BKF Capital Issues Open Letter To Qualstar Shareholders; Urges Shareholders Not to be Fooled By the Company’s Investor

  BKF Capital Issues Open Letter To Qualstar Shareholders; Urges Shareholders
  Not to be Fooled By the Company’s Investor Presentation

Business Wire

BOCA RATON, Fla. -- June 14, 2013

BKF Capital Group, Inc. (OTCQB:BKFG), the second largest shareholder of
Qualstar Corporation, today that issued an open letter to the shareholders of
Qualstar Corporation (NASDAQ:QBAK), in response to the Company’s release
yesterday of an investor presentation. BKF urges shareholders not to be fooled
by the investor presentation into believing that the Company is on the road to
recovery under current CEO Lawrence Firestone and the directors that he has
brought to the Board. BKF believes that, under the strategy of Mr. Firestone
and his fellow directors, the Company will continue to burn cash, incur
unreasonable and unnecessary expenses and suffer losses. The Board therefore
needs to be replaced.

BKF is urging all shareholders to vote on the GOLD proxy card to elect the
directors nominated by BKF at the 2013 Annual Meeting of Shareholders of
Qualstar that will be held on June 28, 2013.

Shareholders who have questions about the BKF solicitation, who require
assistance in voting their shares, or who need additional copies of BKF’s
Proxy Statement, are requested to contact our proxy advisors, AST Phoenix
Advisors, 6201 15^th Avenue, 3^rd Floor, Brooklyn, NY 11219. Call Toll Free:
(877) 478-5038. Banks and Brokers Call Collect: (212) 493-3910.

The complete text of the letter to shareholders follows:

June 14. 2013

                    OPEN LETTER TO QUALSTAR SHAREHOLDERS:

           DO NOT BE FOOLED BY THE COMPANY’S INVESTOR PRESENTATION

Dear Fellow Qualstar Shareholders:

We are BKF Capital Group, Inc., and we own 18.7% of the stock of Qualstar
Corporation. We are running a proxy contest to elect our slate of directors at
the Company’s 2013 Annual Meeting of Shareholders on June 28^th, because—

  *our Company is bleeding cash;
  *our Company continues to lose sales;
  *our Company continues to lose money;
  *our stock price continues to go down; and

the directors nominated by management — who in total own 5,000 shares of the
Company’s stock — have been leading us down a risky and costly path that we,
as shareholders, cannot afford.

Yesterday, the Company released a colorful, graphics laden investor
presentation to convince you that management is making significant progress
towards turning around the Company’s declining fortunes, despite record losses
and cash burn in the nine months ended March 31, 2103.

                              DO NOT BE FOOLED!

Instead of reassuring us, the presentation reinforces our fears that the
current Board is embarking on a strategy that is bound to fail. If we, as
shareholders, do not put an end to this strategy, at the current burn rate,
our Company will literally run out of money in two years.

It’s All About the Tape Storage Business

First, you should filter out management’s talk of the Company’s power
conversion business. The power conversion business has never been the problem.
It has been a solid, profitable business — that is until the last 12 months
during the tenure of CEO, Lawrence Firestone and the directors that he has
brought to the Board this year. This business owes nothing to Mr. Firestone or
his directors.

Second, you should realize that there are fundamental reasons why the
Company’s tape storage business has been consistently dragging down its
operating results, and continues to do so. These issues are simply ignored in
the investor presentation.

The tape storage space is highly competitive, and the competitors include some
of the biggest names in computer hardware, like Oracle and IBM. Even the
Company’s closest competitors, Overland Storage Inc. and Quantum Corp., which
are larger and have greater resources, are struggling.

Consider these statistics:

                         Qualstar  Overland  Quantum   Oracle    IBM
Market Cap                $18.38M    $36.82M    $351.14M   $159.08B   $223.67B
Employees                 68         184        N/A        115,000    434,246
Qtrly Rev Growth          -0.36      -0.23      -0.13      -0.01      -0.05
(YOY)^*
Revenue (TTM)^**          14.05M     51.25M     587.57M    37.15B     103.24B
Gross Margin (TTM)        0.32       0.34       0.41       0.80       0.48
EBITDA (TTM)              -5.48M     -16.12M    -5.47M     17.29B     26.40B
Operating Margin (TTM)    -0.40      -0.34      -0.06      0.39       0.21
Net Income (TTM)          -9.56M     -16.92M    -52.42M    10.57B     16.57B
EPS (TTM)                 -0.78      -0.60      -0.22      2.15       14.5
________

* Year over year

** Trailing twelve months

The reasons why Qualstar’s closest competitors are losing money in the space
are not hard to understand.

  *The market as a whole is moving away from tape storage.
  *Customers are tending to go to a single vendor for their computer hardware
    and storage needs. If a customer is buying his servers from Dell, he is
    likely to be buying his tape storage devices from Dell as well.
  *Particularly in the medium to large end of the market, tape storage
    solutions are being bundled with other products. This is why we are
    particularly troubled with the suggestion in the investor presentation
    that the Company is attempting to move even further up market.

With its small size and limited resources, we do not believe that the Company
can go it alone in the tape storage business. If it persists in going down
this path, we believe, it will just burn through more and more of our money,
without generating earnings.

