at September 13, 2007
is 12,253,117.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of registrant’s definitive proxy statement for its annual meeting of
shareholders to be held in 2008 are incorporated by reference into Part III
of this Form 10-K.
QUALSTAR
CORPORATION
FORM 10-K
FOR
THE FISCAL YEAR ENDED JUNE 30, 2007
INDEX
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PART I
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Item 1.
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3
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13
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Item 1A.
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14
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Item 1B.
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21
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Item 2.
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22
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Item 3.
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22
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Item 4.
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22
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PART II
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Item 5.
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22
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Item 6.
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23
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Item 7.
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24
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Item 7A.
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29
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Item 8.
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30
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Item 9.
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48
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Item 9A.
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48
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Item 9B.
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48
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PART III
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Item 10.
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49
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Item 11.
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49
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Item 12.
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49
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Item 13.
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49
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Item 14.
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49
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PART IV
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Item 15.
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50
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51
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52
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FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Forward-looking statements inherently
are subject to risks and uncertainties, some of which we cannot predict
or
quantify. Our actual results may differ materially from the results projected
in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in “ITEM 1A — Risk
Factors,” and in “ITEM 7 — Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” You generally can identify
forward-looking statements by the use of forward-looking terminology
such as
“believes,” “may,” “will,” “expects,” “intends,” “estimates,” “anticipates,”
“plans,” “seeks,” or “continues,” or the negative thereof or variations thereon
or similar terminology. Forward looking statements also include the assumptions
underlying or relating to any such statements. Forward looking statements
contained within this document represent a good-faith assessment of Qualstar’s
future performance for which management believes there is a reasonable
basis.
Qualstar disclaims any obligation to update the forward looking statements
contained herein, except as may be required by law.
PART I
ITEM 1.
BUSINESS
INTRODUCTION
We
design, develop, manufacture and sell automated magnetic tape libraries
used to
store, retrieve and manage electronic data primarily in network computing
environments. Tape libraries consist of cartridge tape drives, tape cartridges
and robotics to move the cartridges from their storage locations to the
tape
drives under software control. Our tape libraries provide data storage
solutions
for organizations requiring backup, recovery and archival storage of
critical
data. Our products are compatible with commonly used operating systems,
including UNIX, Windows, and Linux. Our tape libraries are also compatible
with
a wide range of storage management software packages, such as those supplied
by
Computer Associates, EMC/Legato, Tivoli, Symantec, CommVault and BakBone
Software. We currently offer tape libraries for two popular tape drive
technologies, LTO and AIT. We have discontinued sales of libraries with
Super
AIT and DLT tape drives due to declining demand for those tape drive
technologies.
We
sell
our tape libraries worldwide, primarily to value added resellers and
original
equipment manufacturers. These customers typically integrate our tape
libraries
with software from third party vendors and related hardware such as servers
and
network components to provide complete storage solutions, which are then
sold to
end users. We configure our libraries based on each customer’s individual
requirements, with a normal delivery time of one to five working days.
This
rapid fulfillment of customer orders allows our resellers to minimize
their
inventory levels and allows us to compete effectively with distribution
channels
used by our competitors.
Qualstar
was incorporated in California in 1984. In 1995, we entered the tape
automation
market with a series of tape libraries incorporating 8mm tape drives.
Since that
time, we have introduced a succession of tape library models designed
to work
with the leading automation-capable tape drive technologies. Automated
tape
libraries and related products, such as tape drives and tape media, represented
approximately 66.6% of revenues for fiscal 2007, approximately 66.2%
of revenues
for fiscal 2006, and approximately 75.1% of revenues for fiscal 2005.
Sales of
power supplies, services and other products accounted for the balance
of our
revenues.
In
July
2002, we purchased the assets of N2Power, Incorporated, a supplier of
ultrasmall
high efficiency open-frame switching power supplies. Power supplies provided
by
N2Power are utilized within some of our tape library products as well
as sold to
original equipment manufacturers and contract manufacturers for incorporation
into their products. N2Power products are sold under the N2Power brand
name as
well as under a private label brand name through independent sales
representatives and distributors. Revenues from N2Power products totaled
approximately 14.6% of revenues for fiscal 2007, 11.9% of revenues for
fiscal
2006 and 5.0% of revenues for fiscal 2005.
Our
power
supplies are used to convert common alternating current (AC) line
voltages found in buildings and to direct current (DC) voltages that
are needed
internally to operate most electronic equipment. Since purchasing N2Power
we
have continued to develop and market additional models and model families
to
broaden the product line and increase potential business
prospects.
DATA
STORAGE INDUSTRY BACKGROUND
Storing,
managing and protecting data has become critical to the operation of
many
enterprises and governments as the world economy becomes increasingly
information dependent. The data storage industry is growing in response
to the
increase in the amount of data that is generated and that must be preserved.
The
amount of data has been increasing due to the growth in the number of
computers,
the number, size and complexity of computer networks and software applications,
and the emergence of new applications such as image processing, internet
services, medical image storage, video and motion picture image storage,
and
other multi-media applications. In addition, businesses continue to generate
increasing amounts of traditional business information with respect to
their
products, customers and financial data. This increase in the amount of
data that
is generated stimulates increases in the demand for data storage and
the
management of this data.
FACTORS
DRIVING GROWTH IN DATA STORAGE
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Increased
demand from Internet businesses. The growth in the
Internet has created businesses that depend on the creation,
access to and
archival storage of data. We believe this demand will continue
to grow as
individuals and businesses increase their reliance on the Internet
for
communications, commerce and data
retrieval.
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Growth
in new types of data. New types of data are also
fueling the growth in data storage. For example, graphics,
audio, video,
medical and security images, and multi-media uses such as video
on demand,
require far greater storage capacity than text and financial
data.
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Recognition
of the critical importance
ofdata. Corporate databases contain
useful information about customer records, order patterns and
other
factors that can be analyzed and transformed into a valuable
asset and a
competitive advantage. The ability to efficiently store, manage
and
protect this information is important to the value and success
of many
businesses. The usefulness of past and present data is further
enhanced by
sophisticated data mining software applications that can access
and
analyze large databases.
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Growing
awareness of the need for
disasterprotection. Companies are
recognizing that without their data they may not survive. Natural
disasters, as well as overt and covert actions targeted at
individual
companies or classes of users, can destroy data and entire
data centers,
threatening a company’s very existence. Systematic replication and secure
off-site storage of corporate data is recognized as the best
defense
against catastrophic data loss. Tape libraries are a key technology
in
most corporate data disaster protection
plans.
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•
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Compliance
with new regulatory requirements for
recordsretention. Many businesses now
must deal with new regulatory requirements from various governmental
agencies that require businesses to retain data for longer
periods of
time. The regulations that have received the most visibility
include HIPAA
requirements covering medical records; Sarbanes-Oxley, which
addresses
corporate governance; and Rule 17a under the Securities Exchange Act
of 1934, regarding recordkeeping requirements for the securities
industry.
These regulations and others are projected to increase demand
for
long-term storage capacity over the next few
years.
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•
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Growth
in network computing applications
anddata. The use of computer networks
has shifted critical information and applications to network
servers to
allow more people to gain access to stored data as well as
to create new
data. As the speed of network computing has increased, numerous
new
applications have become feasible such as computer fax and
e-mail, all of
which generate progressively more data. Organizations are increasingly
aware of the need to protect this data, as networks become
a
mission-critical element of many
operations.
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Decrease
in the costs of storing data. The costs of data
storage have decreased with advances in technology and improved
manufacturing processes. We expect these costs to continue
to decrease.
The decrease in the cost of data storage encourages the storage
of more
data and makes it more cost effective to simply add more storage
capacity
than to remove old data, which in the past may have been purged
periodically.
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ADVANCES
IN DATA STORAGE MANAGEMENT TECHNOLOGIES
The
growth in data is contributing to an evolution in traditional storage
solutions.
New technologies are designed to provide high-speed connectivity for
data-intensive applications across multiple operating systems. These
new methods
of storage and data management technologies include the
following:
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Fibre
Channel. Fibre Channel is an interface technology
based on industry standards for the connection of storage devices
to
networks. Interface is the term used to describe the electronics,
cabling
and software used to facilitate communications between devices.
With Fibre
Channel, users are better able to share stored information
with other
storage devices and servers over longer distances, with faster
data
transfer speeds, thereby increasing the importance of storage
area
networks.
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•
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Storage
Area Networks. Storage Area Network, or SAN,
architecture applies the inherent benefits of a networked approach
to data
storage applications, which allows data to move efficiently
and reliably
between multiple storage devices and servers. The benefits
of SAN
architecture also include increasing the expandability of existing
storage
solutions and providing a higher level of connectivity than
exists with
traditional technologies. Additionally, SANs are able to provide
these
benefits across multiple operating
systems.
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Advanced
storage management software. This software
automatically migrates infrequently accessed data to the lower
cost
storage medium such as a tape library. A user’s request for this data at
some later date will recall the data automatically from the
tape library.
This process reduces the overall storage cost by using the
least expensive
storage medium to store data that is not expected to be needed
on a
frequent basis. Advances in storage management software have
increased the
ability of businesses to more cost-effectively store, manage
and retrieve
data, which in turn allows businesses to operate more
efficiently.
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Network
Attached Storage. Current storage devices are
dependent on a file server for all commands and control. Network
attached
storage devices give storage devices file server functionality,
which
allow users to plug a storage device directly into a network
without
requiring a separate file server. This allows users to maintain,
or even
enhance, system performance while saving on both time and
cost.
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TYPES
OF DATA STORAGE
Current
non-volatile storage solutions are based primarily on two technologies:
magnetic
disk and magnetic tape. These technologies represent a compromise among
a
variety of competing factors including capacity, cost, speed, portability
and
data reliability. Magnetic tapes are removable, which allows them to
be
transported easily to an off-site location for security or protection
from
physical harm. Magnetic disks provide quicker access to stored data and
generally are used when speed is important. Less frequently used data
is often
migrated from magnetic disks to tape storage. Tape libraries provide
an online
solution, where less frequently used data files are stored on tape at
substantially lower cost compared to disk while still providing automated
access.
TAPE
LIBRARIES AND APPLICATIONS
Tape
libraries automate the tape loading process, eliminate errors induced
by human
operators, and enhance security compared to tapes that must be retrieved
and
loaded manually. Tape libraries can also be operated from remote locations
around the clock, thus, eliminating the need for an operator. Automated
tape
libraries are a key component in a company’s overall storage solution and data
protection strategy.
Tape
drives and tape media are the two key components of tape libraries. The
costs of
tape drives and tape media have declined with advances in technology,
and we
expect this trend to continue. As prices decline, new applications for
automated
storage become justified, further increasing the number of applications
that can
benefit from the use of tape libraries. We believe that continued technological
improvements in tape drives and tape media will continue to reduce overall
storage costs in the future.
Current
and emerging applications for tape libraries include:
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Automated
backup. Backup is the creation of a duplicate copy of
current data for the purpose of recovering the data in the
event the
original is lost or damaged. An automated tape library, in
conjunction
with storage management software, can backup network data at
any time
without human intervention. A library with multiple tape drives
can backup
data using all of its drives simultaneously, thus significantly
speeding
up the recording process. Backup tapes can be removed from
the library and
stored in an off-site location for protection against a loss
of the
primary site.
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Archiving. Archiving
is the storage of data for historical purposes. When information
is stored
on tape, automated tape libraries, under application control,
can catalog
tapes for future retrieval and prevent unauthorized removal
or corruption
of data by using password or key lock protection. Archival
tapes provide a
historic record for use in fraud detection, audit, legal and
other
processes. Tape libraries are also used for archiving due to
benefits
offered by the tape medium, such as long-term data integrity,
resistance
to environmental contamination, ease of relocation and low
cost.
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Image
management. Storage-intensive applications such as
satellite mapping and medical image management systems are
turning to tape
libraries because of the cost advantage over traditional storage
methods.
X-ray images or MRI results, for instance, must frequently
be kept on file
for years. Storing a digitized image in a tape library costs
considerably
less than storing a film copy, and can be retrieved years later
with the
click of a mouse.
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DISTRIBUTION
OF TAPE LIBRARY PRODUCTS
The
requirements for storage solutions vary depending on the size of an enterprise,
the type of data generated and the amount of data to be stored. With
the
increased dependence on stored data, most organizations, regardless of
their
size, have a heightened need for storage solutions that integrate devices
such
as tape drives, tape libraries and storage management software. Those
organizations with sufficient in-house information technology resources
can rely
on their internal infrastructure and expertise to design, purchase and
implement
their own storage solutions. These organizations may elect to purchase
equipment
from distributors or directly from the original equipment manufacturers.
Many
organizations, however, do not have sufficient in-house resources but
have the
same need for data storage solutions. These organizations often look
to value
added resellers to design, supply and install their storage
solutions.
Value
added resellers develop and install storage solutions for enterprises
that face
complex storage needs but lack the in-house capability of designing and
implementing the proper solution or have chosen to outsource these functions.
Typically, the value added reseller will select among a variety of different
hardware technologies and software options, as well as provide installation
and
other services, to deliver a complete storage solution for the end user.
Value
added resellers require rapid turnaround of orders, custom configuration
of tape
libraries, drop shipment to their customer’s site, software, and marketing and
technical support.
Original
equipment manufacturers generally resell products made by others under
their own
brand name and typically assume responsibility for product sales, service
and
support. Original equipment manufacturers enable manufacturers, such
as
Qualstar, to reach end users not served by other channels and to serve
select
vertical markets where specific original equipment manufacturers have
exceptional strength. Original equipment manufacturers require special
services
such as product configuration control, extensive qualification testing,
custom
colors and private labeling.
OUR
TAPE LIBRARY SOLUTIONS
We
offer
storage solutions that respond to the growing data management challenges
facing
businesses today, while addressing the unique needs of value added resellers
and
original equipment manufacturers.
We
believe that high reliability is important to the end users of our products
due
to the critical nature of the data that is being stored, shorter time
periods
available for the back-up operations, and the operation of backup systems
during
hours when personnel may not be available to respond to problems. To
address
these concerns, we emphasize quality and reliability in the design,
manufacturing and testing of our products which reduces the potential
for
product failures and results in products that require little
maintenance.
The
technology utilized in automated tape libraries is continuously evolving
due to
advances in data recording methods, component cost reductions, advances
in
semiconductor and microprocessor technologies, and a general trend toward
miniaturization in the electronics industry. This changing technology
requires
that we continuously develop and market new products to prevent our product
lines from becoming obsolete.
Our
tape
libraries are compatible with over 45 third-party storage management
software
packages, including those supplied by Computer Associates, EMC/Legato,
Tivoli,
Symantec, CommVault and BakBone Software. Storage management software
enables
network administrators to allocate the use of storage technologies among
user
groups or tasks, to manage data from a central location, and to retrieve,
transfer and backup data between multiple workstations. We believe that
storage
management software is a crucial component of any automated storage
installation, and lack of compatibility is a significant barrier to entry
for
new tape library competitors. To ensure compatibility, our engineers
work with
independent software vendors during the product development cycles. We
do not
have contracts with any independent software vendors, nor do we need
access to
their software code to design our products. We maintain relationships
with them
by making tape libraries available so they can qualify their software
to work
with our tape libraries and by evaluating their software for compatibility
with
our tape libraries. We also support our relationships with them by keeping
them
informed about current and anticipated changes to our products and by
referring
business to them when value added resellers or end users inquire about
storage
management software sources.
STRATEGY
Our
goal
is to enhance our position as a supplier of automated tape libraries
and to
maintain or increase our market share in each of the product categories
in which
we compete. To achieve this goal, we intend to:
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•
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Focus
our development efforts on higher margin product
categories. Early in Fiscal 2007 we began shipments
of a newly-developed library system referred to as the XLS
family of
products. The XLS expands the breadth of our product line into
the
enterprise computing environment where tape capacities may
range into the
thousands of tapes. We intend to continue to build on this
product
category with future product releases and enhancements in order
to pursue
this market segment where the potential margins are higher
than we have
traditionally enjoyed.
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Focus
on value added reseller channels. We sell our products
primarily through selected value added resellers who have a
strong market
presence, have demonstrated the ability to work directly with
end users,
and who maintain relationships with major vendors of storage
management
software. Because we market our products primarily through
this channel,
we have implemented a variety of programs to support and enhance
our
relationships with our reseller partners. These programs are
designed to
benefit the reseller and increase the likelihood of selling
our products.
We intend to maintain our marketing presence in support of
this channel.
We conduct business with our value added resellers on an individual
purchase order basis and no long-term purchase commitments
are
involved.
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Maintain
and strengthen original equipment
manufacturerrelationships. We sell
our products to several companies under private label or original
equipment manufacturer relationships. Original equipment manufacturer
sales enable us to reach some end users not served by our value
added
resellers. The same product characteristics that make our tape
libraries
attractive to value added resellers also are important to original
equipment manufacturers. We conduct business with our original
equipment
manufacturer customers on an individual purchase order basis
and no
long-term purchase commitments are
involved.
|
Our
strategy for the power supply business is to selectively pursue market
opportunities where we can command a premium price for high-efficiency
products
rather than becoming a commodity supplier. As electronic devices continue
to
shrink in size, many designers are forced to consider our high-density,
high-efficiency approach.
We
believe that our experience, efficiency and control over the development
and
manufacture of new products are key factors in the successful execution
of our
strategy. We design our tape libraries with a high percentage of common
parts,
use quality components and minimize the number of moving parts. We utilize
proprietary techniques in the design, production and testing of our libraries
in
order to simplify the manufacturing process and reduce our costs. We
manufacture
all of our products at a single facility and we control our inventory
closely to
provide rapid delivery to our customers. These steps allow us to design
and
bring to market new products in response to changing technology.
PRODUCTS
Tape
Libraries
We
offer
a number of tape library families, each capable of incorporating one
or more
tape drive technologies, as summarized in the following table:
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Product
Family
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Tape
Drive Technology
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Range
of Tape Cartridges
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Maximum
Capacity in Terabytes(1)
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TLS-4000
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Sony
AIT
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12
to 600
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240
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TLS-8000
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LTO
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11
to 264
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211
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RLS-4000
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Sony
AIT
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22
to 70
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28
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RLS-8000
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LTO
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12
to 44
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35
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XLS
Series
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LTO
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295-2805
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(2) |
2,244
|
(2) | ||
____________
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(1)
|
A
Terabyte is one million megabytes, or one thousand gigabytes.
