-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GvxLmGmZ+Of2egbP14FjlVwrsmOT+6lpaf5gFsbkLZ0koSj+Bdx20PCeMQp2d2LW kc58xW0BB2ukFonoaa7Ylg== 0000899243-01-500402.txt : 20010510 0000899243-01-500402.hdr.sgml : 20010510 ACCESSION NUMBER: 0000899243-01-500402 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OYO GEOSPACE CORP CENTRAL INDEX KEY: 0001001115 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 760447780 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-36727 FILM NUMBER: 1626585 BUSINESS ADDRESS: STREET 1: 7334 N GESSNER RD CITY: HOUSTON STATE: TX ZIP: 77040 BUSINESS PHONE: 7139399700 MAIL ADDRESS: STREET 1: 9777 W GULF BANK ROAD SUITE 5 CITY: HOUSTON STATE: TX ZIP: 77040 10-Q 1 d10q.txt FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended March 31, 2001 [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 001-13601 OYO GEOSPACE CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 76-0447780 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 12750 SOUTH KIRKWOOD, SUITE 200 STAFFORD, TEXAS 77477 (Address of Principal Executive Offices) (281) 494-8282 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ There were 5,529,080 shares of the Registrant's Common Stock outstanding as of the close of business on May 7, 2001. ================================================================================ TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page - ------------------------------ Number ------ Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. OTHER INFORMATION - --------------------------- Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors OYO Geospace Corporation and Subsidiaries We have reviewed the accompanying consolidated balance sheet of OYO Geospace Corporation and Subsidiaries as of March 31, 2001, and the related consolidated statements of operations for the three months and six months ended March 31, 2001 and 2000, and the consolidated statements of cash flows for the six months ended March 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the aforementioned financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of September 30, 2000, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year then ended (not presented herein) and, in our report dated November 9, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of September 30, 2000, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP Houston, Texas May 7, 2001 3 OYO GEOSPACE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
ASSETS MARCH 31, 2001 SEPTEMBER 30, 2000 --------------- ------------------- (unaudited) Current assets: Cash and cash equivalents................................ $ 1,370 $ 3,989 Trade accounts and notes receivable, net................. 14,175 8,509 Inventories.............................................. 24,549 22,095 Deferred income tax...................................... 1,127 1,320 Prepaid expenses and other............................... 711 1,778 ------- ------- Total current assets.................................. 41,932 37,691 Rental equipment, net...................................... 2,203 1,846 Property, plant and equipment, net......................... 19,778 19,550 Goodwill and other intangible assets, net.................. 4,990 5,204 Deferred income tax........................................ 254 675 Other assets............................................... 1,809 142 ------- ------- Total assets.......................................... $70,966 $65,108 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities of long-term debt... $ 205 $ 198 Accounts payable......................................... 5,626 5,694 Accrued expenses and other............................... 7,783 2,679 Income tax payable....................................... 265 232 ------- ------- Total current liabilities............................. 13,879 8,803 Long-term debt............................................. 3,880 3,984 Deferred income tax........................................ 1,485 1,612 ------- ------- Total liabilities..................................... 19,244 14,399 ------- ------- Stockholders' equity: Preferred stock.......................................... - - Common stock............................................. 55 55 Additional paid-in capital............................... 30,266 30,088 Retained earnings........................................ 22,703 21,875 Accumulated other comprehensive loss..................... (929) (679) Unearned compensation-restricted stock awards............ (373) (630) ------- ------- Total stockholders' equity............................ 51,722 50,709 ------- ------- Total liabilities and stockholders' equity............ $70,966 $65,108 ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 4 OYO GEOSPACE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) (unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED --------------------------------- --------------------------------- MARCH 31, 2001 MARCH 31, 2000 MARCH 31, 2001 MARCH 31, 2000 --------------- --------------- --------------- --------------- Sales........................................... $ 16,928 $ 14,963 $ 31,895 $ 27,758 Cost of sales................................... 11,401 10,575 21,509 18,988 ---------- ---------- ---------- ---------- Gross profit.................................... 5,527 4,388 10,386 8,770 Operating expenses: Selling, general and administrative........... 3,262 2,324 6,244 4,754 Research and development...................... 