GOK Geokinetics, Inc.

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GEOKINETICS INC.

INDEX

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Glossary of Certain Defined Terms:

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PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

Geokinetics Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

See accompanying notes to the condensed consolidated financial statements.

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Geokinetics Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

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Geokinetics Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

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Geokinetics Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

and Other Comprehensive Income

(In thousands, except share amounts)

(Unaudited)

See accompanying notes to the consolidated financial statements.

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GEOKINETICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: General

Organization

The Company, a Delaware corporation founded in 1980, is based in Houston, Texas.  The Company is a global provider of seismic data acquisition, data processing and integrated reservoir geoscience services, and a leader in providing land, transition zone and shallow water OBC environment geophysical services.  These geophysical services include acquisition of 2D, 3D, time-lapse 4D and multi-component seismic data surveys, data processing and integrated reservoir geoscience services for customers in the oil and natural gas industry, which include E&P companies in North America, Latin America (including Mexico), Africa, Asia-Pacific and the Middle East.  The Company also owns a multi-client data library whereby it maintains full or partial ownership of data acquired; client access is provided via licensing agreements.  The Company’s multi-client data library consists of data covering various areas in the United States, Canada, Brazil and Australia.

Basis of Presentation

The Company’s unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with GAAP and pursuant to the rules and regulations of the SEC.  The Company believes that the presentations and disclosures herein are adequate for a fair presentation.  The unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the interim periods presented.  These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its 2010 Form 10-K.  The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

The unaudited interim condensed consolidated financial statements include the accounts of Geokinetics Inc. and its subsidiaries.  All significant intercompany transactions have been eliminated in consolidation.  The consolidated financial statements of the Company have been prepared on the accrual basis of accounting in accordance with GAAP.  The results of operations of the Company for the nine months ended September 30, 2010 include the results of operations of PGS Onshore since February 12, 2010, which may affect comparability of certain of the financial information included herein.

Certain prior period amounts have been reclassified to conform to current period financial statement presentation.

Recent Developments

In May 2011, the RBC Revolving Credit Facility was assigned to the Lenders.  A $50.0 million amended and restated credit agreement with the Lenders was entered into on August 12, 2011.  See note 4.  Because borrowings under the Whitebox Revolving Credit Facility bear interest at a rate of 11.125% and amounts in excess of the total amount outstanding and the total amount available of $50.0 million are subject to an unused commitment fee of 11.125%, the Company will incur interest costs of approximately $5.6 million per year in connection with the Whitebox Revolving Credit Facility regardless of the Company’s borrowing level.

On September 1, 2011, the Company sold a subsidiary that held a royalty interest in a Colombian oil and gas property for $6.3 million plus applicable adjustments for net working capital.  The Company received net proceeds of $5.9 million.  The transaction resulted in a pre-tax gain of $5.6 million which is included in other income (expense) in the Company’s consolidated statement of operations.

On September 8, 2011, a liftboat which the Company had contracted to support an ocean-bottom-cable project in the Bay of Campeche, Mexico, was disabled due to high winds and unusually high seas generated by Tropical Storm Nate which resulted in the crew abandoning the vessel.  While the Company and local authorities conducted an immediate search and rescue operation, there were fatalities to two Company employees and two contractors.  As a result, operations on the project were suspended pending an investigation and evaluation of the incident.  The suspension of the operation has resulted in lost revenues from the contract while the Company continues to incur costs to maintain the crew and equipment and otherwise in connection with the incident.  The Company is currently working with its customer in an effort to restart the project before the end of November 2011 .  Failure to resume operations on the project on a timely basis will have a negative effect on our cash flows and results of operations and would cause a further deterioration of our liquidity.  See note 12 for additional information on the impact of this incident.

On September 30, 2011, the Company was notified by two credit rating agencies that they had downgraded the Company’s credit rating because of litigation uncertainty from the Mexico liftboat incident, the Company’s low margins in international markets, tight liquidity and weak financial metrics in an improved oil and gas operating environment.

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During the third quarter of 2011, the Company performed an interim goodwill assessment in light of the recent events and circumstances adversely impacting the Company mentioned above.  The Company recorded a preliminary goodwill impairment charge of $40.0 million as of September 30, 2011.  See below.

