Star Equity (STRR) DEFA14A Additional proxy soliciting materials

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.     )

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¨ Definitive Proxy Statement

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¨ Soliciting Material Pursuant to §240.14a-12

DIGIRAD CORPORATION

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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April 2013

*

*

*

*

*

“Safe

Harbor”

Statement

under

the

Private

Securities

Litigation

Reform

Act

of

1995:

The

presentation

and

information

contained

herein

present

“forward-looking

statements”

addressing

expectations, prospects, estimates and other matters that are dependent upon future events or

developments. The matters discussed in these forward-looking statements are subject to risks and

uncertainties that could cause actual results to differ materially from those projected, anticipated or

implied. The most significant of these uncertainties are described in Digirad’s Form 10-K, Form 10-Q

and Form 8-K reports (including all amendments to those reports) and exhibits to those reports, and

include (but are not limited to) the following: statements about

the Company’s revenues, expenses,

margins, cash flow from operations, personnel and equipment leasing services, centers of influence

strategy and benefits, market conditions and trends, heath care dynamics, demand for imaging

leasing services and products, imaging modality trends, competitive advantages, utilization, cost

control, financial results, restructuring efforts, the positive impact of corporate governance changes,

and ability to increase revenue and cash flow on a go-forward basis. This presentation reflects

management’s views as of date presented. Except to the limited extent required by applicable law,

Digirad undertakes no obligation to update or revise any forward-looking statements, whether as a

result of new information, future events or otherwise.

EXECUTIVE SUMMARY

The

Digirad

Board

is

newly

reconstituted

with

5

independent

directors

•

4 introduced in past 12 months and recommended by stockholders

The

Reconstituted

Board

has

adopted

a

new

strategic

plan

to

drive

cash

flow and stockholder value

•

Refocus on Digirad Imaging Solutions (DIS) and installed base

camera customer service

•

Reduce costs and eliminate less productive  assets

Management

team

has

been

resized

•

New President and CEO, CFO, and Diagnostic Imaging President

Digirad

Board

has

adopted

significant

corporate

governance

reforms

Digirad

Board

is

committed

to

returning

capital

to

stockholders

through

a $12 million stock buyback program

Dissident slate lacks relevant experience and has not articulated a new

plan for Digirad

3

•

Board reconstituted on February 7, 2013 to become a more nimble and

cost efficient size

•

Size reduced from 8 members to 6 members

•

Jeff Eberwein appointed Chairman of the Board

•

4 independent directors introduced in past 12 months, each of whom

were recommended by our stockholders

•

3 in April 2012; 1 in June 2012

•

All

5

directors

standing

for

re-election

are

independent;

going

forward,

the

Board

will

be

comprised

of

5

non-employee

independent

directors, plus the CEO

•

Board

collectively

has

significant

ownership

in

the

Company

•

Over 5%

purchased in the open market

•

All

directors are in compliance with our director ownership policies

•

Eberwein and Gillman each own directly over 467,000 shares

4

•

On February 28, 2013, the reconstituted Board announced a new

strategic plan, management changes, the adoption of significant

corporate governance reforms, and its commitment to returning

cash to stockholders

•

Since February 7, 2013 (the date the Board was reconstituted), the

Company’s stock price has increased almost 40%!

Digirad’s Board has been incredibly responsive to stockholder

concerns and is committed to maximizing stockholder value. 

Now is not the time to change direction.

5

Digirad Imaging Solutions

•

New strategic focus; it is all about cash flow:

Focus on Digirad Imaging Solutions (DIS) cash flow generation

Execute financially disciplined acquisitions via attractive returns and fast payback;

committed

to only acquisitions that make financial sense

Utilize NOLs to offset nearly all, if not all, of the taxable income generated from

increased cash flow

Diagnostic Imaging

•

Significant restructuring of the Diagnostic Imaging business to reduce costs

Estimated elimination of $3 million to $4 million of costs annually

Focus on cash flow generation, primarily from customer service business associated

with the installed base of cameras

Will continue to sell cameras, but at a slower pace

Main goal is to eliminate investment in less productive assets

Corporate Headquarters Move to Atlanta

•

Certain functions will move to further reduce costs and reduce overhead

6

Increase

Value to Stockholders

•

Stockholder value will be increased by:

Reducing costs as we restructure and focus on cash flow

+

Acquiring financially disciplined, cash generating businesses, subject to stockholder

approval if cost exceeds $5 million

+

Share repurchases

=

Stockholder Value

•

Goal is to ultimately generate $3 million to $4 million annually

of consolidated cash flow

Return

of Value to Stockholders

•

Announced increase to the Digirad share buyback program on February 28, 2013: 

increased from $4 million to $12 million ($10 million available)

•

Cash on hand + cash we will generate + buy back program = Aggressive return to

stockholders

•

Commitment to returning value to stockholders further solidified

by Company

announcement of 10b5-1 buyback plan implemented on March 15, 2013

•

Board undertook aggressive share buyback program because the price is right

to buy.  