The table
shows native capacity and excludes gains from data
compression, which can increase capacity by more than
100%.
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(2)
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2,805
tapes and 2,244 terabytes reflect the product configuration
at its initial
release stage. Planned future releases of internal firmware
will allow
expansion to as high as 6,265 tapes and 5,012 terabytes using
LTO tape
technology.
|
Our
tape
library families include a number of models that differ in storage capacity,
price and features. Our libraries are installed in network computing
environments ranging from small departmental networks to enterprise-wide
networks supporting hundreds of users. We believe that selling products
for
multiple tape drive technologies insulates us somewhat from the dynamics
of the
marketplace as various tape standards compete for market share. This
helps our
products appeal to the broadest possible range of end user market segments.
This
wide range of products makes us a one-stop supplier for our value added
reseller
and original equipment manufacturer customers, enabling them to meet
most end
user requirements for a specific tape format or data capacity.
Tape
libraries generally contain two or more tape drives and from ten to thousands
of
tapes. We design our tape libraries for continuous, unattended operation.
Multiple tape drives allow simultaneous access to different data files
by
different users on the network, and increase the rate at which data can
move on
to, out of, or within the network. A library with multiple tape drives
can back
up data using multiple drives simultaneously, significantly speeding
up the
recording process. In some of our libraries, tape cartridges are stored
in
removable magazines, allowing for easy bulk removal of the tapes. Our
libraries
also offer features such as barcode readers to scan cartridge labels
and an
input/output port for importing and exporting tapes under system control.
Several of our library models are expandable in the field by increasing
the
number of tape storage positions. This feature provides the end user
with the
ability to increase data capacity as storage needs grow.
We
continue to develop and release new libraries to expand our product offerings
to
meet the changing demands of the marketplace. In addition, we continue
to
enhance and improve our existing products to maintain our competitive
position.
Some
of
our tape libraries incorporate a number of specialized features that
we believe
improve reliability, serviceability and performance, including:
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•
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Rapid
tape drive replacement. We design our libraries so that a tape
drive can be replaced quickly without special tools. This feature
minimizes the off-line time required when a tape drive must
be replaced,
and frequently avoids the high cost and delays of a service
call.
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•
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Fibre
Channel connectivity. We offer a Fibre Channel option on many
of our models for connection to Storage Area Networks and other
high
performance applications.
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•
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Closed-loop
servo control. Our tape libraries use digital closed-loop servo
control for robotic motion to provide precise tape handling.
This yields
motion that is smooth, repeatable and highly
reliable.
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•
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Brushless
motors. Motors are a key component in any robotic system. We
use only brushless electric motors in our tape libraries. Brushless
motors
provide longer life and less electrical noise compared to conventional
brush-type motors. We build many of our own motors in order
to obtain
optimum performance and
reliability.
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•
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Remote
management. Many larger companies with global back-up
requirements or disaster management programs require tape libraries
that
can be located off-site in various regions, but that must be
administered
from a single location. With our remote library manager, customers
can put
libraries anywhere in the world and manage them from a single
administrative hub using a standard web
browser.
|
Our
RLS
Series of tape libraries are designed to fit efficiently in equipment
racks and
provide back-up capacity in only five standard units, or a total of
8.75 inches of rack space. In addition, some models in the RLS series are
designed to support dual-redundant power supplies and hot-swappable tape
drives.
Our
XLS
family of tape libraries is designed to be expandable from 300 to over
6000
tapes and is focused on the needs of large enterprises. The XLS product
is
feature rich and is intended to provide the customer with a highly reliable
and
high efficiency solution. Initial customer shipments commenced in July
2006.
Power
Supplies
In
addition to tape libraries, we design and sell ultrasmall, open frame,
high
efficiency switching power supplies. These power supplies are used to
convert AC
line voltage to DC for use in a wide variety of electronic equipment
such as
telecommunications equipment, servers, routers, switches, wireless systems
and
gaming devices.
Our
power
supplies are sold under the N2 Power brand. We have specialized in units
that
are less than 1¾ inches high and that are optimized for high efficiency
operation. The high efficiency allows the units to be operated in confined
spaces without heating up the surrounding equipment. These products are
manufactured for us in China and sold to original equipment manufacturers
(OEM)
and contract manufacturers as well as to distributors.
We
believe that as worldwide energy concerns and energy costs rise, our
high
efficiency approach will become more important. Additionally,
these power supplies are utilized within some of our tape library
products. We have developed a line of power supply products that
deliver up to twice the power in half the space of competitive
products. Manufacturers of servers, routers, switches, telecom gear,
and other
process-based equipment continuously pursue smaller, more powerful, and
more
efficient power sources for their equipment to remain competitive.
Each
power supply undergoes a complete functional test and a multi hour burn-in
to
insure that every unit meets our stringent quality requirements. We
believe our high power factor design reduces loads on both generating
stations
and air-cooling systems.
Other
Products
We
also
sell ancillary products related to our tape libraries, such as tape media,
tape
magazines, cables, bar code labels and fiber channel adapters.
SALES
AND MARKETING
Sales
We
sell
our tape library products primarily through value added resellers. Our
sales
force will initiate contact with value added resellers who are candidates
to
sell our tape libraries. We strive to develop relationships with resellers
who
have expertise in storage management applications, established relationships
with end users and the experience to understand and satisfy their customers’
needs.
We
believe that by selling directly to value added resellers, we have an
advantage
over competitors who will often sell directly to end users, thereby competing
with their resellers. Some of the advantages of our strategy include
the
following:
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•
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Higher
profit margins. Focusing on this channel, we achieve economies
that result in higher profit margins to be shared by both the
reseller and
us.
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•
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Custom
configurations. We offer custom configurations of our products,
such as special paint, private branding and non-standard options,
on very
short notice.
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•
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Channel
conflicts avoided. We refer substantially all end user
inquiries to our reseller partners. Frequently, our sales force
will make
end user visits with resellers to help close a pending
sale.
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•
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Credit. We
extend credit terms to resellers who meet our credit
requirements.
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•
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Rapid
delivery. We generally ship a product within one to five
working days of confirming an order, rivaling the delivery
time of
competitors that use distributors to bring products to
market.
|
Although
we sell our tape libraries primarily to value added resellers, we believe
that
original equipment manufacturers are an important element of our business.
The
sales cycle for original equipment manufacturers generally encompasses
six
months to one year and may involve extensive product and system qualification
testing, evaluation, integration and verification. Original equipment
manufacturers typically assume responsibility for product sales, service
and
support.
Our
international sales are currently directed from our corporate offices
in Simi
Valley, California. All of our international sales are denominated in
U.S. dollars. Revenues from customers outside of North America were
approximately $5.0 million, or 24.4% of revenues in fiscal 2007, approximately
$5.7 million, or 26.1% of revenues in fiscal 2006, and approximately
$6.9 million, or 27.3% of revenues in fiscal 2005.
Our
sales
are spread across a broad customer base. Revenues from Qualstar’s two largest
customers combined were approximately 11.9%, 13.4%, and 13.9% for the
years
ended June 30, 2007, 2006, and 2005, respectively and no single customer
accounted for more than 10% of our revenue.
Marketing
We
support our sales efforts with a broad array of marketing programs designed
to
generate brand awareness, attract and retain qualified value added resellers
and
inform end users about the advantages of our products. We provide our
resellers
with a full range of marketing materials, including product specifications,
sales literature, software connectivity information and product application
notes.
We
train
our resellers to sell our products and to answer customers’ questions. We
advertise in key publications and participate in trade shows. We display
our
products under the Qualstar brand name at some trade shows and participate
in
other trade shows in partnership with our principal suppliers and resellers.
We
support our marketing and customer support with a website that features
comprehensive marketing and product information. We conduct sales and
technical
training classes for our resellers. We also conduct various promotional
activities for resellers such as cooperative advertising.
CUSTOMER
SERVICE AND TECHNICAL SUPPORT
We
believe that strong customer service and technical support is an essential
aspect of our business. Our customer service and technical support efforts
consist of the following components:
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•
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Technical
support. Our technical support personnel are available
twenty-four hours per day, Monday through Friday. Technical
support
personnel are available to all customers at no charge by telephone
and
e-mail to answer questions and solve problems relating to our
products. Our technical support personnel are trained in all
aspects of our products. Our support staff is located at our
headquarters
in Simi Valley, California. We sell service contracts for on-site
service
of our tape libraries installed within the United States and
Canada, which
are fulfilled by IBM Corporation and on-site service contracts
sold in
Europe are fulfilled by Eastman Kodak S.A. Commercial Imaging
Group.
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Installation
services. Our technical support personnel provide
assistance to our resellers by traveling to the end user’s location to
assist the reseller or end user with setup and installation
on many of our
larger library systems, such as the XLS series of
products.
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Sales
engineering. Our engineers provide pre-sales support
to our resellers, and post-sales support if necessary. Engineers
typically
become involved in more complex problem-solving situations
involving
interactions between our products, third-party software, network
server
hardware and the network operating systems. Engineers work
with resellers
and end users over the telephone and at an end user site as
required.
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•
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Training. We
offer a product maintenance training program for end users,
value added
resellers, original equipment manufacturers, customer service
and
technical support personnel. We conduct training classes at
our
headquarters.
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•
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Warranty. We
provide a three year warranty on our TLS and RLS tape libraries
and a one
year warranty on our XLS tape libraries. Some TLS and all RLS
models have
three year advance replacement warranty coverage that provides
for
replacement of components, or if necessary, complete libraries.
All other
TLS models have a one-year advance replacement warranty with
the second
and third year being return-to-factory for service at no charge.
XLS
libraries sold in North America have a one year onsite service
warranty
and XLS libraries sold outside of North America have one year
advance
replacement warranty coverage that provides for replacement
of components,
or if necessary, complete libraries. Customers may purchase
extended
advance replacement service coverage and on-site service if
they are
located in the United States, Canada and most countries within
Europe.
|
MANUFACTURING
AND SUPPLIERS
We
manufacture all of our tape libraries at our facility in Simi Valley,
California. We operate our manufacturing on one daily eight-hour shift.
However,
if required, we have the ability to add a second or third shift to increase
our
capacity.
To
respond rapidly to orders, we build our tape libraries to a semi-finished
state,
perform full testing and then place the tape libraries in a holding area
until
an order is received. Once an order is confirmed, we remove the unit
from the
holding area, install tape drives and configure the unit to meet the
specific
requirements of the order, retest and then ship.
The
manufacturing cycle to bring our libraries to a semi-finished state is
approximately five working days for our TLS and RLS libraries and approximately
30 working days for our XLS libraries. We believe that this process represents
an effective way to control our inventory levels while maintaining the
ability
to fill specific orders in short lead times. We coordinate inventory
planning
and management with suppliers and customers to match our production to
market
demand. Once we confirm an order, we generally ship the product within
one to
five working days. We believe this response time is among the fastest
in the
industry and gives us a competitive edge. Because we fill the majority
of our
orders as they are received, our backlog generally is small and is not
indicative of future revenues.
We
carefully select our suppliers based on their ability to provide quality
parts
that meet our specifications and volume requirements. Inventory planning
and
management is coordinated closely with suppliers to match our production
needs.
Many of the components assembled into our libraries are off-the-shelf
parts,
which reduces the risk of part shortages and allows us to maintain inventory
of
these parts at a minimum. A number of our component parts are not available
off
the shelf, but are designed to our specifications.
Tape
drives and tape media are available only from a limited number of suppliers,
some of which are sole-source providers. Some of our suppliers compete
with us
by selling their own tape libraries. Any disruption in supplies of tape
drives
or tape media could delay shipments of our products.
COMPETITION
The
market for automated tape libraries is intensely competitive and characterized
by rapidly changing technology and evolving standards. Because we offer
a broad
range of libraries for different tape drive technologies, we tend to
have a
large number of competitors that differ depending on the particular format
and
performance level. Our principal competitors in this market segment include
Sun
MicroSystems, Quantum Corporation, Overland Storage, Inc., and SpectraLogic
Corporation.
Many
of
our competitors have substantially greater financial and other resources,
better
name recognition, larger research and development staffs, and more capabilities
in manufacturing, marketing and distributing products than we do. Our
competitors may develop new technologies and products that are more effective
than our products. We are not ISO-9000 certified, unlike some of our
competitors, which may limit some customers’ ability to purchase our
products.
As
competitors introduce products in a particular tape drive technology,
the
increased competition normally results in price erosion and a reduction
in gross
margins for all competitors. We cannot assure you that we will be able
to
compete successfully against either current or potential competitors
or that
competition will not cause a reduction in our revenues or profit margins.
We
believe that our ability to compete depends on a number of factors, including
the success and timing of new product developments by us and by our competitors,
compatibility of our products with a broad range of computing systems,
product
performance, reliability, price, marketing and sales execution and customer
support. Specifically, we believe that the principal competitive factors
in the
selection of a tape library include:
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reliability
of the robotic assembly that handles the tape
cartridges;
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initial
purchase price;
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storage
capacity;
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speed
of data transfer;
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compatibility
with existing operating systems and storage management
software;
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after-sale
expandability of a tape library to meet increasing storage
requirements;
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expected
product life, cost of maintenance and total cost of
ownership; and
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physical
configuration and power requirements of the
library.
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We
believe our tape libraries compete favorably overall with respect to
many of
these factors.
Our
power
supply products compete in a number of markets focused on the needs of
OEM and
contract manufacturers. We have concentrated on supplying units that
provide
above average electrical efficiency as well as high space efficiency
as measured
in watts per cubic inch.
RESEARCH
AND DEVELOPMENT
Our
research and development team consists of engineers and technicians who
have
data storage and related industry experience. We have developed over
40 separate
tape library models for eleven different tape formats over the last twelve
years.
Our
research and development efforts rely on the integration of multiple
engineering
disciplines to generate products that meet market needs in a competitive
and
timely fashion. Successful development of automated tape libraries requires
the
integration of mechanical design, electronic design packaging, and firmware
design into a single product. Product success also relies on the engineering
group’s thorough knowledge of each of the different tape drive
technologies.
We
frequently develop new products in response to the availability of a
new tape
drive technology. As tape drive manufacturers compete in the marketplace,
they
continually invest in research and development to gain performance leadership
either by offering increasingly enhanced versions of their current tape
drive
products or by introducing an entirely new tape drive technology. We
benefit
from these industry developments by utilizing the new technology in our
products. Our engineers work closely with the tape drive manufacturers
through
the drive development cycle to assure that reliable tape library and
tape drive
combinations are brought to market.
The
design architecture of our tape libraries makes use of common parts across
most
product families, allowing us to develop and introduce new products quickly.
If
a new tape drive is an advanced version of one already incorporated in
one or
more of our products, our time and dollar investment to incorporate the
new
drive can be relatively small, with the primary focus being on verification
testing. When the form factors differ, the time and investment requirements
can
grow and may require development of a new product family
altogether.
We
also
develop new products as we identify emerging market needs. Our sales,
marketing,
product development and engineering groups identify products to fulfill
customer
and marketplace needs. Our research and development group concentrates
on
leveraging previous engineering investments into new products. For example,
our
firmware is based on successive generations of the operating system developed
for our first library. We also use common parts in our different library
series
and leverage our electro-mechanical and electronic hardware technology
from
previous products into next generation designs. In some cases, entire
subassemblies are transferable, leveraging not only engineering time
but also
materials purchasing, inventory stocking and manufacturing efforts.
We
continue to develop new models and new power supply families in response
to
input from our customers. The product development cycle involves circuit
design,
printed circuit board layouts, prototype testing, safety agency and compliance
testing and test equipment development.
Our
research and development expenses were approximately $3.1 million in fiscal
2007, approximately $3.1 million in fiscal 2006, and approximately
$3.8 million in fiscal 2005.
INTELLECTUAL
PROPERTY
We
rely
on copyright protection of our firmware, as well as patent protection
for some
of our designs and products. We also rely on a combination of trademark,
trade
secret and other intellectual property laws to protect our proprietary
rights.
However, we do not believe our intellectual property provides significant
protection from competition. We believe that, because of the rapid pace
of
technological change in the tape storage industry, patent, copyright,
trademark
and trade secret protection are less significant than factors such as
the
knowledge, ability and experience of our personnel and timely new product
introductions.
We
enter
into Employee Proprietary Information and Inventions Agreements with
our
engineers along with all employees and consultants to protect our technology
and
designs. However, we do not believe that such protection can preclude
competitors from developing substantially equivalent products.
EMPLOYEES
As
of
August 31, 2007, we had 87 employees, including 35 in operations and
manufacturing, 20 in research and development, 6 in customer service
and
technical support, 14 in sales and marketing, and 12 in administration
and
finance. We also employ a small number of temporary employees and consultants
as
needed. We are not a party to any collective bargaining agreement or
other
similar agreement. We believe that we have a good relationship with our
employees.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Executive
Officers
Officers
are elected by and serve at the discretion of the board of directors.
The
executive officers of Qualstar as of September 14, 2007
are:
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Name
|
Age
|
Position
|
|
William
J. Gervais
|
64
|
Chief
Executive Officer, President and Director
|
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Richard
A. Nelson
|
64
|
Vice
President of Engineering, Secretary and Director
|
|
Andrew
A. Farina
|
61
|
Vice
President and Chief Financial Officer
|
|
David
L. Griffith
|
50
|
Vice
President of Operations
|
|
Robert
K. Covey
|
60
|
Vice
President of Marketing
|
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Robert
C. King
|
63
|
Vice
President of Sales
|
Background
William
J. Gervais is a founder of Qualstar and has been our President and a
director
since our inception in 1984, and was elected Chief Executive Officer
in January
2000. From 1984 until January 2000, Mr. Gervais also served as our Chief
Financial Officer. From 1981 until 1984, Mr. Gervais was President of
Northridge Design Associates, Inc., an engineering consulting firm.
