DEFA14A

 

 

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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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