7

•

Management team is being right-sized based on our healthcare services focus

•

Top three management positions appointed since September 2012

•

Todd Clyde will step down after a transition period (July 2013)

•

Several other management positions are being eliminated to make the organization lean and nimble

Matt

Molchan,

President,

Digirad

(appointed

February

2013)

•

More than 10 years experience in mobile imaging

•

Digirad employee for over 6 years

•

Will become CEO in July 2013

Mickey King,

Executive Director, DIS (Appointed January 2012)

•

More than 20 years experience in mobile imaging

•

Digirad employee for over 6 years

Jeff

Keyes,

Chief

Financial

Officer

(appointed

September

2012)

•

History of high growth medical technology companies, including experience in spin-offs, IPOs, and start-up

environments

•

Experienced in rapid change and restructuring management

Virgil

Lott,

President,

Diagnostic

Imaging

(appointed

February

2013)

•

25 years experience in medical imaging and operations

•

Digirad employee for over 7 years

8

Digirad’s Board has:

•

Established a CEO stock ownership policy that requires significant participation

of

the

CEO,

at

3x

annual

base

salary,

which

is

in

line

with

ISS’

recommended

practices

•

Adopted a resolution to require stockholder approval for any acquisition in

excess of $5 million in purchase price

•

Amended our non-management director stock ownership policy in order to

increase the amount of stock that each non-employee director must own to

continue service to the Board

•

Adopted a term limit policy of no more than 10 years

•

Instituted a cap on annual issuance of stock equity awards to a maximum of 3%

of the total equity outstanding

Digirad’s Board is committed to corporate governance best practices

9

Digirad’s Directors Have the

Relevant Experience to Execute

Our New Strategic Plan and

Maximize Value For All

Stockholders

•

Over 20 years of Wall Street experience

•

Board experience with a variety of companies

•

Specific experience in mergers & acquisitions as well as proper NOL utilization

•

Significant network of contacts in the investor community that can be leveraged to drive

investor interest in Digirad.

11

Mr.

Eberwein

is

the

Founder

and

CEO

of

Lone

Star

Value

Investors,

LLC,

an

investment

firm.

Prior

to

founding

Lone

Star

in

January

2013,

Mr.

Eberwein

was

a

Portfolio

Manager

at

Soros

Fund

Management

from

January

2009

to

December

2011

and

Viking

Global

Investors

from

March

2005

to

September

2008.

Mr.

Eberwein

also

serves

on

the

Boards

of,

since

May

2012,

The

Goldfield

Corporation,

a

provider

of

electrical

transmission

construction

and

maintenance

services,

NTS,

Inc.,

an

engineering

services

company

that

provides

design

consulting

services,

testing

and

certifications

and

supply

chain

management

solutions,

On-Track

Innovations

Ltd,

a

developer

and

marketer

of

contactless

smartcard

technology

and

product

solutions,

and

Aetrium

Incorporated,

a

global

semiconductor

company

that

provides

IC

handlers

and

reliability

test

systems.

Mr.

Eberwein

is

the

Treasurer

and

serves

on

the

Executive

Committee

of

the

Board

of

Hope

for

New

York,

a

501(c)(3)

organization

dedicated

to

serving

the

poor

in

New

York

City.

Mr.

Eberwein

earned

an

MBA

from

The

Wharton

School,

University

of

Pennsylvania

and

a

BBA

with

High

Honors

from

The

University

of

Texas

at

Austin.

Jeffrey E. Eberwein

–

Chairman, Director since 2012

Founder and Chief Executive Officer of Lone Star Value Investors, LLC

John M. Climaco

–

Director since 2012

President, Chief Executive Officer and Director, Axial Biotech, Inc.

•

Extensive executive  and operating experience with healthcare services

•

Track record of raising capital, engineering strategic alliances, building executive

teams and managing complex business operations and legal strategies

12

Mr.

Climaco is the President and Chief Executive Officer, as well as

a member of the board of directors,

of Axial Biotech, Inc., a venture-backed molecular diagnostics company specializing in spine disorders, which

he co-founded in January 2003. Under Mr.

