Mandatorily Redeemable Preferred Stock

12 Months Ended

Dec. 31, 2011

Mandatorily Redeemable Preferred Stock

Mandatorily Redeemable Preferred Stock

NOTE 7: Mandatorily Redeemable Preferred Stock

The Company classifies its Series C and Series D Preferred Stock, which is not convertible or exchangeable for the Company’s common stock, as a long-term liability as they are considered mandatorily redeemable financial instruments.  Dividends paid or accrued are reflected as interest expense in the Company’s consolidated statement of operations.

Mandatorily redeemable preferred stock consisted of (in thousands, expect share amounts):

	December 31, 2011				December 31, 2010
	Shares	$			Shares	$
Series C Mandatorily Redeemable Preferred:
Issued	133,982	$	33,495		133,982	$	33,495
Discount, net of accretion	—	(927		)	—	(1,159		)
Accrued interest	35,637	8,909			17,089	4,272
Series C Mandatorily Redeemable Preferred, net	169,619	$	41,477		151,071	$	36,608
Series D Mandatorily Redeemable Preferred:
Issued	120,000	$	30,000		120,000	$	30,000
Discount, net of accretion	—	(22,049		)	—	(21,504		)
Accrued interest	15,127	3,782			643	161
Series D Mandatorily Redeemable Preferred, net	135,127	$	11,733		120,643	$	8,657
Total		$	53,210			$	45,265

Series C Mandatorily Redeemable Preferred Stock and 2008 Warrants

On July 28, 2008, the Company issued 120,000 shares of its Series B Preferred Stock, $10.00 par value (“Series B-2 Preferred Stock”) and warrants to purchase 240,000 shares of Geokinetics common stock to Avista and an affiliate of Avista for net proceeds of $29.1 million.  In December 2009, in conjunction with the financing of the acquisition of PGS Onshore, the Company agreed to exchange its Series B-2 Preferred Stock for 133,982 shares of new Series C redeemable preferred stock (“Series C Preferred Stock”) plus 750,000 shares of Geokinetics common stock.  The fair value of the Series C Preferred Stock at the date of exchange was $32.1 million.  The shares of Series C Preferred Stock were issued to Avista and have an aggregate liquidation preference equal to the liquidation preference of the Series B-2 Preferred Stock.  The liquidation value of the Series C Preferred Stock was $42.4 million at December 31, 2011.  The Company is required to redeem the Series C Preferred Stock on December 16, 2015.  The Series C Preferred Stock accrues dividends at a rate of 11.75%.  Dividends accrue until December 16, 2015.  The Series C Preferred Stock is not convertible or exchangeable for Geokinetics’ common stock.  The Series C Preferred Stock has liquidation preference over the Series D preferred stock (see below).

For the years ended December 31, 2011, 2010 and 2009, the Company recognized interest expense of $4.8 million $4.1 million and $0.1 million, respectively, related to the Series C Preferred Stock, which includes accretion of discount of $0.2 million, $0.2 million and $0 million, respectively.

The 2008 Warrants had an initial exercise price of $20.00 per share; however, pursuant to the anti-dilution provisions described below, the exercise price of the 2008 Warrants was reduced to $9.25 per share as a result of the common stock issuance in December 2009.  Additionally, the exercise price of the 2008 Warrants was further reduced to $9.05 per share as a result of the issuance of the Advisory Shares on August 29, 2011, associated with the advisory fee for the Whitebox Revolving Credit Facility.  See note 6.

The 2008 Warrants expire on July 28, 2013 and contain anti-dilution provisions substantially identical to the Series B Preferred Stock such that if the Company issues certain equity securities for a price that is lower than the warrant exercise price, the exercise price of the warrants will be adjusted downward pursuant to a specific formula.  As a result of the anti-dilution provisions, the 2008 Warrants are accounted for at fair value and recorded as derivative liabilities in the Company’s consolidated balance sheets at December 31, 2011 and 2010.

Series D Mandatorily Redeemable Junior Preferred Stock and 2010 Warrants

In December 2010, the Company completed a $30.0 million private placement of 120,000 shares of a new series of junior preferred stock (“Series D Preferred Stock”) and warrants to purchase 3,495,000 shares of Geokinetics common stock.  The Series D Preferred Stock was issued to related parties including Avista and its affiliates, PGS, Levant and certain directors of the Company.  Dividends on the Series D Preferred Stock accrue from the date of issuance and are paid in cash or accrued at the election of Geokinetics at a rate of 10.5% per annum and compounded quarterly if paid in cash and 11.5% per annum and compounded quarterly if accrued but not paid.  The Series D Preferred Stock is subject to mandatory redemption on December 15, 2016 and subject to redemption at the option of Geokinetics at the liquidation preference.  The preferred stock was issued at a value of $8.3 million.  The original discount of $21.7 million will be accreted through December 15, 2016 as additional interest expense using the effective interest rate method.  The liquidation value of the Series D Preferred Stock was $33.8 million at December 31, 2011.  The Series D Preferred Stock is not convertible or exchangeable for Geokinetics’ common stock.

For the years ended December 31, 2011 and 2010, the Company recognized total interest expense of $3.1 million and $0.2 million, respectively, related to the Series D Preferred Stock, which includes accretion of discount of $(0.5) million and $0 million, respectively.

The 2010 Warrants had an initial exercise price of $9.64 per share, which was equal to 105% of the closing price of the Company’s common stock on December 13, 2010.  However, pursuant to the anti-dilution provisions described below, the exercise price of the 2010 Warrants was reduced to $3.84 per share as a result of the issuance of the Advisory Shares on August 29, 2011, associated with the advisory fee for the Whitebox Revolving Credit Facility.

The 2010 Warrants expire on December 15, 2016 and contain price protection provisions such that if the Company issues certain equity securities for a price that is lower than the warrant conversion price during the two-year period following the issuance date of the 2010 Warrants, the exercise price of the warrants will be adjusted to the price of the newly issued equity securities.  After the two-year period, the exercise price adjusts in accordance with a similar formula as the Series B Preferred Stock.  See note 9.  As a result of the anti-dilution provisions, the 2010 Warrants are accounted for at fair value and recorded as derivative liabilities in the consolidated balance sheets at December 31, 2011 and 2010.