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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended March 31, 2005
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from           to
Commission file number 000-30083
QUALSTAR CORPORATION
     
Incorporated under the laws   95-3927330
of the State of California
   (I.R.S. Employer
Identification No.)
3990-B Heritage Oak Court
Simi Valley, CA 93063
(805) 583-7744
      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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No þ
      Total shares of common stock without par value outstanding at March 31, 2005 is 12,253,117.
 
 

 

QUALSTAR CORPORATION
FORM 10-Q
For the quarterly period ended March 31, 2005
Table of Contents
                 
        Page
         
PART I — FINANCIAL INFORMATION
  ITEM 1.     Financial Statements:        
        Consolidated Condensed Balance Sheets — March 31, 2005 and June 30, 2004     3  
        Consolidated Condensed Statements of Operations — Three months and nine months ended March 31, 2005 and 2004     4  
        Consolidated Condensed Statements of Cash Flows — Nine months ended March 31, 2005 and 2004     5  
        Consolidated Condensed Statement of Changes in Shareholders’ Equity — Nine months ended March 31, 2005     6  
        Notes to Interim Consolidated Condensed Financial Statements     7  
  ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     11  
  ITEM 3.     Qualitative and Quantitative Disclosures About Market Risk     16  
  ITEM 4.     Controls and Procedures     16  
 
PART II — OTHER INFORMATION
  ITEM 4.     Submission of Matters to a Vote of Security Holders     16  
  ITEM 6.     Exhibits     17  
Signatures     18  

2

 

PART I — FINANCIAL INFORMATION
ITEM 1. Financial Statements
QUALSTAR CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, 2005 and June 30, 2004
                     
    March 31,   June 30,
    2005   2004
         
    (Unaudited)    
    (In thousands)
ASSETS
Current assets:
                
 
Cash and cash equivalents
   $ 2,434     $ 6,401  
 
Marketable securities
     31,663       29,376  
 
Receivables, net of allowances of $278 as of March 31, 2005, and $217 at June 30, 2004, respectively
     3,185       4,628  
 
Inventories
     7,648       7,418  
 
Prepaid expenses and other current assets
     469       470  
 
Prepaid income taxes
     638       1,072  
 
Deferred income taxes
     —       594  
             
   
Total current assets
     46,037       49,959  
             
Property and equipment, net
     1,263       1,439  
Other assets
     209       249  
             
   
Total assets
   $ 47,509     $ 51,647  
             
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
                
 
Accounts payable
   $ 832     $ 1,171  
 
Accrued payroll and related liabilities
     486       500  
 
Other accrued liabilities
     1,254       1,754  
             
   
Total current liabilities
     2,572       3,425  
Deferred income taxes
     —       158  
Shareholders’ equity:
                
 
Common stock, no par value; 50,000 shares authorized, 12,253 and 12,596 shares issued and outstanding at March 31, 2005 and June 30, 2004, respectively
     18,370       20,121  
 
Notes from directors
     —       (45 )
 
Accumulated other comprehensive loss
     (304 )     (101 )
 
Retained earnings
     26,871       28,089  
             
   
Total shareholders’ equity
     44,937       48,064  
             
   
Total liabilities and shareholders’ equity
   $ 47,509     $ 51,647  
             
See the accompanying notes to these interim condensed consolidated financial statements.

3

 

QUALSTAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three Months and Nine Months Ended March 31, 2005 and 2004
                                   
    Three Months Ended   Nine Months Ended
    March 31,   March 31,
         
    2005   2004   2005   2004
                 
    (Unaudited)
    (In thousands, except per share data)
Net revenues
   $ 5,742     $ 8,302     $ 18,439     $ 23,834  
Cost of goods sold
     3,881       5,295       11,934       14,993  
                         
Gross profit
     1,861       3,007       6,505       8,841  
                         
Operating expenses:
                                