Climaco’s leadership, and through partnerships he created with

companies including Medtronic, Johnson

& Johnson and Smith

& Nephew, Axial successfully developed and

commercialized ScoliScore, the first molecular prognostic test in the orthopedic industry. In 2012 and 2013,

Axial sold its major assets, and is in the process of winding down operations. Prior to founding Axial Biotech,

Mr.

Climaco served as a Producer in 1998 and Director of Programming

from May 1999 to August 2000 for

Quokka Sports, a venture-backed online media company that went public in 1999. While with

Quokka,

Mr.

Climaco created partnerships with Intel, Microsoft WebTV, NBC Sports, and National Geographic.

Mr.

Climaco practiced with Fabian

& Clendenin in corporate and tax law in Salt Lake City from March 2001 to

April 2007. Mr.

Climaco earned a B.A. degree in Philosophy, cum laude, from Middlebury College and a J.D.

from the University of California, Hastings College of Law.

Charles M. Gillman

–

Director since 2012

Portfolio Manager, Nadel and Gussman, LLC

•

Extensive experience with strategic capital allocation and consulting

•

Substantial public board experience

13

In June 2001, Charles M. Gillman was employed by Nadel and Gussman, LLC (“NG”) to serve as portfolio

manager

of

certain

investment

portfolios

of

NG

and

its

related

family

interests.

NG

is

a

management

company

located in Tulsa, Oklahoma that employs personnel for business entities related to family members of Herbert

Gussman. In June 2002, Mr.

Gillman founded Value Fund Advisors, LLC (“VFA”) to serve as investment advisor to

certain NG family related assets. VFA discontinued its role as investment advisor to these assets in December 2008.

In

December

2008,

Mr.

Gillman

entered

into

an

employment

agreement

with

NG

to

provide

portfolio

management

services

to

NG.

Pursuant

to

this

employment

agreement,

Mr.

Gillman

serves

as

Portfolio

Manager

of

certain

NG

and

family

assets.

Mr.

Gillman

began

his

career

as

a

strategic

management

consultant

for

McKinsey

&

Company,

New

York, where he worked to develop strategic plans for business units of companies located both inside the United

States

and

abroad.

Thereafter

and

prior

to

joining

NG,

Mr.

Gillman

held

a

number

of

positions

in

the

investment

industry

and

developed

an

expertise

in

the

analysis

of

companies

going

through

changes

in

their

capital

allocation

strategy. Mr.

Gillman earned a B.S., summa cum laude, from the Wharton School of the University of Pennsylvania

in

May

1992.

In

addition,

Mr.

Gillman

currently

serves

on

the

boards

of

directors

of

Littlefield

Corporation,

a

charitable

gaming

company,

which

he

joined

in

May

2008

and

where

he

is

a

member

of

the

Compensation

and

Nominating Committees and previously served on the Audit Committee; and CompuMed, Inc., a private medication

management

company,

which

he

joined

in

February

2008.

Mr.

Gillman

also

serves

on

the

board

of

the

Penn

Club

of

New York.

James B. Hawkins -

Director since 2012

President, Chief Executive Officer and Director, Natus Medical Incorporated

14

•

Over 20 years of experience running medical device companies

•

Completed over 20 acquisitions in his career

•

As a Founder and CEO of Invivo Corporation, Mr.

Hawkins sold the Company for seven

times the value of its IPO price.

•

Since joining Natus Medical, its market cap has grown approximately 700 percent in

value.

Since April 2004, Mr.

Hawkins has served as the President, Chief Executive Officer and

a director of Natus

Medical Incorporated, a provider of healthcare products used for

the screening, detection, treatment, monitoring,

and tracking of common medical ailments such as hearing impairment, neurological dysfunction, epilepsy, sleep

disorders, and certain newborn conditions. Prior to joining Natus Medical, Mr.

Hawkins was President, Chief Executive

Officer and

a

director

of

Invivo

Corporation,

a

developer

and

manufacturer

of

multi-parameter

vital

sign

monitoring

equipment, and its predecessor from, 1985 through January 2004. Mr.

Hawkins also served as secretary of Invivo from

1986 until January 2004. Mr.

Hawkins has served as a director of IRIDEX Corporation, a provider of therapeutic based

laser systems, delivery devices and consumable instrumentation used to treat sight-threatening eye diseases in

ophthalmology, since October 2007. Mr.

Hawkins earned a B.A. degree in Business Commerce from Santa Clara

University and an M.B.A. from San Francisco State University.