Mr. Gervais was a co-founder, and served as Engineering Manager from 1976
until 1981, of Micropolis Corporation. Mr. Gervais earned a B.S. degree in
Mechanical Engineering from California State Polytechnic University,
Pomona in
1967.
Richard
A. Nelson is a founder of Qualstar and has been our Vice President of
Engineering, Secretary and a director since our inception in 1984. From
1974 to
1984, Mr. Nelson was self employed as an engineering consultant
specializing in microprocessor technology. Mr. Nelson earned a B.S. in
Electronic Engineering from California State Polytechnic University,
Pomona in
1966.
Andrew
A. Farina joined Qualstar as Chief Financial Officer in November 2006.
From
September 1996 to December 2005, Mr. Farina was the Chief
Financial Officer of 99¢ Only Stores. From March 1993 thru September 1996, Mr.
Farina was Vice President of Finance of Crown BBK, Inc., a food brokerage
business. From June 1991 to March 1993, Mr. Farina held the position
of Vice
President of Finance for Benchmark Corporation. From 1976 through February
1991,
Mr. Farina held various positions, starting as divisional Controller
and
advancing to President at Sirena, Inc., a division of Sara Lee. Mr.
Farina earned a B.S. degree in Accounting from the University of Nevada
in 1969
and obtained his CPA certification in the State of California in
1974. Mr. Farina received his MBA from California State Polytechnic
University in 1982.
David
L.
Griffith, our Vice President of Operations, joined the company in October
of
2001. From 1999 to 2001, Mr. Griffith served as the President and Chief
Executive Officer of Stardrive Solutions Inc., a software solutions provider
for
the broadcast automation industry. From 1998 to 1999, Mr. Griffith was the
Corporate Vice President of Business Development at Tandberg Data ASA
where he
was responsible for the development of worldwide business plans and corporate
expansion activities. From 1994 to 1998, Mr. Griffith was the President and
Chief Executive Officer of Tandberg Data, Inc. located in Simi Valley,
California. From 1990 to 1994, Mr. Griffith was the Vice President of Sales
and Marketing for Tandberg Data, Inc. From 1987 to 1990, Mr. Griffith acted
as Marketing Manager and Program Manager for the Memory Products Group
of
Siemens Information Systems. Mr. Griffith received a degree in Mechanical
Engineering from California State Polytechnic University in 1980.
Robert
K.
Covey has been our Vice President of Marketing since 1994. From 1986
to 1993
Mr. Covey was regional manager of ATG Cygnet, an optical disk library firm.
From 1982 to 1985, Mr. Covey served as national sales manager at Micropolis
Corporation, a former disk drive manufacturer. Mr. Covey attended Butler
University and Bentley College from 1965 to 1968.
Robert
C.
King was appointed our Vice President of Sales in June 2005. From 1999
until it
was acquired by JDS Uniphase in 2004, Mr. King was Vice President, Sales
for E2O Communications, a manufacturer of optical transceivers. From
1995 to
1998 Mr. King was Vice President, Sales and Marketing for Advanced
Photonix. From 1992 to 1995, Mr. King served as Vice President, Sales and
Marketing for Performance Materials Corporation. From 1989 to 1992,
Mr. King served as Vice President, Market and Business Development for PCO,
a subsidiary of Corning Incorporated. Mr. King holds a B.S.M.E. degree from
Ohio University in Athens, Ohio.
ITEM 1A.
RISK FACTORS
This
Annual Report on Form 10-K contains forward-looking statements, as
described at page 3 of this report under the caption “Forward-Looking
Statements.” We believe that the risks described below are the most important
factors which may cause our actual future results of operations to differ
materially from the results projected in the forward-looking
statements.
RISKS
RELATED TO OUR BUSINESS
The
principal risks applicable to our business in general are described below.
Specific risks applicable to our tape library and power supply operating
segments are described in the following subsections of
Item 1A.
We
have a limited number of executives. The loss of any single executive
or
thefailure to hire and integrate capable new executives
could
harm our business.
The
success of our business is tied closely to the managerial, engineering
and
business acumen of our existing executives. William J. Gervais, our President,
has been largely responsible for the development of most of our tape
libraries,
has overseen our operations and growth, and established and maintained
our
strategic relationships. We expect that he will continue these efforts
for the
foreseeable future. Our future success will also depend on our ability
to
attract, retain and motivate key executives and other key personnel,
many of
whom have been instrumental in developing new technologies and strategic
plans.
We may not be able to retain our existing personnel or attract additional
qualified personnel in the future. However, our current dependence on
a limited
number of executives and other key personnel, for whom replacements may
be
difficult to find, entails a risk that we may not be able to supervise
and
manage our ongoing operations.
Our
lack of significant order backlog makes it difficult to forecast future
revenuesand operating results.
We
normally ship products within a few days after orders are received.
Consequently, we do not have significant order backlog and a large portion
of
our revenues in each quarter result from orders we received during that
quarter.
Because backlog can be an important indicator of future revenues, our
lack of
backlog makes it more difficult to forecast our future revenues. Since
our
operating expenses are relatively fixed in the short term, unexpected
fluctuations in revenues could negatively impact our quarterly operating
results.
Our
research and development spending may not yield results that justify
the
costsincurred.
In
recent
fiscal years we have spent substantial amounts for research and development.
Our
products and markets are technologically advanced and rapidly evolving,
and we
cannot be assured that these efforts will successfully provide us with
new or
upgraded products that will be competitive. If these programs are not
successful, our investment in research and development will not yield
corresponding benefits to us.
Our
customers have the right to return our products in certain circumstances.
Anexcessive number of returns may reduce our
revenues.
Our
customers have 30 days from the date of purchase to return products that do
not conform to an end user’s requirements. Distributors have additional return
privileges that extend well beyond 30 days. We may otherwise allow product
returns if we think that doing so maximizes the effectiveness of our
sales
channels and promotes our reputation for quality and service. Although
we
estimate and reserve for potential returns in our reported financial
results,
actual returns could exceed our estimates. If the number of returns exceeds
our
estimates, our financial results could be adversely impacted for the
periods
during which returns are made.
We
may spend money pursuing sales that do not occur when anticipated or
at
all.
Original
equipment manufacturer customers typically conduct significant evaluation,
testing, implementation and acceptance procedures before they begin to
market
and sell new products. This evaluation process is lengthy and may range
from six
months to one year or more. This process is complex and may require significant
sales, marketing, engineering and management resources on our part. The
process
becomes more complex as we simultaneously qualify our products with multiple
customers or pursue large orders with a single customer. As a result,
we may
expend resources to develop customer relationships before we recognize
any
revenue from these relationships, if at all.
We
sell a significant portion of our products to customers located outside
the
UnitedStates. Currency fluctuations and increased costs
associated with internationalsales could make our products
unaffordable in foreign markets, which would reduce ourrevenue
or profitability.
Revenues
from shipments to customers outside of North America accounted for approximately
24.4% of revenues in fiscal 2007, approximately 26.1% of revenues in
fiscal
2006, and approximately 27.3% of revenues in fiscal 2005. We believe
that
international sales will continue to represent a significant portion
of our
revenues. Our international sales subject us to a number of risks,
including:
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•
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political
and economic instability may reduce demand for our products
or our ability
to market our products in foreign
countries;
|
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•
|
although
we denominate our international sales in U.S. dollars, currency
fluctuations could make our products unaffordable to foreign
purchasers or
more expensive compared to those of foreign
manufacturers;
|
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•
|
restrictions
on the export or import of technology may reduce or eliminate
our ability
to sell in certain markets;
|
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•
|
greater
difficulty of administering business overseas may increase
the costs of
foreign sales and support;
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•
|
foreign
governments may impose tariffs, quotas and taxes on our
products;
|
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•
|
longer
payment cycles typically associated with international sales
and potential
difficulties in collecting accounts receivable may reduce the
profitability of foreign
sales; and
|
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•
|
our
current determination not to seek ISO-9000 certification, a
widely
accepted method of establishing and certifying the quality
of a
manufacturer’s operations, may reduce
sales.
|
These
risks may increase our costs of doing business internationally and reduce
our
revenues or profitability.
A
failure to develop and maintain proprietary technology may negatively
affect
ourbusiness.
We
rely
on copyright protection of electronic circuits and our firmware, as well
as
patent protection for some of our designs and products. We also rely
on a
combination of trademark, trade secret, and other intellectual property
laws and
various contract rights to protect our proprietary rights. However, we
do not
believe our intellectual property rights provide significant protection
from
competition. As a consequence, these rights may not preclude competitors
from
developing products that are substantially equivalent or superior to
our
products. In addition, many aspects of our products are not subject to
intellectual property protection and therefore can be reproduced by our
competitors.
Intellectual
property infringement claims brought against us could be time
consumingand expensive to defend.
In
recent
years, there has been an increasing amount of litigation in the United
States
involving patents and other intellectual property rights. Qualstar is
not
currently directly involved in any intellectual property litigation or
proceedings. However, in April 2004 we settled litigation that Raytheon
Company
had filed alleging that Qualstar and eight other named defendants infringed
on a
patent owned by Raytheon Company entitled “Mass Data Storage Library.” In the
future, we may become subject to other claims or inquiries regarding
our alleged
unauthorized use of a third party’s intellectual property. An adverse outcome in
litigation could force us to do one or more of the following:
|
•
|
stop
selling, incorporating or using our products or services that
use the
challenged intellectual property;
|
|
•
|
subject
us to significant liabilities to third
parties;
|
|
•
|
obtain
from the owners of the infringed intellectual property right
a license to
sell or use the relevant technology, which license may not
be available on
reasonable terms, or at
all; or
|
|
•
|
redesign
those products or services that use the infringed technology,
which
redesign may be either economically or technologically
infeasible.
|
Whether
or not an intellectual property litigation claim is valid, the cost of
responding to it, in terms of legal fees and expenses and the diversion
of
management resources, could harm our business.
Our
warranty reserves may not adequately cover our warranty
obligations.
We
have
established reserves for the estimated liability associated with our
product
warranties. However, we could experience unforeseen circumstances where
these or
future reserves may not adequately cover our warranty obligations.
Our
revenues and operating results may fluctuate unexpectedly from quarter
toquarter, which may cause our stock price to
decline.
Our
quarterly revenues and operating results have fluctuated in the past,
and are
likely to vary significantly in the future due to several factors,
including:
|
•
|
general
economic conditions affecting spending for information
technology;
|
|
•
|
increased
competition and pricing pressures;
|
|
•
|
reductions
in the size, delays in the timing, or cancellation of significant
customer
orders;
|
|
•
|
shifts
in product or distribution channel
mix;
|
|
•
|
the
timing of the introduction or enhancement of products by us,
our original
equipment manufacturer customers or our
competitors;
|
|
•
|
expansions
or reductions in our relationships with value added reseller
and original
equipment manufacturer customers;
|
|
•
|
financial
difficulties affecting our value added reseller or original
equipment
manufacturer customers that render them unable to pay amounts
owed to
us;
|
|
•
|
market
acceptance of new and enhanced versions of our
products;
|
|
•
|
new
product developments by storage device manufacturers, such
as disk drives,
that could render our products less cost effective or less
competitive;
|
|
•
|
the
rate of growth in the data storage market and the various segments
within
it;
|
|
•
|
timing
and levels of our operating
expenses; and
|
|
•
|
availability
of key components and performance of key
suppliers.
|
We
believe that period to period comparisons of our operating results may
not
necessarily be reliable indicators of our future performance. It is likely
that
in some future period our operating results will not meet your expectations
or
those of public market analysts.
Any
unanticipated change in revenues or operating results is likely to cause
our
stock price to fluctuate since such changes reflect new information available
to
investors and analysts. New information may cause investors and analysts
to
revalue our stock and this, in the aggregate, may cause fluctuations
in our
stock price.
Our
officers and directors could implement corporate actions that are not
in the
bestinterests of our shareholders as a
whole.
Our
executive officers and directors own beneficially, in the aggregate,
approximately 43% of our outstanding common stock as of June 30, 2007. As a
result, these shareholders will be able to exercise significant control
over all
matters requiring shareholder approval, including the election of directors
and
approval of significant corporate transactions, which could delay or
prevent
someone from acquiring or merging with us. The interests of our officers
and
directors, when acting in their capacity as shareholders, may lead them
to:
|
•
|
vote
for the election of directors who agree with the incumbent
officers’ or
directors’ preferred corporate
policy; or
|
|
•
|
oppose
or support significant corporate transactions when these transactions
further their interests as incumbent officers or directors,
even if these
interests diverge from their interests as shareholders per
se and thus
from the interests of other
shareholders.
|
Some
provisions of our charter documents may make takeover attempts difficult,
whichcould depress the price of our stock and inhibit your
ability to receive a premiumprice for your
shares.
Our
board
of directors has the authority, without any action by the shareholders,
to issue
up to 5,000,000 shares of preferred stock and to fix the rights and
preferences of such shares. In addition, our articles of incorporation
and
bylaws contain provisions that eliminate cumulative voting in the election
of
directors and require shareholders to give advance notice if they wish
to
nominate directors or submit proposals for shareholder approval. These
provisions may have the effect of delaying, deferring or preventing a
change in
control, may discourage bids for our common stock at a premium over its
market
price and may adversely affect the market price, and the voting and other
rights
of the holders of our common stock.
We
do not currently intend to pay dividends and therefore you will only
be able
torecover your investment in our common stock, if at
all, by
selling the shares of thestock that you
own.
We
historically have pursued a policy of reinvesting our earnings in research
and
development, expanding our value added reseller and original equipment
manufacturer relationships, and expanding our manufacturing capabilities.
Consequently, we have never paid dividends on our shares of capital stock.
We
currently intend to continue this policy for the foreseeable future to
strengthen our financial and competitive position in the markets in which
we
operate.
Trading
in our stock has been limited and our stock price has been
volatile.Consequently, it may be difficult to sell your
shares.
There
has
been very little trading in shares of our stock and some days it does
not trade
at all. This, as well as the factors listed below, has caused the price
of our
stock to be volatile. Consequently, it may be difficult to sell your
shares of
our stock at the price you paid for them or at a price equal to that
quoted on
The Nasdaq Stock Market. Factors that may cause our stock price to fluctuate
in
the future include:
|
•
|
quarterly
variations in operating results, especially if they differ
from our
previously announced forecasts or forecasts made by
analysts;
|
|
•
|
our
announcements of anticipated future revenues or operating
results;
|
|
•
|
announcements
concerning us, our competitors, our customers, or our
industry;
|
|
•
|
the
introduction of new technology or products by us or our
competitors;
|
|
•
|
comments
regarding us and the data storage market made by industry analysts
or on
Internet bulletin boards;
|
|
•
|
changes
in earnings estimates by analysts or changes in accounting
policies;
|
|
•
|
changes
in product pricing policies by us or our
competitors; and
|
|
•
|
changes
in general economic conditions.
|
In
addition, stock markets have experienced extreme price and volume volatility
in
recent years. This volatility has had a substantial effect on the market
prices
of securities of many smaller public companies for reasons frequently
unrelated
or disproportionate to the operating performance of the specific companies.
These market fluctuations may adversely affect the market price of our
common
stock.
RISKS
RELATED TO OUR TAPE LIBRARY BUSINESS
The
principal risks applicable specifically to our tape library operating
segment
are described below.
Our
principal competitors devote greater financial resources to developing,
marketingand selling automated tape libraries. Consequently,
we
may be unable to maintain orincrease our market
share.
We
face
significant competition in developing and selling automated tape libraries.
Rapid and ongoing changes in technology and product standards could quickly
render our products less competitive, or even obsolete. We have significantly
fewer financial, technical, manufacturing, marketing and other resources
than
many of our competitors and these limited resources may harm our business
in
many ways. For example, in the past several years our competitors
have:
|
•
|
acquired
other tape library companies;
|
|
•
|
increased
the geographic scope of their
market;
|
|
•
|
offered
a wider range of tape library
products; and
|
|
•
|
developed
and acquired proprietary software and disk based products that
operate in
conjunction with their products and the products of their
competitors.
|
In
the
future, our competitors may leverage their greater resources to:
|
•
|
develop,
manufacture and market products that are less expensive or
technologically
superior to our products;
|
|
•
|
attend
more trade shows and spend more on advertising and
marketing;
|
|
•
|
reach
a wider array of potential customers through a broader range
of
distribution channels;
|
|
•
|
respond
more quickly to new or changing technologies, customer requirements
and
standards; or
|
|
•
|
reduce
prices in order to preserve or gain market
share.
|
We
believe competitive pressures are likely to continue. We cannot guarantee
that
our resources will be sufficient to address this competition or that
we will
manage costs and adopt strategies capable of effectively utilizing our
resources. If we are unable to respond to competitive pressures successfully,
our prices and profit margins may fall and our market share may
decrease.
Our
suppliers could reduce shipments of tape drives and tape media. If this
occurs,we would be forced to curtail production, our revenues
could fall and our marketshare could
decline.
Automated
tape libraries and related products, such as tape drives and tape media,
represented approximately 66.6% of our revenues for fiscal 2007, approximately
66.2% of our revenues for fiscal 2006 and approximately 75.1% of our
revenues
for fiscal 2005. We depend on a limited number of third-party manufacturers
to
supply us with the tape drives and tape media that we incorporate into
our
automated tape libraries. Some tape drive manufacturers, including Sony
Corporation and IBM Corporation, compete with us by also manufacturing
tape
libraries. There can be no assurance that other tape drive manufacturers
will
not also begin to manufacture libraries.
