VeriFone sells Lehman claim for closing hedges on 1.375% convertibles

By Susanna Moon

Chicago, Dec. 23 - VeriFone Systems Inc. sold the claim for the loss incurred in closing out the hedge transaction on its $316 million of 1.375% senior convertible notes due June 2012 with Lehman Brothers as underwriter, according to a 10-K filing with the Securities and Exchange Commission.

As a result, the company recorded a $5 million realized gain on the sale of the claim for the fiscal year ended Oct. 31.

The company issued the convertibles on June 22, 2007 through Lehman Brothers and J.P. Morgan Securities LLC.

In connection with the offering, the company entered into note hedge transactions with underwriting affiliates Lehman Brothers OTC Derivatives and JPMorgan Chase Bank, NA, London Branch.

These note hedge transactions reduce the potential dilution upon conversion of the notes if the volume-weighted average price of the company's common stock on each trading day of the relevant conversion period or other relevant valuation period for the notes is more than $44.02 per share.

The note hedge transactions are set to expire on the earlier of the last day on which any notes remain outstanding and June 14, 2012.

When Lehman Brothers filed for Chapter 11 bankruptcy in September 2008, it constituted an event of default under the note hedge transaction with Lehman Derivatives and the related guaranty by Lehman Brothers, giving VeriFone the right to terminate the note hedge transaction and get claim reimbursement for the loss incurred in terminating the transaction.

In June VeriFone reached a settlement with Lehman Derivatives to cancel the note hedge with them and consent to the assignment of warrants held by them to a third party in return for an allocated unsubordinated non-priority general unsecured claim against them in the amount of $9 million.

In July the company sold the claim without recourse for $5 million.

As of Oct. 31, the company held the remaining note hedge transactions that reduce the potential dilution by one half upon conversion of the outstanding notes if conditions are met.

In addition, VeriFone sold warrants to the counterparties whereby they have the option to purchase up to about 7.2 million common shares at $62.356 per and received about $31 million in cash proceeds from the sale of these warrants. The warrants expire progressively from Dec. 19, 2013 to Feb. 3, 2014.

There was $277 million of the convertibles outstanding as of Oct. 31 and Oct. 31, 2010. The company has repurchased $38.9 million principal amount of the outstanding convertibles so far.

VeriFone is a San Jose, Calif.-based secure electronic payment services company.

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