John W. Sayward

–

Director since 2008

Retired Partner, Nippon Heart Hospital LLC

•

Over 15 years experience serving as CFO of medical device and pharmaceutical

companies

•

Significant experience in financial discipline and financial oversight

15

From September 2005 to January 2007, Mr.

Sayward was a partner at Nippon Heart Hospital LLC,

a company that built and managed cardiovascular care hospitals in Japan. From July 2002 to May 2005,

Mr.

Sayward was the Executive Vice President and Chief Financial Officer of LMA North America Inc., a

global leader in the manufacture and distribution of medical anesthesia devices. From February 1997

to November 2001, Mr.

Sayward served as the Executive Vice President of Finance, Chief

Financial

Officer and Treasurer of SICOR Inc., an international pharmaceutical company, and was elected to its

board of directors in June 1998. Mr.

Sayward earned a B.A. degree from Northwestern University in

1973 and a Master of Management from the Kellogg School of Management at Northwestern

University in 1975.

16

•

Digirad believes Red Oak is just seeking control without

paying a control premium.  This is their second proxy

contest for control in 2 years, despite a newly

constituted Board comprised entirely of independent

directors. 

•

Red Oak has not articulated any new business plan for the

company

•

Red Oak nominees do not have the relevant experience

or knowledge of our business

•

November

30,

2011

–

Red

Oak

nominates

five

candidates

for

election

to

the

Board

at

the

2012

Annual

Meeting

of Stockholders , disclosing an ownership of just 3,000 shares or less than 1% of our outstanding stock. Digirad

offered

Red

Oak

3

Board

seats

in

an

attempt

to

avoid

a

costly

and

unproductive

proxy

contest

–

Red Oak refused

as

they

only

wanted

full

control

17

•

March

26,

2012

–

We

announce

plans

to

add

up

to

three

new

independent

directors

to

the

Board

with

input

from our stockholders

•

April

23,

2012

–

We

appoint

3

new

independent

directors

identified

by

our

stockholders

•

June

4,

2012

–

We

appoint

1

new

independent

director

after

considering

a

number

of

candidates

suggested

by

stockholders, including  two Red Oak nominees

•

June

29,

2012

–

We

entered

into

a

settlement

agreement

with

Red

Oak

and

agreed,

among

other

things,

to

undertake certain governance and compensation changes

•

February

7,

2013

–

Our

Board

is

reconstituted

with

6

directors;

Jeff

Eberwein

is

appointed

Chairman

•

February

28,

2013

–

We

announce

a

new

strategic

plan,

management

changes,

the

adoption

of

significant

corporate governance reforms, and commitment to returning significant cash to stockholders

•

February

28,

2013

–

We

receive

notice

from

Red

Oak

of

its

intention

to

nominate

five

candidates

for

election

to

the Board and bring four business proposals before the 2013 Annual Meeting of Stockholders

•

March

13,

2013

–

We

adopt

additional

corporate

governance

reforms

and

increase

our

share

buyback

program

to $12 million

•

March

14,

2013

–

We

inform

Red

Oak

of

our

recent

corporate

actions

and

requested

that

Red

Oak

withdraw

its

nominations and business proposals

•

March

18,

2013

–

Red

Oak

files

its

initial

Schedule

13D

disclosing

an

ownership

just

over

5%

•

March

28,

2013

–

Red

Oak

withdraws

its

four

business

proposals

•

April 10, 2013 -

Red Oak Partners  files its own proxy statement

Red Oak has proposed cost-cutting measures and corporate governance reforms that we have

already addressed.

•

Red Oak wants greater stock ownership for directors and to reduce Board compensation

Digirad’s Board has already adopted a comprehensive director stock ownership policy,

which all directors are in compliance with.  To date, the Digirad directors own over 5% of

the outstanding shares.  Digirad also believes its compensation is reasonable based on its

size and peer group.  Further, David Sandberg has had least one instance where he joined a

Board

and

then

actually

received

an

increase

in

pay  

•

Red

Oak

claims

it

would

utilize

its

network

of

advisors

to

bring

deal

flow

Digirad’s Board already has a very robust network of contacts

associated with the

space in which we operate.  We do not need to spend $100,000 to review acquisitions as

proposed by Red Oak.

•

Red Oak wants to conduct a 382 NOL study to determine proper NOL

utilization

Digirad’s Board has already performed this exercise

and will utilize its NOLs to offset

nearly all, if not all, of the taxable income generated from increased cash flow

•

Red

Oak

wants

to

review

and

rebid

most

corporate

costs

We are already conducting that process.

Our new strategic plan includes cutting $3-$4

million of costs annually from our business.