Historically,
some of these suppliers have been unable to meet demand for their products
and
have allocated their limited supply among customers. If suppliers limit
our
supply of tape drives or tape media, we may be forced to delay or cancel
shipments of our tape libraries. The major supplier risks we face include
the
following:
|
•
|
Sony
Electronics, Inc. is our sole-source supplier of AIT drives
and media. In
the past, Sony has allocated some of their products and may
allocate them
again in the future. In fiscal 2007 we derived approximately
$6.6 million or 32.2% of our revenues, in fiscal 2006 we derived
approximately $7.9 million, or 36.4%, of our revenues, and in fiscal
2005 we derived approximately $12.0 million, or 47.8% of revenues
from the sale of libraries, tape drives and tape media based
on Sony AIT
and Super AIT technologies. If Sony reduces its sales to us
or raises its
prices, we could lose revenues and our margins could
decline.
|
|
•
|
The
LTO standard was developed by an industry consortium consisting
of IBM,
Hewlett Packard and Quantum Corporation. LTO competes with
AIT. All three
drive suppliers also sell automated tape libraries that utilize
LTO tape
drives and compete with our products. Therefore, even if we
receive
adequate allocation, it may be at a price that renders our
products
uncompetitive.
|
Our
other
suppliers have in the past been, and may in the future be, unable to
meet our
demand, including our needs for timely delivery, adequate quantity and
high
quality. We do not have long-term supply contracts with any of our significant
suppliers. The partial or complete loss of any of our suppliers could
result in
lost revenue, added costs and production delays or could otherwise harm
our
business and customer relationships.
Our
revenues could decline if we fail to execute our distribution
strategysuccessfully.
We
distribute and sell our automated tape libraries primarily through value
added
resellers and original equipment manufacturers, and intend to continue
this
strategy for the foreseeable future. Value added resellers integrate
our tape
libraries with products of other manufacturers and sell the combined
products to
their own customers. Original equipment manufacturers combine our tape
libraries
with their own products and sell the combined product under their own
brand. We
currently devote, and intend to continue to devote, significant resources
to
develop and maintain these relationships. A failure to initiate, manage
and
expand our relationships with value added resellers or original equipment
manufacturers could limit our ability to grow or sustain our current
level of
revenues.
Our
focus
on the distribution of our products through value added resellers poses
the
following risks:
|
•
|
we
may reach fewer customers because we depend on value added
resellers to
market to end users and these value added resellers may fail
to market
effectively or fail to devote sufficient or effective sales,
marketing and
technical support to the sales of our
products;
|
|
•
|
we
may lose sales because many of our value added resellers sell
products
that compete with our products. These value added resellers
may reduce
their marketing efforts for our products in favor of products
manufactured
by our competitors;
|
|
•
|
our
costs may increase as value added resellers generally require
a higher
level of customer support than do original equipment
manufacturers; and
|
|
•
|
as
the market for tape libraries matures, we expect that tape
libraries
designed for small and medium size businesses will not require
the level
of sales, marketing and technical support traditionally provided
by value
added resellers and, consequently, tape libraries for these
customers will
be increasingly sold through distribution channels rather than
through
value added resellers.
|
We
depend
upon our original equipment manufacturer customers’ ability to develop new
products, applications and product enhancements that incorporate our
products in
a timely, cost-effective and customer-friendly manner. We cannot guarantee
that
our original equipment manufacturer customers will meet these challenges
effectively. Original equipment manufacturers typically conduct substantial
and
lengthy evaluation programs before certifying a new product for inclusion
in
their product line. We may be required to devote significant financial
and human
resources to these evaluation programs with no assurance that our products
will
ever be selected. In addition, even if selected by the original equipment
manufacturer, there generally is no requirement that the original equipment
manufacturer purchase any particular amount of product from us or that
it
refrain from purchasing competing products.
We
do not
have any exclusive agreements with our value added resellers or original
equipment manufacturers, who purchase our products on an individual purchase
order basis. If we lose important value added resellers or original equipment
manufacturer customers, if they reduce their focus on our products or
if we are
unable to obtain additional value added reseller or original equipment
manufacturer customers, our business could suffer.
We
rely on tape technology for a substantial part of our revenues. Our business
willbe harmed if demand for storage solutions using tape
technology declines or fails todevelop as we
expect.
We
derive
a high percentage of our revenues from products that incorporate some
form of
tape technology. We expect to derive a high percentage of our revenues
from
these products for the foreseeable future. As a result, we will continue
to be
subject to the risk of a decrease in revenues if demand for these products
declines or if rising prices make it more difficult to obtain them. If
products
incorporating other technologies gain comparable or superior market acceptance
and competitive price advantage, our business, financial condition and
operating
results could be adversely and materially affected unless we successfully
develop and market products incorporating the new technology.
If
we fail to develop and introduce new products on a timely and
cost-effectivebasis, or if our products do not contain the
features required by the marketplace, wewill eventually lose
market share and sales to more innovative competitors.
The
market for our products is characterized by rapidly changing technology
and
evolving industry standards. The future success of Qualstar will depend
on our
ability to anticipate changes in technology, to develop new and enhanced
products on a timely and cost-effective basis, and to introduce, manufacture
and
achieve market acceptance of these new and enhanced products. In particular,
our
success will depend on the market acceptance of our new XLS family of
automated
tape libraries. Our RLS and TLS families of tape libraries are facing
increasing
competition from products manufactured by our competitors and may face
competition from other types of storage devices that may be developed
in the
future.
Development
schedules for high technology products are inherently subject to uncertainty
and
there can be no assurance we will be able to meet our product development
schedules or that our development costs will be within budgeted amounts.
If the
products or product enhancements developed are not deliverable due to
technical
problems, quality issues or component shortages, or if such products
or product
enhancements are not accepted by the marketplace or are unreliable, then
our
business, financial condition and results of operations may be materially
adversely affected.
The
introduction of new storage technologies or the adoption of an industry
standard
different than our current product standards could render our existing
products
obsolete.
We
depend upon independent software vendors to provide storage management
software
that makesour tape libraries functional.
The
utility of an automated tape library depends upon the storage management
software, which supports the library and integrates it into the user’s computing
environment to provide a complete storage solution. We do not develop
and have
no control over the development of this storage management software.
Instead we
rely on third party independent software vendors to develop and support
this
software. Accordingly, the continued development and future growth of
the market
for our products will depend partly upon the success of software vendors
to meet
the overall data storage and management needs of tape library purchasers
and our
ability to maintain relationships with these firms. Although we do not
have
contracts with any third party independent software vendors, we maintain
relationships with them by:
|
•
|
supplying
tape libraries so they can qualify their software to work with
our tape
libraries;
|
|
•
|
evaluating
their software for compatibility with our tape
libraries;
|
|
•
|
keeping
them informed as to current and contemplated changes to our
products; and
|
|
•
|
referring
business to them when value added resellers or end users inquire
about
software sources.
|
We
may have to expend significant amounts of time and money defending or
settlingproduct liability claims arising from failures of our
tape libraries.
Because
our tape library customers use our products to store and backup their
important
data, we face potential liability if our products fail to perform. Although
we
maintain general liability insurance, our insurance may not cover potential
claims of this type or may not be adequate to indemnify us for all liability
that may be imposed. Any imposition of liability that is not covered
by
insurance or that exceeds our insurance coverage could reduce our profitability
or cause us to discontinue operations.
Undetected
flaws could increase our costs, reduce our revenues and divert
resourcesfrom our core business needs.
Our
tape
libraries are complex. Despite our efforts to revise and update our
manufacturing and test processes to address engineering and component
changes,
we may not be able to control and eliminate manufacturing flaws adequately.
These flaws may include undetected software or hardware defects associated
with:
|
•
|
a
newly introduced product;
|
|
•
|
a
new version of an existing
product; or
|
|
•
|
a
product that has been integrated into a network storage solution
with the
products of other vendors.
|
The
variety of contexts in which errors may arise may make it difficult to
identify
the source of a problem. These problems may:
|
•
|
cause
us to incur significant warranty, repair and replacement
costs;
|
|
•
|
divert
the attention of our engineering personnel from our product
development
efforts;
|
|
•
|
cause
significant customer relations
problems; or
|
|
•
|
damage
our reputation.
|
To
address these risks, we frequently revise and update manufacturing and
test
procedures to address engineering and component changes to our products.
If we
fail to adequately monitor, develop and implement appropriate test and
manufacturing processes we could experience a rate of product failure
that
results in substantial shipment delays, repair or replacement costs or
damage to
our reputation. Product flaws may also consume our limited engineering
resources
and interrupt our development efforts. Significant product failures would
increase our costs and result in the loss of future sales and be harmful
to our
business.
RISKS
RELATED TO OUR POWER SUPPLY BUSINESS
The
principal risks applicable specifically to our power supply operating
segment
are described below.
We
primarily depend on a single contract manufacturer for the majority of
our power
supplies.Loss of this supplier could harm our
business.
The
primary supplier of our N2 Power power supplies is located in China.
If this
manufacturer should be unable to deliver products to us on a timely basis
or at
all, our power supply business could be adversely affected. Though we
have five
years of favorable experience with this supplier, there can be no assurance
that
circumstances might not change and compel this supplier to curtail or
terminate
deliveries to us.
Price
erosion may have a material adverse effect on our margins and
profitability.
The
majority of the power supply manufactures that we compete with have
substantially more resources and more models available than we do. Additionally
the power supply business is generally characterized by intense competition.
There can be no assurances that a competitor will not choose to use its
resources to underprice our products in the market, thereby adversely
affecting
our sales or margins.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our
headquarters, located in Simi Valley, California, consists of a single
building
containing approximately 57,000 square feet housing our manufacturing,
sales and marketing, finance and administration and approximately half
of our
engineering. Our lease on this facility expires in February 2011. Rent
on this
facility is $39,000 per month, with step-ups ranging from $2,400 to
$2,800 per month every two years.
We
also
lease approximately 4,300 square feet of office space in Boulder, Colorado,
that houses our Advanced Development Group. The lease of the Boulder,
Colorado
facility expires in May 2009. We closed our sales office in Surrey, United
Kingdom in May 2007.
ITEM 3.
LEGAL PROCEEDINGS
We
are
from time to time involved in various lawsuits and legal proceedings
that arise
in the ordinary course of business. At this time, we are not aware of
any
pending or threatened litigation against us that we expect will have
a material
adverse effect on our business, financial condition, liquidity or operating
results. Legal claims are inherently uncertain, however. We cannot assure
you
that we will not be adversely affected in the future by legal
proceedings.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF
SHAREHOLDERS
No
matters were submitted to a vote of security holders during the fourth
quarter
of the fiscal year ended June 30, 2007.
PART II
|
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
Qualstar’s
common stock is quoted on The NASDAQ Stock Market (NASDAQ Symbol — QBAK).
The following table sets forth the high and low closing sale prices of
our
common stock as reported by NASDAQ, during the periods indicated:
|
Period
|
Date
Range
|
High
|
Low
|
||||||
|
Fiscal
2007:
|
|||||||||
|
First
Quarter
|
July 1 —
September, 30, 2006
|
$ |
3.51
|
$ |
2.60
|
||||
|
Second
Quarter
|
October 1 —
December 31, 2006
|
$ |
3.81
|
$ |
2.76
|
||||
|
Third
Quarter
|
January
1 — March 31, 2007
|
$ |
3.57
|
$ |
2.86
|
||||
|
Fourth
Quarter
|
April 1 —
June 30, 2007
|
$ |
3.65
|
$ |
2.84
|
||||
|
Fiscal
2006:
|
|||||||||
|
First
Quarter
|
July 1 —
September, 30, 2005
|
$ |
4.51
|
$ |
3.55
|
||||
|
Second
Quarter
|
October 1 —
December 31, 2005
|
$ |
5.00
|
$ |
3.21
|
||||
|
Third
Quarter
|
January
1 — March 31, 2006
|
$ |
4.50
|
$ |
3.30
|
||||
|
Fourth
Quarter
|
April 1 —
June 30, 2006
|
$ |
4.20
|
$ |
3.00
|
||||
There
were approximately 43 owners of record of Qualstar’s common stock as of
September 13, 2007.
Qualstar
has declared no cash dividends during the periods reported. Qualstar
does not
currently anticipate paying cash dividends in the foreseeable future,
but
intends to retain any future earnings for reinvestment in its business.
Any
future determination to pay cash dividends will be at the discretion
of our
Board of Directors and will be dependent upon Qualstar’s financial condition,
results of operations, capital requirements, terms of any debt instruments
then
in effect and such other factors as our Board of Directors may deem relevant
at
the time.
ADDITIONAL
EQUITY COMPENSATION PLAN INFORMATION
The
following table provides additional information regarding Qualstar’s equity
compensation plans as of June 30, 2007:
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under
equity
compensation plans (excluding securities reflected in column
(a))
|
|||||||||
|
(a)
|
(b)
|
(c)
|
||||||||||
|
Equity
compensation plans approved by security holders(1)
|
585,000
|
$ |
4.07
|
217,175
|
||||||||
|
Equity
compensation plans not approved by security holders
|
—
|
—
|
—
|
|||||||||
|
Totals
|
585,000
|
$ |
4.07
|
217,175
|
||||||||
____________
|
(1)
|
Includes
shares subject to stock options granted under the 1998 Stock
Incentive
Plan, and shares available for additional option grants under
that plan,
as of June 30, 2007.
|
ITEM 6.
SELECTED FINANCIAL DATA
The
following selected financial data is qualified in its entirety by and
should be
read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the financial statements and notes
thereto included elsewhere in this 10-K. Our historical financial results
are
not necessarily indicative of results to be expected for any future
period.
|
Years
Ended June 30,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(In
thousands, expect per share amounts)
|
||||||||||||||||||||
|
Statements
of Income Data:
|
||||||||||||||||||||
|
Net
revenues
|
$ |
20,612
|
$ |
21,731
|
$ |
25,144
|
$ |
31,530
|
$ |
33,557
|
||||||||||
|
Cost
of goods sold
|
14,092
|
14,856
|
16,529
|
19,575
|
21,171
|
|||||||||||||||
|
Gross
profit
|
6,520
|
6,875
|
8,615
|
11,955
|
12,386
|
|||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Research
and development
|
3,136
|
3,083
|
3,750
|
4,268
|
3,994
|
|||||||||||||||
|
Sales
and marketing
|
3,110
|
3,213
|
3,350
|
3,607
|
3,834
|
|||||||||||||||
|
General
and administrative
|
3,168
|
3,629
|
3,955
|
5,420
|
4,428
|
|||||||||||||||
|
Total
operating expenses
|
9,414
|
9,925
|
11,055
|
13,295
|
12,256
|
|||||||||||||||
|
Income
(loss) from operations
|
(2,894 | ) | (3,050 | ) | (2,440 | ) | (1,340 | ) |
130
|
|||||||||||
|
Investment
income
|
1,477
|
1,269
|
858
|
624
|
693
|
|||||||||||||||
|
Impairment
loss for other-than-temporary decline in investments
|
—
|
—
|
—
|
(160 | ) |
—
|
||||||||||||||
|
Income
(loss) before income taxes
|
(1,417 | ) | (1,781 | ) | (1,582 | ) | (876 | ) |
823
|
|||||||||||
|
Provision
(benefit) for income taxes
|
30
|
(89 | ) |
65
|
(145 | ) |
274
|
|||||||||||||
|
Net
income (loss)
|
$ | (1,447 | ) | $ | (1,692 | ) | $ | (1,647 | ) | $ | (731 | ) | $ |
549
|
||||||
|
Earnings
(loss) per share:
|
||||||||||||||||||||
|
Basic
|
$ | (0.12 | ) | $ | (0.14 | ) | $ | (0.13 | ) | $ | (0.06 | ) | $ |
0.04
|
||||||
|
Diluted
|
$ | (0.12 | ) | $ | (0.14 | ) | $ | (0.13 | ) | $ | (0.06 | ) | $ |
0.04
|
||||||
|
Shares
used to compute earnings (loss) per share:
|
||||||||||||||||||||
|
Basic
|
12,253
|
12,253
|
12,398
|
12,577
|
12,579
|
|||||||||||||||
|
Diluted
|
12,253
|
12,253
|
12,398
|
12,577
|
12,666
|
|||||||||||||||
|
Years
Ended June 30,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ |
7,697
|
$ |
6,845
|
$ |
12,210
|
$ |
6,401
|
$ |
6,236
|
||||||||||
|
Marketable
securities
|
25,568
|
26,822
|
21,854
|
29,376
|
29,857
|
|||||||||||||||
|
Working
capital
|
25,152
|
*29,012
|
*25,121
|
46,534
|
47,191
|
|||||||||||||||
|
Total
assets
|
44,063
|
45,399
|
47,223
|
51,647
|
52,096
|
|||||||||||||||
|
Total
debt
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Shareholders’
equity
|
41,841
|
42,858
|
44,653
|
48,064
|
48,868
|
|||||||||||||||
____________
|
|
*
|
In
fiscal 2006 and 2005, certain marketable securities were reclassified
to
long-term assets.
|
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF
OPERATIONS
The
following discussion and analysis should be read in conjunction with
our
financial statements and notes thereto.
OVERVIEW
We
design, develop, manufacture and sell automated magnetic tape libraries
used to
store, retrieve and manage electronic data primarily in network computing
environments. We currently offer tape libraries for two popular tape
drive
technologies, LTO and AIT. We have discontinued sales of libraries with
Super
AIT and ALT tape drives due to declining demand for those tape drive
technologies.
Many
enterprises now routinely manage very large databases, in addition to
storing
information on local desktop computers. This, coupled with the growth
in the
amount of data from new sources and applications, is increasing the need
for
managing and storing data efficiently. Anticipating the increased demand
for
tape libraries, we have developed tape libraries spanning a broad range
of tape
formats, prices, capacity and performance. We expect our products to
continue to
evolve in the future in response to emerging tape technologies and changing
customer preferences.
We
have
developed a network of value added resellers who specialize in delivering
complete storage solutions to end users. End users of our products range
from
small businesses requiring simple automated backup solutions to large
organizations needing complex storage management solutions. We also sell
our
products to original equipment manufacturers who bundle our products
with their
own and sell them as part of a complete system or solution. We assist
our
customers with marketing, sales and technical support.
Our
international sales efforts are currently directed from our corporate
offices in
Simi Valley, California. All of our international sales are
denominated in U.S. dollars. Revenues from sales outside North America were
approximately $5.0 million, or 24.4% of revenues in fiscal 2007,
approximately $5.7 million, or 26.1% of revenues in fiscal 2006, and
approximately $6.9 million, or 27.3% of revenues in fiscal
2005.
We
also
design, develop and sell ultra-small high-efficiency open-frame switching
power
supplies for original equipment manufacturers of telecommunications equipment,
servers, routers, switches, RAIDs, and other equipment. Our power supplies
are
sold under the N2Power brand name through independent sales representatives
and
a private distributor. The primary customers are original equipment
manufacturers and contract manufacturers.