While revenues, backlog and operating cash flows have increased during the third quarter of 2011 as well as year to date compared to 2010, the Company continues to incur operating losses due to delays in project commencements, low international asset utilization and the Mexico liftboat incident, resulting in serious concerns about the Company’s liquidity, especially in the fourth quarter of 2011 (when an interest payment of $14.6 million on the Notes is due) and the first quarter of 2012.  Management has instituted a number of steps which would improve the Company’s liquidity position if successfully implemented.  If these steps are unsuccessful or the Company experiences a further deterioration of its business or another adverse event occurs with respect to the Company or its operations, the Company may not have sufficient liquidity to meet its ongoing operating expenses and debt service obligations under the Whitebox Revolving Credit Facility or the Notes, all of which would have a material adverse effect on the Company.  This may force the Company to further curtail existing operations, reduce or delay capital expenditures or sell assets to meet its operating and debt service obligations and it could be forced to take other actions, including a restructuring of its existing indebtedness and capital structure to address the ongoing liquidity issues.

Significant Accounting Policies

Multi-client sales of data jointly owned with a partner

The Company has jointly acquired surveys with a partner whereby the Company shares the costs of acquisition and the related revenues on data sales.  Prior to the third quarter of 2011, the Company recognized revenues on these sales when the processed data was delivered to the ultimate client.  During the third quarter of 2011, the Company modified its approach to revenue recognition for these partner sales to be consistent with our pre-funding and late sales revenue recognition approach.  Accordingly, the Company recognizes pre-funding revenue as the services are performed on a proportional performance basis, provided that all other revenue recognition criteria are satisfied.  Late sales revenue will continue to be recognized when our customer executes a valid license agreement and has received the underlying data or has the right to access the licensed portion of the data and collection is reasonably assured.  The change in revenue recognition approach for these partner sales did not have a material impact on our consolidated financial statements for previously reported quarterly results.  The Company is not able to estimate the impact of this change in revenue recognition approach on future financial periods as the impact will vary based on the underlying contract specifications.  The Company did not modify its approach to revenue recognition for multi-client data sales for pre-funding arrangements or late sales.

Recent Accounting Standards

In September 2011, the FASB issued an update to ASC 350, Intangibles - Goodwill and Other.  This ASU allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  Therefore, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.  The ASU includes a number of events and circumstances for an entity to consider in conducting the qualitative assessment.  The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning January 1, 2012.  Early adoption is permitted.  The Company is currently evaluating the impact of this guidance.

In June 2011, the FASB issued an update to ASC 220, Presentation of Comprehensive Income.  This ASU provides that an entity that reports items of other comprehensive income has the option to present comprehensive income in either (i) a single statement that presents the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income; or (ii) a two-statement approach which presents the components of net income and total net income in a first statement, immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income.  The option in current GAAP that permits the presentation of other comprehensive income in the statement of changes in equity was eliminated.  Per the ASU, the guidance will be applied retrospectively and is effective for the Company for interim and annual periods beginning on January 1, 2012, with early adoption permitted.  However, subsequent to the issuance of this ASU, the FASB issued a notice that it will discuss at a future meeting whether to delay the effective date of certain provisions in this ASU related to the presentation of reclassification adjustments.  The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued an update to ASC 820, Fair Value Measurements.  This ASU clarifies the application of certain fair value measurement requirements and requires, among other things, expanded disclosures for Level 3 fair value measurements and the categorization by level for items for which fair value is required to be disclosed in accordance with ASC 825,

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Financial Instruments.  The guidance will be applied prospectively and is effective for the Company for interim and annual periods beginning on January 1, 2012.  Early adoption is not permitted.  The Company is currently evaluating the impact of this guidance.

Property and Equipment

Property and equipment and accumulated depreciation were as follows (in thousands):

The Company reviews the useful life and residual values of property and equipment on an ongoing basis considering the effect of events or changes in circumstances.  Depreciation expense related to the Company’s property and equipment for the three and nine months ended September 30, 2011 was $16.1 million and $52.2 million, respectively.  Depreciation expense related to the Company’s property and equipment for the three and nine months ended September 30, 2010 was $18.2 million and $50.5 million, respectively.

During April 2011, the Company experienced a loss of certain equipment as a result of a wild fire in Colorado, in the United States, which reached the Company’s staging area.  The lost assets were fully insured and the claims process is underway.  During the second quarter of 2011, the Company recorded a net gain of $0.2 million in connection with this event consisting of the write-off of the net book value of the lost equipment of $1.3 million and insurance proceeds received of $1.5 million.  The Company expects to receive additional insurance proceeds during 2011 related to this event.