What Are the Details Behind the Company’s Outsourcing Initiative?

The Company touts the outsourcing to CTS as a means to cut costs and improve
operating efficiency. That may be so. But we have no idea if it is true
because the Company has not revealed any details regarding its outsourcing
program or the risks that the program may entail.

For example, the Company tells us that it will be off-loading its remaining
inventory to its outsourcing manufacturer. In our experience, however, that
comes with strings attached, in the form of a repurchase guarantee if the
inventory is not used or sold.

Gains in Gross Margins Has Been More Than Offset By Increased Expenses

The Company trumpets the increase in gross margins from 27.3% in FY 2012 to
40.0% in the third quarter of FY 2013. Very nice. But what the Company does
not highlight is that the increase in gross margins has been accompanied by
exorbitant increases in G&A costs, engineering costs and sales and marketing
costs — which together have gone up by 87.3% in the last nine months. No
wonder that the Company’s operating loss in the first nine months of FY 2013
is 17.7% greater than all of FY 2012.

How Much Longer Are Shareholders Supposed to Wait for Promised Improvements?

In June 2012, when Mr. Firestone was appointed as CEO, he projected that the
Company would break even or be profitable on a monthly basis by the end of FY
2013. We are at the end of FY 2013 and the Company is not even close to
achieving this goal. Instead the investor presentation now asks you to believe
in a “FY 2014 Strategic Focus.”

Mr. Firestone did not keep to his predictions for FY 2013, and we do not
believe he will do so in FY 2014 either. Given the continuing cash burn,
shareholders simply cannot afford to wait for his promises of recovery.

There Is No Fiscal Responsibility, Because the Company Is Not Run By Directors
with an Ownership Stake

The management nominated directors have virtually no stake in the Company. Ask
yourself. If these directors, including Mr. Firestone, are so confident in
their strategy portrayed in the investor presentation, why have they not been
investing their own money in the Company? The reality is otherwise. If the
high cost, swing for the fences strategy they are pursing fails, as we think
it will, these directors, Mr. Firestone included, can simply walk away, and
leave us, the Qualstar shareholders, empty handed.

To take one example. Management is reporting that it will be spending over
$1.1 million in the current fiscal year to oppose BKF, this in a company with
a total market capitalization of under $20 million. You would not do this if
it were your money. Mr. Firestone and the rest of the Board are doing it,
because it is not theirs.

Mr. Firestone is Being Paid As If He Were a CEO Who Has Already Succeeded, Not
One Whose Success Is in Doubt

Mr. Firestone is being paid a base salary of $300,000, going up to $350,000 on
July 1, 2013. For a company of Qualstar’s size that has lost almost $7 million
in the first nine months of FY 2013, we believe this is outrageously high. If
the Company is serious about addressing its cost structure, as implied in the
investor presentation, it should be starting with executive compensation at
the top.

Do Not Believe What Management Is Telling You About BKF

Mr. Firestone and the rest of the current Board are telling you repeatedly
that BKF has a hidden agenda to acquire the Company and take the benefits of
ownership for itself.

We have said it before and will say it again. This is absolutely and totally
false. Do not believe it.

BKF will benefit from the turnaround that we hope to achieve if our nominees
are elected proportionately with all other shareholders. We will take no
benefit that is not available to all shareholders as a whole.

What You Should Do?

BKF has determined that the only way to fix Qualstar is to replace the Board
with new independent directors. We are therefore asking for your help to elect
the directors nominated by BKF on the GOLD proxy card.

Every vote counts. Therefore no matter how many or how few shares you own, it
is important that you return your GOLD proxy card and vote FOR the election of
the five nominees of BKF, and as recommended by BKF on the other proposals at
the 2013 Annual Meeting.

Do not return the WHITE proxy card or any other card furnished to you by or on
behalf of the Company. Remember as well that only your last vote will count,
so that even if you have voted on the Company’s WHITE proxy card, you may
revoke your vote by returning a later dated GOLD proxy card in favor of the
BKF nominees and as recommended by BKF on the other proposals.

We thank you in advance for your support.

BKF Capital Group, Inc.

Maria N. Fregosi

Chief Operating Officer

If you have any questions, require assistance in voting your shares, or need
additional copies of BKF’s Proxy Statement, please contact our proxy advisors—

AST PHOENIX ADVISORS
6201 15^th AVENUE
3^RD FLOOR
BROOKLYN, NY 11219
CALL TOLL FREE: (877) 478-5038
BANKS AND BROKERS CALL COLLECT: (212) 493-3910

About BKF Capital Group Inc.

BKF Capital Group Inc. is a publicly traded company that intends to create an
asset management platform with investment vehicles that focus on areas of
portfolio management that typically receive less attention from investors but
also present unique investment opportunities. BKF is also engaged in seeking
to arrange an acquisition, with an operating business with revenues, at least
three years of operating history and unique value opportunities. For
additional information please visit: www.bkfcapital.com.

Contact:

BKF Capital Group, Inc.
Maria Fregosi 561-362-4199 Ext. 209
mfregosi@bkfcapital.com
 
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