 
Research and development
     904       1,070       2,722       3,291  
 
Sales and marketing
     822       910       2,537       2,648  
 
General and administrative
     924       1,697       2,992       4,484  
                         
Total operating expenses
     2,650       3,677       8,251       10,423  
                         
Loss from operations
     (789 )     (670 )     (1,746 )     (1,582 )
Investment income
     219       142       594       488  
                         
Loss before income taxes
     (570 )     (528 )     (1,153 )     (1,094 )
Provision (benefit) for income taxes
     65       (182 )     65       (379 )
                         
Net loss
   $ (635 )   $ (346 )   $ (1,218 )   $ (715 )
                         
Loss per share:
                                
 
Basic
   $ (0.05 )   $ (0.03 )   $ (0.10 )   $ (0.06 )
                         
 
Diluted
   $ (0.05 )   $ (0.03 )   $ (0.10 )   $ (0.06 )
                         
Shares used to compute loss per share:
                                
 
Basic
     12,253       12,587       12,446       12,574  
                         
 
Diluted
     12,253       12,587       12,446       12,574  
                         
See the accompanying notes to these interim condensed consolidated financial statements.

4

 

QUALSTAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Months Ended March 31, 2005 and 2004
                     
    Nine Months Ended
    March 31,
     
    2005   2004
         
    (Unaudited)
    (In thousands)
OPERATING ACTIVITIES:
                
 
Net loss
   $ (1,218 )   $ (715 )
 
Adjustments to reconcile net loss to net cash provided by operating activities:
                
   
Depreciation and amortization
     349       314  
   
Provision for (recovery of) bad debts and returns
     (2 )     308  
   
Amortization of deferred compensation
     —       140  
   
Accrued interest on directors’ notes
     —       (5 )
   
Gain on sale of securities
     (11 )     —  
 
Changes in operating assets and liabilities:
                
   
Accounts receivable
     1,445       300  
   
Inventories
     (230 )     (40 )
   
Prepaid expenses and other assets
     5       (285 )
   
Prepaid income taxes
     434       208  
   
Deferred income taxes
     436       —  
   
Accounts payable
     (339 )     108  
   
Other accrued liabilities
     (514 )     392  
             
Net cash provided by operating activities
     355       725  
             
INVESTING ACTIVITIES:
                
 
Purchases of property, equipment and leasehold improvements
     (137 )     (149 )
 
Proceeds from sale of marketable securities
     18,000       31,456  
 
Purchases of marketable securities
     (20,479 )     (34,865 )
             
Net cash used in investing activities
     (2,616 )     (3,558 )
             
FINANCING ACTIVITIES:
                
 
Proceeds from exercise of stock options
     76       38  
 
Repurchase of common stock
     (1,827 )     (314 )
 
Principal and interest payments on directors’ notes
     45       79  
             
Net cash used in financing activities
     (1,706 )     (197 )
             
Net decrease in cash and cash equivalents
     (3,967 )     (3,030 )
Cash and cash equivalents at beginning of period
     6,401       6,236  
             
Cash and cash equivalents at end of period
   $ 2,434     $ 3,206  
             
Supplemental cash flow disclosure:
                
 
Income taxes paid
   $ —     $ —  
             
See the accompanying notes to these interim condensed consolidated financial statements.

5

 

QUALSTAR CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
Nine Months Ended March 31, 2005
                                                   
            Accumulated        
    Common Stock   Notes   Other        
        from   Comprehensive   Retained    
    Shares   Amount   Directors   Loss   Earnings   Total
                         
            (Unaudited)        
            (In thousands)        
Balance at June 30, 2004
     12,596     $ 20,121     $ (45 )   $ (101 )   $ 28,089     $ 48,064  
Proceeds from 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:
                                                
 
Change in unrealized losses on investments
     —       —       —       (203 )     —       (203 )
 
Net loss
                                     (1,218 )     (1,218 )
                                     
Comprehensive loss
                                             (1,421 )
                                     
Balance at March 31, 2005
     12,253     $ 18,370     $ —     $ (304 )   $ 26,871     $ 44,937  
                                     
See the accompanying notes to these condensed consolidated financial statements.