The Company stores and maintains property and equipment in the countries in which it does business.  In connection with the acquisition of PGS Onshore in February 2010, the Company acquired certain property and equipment in Libya and entered into an agreement with PGS to operate the business there on the Company’s behalf.  See note 13.  The Company subsequently completed the formation of a subsidiary and acquired certain required licenses to operate its seismic acquisition business.  However, as a result of the civil unrest in Libya, the Company has been unable to operate its business or utilize its equipment in Libya since the first quarter of 2011and is currently evaluating options regarding transfer of this equipment out of the area.  At September 30, 2011, the net book value of the equipment in Libya was $10.6 million.  While the Company maintains insurance coverage on these assets, including political risk coverage, this coverage is limited only to certain defined loss events.  To date, these defined events have not occurred.

Goodwill

All of the Company’s goodwill is related to its data acquisition segment.  The changes in the carrying amounts of goodwill were as follows (in thousands):

Goodwill Impairment Assessment

Accounting guidance requires intangible assets with indefinite lives, including goodwill, be evaluated on an annual basis for impairment or more frequently if an event occurs or circumstances change which could potentially result in an impairment.  The Company performs its annual impairment assessment as of December 31.  While the data acquisition segment consists of various

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geographical markets, the Company has concluded that it has only one reporting unit for purposes of this impairment evaluation.  In accordance with the applicable accounting guidance, the Company performs a two-step impairment test for goodwill.  In the first step of the impairment test the fair value of the Company’s reporting unit is compared to its carrying amount, including goodwill, to determine if a potential impairment exists.  If the carrying amount of the reporting unit exceeds its fair value, the second step is performed to measure the amount of impairment by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.

Given the recent events impacting the Company, including the Mexico liftboat incident, a sustained decline in the Company’s market capitalization and the credit rating downgrades, the Company concluded that there were sufficient indicators to require an interim goodwill impairment analysis during the third quarter of 2011.  As of the date of this filing, due to the complexities inherent in the analysis required, the Company has not fully completed step two of the impairment analysis of goodwill but, through the analysis performed to date, the Company has determined that the collective impact of these events and circumstances would more likely than not reduce the fair value of its reporting unit below its carrying value and result in an impairment loss which can be reasonably estimated.  As of September 30, 2011, the Company recorded a goodwill impairment charge of $40.0 million, representing the best estimate within the range of the estimated impairment loss.  However, the Company expects to finalize its goodwill impairment analysis during the fourth quarter of 2011, which could result in an upward adjustment to the impairment charge already recorded.

The following summarizes the most significant estimates and assumptions used by the Company in the interim goodwill impairment analysis:

·                   The preliminary fair value estimate in step one was determined using a combination of the income approach and the market-based approach.  In weighting the results of these valuation approaches, the Company placed greater emphasis on the income approach.

·                   Income approach.

·                   Estimated cash flows were projected based on certain assumptions regarding revenues, direct costs, general and administrative expenses, depreciation, income taxes, capital expenditures and working capital requirements for the next five years.

·                   The terminal value assumed a long-term growth rate of 5%.

·                   The projected cash flows and the terminal value were discounted to present value using a discount rate of 17%.  The discount rate reflects the recent reduction in the Company’s credit rating.

·                   Market approach.

·                   The Company calculated its market capitalization based on its common stock price at September 30, 2011, and considering other relevant information generated by market transactions.

·                   The fair values of the Company’s debt, preferred stock, redeemable preferred stock and derivative liabilities were added to the market capitalization calculated above.  The fair value of the senior debt was calculated using quoted market prices at October 3, 2011, when available.  The fair values of the preferred stock and the mandatorily redeemable preferred stock and the derivative liabilities were calculated using the discounted cash flow method of the income approach. The fair values of the derivative liabilities were calculated using a Monte Carlo valuation model.

·                   The preliminary calculation of the implied fair value of the goodwill of the Company’s reporting unit required by step two did not include a full valuation of all the Company’s recognized assets and liabilities or any of its unrecognized intangible assets.  In reaching the best estimate of the impairment charge to record as of September 30, 2011, the Company evaluated hypothetical fair values of certain recognized assets and liabilities and considered the resulting range of potential impairment charges.