1,449 1,605 2,918 2,942 ---------- ---------- ---------- ---------- Total operating expenses................... 4,711 3,929 9,162 7,696 ---------- ---------- ---------- ---------- Income from operations.......................... 816 459 1,224 1,074 Other income (expense): Interest expense.............................. (94) (77) (174) (154) Interest income............................... 74 100 108 180 Other, net.................................... (36) 30 (12) 56 ---------- ---------- ---------- ---------- Total other income (expense), net.......... (56) 53 (78) 82 ---------- ---------- ---------- ---------- Income before income taxes...................... 760 512 1,146 1,156 Income tax expense.............................. 203 103 318 328 ---------- ---------- ---------- ---------- Net income...................................... $ 557 $ 409 $ 828 $ 828 ========== ========== ========== ========== Basic earnings per share........................ $0.10 $0.08 $0.15 $0.15 ========== ========== ========== ========== Diluted earnings per share...................... $0.10 $0.07 $0.15 $0.15 ========== ========== ========== ========== Weighted average shares outstanding - Basic 5,487,990 5,432,058 5,475,435 5,421,330 Weighted average shares outstanding - Diluted 5,633,476 5,511,583 5,600,456 5,482,912
The accompanying notes are an integral part of the consolidated financial statements. 5 OYO GEOSPACE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
SIX MONTHS SIX MONTHS ENDED ENDED MARCH 31, 2001 MARCH 31, 2000 --------------- --------------- Cash flows from operating expenses: Net income.................................................. $ 828 $ 828 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income tax....................................... 484 (140) Depreciation and amortization............................. 2,053 1,791 Amortization of restricted stock awards................... 233 254 Bad debt expense.......................................... 17 78 Effects of changes in operating assets and liabilities: Trade accounts and notes receivable....................... (5,184) (1,906) Inventories............................................... (2,351) 84 Prepaid expenses and other assets......................... 1,065 769 Accounts payable.......................................... (298) 1,290 Accrued expenses and other................................ 5,223 (410) Income tax payable........................................ 33 (366) -------- ------- Net cash provided by operating activities............... 2,103 2,272 -------- ------- Cash flows from investing activities: Capital expenditures........................................ (2,519) (3,608) Purchase of business, net of cash acquired.................. (2,000) -- Proceeds from sale of equipment............................. 2 20 -------- ------- Net cash used in investing activities................... (4,517) (3,588) -------- ------- Cash flows from financing activities: Increase in notes payable................................... 13,613 - Principal payments on notes payable......................... (13,709) (91) Proceeds from exercise of stock options..................... 141 - -------- ------- Net cash provided by (used in) financing activities..... 45 (91) -------- ------- Effect of exchange rate changes on cash...................... (250) - -------- ------- Decrease in cash and cash equivalents........................ (2,619) (1,407) Cash and cash equivalents, beginning of period............... 3,989 5,280 -------- ------- Cash and cash equivalents, end of period..................... $ 1,370 $ 3,873 ======== =======
The accompanying notes are an integral part of the consolidated financial statements. 6 OYO GEOSPACE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated balance sheet of OYO Geospace Corporation and its subsidiaries (the "Company") at September 30, 2000, has been derived from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at March 31, 2001, and the consolidated statements of operations for the three and six months ended March 31, 2001 and 2000, and the consolidated statements of cash flows for the six months ended March 31, 2001 and 2000, have been prepared by the Company, without audit. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows have been made. The results of operations for the three months and six months ended March 31, 2001 are not necessarily indicative of the operating results for a full year or of future operations. Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended September 30, 2000. The Company has embarked on a long-term project to develop a seabed seismic array. The Company does not recognize revenue until such projects are completed and in-service; therefore, progress payments are classified as deferred revenue until completion of the project. Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), as amended by SFAS No. 137 and SFAS No. 138, was issued by the Financial Accounting Standards Board in June 1998. SFAS 133 requires the Company to record all derivatives on the balance sheet at fair value. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, liabilities and firm commitments or for forecasted transactions, deferred and recorded as a component of accumulated other comprehensive income until the hedged transactions occur and are recognized in earnings. The Company purchases printheads from OYO Corporation whereby such purchases are denominated in Japanese Yen. The Company routinely attempts to hedge its currency exposure on these purchases by entering into foreign currency forward contracts with a bank. The purpose of entering into these forward hedge contracts is to eliminate all variability of cash flows associated with foreign currency exposure risk on amounts payable in Japanese Yen. Because both the settlement dates and notional amounts on the forward contracts are always identical to the settlement dates and payable balances, respectively, the Company considers such forward contracts to be highly effective in that they eliminate all variability of cash flows on payables denominated in Yen. Under Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and for Hedging Activities" and related interpretations, the Company's forward contracts with the bank are considered derivatives. SFAS No. 133, which is effective for the Company's fiscal year 2001, requires that the Company record these foreign currency forward contracts on the balance sheet and mark them to fair value at each reporting date. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information as of March 31, 2001 and for the three months and six months ended March 31, 2001 and 2000, because that report is not a "report" or a "part" of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act. 7 OYO GEOSPACE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. EARNINGS PER COMMON SHARE The following table summarizes the calculation of net earnings and weighted average common shares and common equivalent shares outstanding for purposes of the computation of earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------- ------------------------------- MARCH 31, 2001 MARCH 31, 2000 MARCH 31, 2001 MARCH 31, 2000 -------------- -------------- -------------- -------------- Net earnings available to common stockholders (in thousands)................ $ 557 $ 409 $ 828 $ 828 ========== ========== ========== ========== Weighted average common shares outstanding... 5,487,990 5,432,058 5,475,435 5,421,330 Weighted average common share equivalents outstanding................................ 145,486 79,525 125,021 61,582 ---------- ---------- ---------- ---------- Weighted average common shares and common share equivalents outstanding............. 5,633,476 5,511,583 5,600,456 5,482,912 ========== ========== ========== ========== Basic earnings per common share.............. $ 0.10 $ 0.08 $ 0.15 $ 0.15 ========== ========== ========== ========== Diluted earnings per common share............ $ 0.10 $ 0.07 $ 0.15 $ 0.15 ========== ========== ========== ==========
3. COMPREHENSIVE INCOME Comprehensive income includes all changes in a company's equity, except those resulting from investments by and distributions to owners. The following table summarizes the components of comprehensive income (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------------- -------------------------------- MARCH 31, 2001 MARCH 31, 2000 MARCH 31, 2001 MARCH 31, 2000 ------------------- --------------- --------------- -------------- Net income........................................ $ 557 $ 409 $ 828 $828 Foreign currency translation adjustments.......... (266) 120 (250) 1 ----- ------- ----- ---- Total comprehensive income........................ $ 291 $ 529 $ 578 $829 ===== ======= ===== ====
4. TRADE ACCOUNTS AND NOTES RECEIVABLE Trade accounts and notes receivable consisted of the following (in thousands):
MARCH 31, 2001 SEPTEMBER 30, 2000 -------------- ------------------ Trade accounts receivable.............................. $12,011 $8,187 Trade notes receivable................................. 2,519 675 Allowance for doubtful accounts and notes.............. (355) (353) ------- ------ $14,175 $8,509 ======= ======
8 OYO GEOSPACE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. INVENTORIES Inventories consisted of the following (in thousands):
MARCH 31, 2001 SEPTEMBER 30, 2000 ------------------ ------------------ Finished goods......................................................... $ 3,719 $ 2,900 Work in process........................................................ 3,492 2,708 Raw materials.......................................................... 17,338 16,487 ------- ------- $24,549 $22,095 ======= =======
6. ACCRUED EXPENSES AND OTHER Accrued expenses and other consisted of the following (in thousands):
MARCH 31, 2001 SEPTEMBER 30, 2000 -------------- ------------------ Accrued expenses....................................................... $ 2,924 $ 2,679 Deferred revenue....................................................... 4,859 -- ------- ------- $ 7,783 $ 2,679 ======= =======
7. ACQUISITION On February 8, 2001, the Company acquired the operating assets and business of EcoPRO Imaging Corporation ("EcoPRO"). Furthermore, the Company entered into a three-year global thermal film and distribution alliance with Labelon, the prior owner of EcoPRO. The allocation of the purchase price for EcoPRO and a reconciliation of the purchase price to cash used for the business acquisition is as follows (in thousands):
Accounts receivable............ $ 473 Inventories.................... 103 Deferred purchasing benefits... 1,640 Current liabilities............ (216) ------ Cash paid for acquisition...... $2,000 ======