6

 

QUALSTAR CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2005
(in thousands, except per share data)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
      The accompanying condensed consolidated financial statements are unaudited, except for the balance sheet at June 30, 2004 which is derived from our audited financial statements, and should be read in conjunction with the consolidated financial statements and related notes included in Qualstar Corporation’s (“Qualstar,” “us,” “we,” or “our”) Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed with the Securities and Exchange Commission (SEC) on September 24, 2004. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting primarily of normal recurring items, which are necessary for the fair presentation of Qualstar’s consolidated financial position as of March 31, 2005, consolidated results of operations for the three and nine months ended March 31, 2005, and consolidated cash flows for the nine months ended March 31, 2005. Operating results for the three and nine month periods ended March 31, 2005 are not necessarily indicative of results to be expected for a full year.
NOTE 2. LOSS PER SHARE
      The following table sets forth the computation of basic and diluted net loss per share for the three months and nine months ended March 31, 2005 and 2004:
                                   
    Three Months Ended   Nine Months Ended
    March 31,   March 31,
         
    2005   2004   2005   2004
                 
Numerator:
                                
 
Net loss
   $ (635 )   $ (346 )   $ (1,218 )   $ (715 )
Denominator:
                                
 
Denominator for basic net loss per share — weighted average shares
     12,253       12,587       12,446       12,574  
 
Dilutive potential common shares from employee stock options and restricted stock
     —       —       —       —  
                         
 
Denominator for diluted net loss per share — adjusted weighted average shares and assumed conversions
     12,253       12,587       12,446       12,574  
                         
Basic net loss per share
   $ (0.05 )   $ (0.03 )   $ (0.10 )   $ (0.06 )
                         
Diluted net loss per share
   $ (0.05 )   $ (0.03 )   $ (0.10 )   $ (0.06 )
                         
      All shares related to stock options are excluded for the three months and nine months ended March 31, 2005, and 2004, respectively, from the computation of diluted loss per share as the effect would have been antidilutive.
NOTE 3. STOCK BASED COMPENSATION
      Employee stock options are accounted for under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” as amended and interpreted, which requires recognition of expense when the option price is less than the fair value of the stock at the date of grant. Qualstar generally awards options for a fixed number of shares at an option price equal to the fair value at the date of grant. Qualstar has adopted the disclosure-only provisions of the Financial Accounting Standards Board’s

7

 

QUALSTAR CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(FASB) Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” (SFAS 123).
      If the Company recognized employee stock option-related compensation expense in accordance with SFAS 123 and used the minimum value method for grants prior to the Company’s initial public offering and the Black-Scholes method model afterward for determining the weighted average fair value of options granted, the Company’s net loss and loss per share would have been increased to the pro forma amounts indicated below:
                                 
    Three Months Ended   Nine Months Ended
    March 31,   March 31,
         
    2005   2004   2005   2004
                 
Net loss as reported
   $ (635 )   $ (346 )   $ (1,218 )   $ (715 )
Stock-based employee compensation cost included in reported net income (loss)
     —       11       —       140  
Pro forma stock-based employee compensation cost under SFAS 123
     (68 )     (128 )     (204 )     (384 )
                         
Pro forma net loss
   $ (703 )   $ (463 )   $ (1,422 )   $ (959 )
                         
Loss per share:
                                
Basic — as reported
   $ (0.05 )   $ (0.03 )   $ (0.10 )   $ (0.06 )
                         
Basic — pro forma
   $ (0.06 )   $ (0.04 )   $ (0.11 )   $ (0.08 )
                         
Diluted — as reported
   $ (0.05 )   $ (0.03 )   $ (0.10 )   $ (0.06 )
                         
Diluted — pro forma
   $ (0.06 )   $