The estimates and assumptions described above used to estimate the impairment charge recorded as of September 30, 2011 are subject to a high degree of bias and uncertainty.  Different assumptions as to the Company’s future revenues and cost structure, growth rate and discount rate would result in estimated future cash flows that could be materially different than those considered in the impairment assessment performed.  Any future fair value estimate for the Company’s reporting unit that is greater than the fair value estimate as of September 30, 2011 will not result in a reversal of the impairment charge.

Multi-Client Data Library

Multi-client data library consists of seismic surveys that are licensed to customers on a non-exclusive basis in the United States.  The Company capitalizes all costs directly associated with acquiring and processing the data, including depreciation of the assets used in production of the surveys.

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Multi-client seismic library costs and accumulated amortization were as follows (in thousands):

Multi-client seismic library revenues for the three and nine months ended September 30, 2011 were $38.8 million and $89.4 million, respectively.  Multi-client seismic library revenues for the three and nine months ended September 30, 2010 were $15.4 million and $34.2 million, respectively.

Amortization expense related to the Company’s multi-client data library for the three and nine months ended September 30, 2011 was $32.0 million and $71.4 million, respectively.  Amortization expense related to the Company’s multi-client data library for the three and nine months ended September 30, 2010 was $7.0 million and $17.4 million, respectively.

Deferred Financing Costs

The Company had deferred financing costs of $13.9 million and $11.8 million at September 30, 2011 and December 31, 2010, respectively.  During the three and nine months ended September 30, 2011, the Company amortized approximately $0.8 million and $3.2 million, respectively, to interest expense.  During the three and nine months ended September 30, 2010, the Company amortized approximately $0.7 million and $2.0 million, respectively, to interest expense.

During the third quarter of 2011, the Company incurred $5.9 million in deferred financing costs in connection with the amended and restated credit agreement for the Whitebox Revolving Credit Facility entered into on August 12, 2011.  These costs will be amortized through the maturity date of the agreement.  During the second quarter of 2011, the Company wrote off $1.1 million of deferred financing costs in connection with Amendment No. 4 to the RBC Revolving Credit Facility which is included in interest expense in the consolidated statement of operations and $1.1 million of deferred financing costs in connection with the early extinguishment of the RBC Revolving Credit Facility which is included in other income (expense) in the Company’s consolidated statement of operations.  See note 4.

During February 2010, in connection with the closing of the acquisition of PGS Onshore, the Company wrote off $2.5 million of deferred financing costs related to the early extinguishment of certain debt which is included in other income (expense) in the Company’s consolidated statement of operations).  See note 4.

Other Assets, Net

Other assets, net, are as follows (in thousands):

Amortization expense related to the above assets was $0.9 million and $2.7 million, respectively, for the three and nine months ended September 30, 2011.  Amortization expense related to the above assets was $1.2 million and $2.7 million, respectively, for the three and nine months ended September 30, 2010.

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NOTE 2: Sales of Certain Accounts Receivable

In order to improve the Company’s liquidity, one of the Company’s international subsidiaries in Latin America sells certain eligible trade accounts receivable without recourse under a program sponsored by a financial agent of the foreign government to accelerate collections.  There is no recourse to the subsidiary for uncollectible receivables and, once sold, the subsidiary’s effective control over the accounts is ceded.  The cost associated with these sales is calculated based on LIBOR plus five percentage points and the value and due date of the accounts receivable sold.

At the time of sale, the related accounts receivable are removed from the balance sheet and the proceeds and cost are recorded.  Accounts receivable sold under this arrangement totaled $50.4 million during the nine months ended September 30, 2011.  The loss on the sale of these accounts receivable for the three and nine months ended September 30, 2011 was $0 million and $0.2 million, respectively, and is included in operating expenses in the Company’s consolidated statement of operations.  There were no sales of trade accounts receivable during the same periods in 2010.

NOTE 3: Acquisition

On December 3, 2009, the Company entered into an agreement with PGS to acquire PGS Onshore.  The Company closed this transaction on February 12, 2010 for cash and stock consideration valued at $202.8 million.  The acquisition of PGS Onshore provided the Company with a significant business expansion of its Data Acquisition segment into Mexico, North Africa, the Far East, and in the United States, including Alaska.  In addition, the acquisition substantially increased the Company’s multi-client data library with data covering approximately 5,500 square miles of 3D data located primarily in Texas, Oklahoma, Wyoming and Alaska.

The operations of PGS Onshore have been combined with those of the Company since February 12, 2010.  Disclosure of earnings of PGS Onshore since the acquisition is not practicable as it is not being operated as a standalone subsidiary.

