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Debt
 6 Months Ended
Jun. 30, 2011
Debt  
Debt

Note 7—Debt

 

Convertible Notes

 

Our convertible notes were initially convertible into 36.7277 shares of common stock per $1,000 principal amount of notes (equivalent to a conversion price of $27.23 per share or a premium of 38% over the closing market price for Veeco’s common stock on April 16, 2007). We paid interest on these notes on April 15 and October 15 of each year. The notes were unsecured and were effectively subordinated to all of our senior and secured indebtedness and to all indebtedness and other liabilities of our subsidiaries.

 

During the first quarter of 2011, at the option of the holders, $7.5 million of notes were tendered for conversion at a price of $45.95 per share in a net share settlement. We paid the principal amount of $7.5 million in cash and issued 111,318 shares of our common stock. We recorded a loss on extinguishment totaling $0.3 million related to these transactions.

 

During the second quarter of 2011, we issued a notice of redemption on the remaining outstanding principal balance of notes outstanding. As a result, at the option of the holders, the notes were tendered for conversion at a price of $50.59 per share, calculated as defined in the indenture relating to the notes, in a net share settlement. As a result, we paid the principal amount of $98.1 million in cash and issued 1,660,095 shares of our common stock. We recorded a loss on extinguishment totaling $3.0 million related to these transactions.

 

Certain accounting guidance requires a portion of convertible debt to be allocated to equity. This guidance requires issuers of convertible debt that can be settled in cash to separately account for (i.e., bifurcate) a portion of the debt associated with the conversion feature and reclassify this portion to equity. The liability portion, which represents the fair value of the debt without the conversion feature, is accreted to its face value over the life of the debt using the effective interest method by amortizing the discount between the face amount and the fair value. The amortization is recorded as interest expense. Our convertible notes were subject to this accounting guidance. This additional interest expense did not require the use of cash.

 

The components of interest expense recorded on the notes were as follows (in thousands):

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Contractual interest

 

$

1,013

 

$

1,089

 

$

2,025

 

$

2,178

 

Accretion of the discount on the Notes

 

490

 

760

 

1,260

 

1,501

 

Total interest expense on the Notes

 

$

1,503

 

$

1,849

 

$

3,285

 

$

3,679

 

Effective interest rate

 

6.1

%

7.0

%

6.7

%

7.0

%

 

The carrying amounts of the liability and equity components of the notes were as follows (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Carrying amount of the equity component

 

$

—

 

$

16,318

 

 

 

 

 

 

 

Principal balance of the liability component

 

$

—

 

$

105,574

 

Less: unamortized discount

 

—

 

4,436

 

Net carrying value of the liability component

 

$

—

 

$

101,138

 

 

Mortgage Payable

 

We also have a mortgage payable, with approximately $2.8 million outstanding at June 30, 2011. The mortgage accrues interest at an annual rate of 7.91%, and the final payment is due on January 1, 2020. The fair value of the mortgage at June 30, 2011 was approximately $3.0 million.