Mandatorily Redeemable Preferred Stock

3 Months Ended

Mar. 31, 2012

Mandatorily Redeemable Preferred Stock

Mandatorily Redeemable Preferred Stock

NOTE 4:    Mandatorily Redeemable Preferred Stock

The Company classifies preferred stock, which is not convertible or exchangeable for the Company’s common stock, as a long-term liability as it is considered a mandatorily redeemable financial instrument.  Dividends paid or accrued are reflected as interest expense in the Company’s interim condensed consolidated statements of operations.

Mandatorily redeemable preferred stock consisted of (in thousands):

	March 31, 2012				December 31, 2011
	Shares	$			Shares	$
	(Unaudited)
Series C Mandatorily Redeemable Preferred:
Issued	133,982	$	33,495		133,982	$	33,495
Discount, net of accretion	—	(870		)	—	(927		)
Accrued interest	40,619	10,155			35,637	8,909
Series C Mandatorily Redeemable Preferred, net	174,601		42,780		169,619		41,477
Series D Mandatorily Redeemable Preferred:
Issued	120,000		30,000		120,000		30,000
Discount, net of accretion	—	(22,022		)	—	(22,049		)
Accrued interest	19,011	4,753			15,127	3,782
Series D Mandatorily Redeemable Preferred, net	139,011		12,731		135,127		11,733
Total		$	55,511			$	53,210

Series C Mandatorily Redeemable Preferred Stock and 2008 Warrants

The shares of Series C Preferred Stock were issued to Avista and its affiliate and have an aggregate liquidation preference equal to the liquidation preference of the Series B-2 Preferred Stock (which shares were exchanged for shares of Series C Preferred Stock).  The liquidation value of the Series C Preferred Stock was $43.7 million at March 31, 2012.  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 three months ended March 31, 2012 and 2011, the Company recognized interest expense of $1.3 million and $1.1 million, respectively, related to the Series C Preferred Stock, which includes an immaterial amount for accretion of discount for both periods.

The 2008 Warrants have a current exercise price of $9.05 per share.  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 March 31, 2012 and December 31, 2011.

Series D Mandatorily Redeemable Junior Preferred Stock and 2010 Warrants

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 $34.8 million at March 31, 2012.  The Series D Preferred Stock is not convertible or exchangeable for Geokinetics’ common stock.

For the three months ended March 31, 2012 and 2011, the Company recognized total interest expense of $1.0 million and $1.1 million, respectively, related to the Series D Preferred Stock, which includes an immaterial amount for accretion of discount for both periods.

The 2010 Warrants have a current exercise price of $3.84 per share. 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 5.  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 March 31, 2012 and December 31, 2011.