The acquisition date fair value of the total consideration transferred consisted of the following (in thousands):

The following table summarizes the final fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

The acquisition of PGS Onshore was accounted for by the purchase method, with the purchase price being allocated to the fair value of assets purchased and liabilities assumed.  During the first quarter of 2011, the Company finalized the fair values of the assets acquired and liabilities assumed and recorded an adjustment to reduce the value of property and equipment by $1.1 million and increase goodwill by the same amount.  The adjustment reflects the Company’s assessment of certain damaged equipment.

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The allocation of the purchase price included the acquisition of a multi-client data library, which consisted of data surveys covering portions of the United States and Canada.  Other intangible assets consisted of order backlog and a marine vibrator patented technology license.  The Company determined the fair values for the multi-client data library and other intangibles using the income approach.  Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life.  To calculate fair value, the Company used probability-weighted cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset.  The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions.

The valuation of the intangible assets acquired and related amortization periods at the acquisition date are as follows (in thousands):

The Company provided deferred taxes and other tax liabilities as part of the acquisition accounting related to the fair market value adjustments for acquired multi-client data library, property and equipment, intangible assets, and other deferred items as well as for uncertain tax positions taken in prior year tax returns.  The fair value of the deferred taxes and other tax liabilities was $18.9 million at the acquisition date.  As part of the purchase agreement, PGS retained the liability for taxes related to prior years and up to the purchase date and agreed to indemnify the Company for taxes imposed.  Accordingly, the Company included compensating amounts in receivables for amounts known at the acquisition date.

Goodwill of approximately $59.0 million was recognized for this acquisition and was calculated as the excess of the consideration transferred over the net assets recognized, representing the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized.  It specifically included the anticipated synergies and other benefits from combining the operations of PGS Onshore with the operations of the Company.  The Company allocated the goodwill to the seismic data acquisition business segment.  The entire amount of goodwill of $59.0 million was not deductible for tax purposes.  See note 1 for further discussion on goodwill.

Costs associated with the acquisition of PGS Onshore totaled $5.2 million during 2010.  Of this amount, $0.0 million and $5.0 million are included in general and administrative expenses for the three and nine months ended September 30, 2010, respectively.

The following unaudited condensed consolidated income statement information for the nine months ended September 30, 2011 and unaudited pro forma consolidated income statement information for the nine months ended September 30, 2010 assumes that the acquisition of PGS Onshore had occurred at the beginning of the period. The Company prepared the unaudited pro forma financial results for comparative purposes only. The unaudited pro forma financial results may not be indicative of the results that would have occurred if Geokinetics had completed the acquisition at the beginning of the period presented or the results that may be attained in the future. Amounts presented below are in thousands, except for the per share amounts:

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NOTE 4: Debt and Capital Lease Obligations

Long-term debt and capital lease obligations were as follows (in thousands):

Whitebox Revolving Credit Facility

On May 16, 2011, the Company received a commitment and summary of principal terms from the Lenders for a $50.0 million senior secured revolving credit facility.  On May 24, 2011, the RBC Revolving Credit Facility was assigned to the Lenders.  Contemporaneously with the assignment, the Company entered into a Forbearance Agreement and Amendment No. 5 whereby the Lenders agreed to waive compliance with certain terms and conditions under the RBC Revolving Credit Facility agreement, as previously modified and amended,  and to forbear from exercising any rights and remedies in connection with certain specified defaults under the RBC Revolving Credit Facility agreement until the earlier of August 22, 2011 or the execution of an amended and restated credit agreement.  Upon the assignment of the RBC Revolving Credit Facility to the Lenders, the Company borrowed $48.3 million under the Whitebox Revolving Credit Facility, used to repay the RBC Revolving Credit Facility and for general working capital purposes.