Net
revenues include revenues from the sale of tape libraries, library tape
drives,
tape cartridges, ancillary products, and power supplies. Ancillary revenues
include service, repair, and on-site service agreements net of the cost
of any
third party service contracts. Automated tape libraries and related products,
such as tape drives and tape media, represented approximately 66.6% of
revenues
in fiscal 2007, approximately 66.2% of revenues in fiscal 2006, and
approximately 75.1% of revenues in fiscal 2005. Sales of power supplies
represented approximately 14.6% of revenues in fiscal 2007, approximately
11.9%
of revenues in fiscal 2006, and approximately 5.0% of revenues in fiscal
2005.
Sales of ancillary products and services accounted for the balance of
our
revenues.
Gross
margins depend on several factors, including the cost of manufacturing,
product
mix, customer demand and the level of competition. Larger tape libraries
provide
higher gross margins than do smaller tape libraries primarily because
the
competition is less intense in this market segment.
Research
and development activities include the design and development of new
products,
as well as enhancements to existing products.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
discussion and analysis of our financial condition and results of operations
is
based upon our financial statements, which have been prepared in accordance
with
accounting principals generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments
that
affect the reported amounts of assets, liabilities, revenues and expenses
and
related disclosure of contingent assets and liabilities. On an on-going
basis,
we evaluate our estimates, including those related to customer promotional
offers, sales returns, bad debts, inventories, warranty costs, investments,
and
income taxes. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
Revenue
Recognition
Revenue
is recognized upon shipment of product to our customers, less estimated
returns,
for which provision is made at the time of sale. Title and risk of loss
transfer
to the customer when the product leaves our dock in Simi Valley, California,
or
another shipping location designated by us. In general, these customers
are
allowed to return the product, free of penalty, within thirty days of
shipment,
if the product does not meet the end user’s requirements.
We
record
an allowance for estimated sales returns based on past experience and
current
knowledge of our customer base. Our experience has been such that only
a very
small percentage of products are returned. Should our experience change,
however, we may require additional allowances for sales returns.
Allowance
for Doubtful Accounts
We
estimate our allowance for doubtful accounts based on an assessment of
the
collectibility of specific accounts and the overall condition of accounts
receivable. In evaluating the adequacy of the allowance for doubtful
accounts,
we analyze specific trade receivables, historical bad debts, customer
credits,
customer credit-worthiness and changes in customers’ payment terms and patterns.
If the financial condition of our customers were to deteriorate, resulting
in an
impairment of their ability to make additional payments, then we may
need to
make additional allowances. Likewise, if we determine that we could realize
more
of our receivables in the future than previously estimated, we would
adjust the
allowance to increase income in the period we made this
determination.
Inventory
Valuation
We
record
inventories at the lower of cost or market value. We assess the value
of our
inventories periodically based upon numerous factors including expected
product
or material demand, current market conditions, technological obsolescence,
current cost and net realizable value. If necessary, we write down our
inventory
for estimated obsolescence, potential shrinkage, or unmarketable inventory
equal
to the difference between the cost of inventory and the estimated market
value
based upon assumptions about future demand and market conditions. If
technology
changes more rapidly than expected, or market conditions become less
favorable
than those projected by management, additional inventory write-downs
may be
required.
Warranty
Obligations
We
provide for the estimated cost of product warranties at the time revenue
is
recognized. We engage in extensive product quality programs and processes,
including active monitoring and evaluation of product failure rates,
material
usage and estimation of service delivery costs incurred in correcting
a product
failure. However, should actual product failure rates, material usage,
or
service delivery costs differ from our estimates, revisions to the estimated
warranty liability would be required. Historically our warranty costs
have not
been significant.
Share-Based
Compensation
Share-based
compensation is accounted for in accordance with SFAS 123R, “Share-Based
Payment.” We use the Black-Scholes option pricing model to determine fair value
of the award at the date of grant and recognize compensation expense
over the
vesting period. The inputs we use for the model require the use of judgment,
estimates and assumptions regarding the expected volatility of the stock,
the
expected term the average employee will hold the option prior to the
date of
exercise, and the amount of share-based awards that are expected to be
forfeited. Changes in these inputs and assumptions could occur and actual
results could differ from these estimates, and our results of operations
could
be materially impacted.
Accounting
for Income Taxes
We
estimate our tax liability based on current tax laws in the statutory
jurisdictions in which we operate. These estimates include judgments
about
deferred tax assets and liabilities resulting from temporary differences
between
assets and liabilities recognized for financial reporting purposes and
such
amounts recognized for tax purposes, as well as about the realization
of
deferred tax assets.
We
maintain a valuation allowance to reduce our deferred tax assets due
to the
uncertainty surrounding the timing of realizing the benefits of net deferred
tax
assets in future years. We have considered future taxable income and
ongoing
prudent and feasible tax planning strategies in assessing the need for
such a
valuation allowance. In the event we were to determine that we would
be able to
realize all or part of our net deferred tax asset in the future, the
valuation
allowance would be decreased accordingly.
We
may
periodically undergo examinations by the federal and state regulatory
authorities and the Internal Revenue Service. We may be assessed additional
taxes and or penalties contingent on the outcome of these examinations.
Our
previous examinations have not resulted in any unfavorable or significant
assessments.
Our
California tax returns for fiscal years 2001 through 2003 were
audited by the California Franchise Tax Board. In July 2007, we accepted
the
Franchise Tax Board’s proposal to resolve these tax audits, which resulted in a
$77,000 reduction in the amount of tax refund we had expected related
to
research and development tax credits. We previously had booked a reserve
of
$55,000 related to this expected refund.
The
Company has net operating losses, capital losses, research and development
credit and other carryforwards for tax purposes of $2.4 million at June 30,
2007 and $1.9 million at June 30, 2006 expiring between fiscal years 2009
and 2025, except for the state research and development credit, which
has no
limit on the carryforward period.
RESULTS
OF OPERATIONS
The
following table reflects, as a percentage of net revenues, statements
of
operations data for the periods indicated:
|
Years
Ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
revenues
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of goods sold
|
68.4
|
68.4
|
65.7
|
|||||||||
|
Gross
margin
|
31.6
|
31.6
|
34.3
|
|||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development
|
15.2
|
14.2
|
14.9
|
|||||||||
|
Sales
and marketing
|
15.1
|
14.8
|
13.4
|
|||||||||
|
General
and administrative
|
15.4
|
16.7
|
15.7
|
|||||||||
|
Loss
from operations
|
(14.1 | ) | (14.1 | ) | (9.7 | ) | ||||||
|
Investment
income
|
7.2
|
5.8
|
3.4
|
|||||||||
|
Loss
before provision (benefit) for income taxes
|
(6.9 | ) | (8.3 | ) | (6.3 | ) | ||||||
|
Provision
(benefit) for income taxes
|
0.1
|
(0.4 | ) |
0.3
|
||||||||
|
Net
loss
|
(7.0 | )% | (7.9 | )% | (6.6 | )% | ||||||
We
have
two operating segments for financial disclosure purposes: tape
libraries and power supplies, as discussed in Footnote 10. The following
table
summarizes our revenue by major product line and by operating
segment:
|
Years
Ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Tape
Library revenues:
|
||||||||||||
|
TLS
|
35.9 | % | 42.6 | % | 51.7 | % | ||||||
|
RLS
|
8.6 | % | 12.2 | % | 13.1 | % | ||||||
|
XLS
|
8.5 | % |
—
|
—
|
||||||||
| 53.0 | % | 54.8 | % | 64.8 | % | |||||||
|
Other
library revenues:
|
||||||||||||
|
Service
|
14.2 | % | 14.5 | % | 10.5 | % | ||||||
|
Media
|
13.6 | % | 11.4 | % | 10.3 | % | ||||||
|
Upgrades,
Spares
|
4.6 | % | 7.4 | % | 9.3 | % | ||||||
|
Total
library revenues
|
85.4 | % | 88.1 | % | 94.9 | % | ||||||
|
Power
Supply revenues
|
14.6 | % | 11.9 | % | 5.1 | % | ||||||
| 100.0 | % | 100.0 | % | 100.0 | % | |||||||
Fiscal
2007 Compared to Fiscal 2006
Net
Revenues. Net revenues were $20.6 million in fiscal
2007 as compared to $21.7 million in fiscal 2006. The decrease of
approximately $1.1 million, or 5.1% is attributed to lower sales of our
tape library products in the TLS and RLS product lines, in conjunction
with
lower service and miscellaneous revenue, partially offset by revenue
from our
new enterprise-level XLS tape library product line and increased media
and power
supply revenue. We commenced sales of our new XLS product line in fiscal
2007,
and sales of these libraries accounted for 8.5% of total revenue in fiscal
2007.
Tape
Library Segment
Revenues
attributed to our tape library segment were $17.6 million, or 85.4% of
revenues in fiscal 2007, as compared to $19.1 million, or 88.1% of revenues
in fiscal 2006. We anticipate sales of our new enterprise-level XLS product
line to capture a larger percent of our tape library revenues in fiscal
2008.
However, we expect sales of our TLS and RLS tape library product lines
to
decline in fiscal 2008.
Power
Supply Segment
Revenues
attributed to our power supply segment were 3.0 million, or 14.6% of
revenues,
in fiscal 2007 as compared to $2.6 million, or 11.9% of revenues in fiscal
2006.
This increase was due to increased sales to OEMs and distributors of
an expanded
power supply product line. We expect continued growth as a percentage
of sales
in our power supply revenues during fiscal 2008.
Gross
Profit. Gross profit was $6.5 million in fiscal 2007 as
compared to $6.9 million in fiscal 2006. The decrease of approximately
$0.4 million, or 5.2%, is comparable as a percent of sales, resulting in
comparable gross profit percentages in fiscal years 2007 and 2006 of
31.6%.
Research
and Development. Research and development expenses were
$3.1 million in fiscal 2007, comparable with $3.1 million in fiscal
2006.
Sales
and Marketing. Sales and marketing expenses were
$3.1 million in fiscal 2007 as compared to $3.2 million in fiscal
2006. The decrease of approximately $0.1 million, or 3.1%, is attributed
primarily to a decrease in marketing salaries and the closing of our
sales
office in the United Kingdom, offset by increased advertising and promotion
expenses.
General
and Administrative. General and administrative expenses were
$3.2 million in fiscal 2007 as compared to $3.6 million in fiscal
2006. The decrease of approximately $0.4 million, or 11.1%, is due to lower
compensation related expenses, legal and audit fees, and insurance expense,
offset in part by higher bad debt expense.
Investment
Income. Investment income was $1.5 million in fiscal
2007 as compared to $1.3 million in fiscal 2006. The increase of
$0.2 million, or 16.4% is due to reinvestment of our lower yielding
maturities into higher yielding investments and due to higher interest
rates in
fiscal 2007.
Provision
for Income Taxes. Provision for income taxes was $30,000 in
fiscal 2007 as compared to a benefit for income taxes of $89,000 in
fiscal 2006. The benefit in fiscal 2006 is due to the reversal of a reserve
established in fiscal 2005 against research and development credits that
were
refunded in fiscal 2006.
Fiscal
2006 Compared to Fiscal 2005
Net
Revenues. Net revenues decreased from $25.1 million in
fiscal 2005 to $21.7 million in fiscal 2006. The decrease of approximately
$3.4 million, or 13.5% is attributed to declining unit sales of our tape
library products in the TLS and RLS product lines, incorporating AIT,
SAIT, DLT,
and LTO tape technology, in conjunction with lower average unit selling
prices,
partially offset by increased service and power supply revenue. Power
supply
revenue has doubled year over year while service revenue increased by
approximately 19%.
Revenues
from tape libraries and drives decreased to $11.9 million, or 54.8% of
revenues, in the year ended June 30, 2006, from $16.3 million, or
64.8% of revenues, in the year ended June 30, 2005.
Gross
Profit. Gross profit decreased from $8.6 million in
fiscal 2005 to $6.9 million in fiscal 2006. The decrease of approximately
$1.7 million, or 20.2%, is primarily due to lower revenues resulting in
lower absorption of manufacturing overhead expenses, additional inventory
reserves and lower average selling prices.
Research
and Development. Research and development expenses decreased
from $3.8 million in fiscal 2005 to $3.1 million in fiscal 2006. The
decrease of approximately $0.7 million, or 17.8%, is due primarily to lower
salaries associated with a decrease in headcount, as our XLS product
line
transitioned from the development phase to the design verification phase,
lower
prototype material costs and lower consulting fees.
Sales
and Marketing. Sales and marketing expenses decreased from
$3.4 million in fiscal 2005 to $3.2 million in fiscal 2006. The
decrease of approximately $0.2 million, or 4.1%, can be attributed
primarily to a decrease in promotion and travel related expenses.
General
and Administrative. General and administrative expenses
decreased from $4.0 million in fiscal 2005 to $3.6 million in fiscal
2006. The decrease of approximately $0.4 million, or 8.2%, is due to lower
legal and bad debt expenses.
Investment
Income. Investment income increased to $1.3 million in
fiscal 2006 from $0.9 million in fiscal 2005. The increase of
$0.4 million, or 48% is due to higher average short-term security balances
combined with higher short-term yields available during the rising interest
rate
environment during fiscal 2006.
Provision
for Income Taxes. Provision for income taxes decreased from
$0.1 million in fiscal 2005 to a benefit for income taxes of
$0.1 million in fiscal 2006. The decrease of $0.2 million is due to
the reversal of a reserve established in fiscal 2005 against research
and
development credits that were refunded in fiscal 2006.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
used
by operating activities was $0.7 million in fiscal 2007 and $19,000 in
fiscal 2006 and cash provided by operating activities was $0.2 million
in fiscal
2005. Cash used by operating activities in fiscal 2007 relates primarily
to our
net loss for the year adjusted for non-cash items, an increase in accounts
receivable and a decrease in accounts payable and other accrued liabilities,
partially offset by a decrease in inventories. In fiscal 2006, the near
breakeven in operating cash resulted from the receipt of research and
development credit refunds and a decrease in accounts receivable, offset
by a
net loss for the year. In fiscal 2005, operating cash was primarily provided
by
refunds of fiscal 2002 federal and state income taxes paid and a decrease
in
accounts receivable, offset partially by decreases in accounts payable
and other
accrued liabilities.
Cash
provided by investing activities was $1.5 million in fiscal 2007, cash used
in investing activities was $5.3 million in fiscal 2006 and cash provided
by investing activities was $7.3 million in fiscal 2005. Cash provided
by
investing activities in fiscal 2007 relates primarily to proceeds from
the sale
of marketable securities, partially offset by purchases of marketable
securities. Cash used in investing activities in fiscal 2006 related
primarily
to the purchase of marketable securities and equipment partially offset
by sales
of marketable securities. Cash provided by investing activities in fiscal
2005
related primarily to sales of marketable securities partially offset
by
purchases of marketable securities and equipment.
Cash
used
in financing activities of $1.7 million for fiscal 2005 related primarily
to
repurchasing shares of our common stock.
As
of
June 30, 2007, we had $7.7 million in cash and cash equivalents and
$25.6 million in marketable securities. We believe that our existing cash
and cash equivalents and funds available from the sale of our marketable
securities will be sufficient to fund our working capital and capital
expenditure needs for at least the next 12 months. We may utilize cash to
invest in businesses, products or technologies that we believe are strategic.
We
regularly evaluate other companies and technologies for possible investment
by
us. In addition, we have made and may in the future make investments
in
companies with whom we have identified potential synergies. However,
we have no
present commitments or agreements with respect to any material acquisition
of
other businesses or technologies.
SUMMARY
OF CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The
following is a summary of our future payments due under contractual obligations
as of June 30, 2007:
|
Year
Ended June 30
|
Operating
Leases
|
Purchase
Obligations
|
Total
|
|||||||||
|
(In
thousands)
|
||||||||||||
|
2008
|
$ |
603
|
$ |
1,543
|
$ |
2,146
|
||||||
|
2009
|
620
|
—
|
620
|
|||||||||
|
2010
|
588
|
—
|
588
|
|||||||||
|
2011
|
307
|
—
|
307
|
|||||||||
|
2012
|
—
|
—
|
—
|
|||||||||
| $ |
2,118
|
$ |
1,543
|
$ |
3,661
|
|||||||
Purchase
obligations in the table above represent the value of open purchase orders
as of
June 30, 2007. We believe that some of these obligations could be canceled
for payment of a nominal penalty or no penalty; however, the amount of
open
purchase orders that could be canceled under such terms is difficult
to
quantify.
OFF-BALANCE
SHEET ARRANGEMENTS
We
do not
have any off-balance sheet arrangements.
ITEM 7A.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
We
develop products in the United States and sell them worldwide. As a result,
our
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets.
As all
sales are currently made in U.S. dollars, a strengthening of the dollar
could make our products less competitive in foreign markets. Our interest
income
is sensitive to changes in the general level of U.S. interest rates,
particularly since the majority of our investments are in shorter duration
securities. We have no outstanding debt nor do we utilize derivative
financial
instruments. Therefore, no quantitative tabular disclosures are
required.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
Page
|
|
|
(1)
Consolidated Financial Statements
|
|
|
Report
of Independent Registered Public Accounting Firm
|
31
|
|
Consolidated
Balance Sheets
|
32
|
|
Consolidated
Statements of Operations
|
33
|
|
Consolidated
Statements of Shareholders’ Equity
|
34
|
|
Consolidated
Statements of Cash Flows
|
35
|
|
Notes
to Consolidated Financial Statements
|
36
|
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders of Qualstar Corporation
We
have
audited the accompanying consolidated balance sheets of Qualstar Corporation
as
of June 30, 2007 and 2006, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three
years in
the period ended June 30, 2007. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether
the financial statements are free of material misstatement. We were not
engaged
to perform an audit of the Company’s internal control over financial reporting.
Our audit included consideration of internal control over financial reporting
as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the consolidated financial position of Qualstar Corporation
at June 30, 2007 and 2006, and the consolidated results of its operations
and
its cash flows for each of the three years in the period ended June 30,
2007, in
conformity with U.S. generally accepted accounting principles.