9 8. SEGMENT AND GEOGRAPHIC INFORMATION The acquisition of EcoPRO during the quarter ended March 31, 2001 expanded the Company's worldwide distribution of products for the commercial graphics industry. As a result, the Company has begun reporting information for two segments: Seismic and Commercial Graphics. The Commercial Graphics segment primarily sells products for the commercial graphics industry; however, it also has some minor sales of seismic products. The seismic product lines currently consist of geophones and hydrophones, including multi-component geophones and hydrophones, seismic leader wire, geophone string connectors, seismic telemetry cable, high definition reservoir characterization products and services, thermal imaging products, marine seismic cable retrieval devices and small data acquisition systems targeted at niche markets. Marine seismic data acquisition products include the Company's patented marine seismic cable retrieval devices. Commercial graphic products include thermal plotters and thermal film. The following tables summarize the Company's segment information:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------------- --------------------------------- MARCH 31, 2001 MARCH 31, 2000 MARCH 31, 2001 MARCH 31, 2000 --------------- ------------------- --------------- --------------- Net sales: Seismic........................ $14,196 $11,785 $26,366 $20,724 Commercial graphics............ 2,918 3,596 5,787 7,756 Eliminations................... (186) (418) (258) (722) ------- ------- ------- ------- Total.......................... $16,928 $14,963 $31,895 $27,758 ======= ======= ======= ======= Income (loss) from operations: Seismic........................ $ 2,390 $ 694 $ 3,303 $ 2,089 Commercial graphics............ (417) 588 (125) 1,436 Corporate...................... (1,048) (765) (1,904) (1,559) Eliminations................... (109) (58) (50) (892) ------- ------- ------- ------- Total $ 816 $ 459 $ 1,224 $ 1,074 ======= ======= ======= ======= MARCH 31, 2001 SEPTEMBER 30, 2000 -------------- ------------------ Total assets: Seismic........................ $55,986 $46,302 Commercial graphics............ 10,694 10,162 Corporate...................... 4,286 8,644 ------- ------- $70,966 $65,108 ======= =======
9. LINE OF CREDIT In February 2001, the Company obtained from Southwest Bank of Texas (the "Bank") a $10.0 million working capital line of credit (the "Credit Agreement") that expires in February 2002. Borrowings under the Credit Agreement are subject to borrowing base restrictions based on consolidated net income plus consolidated interest expense, income taxes, depreciation and amortization. Borrowings under the Credit Agreement are collateralized by accounts receivable and inventory. The Credit Agreement limits additional indebtedness, requires the maintenance of certain financial amounts and contains other covenants customary in transactions of this type. As of March 31, 2001 there were no borrowings outstanding under the Credit Agreement, and the borrowing base under the Credit Agreement was $9.4 million. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the financial condition and results of operations of OYO Geospace Corporation should be read in conjunction with the Consolidated Financial Statements and Notes related thereto included elsewhere in this Form 10-Q. INDUSTRY OVERVIEW We design and manufacture instruments and equipment used in the acquisition and processing of seismic data for the oil and gas industry and for the commercial graphics industry. Seismic We have been in the seismic instrument and equipment business since 1980, marketing our products primarily to the oil and gas industry worldwide. Geoscientists use seismic data to map potential or existing oil and gas bearing formations and the geologic structures that surround them. Seismic data is used primarily in connection with the exploration, development and production of oil and gas. Seismic data acquisition is conducted on land in several stages. First, an energy source imparts seismic waves into the earth, reflections of which are received and measured by geophones and hydrophones. Electrical signals generated by the geophones and hydrophones are then transmitted through leader wire, geophone and hydrophone string connectors and telemetric cable to data collection units, which store information for processing and analysis. Seismic thermal imaging products are output devices used in the field or office to create a graphic representation of the seismic data after it has been acquired. Marine seismic data acquisition is conducted primarily by large ocean-going vessels that tow long seismic cables known as "streamers". Usually, the energy source in marine seismic data acquisition is an airgun, and the reflected seismic waves are received and measured by hydrophones, which are attached to the streamers. The streamers then transmit the electrical impulses back to the vessel via telemetric cable included within the streamers, and the seismic data is then processed in much the same manner as it is on land. It is estimated that one-to two-thirds of the reserves associated with every discovery will be left behind in the reservoir, not able to be recovered economically or at times even identified. Reservoir characterization and management programs, in which the reservoir is carefully imaged and monitored throughout the life of the field, are now seen as a vital tool for improving rates of return. Surveys repeated in time showing dynamic changes within the reservoir can be used to monitor the effects of production. We are developing and marketing a suite of borehole and reservoir characterization