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Northstar Neuroscience Inc (NASDAQ:NSTR) has filed its notice of special meeting of shareholders annexing the Plan of Complete Liquidation and Dissolution (Plan).

We started following NSTR because it is a net cash stock that has announced that it plans to liquidate. NSTR closed yesterday at $1.85, giving it a market capitalization of $48.4M. We originally estimated the final pay out figure in the liquidation to be around $59M or $2.26 per share, which presents an upside of around 25%. The company estimates a slightly lower pay out figure of between $1.90 and $2.10 “assuming we are unable to sell our non-cash assets” and expects to make an initial distribution within approximately 45 days after the Effective Date (which is to be announced) of approximately $1.80 per share. The following is extracted from the Plan:

Q: What will shareholders receive in the liquidation?

A: Pursuant to the Plan of Dissolution, we intend to liquidate all of our remaining non-cash assets and, after satisfying or making reasonable provision for the satisfaction of claims, obligations and liabilities as required by law, distribute any remaining cash to our shareholders. We can only estimate the amount of cash that may be available for distribution among our shareholders. We currently estimate that the amount ultimately distributed will be between approximately $1.90 and $2.10 per share of common stock, assuming we are unable to sell our non-cash assets. Many of the factors influencing the amount of cash distributed to our shareholders as a liquidating distribution cannot be currently quantified with certainty and are subject to change. Accordingly, you will not know the exact amount of any liquidating distributions you may receive as a result of the Plan of Dissolution when you vote on the proposal to approve the Plan of Dissolution. You may receive substantially less than the amount we currently estimate. See “Proposal 1: Approval of Plan of Dissolution-Estimated Liquidating Distributions.”

Q: When will shareholders receive payment of any available liquidation proceeds?

A: Although we are not able to predict with certainty the precise nature, amount or timing of any distributions, we presently expect to make an initial distribution, within approximately 45 days after the Effective Date, to holders of record of our common stock as of the close of business on the Effective Date of approximately $1.80 per share. We do not intend to make any further distributions until after we sell, liquidate or otherwise dispose of our remaining non-cash assets, consisting primarily of our Renova^TM Cortical Stimulation System and related intellectual property, and pay or otherwise make reasonable provision for the payment of claims against and obligations of Northstar. We are not able to predict with certainty the precise nature, amount or timing of any distributions, primarily due to our inability to predict the amount of our remaining liabilities or the amount that we will expend during the course of the liquidation and the net value, if any, of our remaining non-cash assets. To the extent that the amount of our liabilities or the amounts that we expend during the liquidation are greater, or the value of our non-cash assets is less, than we anticipate, our shareholders may receive substantially less than the amount we currently estimate. Our board of directors has not established a firm timetable for any final distributions to our shareholders. Subject to contingencies inherent in winding up our business, our board of directors intends to authorize any distributions as promptly as reasonably practicable in the best interests of Northstar and its shareholders. Our board of directors, in its discretion, will determine the nature, amount and timing of all distributions.

Assuming shares can be purchased at NSTR’s $1.85 close yesterday, after receiving the initial $1.80 per share, an investor will have $0.05 per share of capital invested for an upside of between $0.10 ($1.90 minus $1.80) and $0.30 ($2.10 minus $1.80) per share plus the possibility of receiving a further amount for NSTR’s non-cash assets, which we estimate could be as much as $0.16 per share. That seems like a favorable risk:reward ratio to us. The liquidation is still subject to stockholder approval, but we think NSTR presents a reasonable prospect for a good return in a short time frame.

[Full Disclosure:  We do not have a holding in NSTR. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]