As
discussed in Note 1 to the consolidated financial statements, Qualstar
Corporation changed its method of accounting for share-based compensation
in
accordance with Statement of Financial Accounting Standard No. 123 (revised
2004) on July 1, 2005.
|
/s/ Ernst
& Young LLP
|
Los
Angeles, California
September
21, 2007
QUALSTAR
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
thousands)
|
June 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ |
7,697
|
$ |
6,845
|
||||
|
Marketable
securities, short-term
|
9,574
|
14,040
|
||||||
|
Accounts
receivable, net of allowances of $170 at June 30, 2007 and $118 at
June 30, 2006
|
3,462
|
2,700
|
||||||
|
Inventories
|
5,928
|
7,298
|
||||||
|
Prepaid
expenses and other current assets
|
576
|
511
|
||||||
|
Prepaid
income taxes
|
137
|
159
|
||||||
|
Total
current assets
|
27,374
|
31,553
|
||||||
|
Property
and equipment, net
|
601
|
924
|
||||||
|
Marketable
securities, long-term
|
15,994
|
12,782
|
||||||
|
Other
assets
|
94
|
140
|
||||||
|
Total
assets
|
$ |
44,063
|
$ |
45,399
|
||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ |
654
|
$ |
783
|
||||
|
Accrued
payroll and related liabilities
|
455
|
466
|
||||||
|
Other
accrued liabilities
|
1,113
|
1,292
|
||||||
|
Total
current liabilities
|
2,222
|
2,541
|
||||||
|
Commitments
and contingencies
|
||||||||
|
Shareholders’
equity:
|
||||||||
|
Preferred
stock, no par value; 5,000 shares authorized; no shares
issued
|
—
|
—
|
||||||
|
Common
stock, no par value; 50,000 shares authorized, 12,253 shares
issued and outstanding as of June 30, 2007 and June 30, 2006,
respectively
|
18,593
|
18,503
|
||||||
|
Accumulated
other comprehensive loss
|
(55 | ) | (395 | ) | ||||
|
Retained
earnings
|
23,303
|
24,750
|
||||||
|
Total
shareholders’ equity
|
41,841
|
42,858
|
||||||
|
Total
liabilities and shareholders’ equity
|
$ |
44,063
|
$ |
45,399
|
||||
See
accompanying notes
QUALSTAR
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
|
Years
Ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
revenues
|
$ |
20,612
|
$ |
21,731
|
$ |
25,144
|
||||||
|
Cost
of goods sold
|
14,092
|
14,856
|
16,529
|
|||||||||
|
Gross
profit
|
6,520
|
6,875
|
8,615
|
|||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development
|
3,136
|
3,083
|
3,750
|
|||||||||
|
Sales
and marketing
|
3,110
|
3,213
|
3,350
|
|||||||||
|
General
and administrative
|
3,168
|
3,629
|
3,955
|
|||||||||
|
Total
operating expenses
|
9,414
|
9,925
|
11,055
|
|||||||||
|
Loss
from operations
|
(2,894 | ) | (3,050 | ) | (2,440 | ) | ||||||
|
Investment
income
|
1,477
|
1,269
|
858
|
|||||||||
|
Loss
before income taxes
|
(1,417 | ) | (1,781 | ) | (1,582 | ) | ||||||
|
Provision
(benefit) for income taxes
|
30
|
(89 | ) |
65
|
||||||||
|
Net
Loss
|
$ | (1,447 | ) | $ | (1,692 | ) | $ | (1,647 | ) | |||
|
Loss
per share:
|
||||||||||||
|
Basic
|
$ | (0.12 | ) | $ | (0.14 | ) | $ | (0.13 | ) | |||
|
Diluted
|
$ | (0.12 | ) | $ | (0.14 | ) | $ | (0.13 | ) | |||
|
Shares
used to compute loss per share:
|
||||||||||||
|
Basic
|
12,253
|
12,253
|
12,398
|
|||||||||
|
Diluted
|
12,253
|
12,253
|
12,398
|
|||||||||
See
accompanying notes
QUALSTAR
CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(In
thousands)
|
Accumulated
|
||||||||||||||||||||||||
|
Notes
|
Other
Comprehensive
|
|||||||||||||||||||||||
|
Common
Stock
|
From
|
Income
|
Retained
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Director
|
(Loss)
|
Earnings
|
Total
|
|||||||||||||||||||
|
Balances
at June 30, 2004
|
12,596
|
$ |
20,121
|
$ | (45 | ) | $ | (101 | ) | $ |
28,089
|
$ |
48,064
|
|||||||||||
|
Exercise
of stock options
|
16
|
76
|
—
|
—
|
—
|
76
|
||||||||||||||||||
|
Retirement
of shares pursuant to stock repurchase
|
(359 | ) | (1,827 | ) |
—
|
—
|
—
|
(1,827 | ) | |||||||||||||||
|
Principal
and interest payments on directors’ notes
|
—
|
—
|
45
|
—
|
—
|
45
|
||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
(1,647 | ) | (1,647 | ) | ||||||||||||||||
|
Change
in unrealized gains (losses) on investments
|
—
|
—
|
—
|
(58 | ) |
—
|
(58 | ) | ||||||||||||||||
|
Comprehensive
loss
|
(1,705 | ) | ||||||||||||||||||||||
|
Balances
at June 30, 2005
|
12,253
|
$ |
18,370
|
$ |
—
|
$ | (159 | ) | $ |
26,442
|
$ |
44,653
|
||||||||||||
|
Stock
based compensation
|
—
|
133
|
—
|
—
|
—
|
133
|
||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
(1,692 | ) | (1,692 | ) | ||||||||||||||||
|
Change
in unrealized gains (losses) on investments
|
—
|
—
|
—
|
(236 | ) |
—
|
(236 | ) | ||||||||||||||||
|
Comprehensive
loss
|
(1,928 | ) | ||||||||||||||||||||||
|
Balances
at June 30, 2006
|
12,253
|
$ |
18,503
|
$ |
—
|
$ | (395 | ) | $ |
24,750
|
$ |
42,858
|
||||||||||||
|
Stock
based compensation
|
—
|
90
|
—
|
—
|
—
|
90
|
||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
(1,447 | ) | (1,447 | ) | ||||||||||||||||
|
Change
in unrealized gains (losses) on investments
|
—
|
—
|
—
|
340
|
—
|
340
|
||||||||||||||||||
|
Comprehensive
loss
|
(1,107 | ) | ||||||||||||||||||||||
|
Balances
at June 30, 2007
|
12,253
|
$ |
18,593
|
$ |
—
|
$ | (55 | ) | $ |
23,303
|
$ |
41,841
|
||||||||||||
See
accompanying notes
QUALSTAR
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
Years
Ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||||
|
Net
loss
|
$ | (1,447 | ) | $ | (1,692 | ) | $ | (1,647 | ) | |||
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
421
|
454
|
463
|
|||||||||
|
Deferred
income taxes
|
—
|
—
|
436
|
|||||||||
|
Provision
for (recovery of) bad debts and returns, net
|
88
|
(31 | ) |
38
|
||||||||
|
Stock
based compensation
|
90
|
133
|
—
|
|||||||||
|
Loss
(gain) on sale of securities
|
50
|
—
|
(11 | ) | ||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
(850 | ) |
863
|
1,058
|
||||||||
|
Inventories
|
1,370
|
(141 | ) |
261
|
||||||||
|
Prepaid
expenses and other assets
|
(67 | ) | (57 | ) |
29
|
|||||||
|
Prepaid
income taxes and income taxes payable
|
22
|
481
|
432
|
|||||||||
|
Accounts
payable
|
(129 | ) |
20
|
(408 | ) | |||||||
|
Accrued
payroll and related liabilities
|
(11 | ) | (30 | ) | (4 | ) | ||||||
|
Other
accrued liabilities
|
(179 | ) | (19 | ) | (443 | ) | ||||||
|
Net
cash provided by (used in) operating activities
|
(642 | ) | (19 | ) |
204
|
|||||||
|
INVESTING
ACTIVITIES:
|
||||||||||||
|
Purchases
of equipment
|
(50 | ) | (142 | ) | (164 | ) | ||||||
|
Purchases
of marketable securities
|
(17,041 | ) | (13,204 | ) | (22,277 | ) | ||||||
|
Proceeds
from the sale of marketable securities
|
18,585
|
8,000
|
29,752
|
|||||||||
|
Net
cash provided by (used in) investing activities
|
1,494
|
(5,346 | ) |
7,311
|
||||||||
|
FINANCING
ACTIVITIES:
|
||||||||||||
|
Principal
and interest payments on directors’ notes
|
—
|
—
|
45
|
|||||||||
|
Proceeds
from exercise of stock options
|
—
|
—
|
76
|
|||||||||
|
Repurchase
of common stock
|
—
|
—
|
(1,827 | ) | ||||||||
|
Net
cash used in financing activities
|
—
|
—
|
(1,706 | ) | ||||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
852
|
(5,365 | ) |
5,809
|
||||||||
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
6,845
|
12,210
|
6,401
|
|||||||||
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ |
7,697
|
$ |
6,845
|
$ |
12,210
|
||||||
|
SUPPLEMENTAL
CASH FLOW DISCLOSURES:
|
||||||||||||
|
Income
taxes paid
|
$ |
7
|
$ |
2
|
$ |
5
|
||||||
See
accompanying notes
QUALSTAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Note 1 –
Accounting Policies
Business
Qualstar
Corporation (“Qualstar”) was incorporated in California in 1984 to develop and
manufacture IBM compatible 9-track reel-to-reel tape drives for the personal
computer and workstation marketplaces. Since 1995, Qualstar has focused
its
efforts on designing, developing, manufacturing and selling automated
magnetic
tape libraries used to store, retrieve and manage electronic data primarily
in
the network computing environment. Tape libraries consist of cartridge
tape
drives, tape cartridges and robotics to move the tape cartridges from
their
storage locations to the tape drives under software control. Qualstar’s
libraries provide storage solutions for organizations requiring backup,
recovery, and archival storage of critical electronic information. Qualstar’s
tape libraries are compatible with commonly used operating systems, including
UNIX, Windows and Linux and a wide range of storage management software.
Qualstar currently offers tape libraries for LTO and AIT tape drive
technologies.
In
July
2002, Qualstar purchased the assets of N2Power, Incorporated, a supplier
of
ultra small high efficiency open frame switching power supplies. Power
supplies
are sold with the N2Power brand name as well as under a private label
brand name
to original equipment manufacturers.
Accounting
Principles
The
financial statements and accompanying notes are prepared in accordance
with
generally accepted accounting principles (“GAAP”) in the United States of
America.
Principles
of Consolidation
The
consolidated financial statements include the accounts and operations
of
Qualstar and its wholly owned subsidiary. All significant intercompany
accounts
have been eliminated.
Estimates
and Assumptions
Preparing
financial statements requires management to make estimates and assumptions
that
affect the reported amounts of assets, liabilities, revenue, and expenses.
Examples include estimates of loss contingencies, product life cycles
and
inventory obsolescence, bad debts, sales returns, stock-based compensation
forfeiture rates; the potential outcome of future tax consequences of
events
that have been recognized in our financial statements or tax returns;
and
determining when investment impairments are other-than-temporary. Actual
results
and outcomes may differ from management’s estimates and
assumptions.
Revenue
Recognition
Revenue
is recognized when persuasive evidence of an arrangement exists, delivery
has
occurred, the fee is fixed or determinable, and collectibility is reasonably
assured (less estimated returns, for which provisions are made at the
time of
sale) in accordance with Staff Accounting Bulletin (“SAB”) 104, Revenue
Recognition. The provision for estimated returns is made based on known
claims and estimates of additional returns based on historical data.
Revenues
from technical support services and other services are recognized at
the time
the services are performed. Revenues from service contracts entered into
with
third party service providers are recognized at the time of sale, net
of
costs.
Cash
and Cash Equivalents
Qualstar
classifies as cash equivalents only cash and those investments that are
highly
liquid, interest earning investments with a maturity of three months
or less
from the date of purchase.
Marketable
Securities
Marketable
securities consist primarily of high-quality U.S. corporate securities and
U.S. federal government debt securities. Our marketable securities
portfolio consists of short-term securities with original maturities
of greater
than three months from the date of purchase and remaining maturities
of less
than one year and longer term securities with original maturities of
greater
than one year and less than five years. Marketable securities are classified
as
available for sale and are recorded at market value using the specific
identification method; unrealized gains and losses are reflected in other
comprehensive income until realized; realized gains and losses are included
in
earnings when the underlying securities are sold and are derived using
the
specific identification method for determining the cost of securities
sold. A
$50,000 loss from the sale of marketable securities was recorded in fiscal
year
2007. No significant gains or losses from the sale of marketable
securities were recorded in fiscal year 2006. All of Qualstar’s marketable
securities were classified as available-for-sale at June 30, 2007 and
2006.
Concentration
of Credit Risk, Other Concentration Risks and Significant
Customers
Qualstar
sells its products primarily through a variety of market channels including
original equipment manufacturers (OEM) and value added resellers (VAR)
located
worldwide. Ongoing credit evaluations of customers’ financial condition are
performed by Qualstar, and generally, collateral is not required. Potential
uncollectible accounts have been provided for in the financial
statements.
Sales
outside of North America represented approximately 24.4% of net revenues
in
fiscal 2007, approximately 26.1% of net revenues in fiscal 2006 and
approximately 27.3% of net revenues in fiscal 2005. Revenues from Qualstar’s two
largest customers combined were approximately 11.9%, 13.4%, and 13.9%
for the
years ended June 30, 2007, 2006, and 2005, respectively. At June 30,
2007 and 2006, the two largest customer’s accounts receivable, net of specific
allowances, totaled approximately 24.1% and 20.8% of net accounts receivable,
respectively.
Suppliers
Sales
and
costs of goods sold related to tape library products purchased from one
supplier
totaled approximately 32.2% and 30.6% in fiscal 2007, 36.4% and 34.1%in
fiscal
2006, and 47.8% and 41.0% in fiscal 2005, respectively, of total sales
and cost
of goods sold.
The
primary supplier of our N2 Power power supplies is located in China.
If this
manufacturer should be unable to deliver products to us in a timely basis
or at
all, our power supply business could be adversely affected. Though we
have five
years of favorable experience with this supplier, there can be no assurance
that
circumstances might not change and compel this supplier to curtail or
terminate
deliveries to us.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts reflects our best estimate of probable
losses
inherent in the accounts receivable balance. We determine the allowance
based on
known troubled accounts, historical experience, and other currently available
evidence. Activity in the allowance for doubtful accounts was as
follows:
|
Description
|
Balance
at Beginning of Period
|
Charged
to Costs and Expenses
|
Charged
to Other Accounts
|
Deductions(1)
|
Balance
at End of Period
|
|||||||||||||||
|
Year
Ended June 30, 2007
|
$ |
50,000
|
$ |
88,000
|
$ |
—
|
$ | (17,000 | ) | $ |
121,000
|
|||||||||
|
Year
Ended June 30, 2006
|
$ |
248,000
|
$ | (31,000 | ) | $ |
—
|
$ | (167,000 | ) | $ |
50,000
|
||||||||
|
Year
Ended June 30, 2005
|
$ |
217,000
|
$ |
38,000
|
$ |
—
|
$ | (7,000 | ) | $ |
248,000
|
|||||||||
____________
|
|
(1)
|
Uncollectible
accounts written off, net of
recoveries.
|
Inventories
Inventories
are stated at the lower of cost (first-in, first-out basis) or market.
Cost
includes materials, labor, and manufacturing overhead related to the
purchase
and production of inventories. We regularly review inventory quantities
on hand,
future purchase commitments with our suppliers, and the estimated utility
of our
inventory. If our review indicates a reduction in utility below carrying
value,
we reduce our inventory to a new cost basis.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation expense is computed
using the
straight-line method. Leasehold improvements are depreciated over the
shorter of
the estimated useful life of the asset or the term of the lease. Estimated
useful lives are as follows:
|
Machinery
and equipment
|
5-7 years
|
|
Furniture
and fixtures
|
5-7 years
|
|
Computer
equipment
|
3-5 years
|
Expenditures
for normal maintenance and repair are charged to expense as incurred,
and
improvements are capitalized. Upon the sale or retirement of property
or
equipment, the asset cost and related accumulated depreciation are removed
from
the respective accounts and any gain or loss is included in the results
of
operations.
Long-Lived
Assets
Qualstar
reviews the impairment of long-lived assets whenever events or changes
in
circumstances indicate the carrying amount of any asset may not be recoverable,
in accordance with The Statement of Financial Accounting Standards (SFAS)
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
An impairment loss would be recognized when the estimated undiscounted
future
cash flows expected to result from the use of the asset and its eventual
disposition is less than the carrying amount. If an impairment is indicated,
the
amount of the loss to be recorded is based upon an estimate of the difference
between the carrying amount and the fair value of the asset. Fair value
is based
upon discounted cash flows expected to result from the use of the asset
and its
eventual disposition and other valuation methods. There were no impairment
losses of long-lived assets recognized during the periods
presented.
Shipping
and Handling Costs
Qualstar
records all charges for outbound shipping and handling as revenue. All
inbound
shipping and fulfillment costs are classified as costs of goods
sold.
Warranty
Obligations
Qualstar
provides a three year warranty on its TLS and RLS tape libraries and
a one year
warranty on its XLS tape libraries. Some TLS and all RLS models have
three year
advance replacement warranty coverage that provides for replacement of
components, or if necessary, complete libraries. All other TLS models
have a
one-year advance replacement warranty with the second and third year
being
return-to-factory for service at no charge. XLS libraries sold in North
America
have a one year onsite service warranty and XLS libraries sold outside
of North
America have one year advance replacement warranty coverage that provides
for
replacement of components, or if necessary, complete libraries. A provision
for
costs related to warranty expense is recorded when revenue is recognized,
which
is estimated based on historical warranty costs incurred. Customers may
purchase
extended advance replacement service coverage and on-site service if
they are
located in the United States, Canada and most countries within
Europe.