18

•

Red Oak would seek to reduce the stockholder threshold to call a

special meeting to 10%

Digirad already has a policy

that owners of 20% of common stock may call a special

meeting, which is a normal and customary level for many companies. 

•

Red Oak believes our management compensation is excessive.

As part of our restructuring effort announced in February 2013, we have eliminated

many positions, including four executive management level positions,  and their

associated compensation.  The remaining lead management positions for the Company

and their base salaries (Matt Molchan, President, $275,000; Jeff

Keyes, CFO, $235,000;

Virgil

Lott,

President,

Diagnostic

Imaging,

$235,000)

are

all

within

a

requisite

peer

group

and

rationale

for

their

scope

of

responsibilities.

•

Red Oak believes our audit costs are high.

As a result of our operational changes in 2012 and restructuring

efforts announced in

February 2013, we have and will incur additional audit fees.  We

are strongly committed

to reducing our fees but believe a change in our auditors at this time would be disruptive

and potentially threaten the success of our new strategic plan.

19

•

None of the Red Oak nominees have any meaningful healthcare experience.

•

Three of five Red Oak nominees have little or no experience serving on a public

company board.

•

A California bank, co-founded by a Red Oak nominee, was shut down by the

FDIC after suffering heavy losses on mortgages.

•

Red Oak founder and nominee, David Sandberg, has been sued by a company

alleging

he

engaged

in

numerous

violations

of

federal

securities

laws

in

making

purchases of the company’s common stock.

•

One Red Oak nominee currently sits on more than six company boards.

20

21

Your Board is Committed to Stockholder Return

Since our last Annual Meeting, we have:

The dissident slate does not have a long-term strategy or relevant industry experience. 

Digirad’s Board has a clear, concise and a publicly communicated growth strategy to

maximize value for all stockholders.

Added four new independent Board members with significant relevant experience

Initiated and implemented, as well as continuously review, a variety of best corporate

governance practices

Initiated and completed a Strategic Review, and clearly announced our plans of that

review on February 28, 2013 with the adoption of a new strategic

plan

Have been cognizant and disciplined on returning value to stockholders, both by

increasing our share buyback and implementing our strategic changes, which is evidenced

in our share price, which is up 40% from $1.87 per share on February 7, 2013 (when the

Board was reconstituted) to approximately $2.60 per share on April 12, 2013.

*

*

*

*

*

*

*

*

•

Customer Service (Maintenance)

•

Focused Product Sales

•

Personnel & Equipment Leasing (Services)

•

Nuclear Medicine

•

Ultrasound

•

Other Mobile Services

•

New Services

23

Delivers licensed staffing and imaging equipment to physicians with

no burden and cost of full ownership

Personnel

Logistics

Equipment

24

Physician

Issues

Benefits

to Physician/Healthcare System

Physician

Practices

Hospitals

Imaging

Centers

Evolving regulation and economics are forcing structural change in Healthcare

•

Increase revenue-generating patients

•

Improve level of care

•

Participating in integrated networks (ACOs,

acquisitions)

•

Multi-use exam room maximizes revenue

•

Creating integrated networks (ACOs, acquisitions)

•

Community outreach programs (referral patterns and

managing lives)

•

Turnkey imaging solution with staffing

•

Changes referral patterns

•

Turn key imaging solution with staffing

•

Ability to meet excess demand

•

Hospital acquisitions

25

Expand Practice revenues and profits

•

Cardiology practices

•

Internists

New revenue streams from channel

•

New services; variety of other mobile-based services

•

Accreditation consulting services

Geographic optimization

Tuck-in acquisitions

Stabilizing reimbursement

26

Nuclear

Nuclear / Ultrasound

Headquarters

28 Locations

The most profitable component of Diagnostic Imaging: Customer Service

•

Includes over 20 Field Service Engineers located throughout the United States

•

Flexible and nimble to address customer needs

•

Actively managed to increase margins and to enhance cash flows

•

Serves a significant installed base of cameras

Camera unit sales

•

Continued intent to sell cameras into the market, but at a slower pace, and at a

much higher cost optimized level

27

Continued focus going forward to maximize cash flow from our installed based

and increased efficiencies

Liquid, Strong Ratios, No Long-Term Debt; Well Positioned to Deploy

our Strategy

28

Managed well through volatile external market dynamics

* 2012 results include $1.2 million of inventory reserve adjustments (included in gross profit) related to our February

28, 2013 restructuring announcement, and impact of $0.4 million estimated settlement of radiopharmaceutical

supply litigation (included in operating expenses). 

29