products and services targeted at this market. We expect to incur significant future research and development expenditures aimed at the development of additional seismic acquisition products and services used for high definition reservoir characterization for use in both land and marine environments. While orders for our products have always had the potential to vary substantially from quarter to quarter, with variations in timing impacting our operating results and cash flow, manufacturing capability and expense levels in any given quarter, reservoir characterization projects, especially deepwater projects, contemplate more equipment over a greater period of time than is typically associated with conventional surface seismic systems. Revenue and expense recognition in accordance with generally accepted accounting principles for these large-scale projects has the potential to produce strong fluctuations in quarterly performance. 11 Commercial Graphics Our commercial graphics business segment developed over time as we leveraged our thermal imaging product technology into new markets. With minor product modifications, we were successful in adapting these products for use in the commercial graphics industry. We recently expanded this segment by acquiring a thermal film distribution business. Our commercial graphics segment manufactures and sells thermal imaging products and dry film primarily to the screen print, point of sale, signage and textile market sectors. RESULTS OF OPERATIONS During the quarter ended March 31, 2001 we acquired the operating assets and business of EcoPRO Imaging Corporation ("EcoPRO"). This acquisition expanded our worldwide distribution of products for the commercial graphics industry. As a result of the EcoPRO acquisition, we are reporting information for two segments: Seismic and Commercial Graphics. Summary financial data by business segment follows:
THREE MONTHS ENDED SIX MONTHS ENDED --------------------------------- --------------------------------- MARCH 31, 2001 MARCH 31, 2000 MARCH 31, 2001 MARCH 31, 2000 --------------- --------------- --------------- --------------- SEISMIC Revenue.............. $14,196 $11,785 $26,366 $20,724 Operating income..... 2,390 694 3,303 2,089 COMMERCIAL GRAPHICS Revenue.............. 2,918 3,596 5,787 7,756 Operating income..... (417) 588 (125) 1,436 CORPORATE Revenue.............. -- -- -- -- Operating income..... (1,048) (765) (1,904) (1,559) SEGMENT ELIMINATIONS Revenue.............. (186) (418) (258) (722) Operating income..... (109) (58) (50) (892) CONSOLIDATED TOTALS Revenue.............. 16,928 14,963 31,895 27,758 Operating income..... 816 459 1,224 1,074
OVERVIEW Fiscal Year 2001 Compared to Fiscal Year 2000. Sales for the three months and six months ended March 31, 2001 increased $2.0 million, or 13.1%, and $4.1 million, or 14.9%, respectively, from the corresponding periods of the prior fiscal year. The increase in sales was due to an increase in demand for our seismic products. The increase was partially offset by decline in sales of our commercial graphics products. Consolidated gross profits for the three months and six months ended March 31, 2001 increased by $1.1 million, or 26.0%, and $1.6 million, or 18.4%, respectively, from the corresponding periods of the prior year. The higher gross profits we realized from our seismic products were partially offset by lower gross profits we realized from our commercial graphics products. 12 Consolidated operating expenses for the three months and six months ended March 31, 2001 increased $0.8 million, or 19.9%, and $1.5 million, or 19.0%, respectively, from the corresponding periods of the prior fiscal year. The increase primarily resulted from increased costs associated with new personnel, sales and marketing efforts, information technology upgrades and costs associated with the EcoPRO acquisition. Our effective tax rate for the three months ended March 31, 2001 was 26.7% compared to 20.1% for the three months ended March 31, 2000. The effective tax rate for the six months ended March 31, 2001 was 27.7% compared to 28.4% for the corresponding period of the prior fiscal year. The tax rate of the current and prior years includes certain tax adjustments relating to prior years. The current year tax rate also includes a benefit resulting from the resolution of contingent tax matters from prior years. Excluding these benefits, our effective tax rate would be 34.4% for the current periods compared to 35.0% for the prior year periods. SEISMIC Our seismic product lines currently consist of geophones and hydrophones, including multi-component geophones and hydrophones, seismic leader wire, geophone string connectors, seismic telemetry cable, high definition reservoir characterization products and services, thermal imaging products, marine seismic cable retrieval devices and small data acquisition systems targeted at niche markets. Marine seismic data acquisition products include our patented marine seismic cable retrieval devices. Revenue Sales of our seismic products for the three months and six months ended March 31, 2001 increased $2.4 million, or 20.5%, and $5.6 million, or 27.2%, respectively, from the corresponding periods of the prior year. The increases in seismic product sales primarily resulted from the increase in sales of our land-based products due to increasing worldwide oil and gas exploration efforts. Operating Income Operating income, for the three months and