The
Company follows the provisions of the Financial Accounting Standards
Board
(FASB) Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of the
Indebtedness of Others,” which clarifies the requirements of Statement of
Financial Accounting Standards (SFAS) No. 5, “Accounting for
Contingencies,” relating to a guarantor’s accounting for and disclosures for
certain guarantees. FIN 45 requires enhanced disclosures, among other
things, for certain guarantees, including warranty accruals. Qualstar
does not
issue third party guarantees, as defined, and therefore only the disclosure
provisions of FIN 45 apply.
Activity
in the liability for product warranty for the periods presented were
as follows
(in thousands):
|
June 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Beginning
balance
|
$ |
173
|
$ |
133
|
||||
|
Cost
of warranty claims
|
(58 | ) | (45 | ) | ||||
|
Accruals
for product warranties
|
59
|
85
|
||||||
|
Ending
balance
|
$ |
174
|
$ |
173
|
||||
Research
and Development
All
research and development costs are charged to expense as incurred. These
costs
consist primarily of engineering salaries, benefits, outside consultant
fees,
purchased parts and supplies directly involved in the design and development
of
new products, and facilities and other internal costs.
Advertising
Advertising
and promotion expenses include costs associated with direct and indirect
marketing, trade shows and public relations. Qualstar expenses all costs
of
advertising and promotion as incurred. Advertising and promotion expenses
for
the years ended June 30, 2007, 2006 and 2005 were approximately $604,000,
$407,000 and $520,000, respectively.
Fair
Value of Financial Instruments
The
carrying amounts reported in the balance sheets for cash and cash equivalents,
accounts receivable and accounts payable approximate their fair values
due to
the short term nature of these financial instruments.
Change
in Accounting Principle and Share-Based Compensation
The
Company adopted Statement of Financial Accounting Standard (“SFAS”)
No. 123(R), share-based payment, using the modified prospective application
transition method effective July 1, 2005. The adoption of
SFAS No. 123(R) requires companies to measure the cost of employee and
director services received in exchange for share-based payment awards
based on the grant-date fair value of the award. The Company uses the
Black-Scholes option pricing model to determine the fair value
of stock option grants as of the measurement date. The
cost is recognized over the requisite service period ( the vesting period)
for
the estimated number of stock options ultimately expected to vest. The
Company
recognized $90,000 and $133,000 as stock based compensation expense in
fiscal
years 2007 and 2006, respectively. These amounts are similar to the
amounts reported historically in the Company’s footnotes under the pro forma
disclosure provisions of SFAS 123.
In
accordance with SFAS 123, the Company previously measured employee stock
option related compensation expense using the minimum value method for
grants
prior to the Company’s initial public offering and the Black-Scholes method
afterward for determining the weighted average fair value of options
granted.
For the fiscal year ended June 30, 2005, had employee stock option related
compensation expense been determined based on the Black-Scholes method,
the
Company’s net loss and loss per share would have been increased to the pro forma
amounts indicated below (in thousands, except per share amounts):
|
Fiscal
Year
|
||||
|
June
30, 2005
|
||||
|
Net
loss as reported
|
$ | (1,647 | ) | |
|
Stock-based
employee compensation cost included in reported net loss
|
—
|
|||
|
Pro
forma stock-based employee compensation cost under
SFAS 123
|
(118 | ) | ||
|
Pro
forma net loss
|
$ | (1,765 | ) | |
|
Loss
per share:
|
||||
|
Basic —
as reported
|
$ | (0.13 | ) | |
|
Basic —
pro forma
|
$ | (0.14 | ) | |
|
Diluted —
as reported
|
$ | (0.13 | ) | |
|
Diluted —
pro forma
|
$ | (0.14 | ) | |
In
computing the pro forma compensation expense under SFAS 123, a
weighted-average fair value of $1.27 for the 2005 stock option grants
was
estimated at the date of grant using the minimum value option pricing
model
before Qualstar’s initial public offering and the Black-Scholes model afterward
with the following assumptions:
|
2005
|
||||
|
Expected
dividend yield
|
0 | % | ||
|
Risk-free
interest rate
|
3.8 | % | ||
|
Expected
life of options
|
4 years
|
|||
|
Volatility
|
36.9 | % | ||
Income
Taxes
Income
taxes are accounted for using the liability method in accordance with
SFAS 109, “Accounting for Income Taxes.” Under this method, deferred tax
liabilities and assets are recognized for the expected future tax consequences
of temporary differences between the financial statement and tax bases
of assets
and liabilities, and for the expected future tax benefit to be derived
from tax
credits and loss carryforwards. Current income tax expense or benefit
represents
the amount of income taxes expected to be payable or refundable for the
current
year. A valuation allowance is established when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax
assets
will not be realized.
Comprehensive
Income (Loss)
Comprehensive
income (loss) is accounted for according to SFAS No. 130, “Reporting
Comprehensive Income” (SFAS 130). Comprehensive income (loss) includes
unrealized gains and losses on debt and equity securities classified
as
available-for-sale and included as a component of shareholders’
equity.
Loss
per Share
Qualstar
calculates earnings (loss) per share in accordance with SFAS No. 128,
“Earnings per Share.” Basic earnings per share has been computed by dividing net
loss by the weighted average number of common shares outstanding. Diluted
loss
per share has been computed by dividing net loss by the weighted average
common
shares outstanding plus dilutive securities or other contracts to issue
common
stock as if these securities were exercised or converted to common
stock.
The
following table sets forth the calculation for basic and diluted loss
per share
for the periods indicated:
|
Year
Ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Loss:
|
||||||||||||
|
Net
loss
|
$ | (1,447 | ) | $ | (1,692 | ) | $ | (1,647 | ) | |||
|
Shares:
|
||||||||||||
|
Weighted
average shares for basic loss per share
|
12,253
|
12,253
|
12,398
|
|||||||||
|
Stock
options
|
—
|
—
|
—
|
|||||||||
|
Weighted
average shares for diluted loss per share
|
12,253
|
12,253
|
12,398
|
|||||||||
Shares
issuable under stock options of 585,000, 557,000 and 455,000 for the
years ended
June 30, 2007, 2006 and 2005, respectively, have been excluded from the
computation of diluted loss per share because the effect would be
antidilutive.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
Note 2 –
Marketable Securities
The
following table summarizes marketable securities by security type at
June 30, 2007, and June 30, 2006, respectively (in
thousands):
|
June 30,
2007
|
Amortized
Cost
|
Unrealized
Gain
|
Unrealized
Loss
|
Fair
Value
|
||||||||||||
|
US
Treasury obligations and direct obligations of U.S. Government
agencies
|
$ |
15,357
|
$ |
—
|
$ | (41 | ) | $ |
15,316
|
|||||||
|
Government
Sponsored Enterprise collateralized mortgage obligations
|
4,570
|
—
|
(11 | ) |
4,559
|
|||||||||||
|
Commercial
Paper
|
1,287
|
—
|
—
|
1,287
|
||||||||||||
|
Corporate
bonds
|
3,904
|
—
|
(4 | ) |
3,900
|
|||||||||||
|
Municipal
bonds
|
505
|
1
|
—
|
506
|
||||||||||||
|
Total
|
$ |
25,623
|
$ |
1
|
$ | (56 | ) | $ |
25,568
|
|||||||
|
June 30,
2006
|
Amortized
Cost
|
Unrealized
Gain
|
Unrealized
Loss
|
Fair
Value
|
||||||||||||
|
US
Treasury obligations and direct obligations of U.S. Government
agencies
|
$ |
16,318
|
$ |
—
|
$ | (229 | ) | $ |
16,089
|
|||||||
|
Government
Sponsored Enterprise collateralized mortgage obligations
|
3,519
|
—
|
(108 | ) |
3,411
|
|||||||||||
|
Corporate
bonds
|
7,380
|
—
|
(58 | ) |
7,322
|
|||||||||||
|
Total
|
$ |
27,217
|
$ |
—
|
$ | (395 | ) | $ |
26,822
|
|||||||
The
following tables show the gross unrealized losses and fair value of the
Company’s investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and
length of
time that individual securities have been in a continuous unrealized
loss
position, at June 30, 2007, and June 30, 2006,
respectively.
|
Less
Than 12 Months
|
12
Months or Greater
|
Total
|
||||||||||||||||||||||
|
June 30,
2007
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
US
Treasury obligations and direct obligations of U.S. Government
agencies
|
$ |
—
|
$ |
—
|
$ |
14,668
|
$ | (41 | ) | $ |
14,668
|
$ | (41 | ) | ||||||||||
|
Government
Sponsored Enterprise collateralized mortgage obligations
|
—
|
—
|
3,552
|
(11 | ) |
3552
|
(11 | ) | ||||||||||||||||
|
Corporate
bonds
|
—
|
—
|
2,071
|
(4 | ) |
2,071
|
(4 | ) | ||||||||||||||||
|
Total
|
$ |
—
|
$ |
—
|
$ |
20,291
|
$ | (56 | ) | $ |
20,291
|
$ | (56 | ) | ||||||||||
|
Less
Than 12 Months
|
12
Months or Greater
|
Total
|
||||||||||||||||||||||
|
June 30,
2006
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
US
Treasury obligations and direct obligations of U.S. Government
agencies
|
$ |
4,599
|
$ | (18 | ) | $ |
11,490
|
$ | (211 | ) | $ |
16,089
|
$ | (229 | ) | |||||||||
|
Government
Sponsored Enterprise collateralized mortgage obligations
|
1,757
|
(9 | ) |
1,654
|
(99 | ) |
3,411
|
(108 | ) | |||||||||||||||
|
Corporate
bonds
|
3,340
|
(6 | ) |
3,982
|
(52 | ) |
7,322
|
(58 | ) | |||||||||||||||
|
Total
|
$ |
9,696
|
$ | (33 | ) | $ |
17,126
|
$ | (362 | ) | $ |
26,822
|
$ | (395 | ) | |||||||||
U.S. Treasury
Obligations. The unrealized losses on the Company’s investments in
U.S. Treasury obligations and direct obligations of U.S. Government
agencies were caused by interest rate increases. The contractual terms
of these
investments do not permit the issuer to settle the securities at a price
less
than the amortized cost of the investment. Because the Company has the
ability
and intent to hold these investments until a recovery of fair value,
which may
be maturity, the Company does not consider these investments to be
other-than-temporarily impaired at June 30, 2007.
Government
Sponsored Enterprise (GSE) Collateralized Mortgage
Obligations. Freddie Mac and Fannie Mae are identified as GSEs. The
unrealized losses on the Company’s investment in GSE collateralized mortgage
obligations were caused by interest rate increases. The cash flows of
these
investments are guaranteed by the GSE. Because the decline in market
value is
attributable to changes in interest rates and not credit quality and
because the
Company has the ability and intent to hold these investments until a
recovery of
fair value, which may be maturity, the Company does not consider these
investments to be other-than-temporarily impaired at June 30,
2007.
Corporate
Bonds. The unrealized losses on the Company’s investments in
corporate bonds were caused by interest rate increases. The contractual
terms of
these investments do not permit the issuer to settle the securities at
a price
less than the amortized cost of the investment. Because the Company has
the
ability and intent to hold these investments until a recovery of fair
value,
which may be maturity, the Company does not consider these investments
to be
other-than-temporarily impaired at June 30, 2007.
The
following tables summarize the contractual maturities of the Company’s fixed
maturity securities (in thousands):
|
June 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Less
than 90 days
|
$ |
—
|
$ |
1,557
|
||||
|
Less
than one year
|
9,574
|
12,483
|
||||||
|
Due
in one to five years
|
15,994
|
12,782
|
||||||
| $ |
25,568
|
$ |
26,822
|
|||||
Note 3 –
Inventories
Inventories
consist of the following:
|
June 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Raw
materials, net
|
$ |
5,234
|
$ |
6,473
|
||||
|
Finished
goods
|
694
|
825
|
||||||
| $ |
5,928
|
$ |
7,298
|
|||||
Note 4 –
Property and Equipment
The
components of property and equipment are as follows:
|
June 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Leasehold
improvements
|
$ |
546
|
$ |
546
|
||||
|
Furniture
and fixtures
|
984
|
1,006
|
||||||
|
Machinery
and equipment
|
2,456
|
2,416
|
||||||
|
3,986
|
3,968
|
|||||||
|
Less
accumulated depreciation and amortization
|
(3,385 | ) | (3,044 | ) | ||||
| $ |
601
|
$ |
924
|
|||||
Note 5 –
Income Taxes
The
provision (benefit) for income taxes is comprised of the following:
|
Year
Ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ |
—
|
$ | (86 | ) | $ | (156 | ) | ||||
|
State
|
30
|
(3 | ) | (215 | ) | |||||||
|
30
|
(89 | ) | (371 | ) | ||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
—
|
—
|
342
|
|||||||||
|
State
|
—
|
—
|
94
|
|||||||||
|
—
|
—
|
436
|
||||||||||
| $ |
30
|
$ | (89 | ) | $ |
65
|
||||||
The
following is a reconciliation of the statutory federal income tax rate
to
Qualstar’s effective income tax rate:
|
Year
Ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Statutory
federal income tax benefit
|
(34.0 | )% | (34.0 | )% | (34.0 | )% | ||||||
|
State
income taxes, net of federal income tax benefit
|
(4.0 | ) | (3.4 | ) | (3.7 | ) | ||||||
|
Non-taxable
investment income
|
0.0
|
0.0
|
(3.4 | ) | ||||||||
|
Research
and development credits
|
(14.0 | ) | (6.5 | ) | (15.5 | ) | ||||||
|
Valuation
allowance
|
53.8
|
36.7
|
60.9
|
|||||||||
|
Other
|
0.3
|
2.1
|
(0.2 | ) | ||||||||
| 2.1 | % | (5.1 | )% | 4.1 | % | |||||||
The
tax
effect of temporary differences resulted in deferred income tax assets
(liabilities) as follows:
|
June 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carryforwards
|
$ |
1,358
|
$ |
1,030
|
||||
|
Capital
loss and other credit carryforwards
|
445
|
444
|
||||||
|
Research
and development credit carryforwards
|
635
|
437
|
||||||
|
Allowance
for bad debts and returns
|
65
|
45
|
||||||
|
Inventory
reserves
|
320
|
279
|
||||||
|
Capitalized
inventory costs
|
34
|
30
|
||||||
|
Marketable
securities
|
21
|
151
|
||||||
|
Other
accruals
|
502
|
455
|
||||||
|
Total
gross deferred tax assets
|
3,380
|
2,871
|
||||||
|
Deferred
tax liabilities:
|
||||||||
|
Depreciation
and other
|
(107 | ) | (215 | ) | ||||
|
Total
gross deferred tax liabilities
|
(107 | ) | (215 | ) | ||||
|
Valuation
allowance
|
(3,273 | ) | (2,656 | ) | ||||
|
Net
deferred tax assets
|
$ |
—
|
$ |
—
|
||||
The
Company placed a valuation allowance on net deferred tax assets during
the
fiscal years ended June 30, 2007 and 2006 based on the Company’s assessment
regarding the realizability of such assets in future years. The Company
has net
operating losses, capital losses, research and development credit and
other
carryforwards for tax purposes of $2.4 million at June 30, 2007 and $1.9
million at June 30, 2006 expiring between fiscal years 2009 and 2025,
except for the state research and development credit, which has no limit
on the
carryforward period.
Note 6 –
Preferred Stock
Qualstar’s
capital structure allows for the Board of Directors to authorize
5,000,000 shares of preferred stock. The Board of Directors has authority
to fix the rights, preferences, privileges and restrictions, including
voting
rights, of these shares of preferred stock without any future vote or
action by
the shareholders. At June 30, 2007 and 2006, there were no outstanding
shares of preferred stock.
Note 7 –
Shared Based Stock Option Plans
The
Company has one share-based compensation plan as described below. During
fiscal
2007, 2006 and 2005, the Company recorded share-based compensation associated
with outstanding stock option grants of approximately $90,000, $133,000
and $0,
respectively. No income tax benefit was recognized in the income statement
for
share-based arrangements in any period presented.
Qualstar
adopted a stock option plan (1998 Stock Incentive Plan) under which incentive
and nonqualified stock options could be granted for an aggregate of no
more than
1,215,000 shares of common stock. Under the terms of the plan, options
could be issued at an exercise price of not less than 100% of the fair
market
value of common stock on the date of grant. If an incentive stock option
is
granted to an individual owning more than 10% of the total combined voting
power
of all stock, the exercise price of the option may not be less than 110%
of the
fair market value of the underlying shares on the date of grant. These
option
awards typically vest based on 4 years of continuous service at a rate of
25% per year and terminate as specified in each option agreement, but
terminate no later than ten years after the date of grant.
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model that uses the assumptions noted
in the
following table. Expected volatilities are based on the historical volatility
of
the Company’s stock. The Company uses historical data to estimate option
exercise and employee termination in determining forfeiture rates and
evaluates
separate groups of employees by functional area that have similar historical
exercise behavior. The expected term of options granted is estimated
based on
the vesting term of the award, historical employee exercise behavior,
expected
volatility of the Company’s stock and an employee’s average length of service.
The risk-free interest rate used in this model correlates to a
U.S. constant rate Treasury security with a contractual life that
approximates the expected term of the option award. Weighted-average
numbers
have been used below as indicated.
|
2007
|
2006
|
2005
|
||||||||||
|
Expected
dividend yield
|
0 | % | 0 | % | 0 | % | ||||||
|
Risk-free
interest rate
|
4.5 | % | 4.8 | % | 3.8 | % | ||||||
|
Expected
life of options
|
5 years
|
4 years
|
4 years
|
|||||||||
|
Volatility
|
35.4 | % | 30.8 | % | 36.9 | % | ||||||
The
following table summarizes all stock option activity (in thousands, except
per
share amounts):
|
Options
|
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
||||||||||||
|
Outstanding
at June 30, 2006
|
557
|
$ |
4.36
|
|||||||||||||
|
Granted
|
128
|
2.93
|
||||||||||||||
|
Exercised
|
—
|
—
|
||||||||||||||
|
Forfeited
or expired
|
(100 | ) |
4.23
|
|||||||||||||
|
Outstanding
at June 30, 2007
|
585
|
$ |
4.07
|
7.25
|
$ |
86
|
||||||||||
|
Exercisable
at June 30, 2007
|
299
|
$ |
4.93
|
3.20
|
$ |
21
|
||||||||||
The
weighted-average grant date fair value of options granted during the
fiscal
years 2007, 2006 and 2005 was $1.13, $0.96, and $1.27, respectively.