The amended and restated credit agreement facility was entered into among the Company and the Lenders on August 12, 2011.  In connection with this agreement, the Company paid a closing fee of $1.7 million in cash.  In addition, the Company paid a $4.0 million advisory fee by issuing shares of Geokinetics common stock, valued at 95% of the volume weighted average price over the trailing 10-day trading period following the execution of the amended and restated credit agreement.  On August 29, 2011, Geokinetics issued an aggregate of 1,041,668 shares of common stock (the “Advisory Shares”) to the Lenders.  The issuance of the Advisory Shares triggered the anti-dilution provisions of (i) Geokinetics’ Series B Preferred Stock, (ii) warrants issued on July 28, 2008 to purchase up to 240,000 shares of Common Stock (the “2008 Warrants”), and (iii) warrants issued on December 14, 2010 to purchase up to 3,495,000 shares of Common Stock (the “2010 Warrants”).  The issue price of the Advisory Shares was $3.84, which was less than the conversion price of the Series B Preferred Stock and the exercise prices of the 2008 and 2010 Warrants.  Accordingly, the conversion price of the Series B Preferred Stock and the exercise price of the 2008 Warrants were reduced in accordance with an anti-dilution formula, and the exercise price of the 2010 Warrants was reduced to the issue price of the Advisory Shares, or $3.84 per share.  The anti-dilution formula for the Series B Preferred stock reduced the conversion price by multiplying the conversion price by a fraction, the numerator of which was (i) the number of fully diluted shares of Common Stock outstanding prior to issuance plus the number of shares of Common Stock that $4.0 million would purchase at such conversion price and (ii) the denominator of which was the sum of the number of fully diluted shares outstanding prior to the issuance plus the number of shares issued in payment of the fee, which resulted in an adjusted conversion price of $15.95 per share.  The anti-dilution adjustment to the 2008 Warrants was similar, resulting in an adjusted exercise price of $9.05 per share.  See notes 5 and 6.  The closing fee and the advisory fee were recorded as deferred financing costs and will be amortized through the maturity date of this agreement.

Borrowings outstanding under the facility bear interest at 11.125%; amounts in excess of the amount outstanding and the total amount available of $50.0 million are subject to an unused commitment fee of 11.125%.  The facility does not provide for the issuance of letters of credit and will mature on September 1, 2014.  Borrowings under the facility are secured by certain of Geokinetics’ and its subsidiaries’ US assets and the pledge of a portion of the stock of certain of its foreign subsidiaries.  There are no scheduled amortization or commitment reductions prior to maturity but the Company is required to prepay the facility with proceeds from certain asset sales.  The Company has the option to prepay the facility upon the issuance of certain equity securities or after the first year, subject to a reduction fee schedule.  The facility has no financial maintenance covenants.

Until August 12, 2011, when the amended and restated credit agreement was executed, the Company incurred interest and fees based on the terms of the RBC Revolving Credit Facility, as amended.  Accordingly, the Company incurred a ticking fee of 1% per quarter based on the maximum availability under the facility, a 1.5% fee for unused commitments and borrowings bore interest at a floating rate based on a specific formula.  The interest rate based on this formula was 8.75% during the period between May 24, 2011 and August 12, 2011.

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Senior Secured Notes Due 2014

On December 23, 2009, Holdings issued $300.0 million of Notes in a private placement to institutional buyers at an issue price of $294.3 million, or 98.093% of the principal amount.  The discount is accreted as an increase to interest expense over the term of the Notes.  At September 30, 2011 and December 31, 2010, the effective interest rate on the Notes was 11.1%, which includes the effect of the discount accretion and deferred financing costs amortization.  The stated interest rate on the Notes is 9.75% and is payable semi-annually in arrears on June 15 and December 15 of each year.  The Notes are fully and unconditionally guaranteed by Geokinetics and by each of Geokinetics’ current and future domestic subsidiaries (other than Holdings, which is the issuer of the Notes).  Pursuant to the terms of an inter-creditor agreement, the Notes are junior to the Whitebox Revolving Credit Facility as to receipt of collateral and/or collateral proceeds securing both the Whitebox Revolving Credit Facility and the Notes.  The Company may redeem up to 10% of the original principal amount of the Notes during each 12-month period at 103% of the principal amount plus accrued interest until the second anniversary following their issuance.  Thereafter, the Company may redeem all or part of the Notes at a prepayment premium which will decline over time.  In the event of occurrence of a change of control, the Company will be required to make an offer to repurchase the Notes at 101% of the principal amount plus accrued interest.  The indenture governing the Notes contains customary covenants for non-investment grade indebtedness, including restrictions on the Company’s ability to incur indebtedness, to declare or pay dividends and repurchase its capital stock, to invest the proceeds of asset sales, and to engage in transactions with affiliates.

Capital Lease and Vendor Financing Obligations

From time to time, the Company enters into capital leases and vendor financing arrangements to purchase certain equipment.  The equipment acquired from these vendors is paid over a specified period of time based on the terms agreed upon.  During the nine months ended September 30, 2011, the Company entered into various capital leases, due in 2014, for certain transportation equipment for a total amount of $6.7 million.

