A big fight is under way about the future of Novoste ( NOVT), a medical-device company with declining sales, an evaporating stock price and a fast-shrinking payroll, whose main goal now isn't to reverse its fortunes but to close up shop for good.

On March 7, the Norcross, Ga., company will hold a special meeting to ask shareholders to approve its liquidation. But some stakeholders, including the big hedge fund Steel Partners, oppose the plan. Should Steel Partners prevail, it wants investors to boot the Novoste board.

This is the same Steel Partners that has teamed up with billionaire investor Carl Icahn to make the recent -- and rebuffed -- $10 billion hostile bid for KT&G, Korea's largest tobacco company.

So why is this hedge fund battling over Novoste, which has a market capitalization of $11 million, has never turned a yearly profit and whose stock is off 99% since mid-2000 on a split-adjusted basis?

Health care has nothing to do with it. Steel Partners, the largest Novoste shareholder, wants to sell the company's dwindling assets and leave a shell company that could be merged with a private company. A combination of this sort is called a reverse merger, and it's a strategy sometimes used to avoid the complexities and costs of an initial public offering.

Carry It Forward

Liquidation "is not in the best interests of shareholders," the hedge fund says in a recent proxy statement opposing the re-election of the board. Novoste needs directors who have experience in financial restructuring "and implementing strategic alternatives for distressed companies," the proxy says.

An April 13 stockholders' meeting has been scheduled in which Steel Partners is nominating six candidates for Novoste's seven-member board.

There's another nonmedical reason for the hedge fund's interest. Steel Partners says Novoste has plenty of tax net operating loss carryforwards, which could allow a profit-making merger partner to offset future tax payments. According to documents filed with the Securities and Exchange Commission, Novoste had about $58.5 million in these carryforwards at the end of 2004.

Novoste says Steel Partners misunderstands how the net operating loss carryforwards would apply to the company, asserting that the hedge fund has dramatically overestimated the potential benefits. Novoste tells shareholders in a proxy solicitation that it has looked unsuccessfully for a merger candidate to exploit the carryforwards.

"The likelihood for finding such an attractive transaction is remote in the near term," says Novoste's board of directors in a proxy statement. If it remains a shell while looking for a merger partner, "perhaps over a period of several more years, the board believes that Novoste is likely to continue depleting its remaining cash resources, thereby further reducing shareholder value."

Winding Down

Regardless of who prevails, Novoste has been a lousy investment for long-time investors, if there are any left. On a split-adjusted basis, Novoste's stock, which peaked at $244 in mid-2000, closed Friday at $2.77. The latest figure reflects a 1-for-4 stock split in November, implemented to help Novoste from being delisted by the Nasdaq. Revenue reached $69.9 million in 2001 and has gone downhill ever since.

Novoste also gained unwanted attention for being one of the investments made by Durus Capital Management , a hedge fund whose manager Scott Sacane recently pleaded guilty to securities fraud.

Founded in 1992, Novoste tried to thrive on vascular brachytherapy, or VBT, a radiation treatment delivered inside arteries. VBT prevents arteries from reclogging in patients who have undergone angioplasty, a procedure for clearing plaque-filled vessels.

The Food and Drug Administration approved VBT in November 2000. VBT remained a niche product as metal arterial stents grew in popularity, and the procedure has been rarely used since drug-coated stents reached the market .

Twelve months ago, Novoste's board of directors threw in the towel. Because VBT "was no longer viable," the board said it had "authorized a staged wind-down of our business."

Failed Merger

However, Novoste hasn't been able to wind down successfully. Last May, it signed a tentative agreement for a reverse merger with ONI Medical Systems of Wilmington, Mass., a privately held medical-imaging products company. Concurrently, Novoste planned to sell its VBT business to another private company, Best Medical International, of Fairfax, Va., assuming the ONI-Novoste merger was completed.

Steel Partners and other Novoste shareholders objected, forcing Novoste to renegotiate the terms with ONI and later, to call off the merger. Novoste also renegotiated its asset-sale deal with Best, but that transaction must be approved by Novoste shareholders.

Steel Partners owns 19.6% of Novoste's shares, and Lloyd I. Miller III, an investment adviser, controls 8.2% of the company's stock. They say they oppose liquidation, even though they support selling the VBT business.

Steel Partners is backed by Institutional Shareholder Services, an independent proxy analysis firm. "There seems to be little downside to shareholders at this time to postpone the liquidation process for an additional year" while Steel Partners looks for a merger partner, ISS says. "If the auction process provides no viable potential acquirer of the net operating loss carryforwards ," then Novoste could be liquidated.

Meanwhile, another proxy firm, Glass Lewis, supports the Novoste board's recommendation to liquidate. Novoste reported Thursday night that Glass Lewis disagrees with Steel Partners' assessment of the net operating loss carryforwards, adding that the hedge fund "has not demonstrated that the dissolution proposal is contrary to shareholders' interest."

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