The total
intrinsic value of options exercised in fiscal year 2005
was $11,000.
At
June
30, 2007, there was $293,000 of total unrecognized compensation cost
related to
nonvested share-based compensation awards granted under the Plan. The
cost is expected to be recognized over a weighted-average period of 2.9
years. The total fair value of shares vested for fiscal years 2007,
2006 and 2005 was $78,000, $156,000 and $188,000, respectively.
Note 8 –
Purchase of N2 Power
On
July 11, 2002, Qualstar acquired the assets and intellectual properties of
N2Power, Incorporated, a privately held company which designed and produced
small and efficient open-frame switching power supplies. The consideration
for
this acquisition amounted to $250,000 plus acquisition expenses of $38,000.
The
purchase price was primarily allocated to a patent, in the amount of
$240,000,
which is being amortized over 5 years. At June 30, 2007, accumulated
amortization of the patent was $240,000. Amortization expense for the
years
ended June 30, 2007, 2006 and 2005 was $48,000 in each year. The
patent is fully amortized as of June 30, 2007.
Note 9 –
Commitments
Qualstar’s
lease agreement for its facility located in Simi Valley, California,
expires in
February of 2011. The annual rent for the lease is $468,000, with
step-ups ranging from $28,000 to $34,000 every two years. The Company
provides
for rent expense on a straight-line basis over the lease term.
Qualstar’s
lease agreement for its facility located in Boulder, Colorado, expires
in May of
2009. The annual rent for the lease is $47,000, with a nominal step-up
of
approximately 3% annually. The Company provides for rent expense on a
straight-line basis over the lease term.
Future
minimum lease payments under these leases are as follows:
|
Year
Ending June 30,
|
Minimum
Lease Payment (in thousands)
|
|||
|
2008
|
$ |
603
|
||
|
2009
|
620
|
|||
|
2010
|
588
|
|||
|
2011
|
307
|
|||
|
2012
and thereafter
|
—
|
|||
| $ |
2,118
|
|||
Rent
expense (including equipment rental) for the years ended June 30, 2007,
2006, and 2005, was $665,000, $670,000, and $671,000, respectively.
Note 10 –
Segment Information
Based
on
the provisions of SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information (SFAS No. 131)” and the manner in which the
Chief Operating Decision Maker analyzes the business, Qualstar has determined
that it has two separate operating segments.
Segment
revenue, loss before income taxes and total assets were as follows:
|
Year
Ended June 30
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Revenue
|
(in
thousands)
|
|||||||||||
|
Tape
Libraries:
|
||||||||||||
|
Product
|
$ |
14,676
|
$ |
16,008
|
$ |
21,231
|
||||||
|
Service
|
2,929
|
3,144
|
2,638
|
|||||||||
|
Total
Tape Libraries
|
17,605
|
19,152
|
23,869
|
|||||||||
|
Power
Supplies
|
3,007
|
2,579
|
1,275
|
|||||||||
|
Consolidated
Revenue
|
$ |
20,612
|
$ |
21,731
|
$ |
25,144
|
||||||
|
Year
Ended June 30
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Loss
before Taxes
|
(in
thousands)
|
|||||||||||
|
Tape
Libraries
|
$ | (1,310 | ) | $ | (1,434 | ) | $ | (1,427 | ) | |||
|
Power
Supplies
|
(107 | ) | (347 | ) | (155 | ) | ||||||
|
Consolidated
Loss before Income Taxes
|
$ | (1,417 | ) | $ | (1,781 | ) | $ | (1,582 | ) | |||
|
Year
Ended June 30
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Total
Assets
|
(in
thousands)
|
|||||||||||
|
Tape
Libraries
|
$ |
43,228
|
$ |
44,312
|
$ |
46,317
|
||||||
|
Power
Supplies
|
835
|
1,087
|
906
|
|||||||||
|
Consolidated
Assets
|
$ |
44,063
|
$ |
45,399
|
$ |
47,223
|
||||||
SFAS No. 131,
establishes standards for reporting information about operating segments.
This
standard requires segmentation based on our internal organization and
reporting
of revenue and operating income based upon internal accounting methods.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly
by the
chief operating decision maker in deciding how to allocate resources
and in
assessing performance. Our chief operating decision maker is our Chief
Executive
Officer. Our two segments are Tape Libraries and Power Supplies. The
two
segments discussed in this analysis are presented the way we internally
managed
and monitored performance in fiscal years 2007, 2006, and 2005. Our financial
reporting systems present various data for management to operate the
business,
including internal profit and loss statements prepared on a basis consistent
with U.S. GAAP. For the years ended June 30, 2007, 2006 and 2005 amounts do
not reflect allocations for certain internal resources, pension expense,
legal
expense, accounting fees, and other items. However, this represented
the
measurement data used by the chief operating decision maker in evaluating
performance. The tape library business has dominated our operations,
thus, our
operations and reporting have been set up to accommodate a single segment
and
attribute all revenues and expenses to the tape library side, with the
power
supply business being an ancillary part of overall operations. As the
power
supply segment grew in fiscal 2006 to represent greater than 10% of combined
revenues, a framework for internal resource allocations for labor, including
direct, indirect and overhead was implemented in fiscal 2006.
The
types
of products and services provided by each segment are summarized
below:
Tape
Libraries — The Company designs, develops, manufactures and sells
automated magnetic tape libraries used to store, retrieve and manage
electronic
data primarily in network computing environments. Tape libraries consist
of
cartridge tape drives, tape cartridges and robotics to move the cartridges
from
their storage locations to the tape drives under software control. Our
tape
libraries provide data storage solutions for organizations requiring
backup,
recovery and archival storage of critical data.
Power
Supplies — The Company designs, develops, and sells ultra small,
open frame, high efficiency switching power supplies. These power supplies
are
used to convert AC line voltage to DC for use in a wide variety of electronic
equipment such as telecommunications equipment, machine tools, routers,
switches, wireless systems and gaming devices.
Certain
assets are tracked separately by the power supplies segment, and all
others are
recorded in the tape library segment for internal reporting presentations.
Cash
is not segregated between the two segments, but retained by the library
segment.
Geographic
Information
Information
regarding revenues attributable to the Qualstar’s primary geographic operating
regions is as follows:
|
Year
Ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Revenues:
|
||||||||||||
|
North
America
|
$ |
15,582
|
$ |
16,051
|
$ |
18,281
|
||||||
|
Europe
|
3,196
|
3,467
|
4,933
|
|||||||||
|
Asia
Pacific
|
1,330
|
1,610
|
1,264
|
|||||||||
|
Other
|
504
|
603
|
666
|
|||||||||
| $ |
20,612
|
$ |
21,731
|
$ |
25,144
|
|||||||
The
geographic classification of revenues is based upon the location to which
the
product is shipped. Qualstar does not have any significant long-lived
assets
outside of the United States.
Note 11 –
Legal Proceedings
The
Company is from time to time involved in various lawsuits and legal proceedings
that arise in the ordinary course of business. At this time, management
is not
aware of any pending or threatened litigation against the Company that
we expect
will have a material adverse effect on our business, financial condition,
liquidity or operating results. Legal claims are inherently uncertain,
however.
There can be no assurance that the Company will not be adversely affected
in the
future by legal proceedings.
Note 12 –
Benefit Plans
Qualstar
has a voluntary deferred compensation plan (the Plan) qualifying for
treatment
under Internal Revenue Code Section 401(k). All employees are eligible to
participate in the Plan following three months of service of employment
and may
contribute up to 100% of their compensation on a pre-tax basis, not to
exceed
the annual IRS maximum. Qualstar, at the discretion of management, may
make
matching contributions in an amount equal to 25% of the first 6% of compensation
contributed by eligible participants. Qualstar’s contributions under the Plan
totaled $43,000, $59,000, and $67,000 for the years ended June 30, 2007,
2006, and 2005 respectively.
Note 13 –
Related Party Transactions
Qualstar’s
outside counsel is a member of its board of directors. During the years
ended
June 30, 2007, 2006, and 2005 Qualstar paid $69,000, $94,000, and $105,000,
respectively to the law firm in which the director is a shareholder for
general
business purposes.
Note 14 –
Recent Accounting Pronouncements
In
June
2006, The Financial Accounting Standards Board (FASB) issued Financial
Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income
Taxes.” FIN 48 prescribes a recognition and measurement threshold for tax
positions taken or expected to be taken on a tax return and relates to
the
uncertainty in income taxes recognized in the financial statements in
accordance
with FAS 109, Accounting for Income Taxes. FIN 48 is effective for the
first fiscal year beginning after December 15, 2006, thus, we expect to
adopt it in our fiscal year beginning July 1, 2007. We do not
expect the adoption of FIN 48 to have a material impact on our financial
statements.
In
2007,
we adopted Staff Accounting Bulletin (“SAB”) 108, “Considering the Effects of
Prior Year Misstatements when Quantifying Current Year
Misstatements.” SAB 108 requires companies to quantify misstatements
using both a balance sheet (iron curtain) and an income statement (rollover)
approach to evaluate whether either approach results in an error that
is
material in light of relevant quantitative and qualitative factors, and
provides
for a one-time cumulative effect transition adjustment. The adoption
of SAB No. 108 did not have an impact on our financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
defines fair value, establishes a framework for measuring fair value
in GAAP,
and expands disclosures about fair value measurements. SFAS 157
does not require any new fair value measurements, but provides guidance
on how
to measure fair value by providing a fair value hierarchy used to classify
the
source of the information. We expect to adopt SFAS 157 in our fiscal
year beginning July 1, 2008. We do not expect the adoption of SFAS
157 to have a material impact on our financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS 159 gives us the
irrevocable option to carry many financial assets and liabilities at
fair
values, with changes in fair value recognized in earnings. We expect
to adopt SFAS 159 in our fiscal year beginning July 1, 2008. We do
not expect the adoption of SFAS 159 to have a material impact on our
financial
statements.
Note 15 –
Quarterly Results of Operations (Unaudited)
|
Three
Months Ended
|
||||||||||||||||
|
June 30,
|
March 31,
|
December 31,
|
September 30,
|
|||||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||||||
|
Fiscal
2007:
|
||||||||||||||||
|
Net
sales
|
$ |
5,786
|
$ |
4,884
|
$ |
5,283
|
$ |
4,659
|
||||||||
|
Gross
profit
|
2,246
|
1,338
|
1,634
|
1,302
|
||||||||||||
|
Net
Income (loss)
|
$ |
245
|
$ | (667 | ) | $ | (446 | ) | $ | (579 | ) | |||||
|
Net
loss per share:
|
||||||||||||||||
|
Basic
|
$ |
0.02
|
$ | (0.06 | ) | $ | (0.04 | ) | $ | (0.05 | ) | |||||
|
Diluted
|
0.02
|
(0.06 | ) | (0.04 | ) | (0.05 | ) | |||||||||
|
Fiscal
2006:
|
||||||||||||||||
|
Net
sales
|
$ |
4,888
|
$ |
5,052
|
$ |
5,689
|
$ |
6,102
|
||||||||
|
Gross
profit
|
1,603
|
1,446
|
1,922
|
1,904
|
||||||||||||
|
Net
loss
|
$ | (694 | ) | $ | (598 | ) | $ | (189 | ) | $ | (211 | ) | ||||
|
Net
loss per share:
|
||||||||||||||||
|
Basic
|
$ | (0.06 | ) | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.02 | ) | ||||
|
Diluted
|
(0.06 | ) | (0.05 | ) | (0.02 | ) | (0.02 | ) | ||||||||
ITEM 9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS
AND PROCEDURES
We
carried out an evaluation, under the supervision and with the participation
of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of Qualstar’s
disclosure controls and procedures as of June 30, 2007, pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports that we file or
submit
under the Exchange Act is recorded, processed, summarized and reported
within
the time periods specified in the Commission’s rules and forms, and to ensure
that the information required to be disclosed by us in reports that we
file or
submit under the Exchange Act is accumulated and communicated to our
management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
We
did
not make any changes in our internal control over financial reporting
during the
fourth quarter of fiscal 2007 that materially affected, or are reasonably
likely
to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER
INFORMATION
None.
PART III
The
information called for by Items 10, 11, 12, 13 and 14 of Part III
of Form 10-K (except information as to Qualstar’s executive officers, which
is included under Part I, Item 1 of this Report) will be included in
Qualstar’s Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after the close of its fiscal year ended
June 30, 2007, and is hereby incorporated by reference to such Proxy
Statement.
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
A
list of
our executive officers and biographical information appears in Part I,
Item 1 of this report. Information about our Directors may be found under
the caption “Election of Directors” of our Proxy Statement (the “Proxy
Statement”). That information is incorporated herein by reference.
Additional
information in response to this item is incorporated herein by reference
to our
proxy statement to be filed within 120 days after our fiscal year ended
June 30,
2007.
ITEM 11. EXECUTIVE
COMPENSATION
Information
in response to this item is incorporated by reference to our proxy statement
to
be filed within 120 days of our fiscal year ended June 30, 2007.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information
in response to this item is incorporated by reference to our proxy statement
to
be filed within 120 days of our fiscal year ended June 30, 2007.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information
in response to this item is incorporated by reference to our proxy statement
to
be filed within 120 days of our fiscal year ended June 30, 2007.
ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Information
in response to this item is incorporated by reference to our proxy statement
to
be filed within 120 days of our fiscal year ended June 30,
2007.
PART IV
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
(a) The
financial statements are set forth under Item 8 of this Annual Report on
Form 10-K.
All
other
schedules have been omitted since the required information is not present
in
amounts sufficient to require submission of the schedule, or because
the
required information is included in the consolidated financial statements
or
notes thereto.
(b) Exhibits:
|
Exhibit
No.
|
Description
|
|
|
3.1(1)
|
Restated
Articles of Incorporation.
|
|
|
3.2(1)
|
Amended
and Restated Bylaws.
|
|
|
10.1(1)*
|
1998
Stock Incentive Plan, as amended and restated.
|
|
|
10.2(1)
|
Form
of Indemnification Agreement.
|
|
|
10.3(2)
|
Lease
agreement between Strategic Performance Fund-II, Inc. and Qualstar
Corporation, dated September 20, 2000.
|
|
|
14.1(3)
|
Code
of Business Conduct and Ethics
|
|
|
21.1
|
Subsidiaries
of Qualstar Corporation
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
Certification
of Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
____________
|
(1)
|
Incorporated
by reference to the designated exhibits to Qualstar’s registration
statement on Form S-1 (Commission File No. 333-96009), declared
effective by the Commission on June 22,
2000.
|
|
(2)
|
Incorporated
by reference to the designated exhibit to Qualstar’s Report on
Form 10-Q for the fiscal quarter ended September 30,
2000.
|
|
(3)
|
Incorporated
by reference to the designated exhibit to Qualstar’s Report on
Form 10-K for the fiscal year ended June 30,
2004.
|
|
*
|
Each
of these exhibits constitutes a management contract, compensatory
plan or
arrangement required to be filed as an exhibit to this report
pursuant to
Item 15(b) of this report.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its
behalf
by the undersigned thereunto duly authorized.
| QUALSTAR CORPORATION | ||
|
Date:
September 26, 2007
|
By:
|
/s/ WILLIAM
J. GERVAIS
|
|
William
J. Gervais,
|
||
|
Chief
Executive Officer and
President
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been
signed below by the following persons on behalf of the registrant and
in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/ WILLIAM
J. GERVAIS
|
Chief
Executive Officer,
|
|||
|
William
J. Gervais
|
President
and Director
|
|||
|
(principal
executive officer)
|
||||
|
/s/ RICHARD
A. NELSON
|
Vice
President, Engineering
|
September 26,
2007
|
||
|
Richard
A. Nelson
|
Secretary
and Director
|
|||
|
/s/ CARL
W. GROMADA
|
Director
|
September 26,
2007
|
||
|
Carl
W. Gromada
|
||||
|
/s/ STANLEY
W. CORKER
|
Director
|
September 26,
2007
|
||
|
Stanley
W. Corker
|
||||
|
/s/ ROBERT
E. RICH
|
Director
|
September 26,
2007
|
||
|
Robert
E. Rich
|
||||
|
/s/ ROBERT
A. MEYER
|
Director
|
September 26,
2007
|
||
|
Robert
A. Meyer
|
||||
|
/s/ ANDREW
A. FARINA
|
Vice-President
and CFO
|
September 26,
2007
|
||
|
Andrew
A. Farina
|
(principal
financial officer)
|
EXHIBIT INDEX
|
Exhibit
No.
|
Description
|
|
|
3.1(1)
|
Restated
Articles of Incorporation.
|
|
|
3.2(1)
|
Amended
and Restated Bylaws.
|
|
|
10.1(1)*
|
1998
Stock Incentive Plan, as amended and restated.
|
|
|
10.2(1)
|
Form
of Indemnification Agreement.
|
|
|
10.3(2)
|
Lease
agreement between Strategic Performance Fund-II, Inc. and Qualstar
Corporation, dated September 20, 2000.
|
|
|
14.1(3)
|
Code
of Business Conduct and Ethics
|
|
|
Subsidiaries
of Qualstar Corporation
|
||
|
Consent
of Independent Registered Public Accounting Firm.
|
||
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
||
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
||
|
Certification
of Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
||
|
Certification
of Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
____________
|
(1)
|
Incorporated
by reference to the designated exhibits to Qualstar’s registration
statement on Form S-1 (Commission File No. 333-96009), declared
effective by the Commission on June 22, 2000.
|
|
(2)
|
Incorporated
by reference to the designated exhibit to Qualstar’s Report on
Form 10-Q for the fiscal quarter ended September 30,
2000.
|
|
(3)
|
Incorporated
by reference to the designated exhibit to Qualstar’s Report on
Form 10-K for the fiscal year ended June 30,
2004.
|
|
*
|
Each
of these exhibits constitutes a management contract, compensatory
plan or
arrangement required to be filed as an exhibit to this report
pursuant to
Item 15(b) of this
report.
|
52