six months ended March 31, 2001, increased $1.7 million, or 244.4% and $1.2 million, or 58.1%, respectively from the corresponding periods of the prior year. The increase in operating income primarily resulted from increased gross profits associated with increased sales. The improved gross profits were partially offset by higher selling, general and administrative expenses. COMMERCIAL GRAPHICS Our commercial graphics products include thermal imaging equipment capable of producing data images ranging in size from 12 to 54 inches wide. In addition, we also distribute thermal film and related products to our customers. Revenue Sales of our commercial graphics products for the three months and six months ended March 31, 2001 decreased $0.7 million, or 18.9%, and $2.0 million, or 25.4%, respectively, from the corresponding periods of the prior year. The decline in sales resulted from a decline in thermal imaging equipment sales, although these sales were partially offset by increased sales of our thermal film products due to the recent acquisition of EcoPRO. Operating Income Operating income, for the three months and six months ended March 31, 2001, decreased $1.0 million and $1.6 million, respectively from the corresponding periods of the prior year. The decrease in operating income primarily resulted from the lower level of thermal imaging equipment sales. 13 LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, we had $1.4 million in cash and cash equivalents. For the six months ended March 31, 2001, we generated approximately $2.1 million of cash in operating activities principally resulting from our net income adjusted for noncash expenses, an increase of $4.9 million in deferred revenue from a deepwater seabed seismic array project offset by increases in accounts receivable and inventories, of which approximately $3.9 million represents new inventory associated with the deepwater seabed seismic array project. For the six months ended March 31, 2001, we used approximately $4.5 million of cash in investing activities, primarily related to capital expenditures and the EcoPRO acquisition. We estimate that our capital expenditures in fiscal 2001 will be $5.0 million to $6.0 million, which we expect to fund through operating cash flow and borrowings under our credit facility. For the six months ended March 31, 2001, we generated approximately $45,000 of cash from financing activities resulting from the proceeds received for the exercise of stock options partially offset by principal payments on long-term mortgage notes payable. In February 2001, we obtained from Southwest Bank of Texas (the "Bank") a $10.0 million working capital line of credit (the "Credit Agreement") that expires in February 2002. Borrowings under the Credit Agreement are subject to borrowing base restrictions based on consolidated net income plus consolidated interest expense, income taxes, depreciation and amortization. Borrowings under the Credit Agreement are collateralized by accounts receivable and inventory. The Credit Agreement limits additional indebtedness, requires the maintenance of certain financial amounts and contains other covenants customary in transactions of this type. As of March 31, 2001 there were no borrowings outstanding under the Credit Agreement, and the borrowing base under the Credit Agreement was $9.4 million. We believe that the combination of existing cash reserves, cash flows from operations and borrowing availability under our existing credit facility should provide us sufficient capital resources and liquidity to fund our planned operations through fiscal 2001. FORWARD LOOKING STATEMENTS AND RISKS This Form 10-Q includes "forward-looking" statements which are subject to the "safe harbor" provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included herein, including statements about potential future products and markets, our future financial position, business strategy and other plans and objectives for future operations, are forward- looking statements. Although we believe the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct, and actual results may differ materially from such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations are disclosed below and in our Annual Report on Form 10-K for the year ended September 30, 2000 under the heading "Forward-Looking Statements and Risks". Further, all written and verbal forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by such factors. Our New Products May Not Achieve Market Acceptance. In recent years, we have incurred significant expenditures to fund our research and development efforts and we intend to continue those expenditures in the future. However, research and development is by its nature speculative, and we cannot assure you that these expenditures will result in the development of new products or services or that any new products and services we have developed recently or may develop in the future will be commercially marketable or profitable to us. 14 In particular, we have incurred substantial expenditures to develop our recently introduced HDSeis(TM) product line. We cannot assure you that we will realize our expectations regarding market acceptance and revenues from these products and services. We May Experience Fluctuations in Quarterly Results of Operations. Historically, the rate of new orders for our products has varied substantially from quarter to quarter. Moreover, we typically operate, and expect to continue