The amount due under all capital leases and vendor financing arrangements at September 30, 2011 and December 31, 2010 was approximately $6.5 million and $2.4 million, respectively.  The net book value of the property and equipment acquired under these capital leases and vendor financing agreements at September 30, 2011 and December 31, 2010 was approximately $8.4 million and $2.8 million, respectively.

Foreign Revolving Credit Lines

The Company maintains various foreign bank overdraft facilities used to fund short-term working capital needs.  At September 30, 2011, and December 31, 2010, the Company had approximately $3.2 million and $3.9 million, respectively, of available credit of which $0.2 million and $0.0 million, respectively, were outstanding under these facilities.

Extinguished Obligations

RBC Revolving Credit Facility

On February 12, 2010, the Company entered into a $50.0 million revolving credit and letters of credit facility, with a group of lenders led by RBC.  The RBC Revolving Credit Facility had an initial maturity date of February 12, 2013.  In the period between June 2010 and December 2010, the Company entered into Amendments No. 1, No. 2 and No. 3 to the RBC Revolving Credit Facility whereby the maximum borrowings were limited to the lesser of $40.0 million or a borrowing base and certain financial covenants were waived and modified.  Borrowings outstanding under the RBC Revolving Credit Facility bore interest at a floating rate based on a specific formula.  At December 31, 2010 and through May 24, 2011 the rate was 8.75%.  The outstanding balance under the facility was $29.8 million and $23.0 million at May 24, 2011 and December 31, 2010, respectively.

On April 1, 2011, the Company entered into a waiver of specific events of default that would have occurred on March 31, 2011 for failure to comply with certain financial reporting covenant requirements.  Additionally, the Company entered into Amendment No. 4, which modified the monthly maximum total leverage ratio, monthly cumulative adjusted EBITDA (as defined in the RBC Revolving Credit Facility agreement) targets and the Company’s interest cost.  This amendment also modified the final maturity date of the revolving credit facility to April 15, 2012.  In connection with Amendment No. 4 the Company wrote off $1.1 million of deferred financing costs related to the modification of the final maturity date, which is included in interest expense in the Company’s consolidated statement of operations.

On May 24, 2011, RBC and the other lenders assigned their rights and obligations under the RBC Revolving Credit Facility to the Lenders under the Whitebox Revolving Credit Facility and received full payment of the amounts then outstanding under the facility plus unpaid accrued interest and fees for a total payment of $30.5 million.  The Company did not incur any pre-payment fees

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or penalties related to the retirement of the RBC Revolving Credit Facility.  The Company wrote off $1.1 million of deferred financing costs associated with the early extinguishment of the RBC Revolving Credit Facility, which is included in other income (expense) in the Company’s consolidated statement of operations.

Other

On February 12, 2010, in conjunction with the closing of the acquisition of PGS Onshore, the Company fully extinguished certain borrowings and obligations as follows:

PNC Credit Facility.  Until February 12, 2010, the Company had a Revolving Credit, Term Loan and Security Agreement with PNC, as lead lender, which provided the Company with a $70.0 million revolving credit facility maturing in May 2012.  On February 12, 2010, the outstanding balance of $45.8 million was repaid and the revolving credit facility was terminated.  The Company recorded a loss of $1.0 million on the redemption of the revolving credit facility which consisted of $0.8 million related to the acceleration of costs that were being amortized over the expected life of the facility, and approximately $0.2 million related to prepayment penalties.  The loss is included in other income (expense) in the Company’s consolidated statement of operations.

CIT Group Equipment Financing.  The Company had several equipment lease agreements with CIT on seismic and other transportation equipment.  The outstanding balance at December 31, 2009 was approximately $12.1 million.  The Company recorded a loss of approximately $0.3 million on the redemption of these obligations related to prepayment penalties.  The loss is included in other income (expense) in the Company’s consolidated statement of operations.

Other Equipment Financing.  The Company had several other vendor financing arrangements for purchase of equipment.  At December 31, 2009, these obligations totaled approximately $9.9 million.  The Company recorded a loss of $1.0 million related to prepayment penalties to fully extinguish certain equipment financing agreements outstanding on February 12, 2010.  The loss is included in other income (expense) in the Company’s consolidated statement of operations.

NOTE 5:   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 consolidated statement of operations.

Mandatorily redeemable preferred stock consisted of (in thousands):