to operate, on the basis of orders in hand for our products before we commence substantial manufacturing "runs"; hence, the completion of orders, particularly large orders for deepwater reservoir characterization projects, can significantly impact the operating results and cash flow for any quarter, and results of operations for any one quarter may not be indicative of results of operations for future quarters. Our Customer Financing Results in Credit Risks to Us. We have found it necessary from time to time to extend long term trade credit to our customers through accounts and notes receivable. As a result, we are subject to the credit risks of nonpayment or late payment. Given current industry conditions, some of our customers may experience liquidity difficulties, which increases those credit risks. We cannot assure you that sufficient aggregate amounts of uncollectible receivables and bad debt charges will not have a material adverse effect on our future results of operations. At March 31, 2001, our bad debt allowance was $0.4 million. We systematically adjust this allowance each month to reflect the estimated credit risk associated with our trade accounts and notes receivable. We base this adjustment on the level of past due accounts and notes receivable, customer creditworthiness, past payment history, access to underlying collateral and other factors. Although we believe this allowance is a fair representation of the credit risk with respect to our outstanding receivables, we cannot assure you that this allowance will be adequate to cover every potential bad debt exposure. 15 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On January 25, 2001, we held our Annual Meeting of Stockholders (the "Meeting"). At the Meeting, our stockholders approved two proposals. Proposal 1 related to the election of Gary Owens and Satoru Ohya as directors, each holding office until the 2004 Annual Meeting of Shareholders or until his successor is duly elected and qualified. Proposal 2 amended our 1997 Key Employee Stock Option Plan (the "Plan") to increase the number of shares available under the Plan from 625,000 to 875,000. The results of the voting follows:
FOR AGAINST WITHHELD --------- ------- -------- Proposal 1 Gary Owens 5,038,730 - 59,200 Satoru Ohya 4,944,730 - 153,200 Proposal 2 5,021,130 75,200 1,500
The total voted shares represented by proxy was 5,097,930. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed with this Quarterly Report. 2.1 Asset Purchase Agreement, dated February 8, 2001, regarding the acquisition of assets of EcoPRO. 2.2 Business Loan Agreement, dated February 16, 2001, made by and between the Company and Southwest Bank of Texas. 2.3 Promissory Note, dated February 16, 2001, made by and between the Company and Southwest Bank of Texas. 15.1 Awareness Letter of Independent Accountants (b) The Company did not file any reports on Form 8-K during the quarter for which this report is filed. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OYO GEOSPACE CORPORATION Date: May 7, 2001 By: /s/ Gary D. Owens ------------------------ Gary D. Owens, Chairman of the Board President and Chief Executive Officer (duly authorized officer) Date: May 7, 2001 By: /s/ Thomas T. McEntire --------------------------- Thomas T. McEntire Chief Financial Officer (principal financial officer) 17 EX-2.1 2 dex21.txt ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT AMONG LABELON CORPORATION, ECO PRO IMAGING CORPORATION AND OYO INSTRUMENTS, LP FEBRUARY 8, 2001 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into as of this 8th day of February, 2001, among Labelon Corporation ("Labelon"), EcoPRO Imaging Corporation ("Seller"), and OYO Instruments, LP ("Purchaser"). RECITALS WHEREAS, Seller is a wholly owned subsidiary of Labelon; and WHEREAS, Seller is engaged in the business of marketing and distributing a 12 1/2" thermal imagesetter (the "Imagesetter") and related supplies under the EcoPRO(TM) brand, and providing technical support and warranty service and support for the Imagesetter (the "Business"); and WHEREAS, Seller desires to sell, and Purchaser desires to purchase, certain assets of Seller (as described herein) used or held in connection with the Business, upon the terms and subject to the conditions set forth herein. AGREEMENT NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows: ARTICLE 1 DEFINITIONS AND INTERPRETATION 1.1 Definitions. As used in this Agreement, the following terms shall have the following meanings: "Agreement" shall have the meaning ascribed such term in the preamble to this Agreement. "Assumed Liabilities" shall have the meaning ascribed such term in Section 3.3 of this Agreement. "Balance Sheet" shall have the meaning ascribed such term in Section 2.1 of this Agreement. "Business" shall have the meaning ascribed such term in the recitals to this Agreement. "Closing" shall have the meaning ascribed such term in Section 7.3 of this Agreement. "Closing Date" shall have the meaning ascribed such term in Section 7.3 of this Agreement. "Closing Net Working Capital" shall have the meaning ascribed such term in Section 3.2 of this Agreement. "Distribution Agreement" means the Distribution and Supply Agreement to be entered into by Labelon and Purchaser at Closing in substantially the form attached hereto as Exhibit A. "Employee Benefit Plan" shall have the meaning ascribed such term in Section 4.17 of this Agreement. "Excluded Assets" shall mean all assets of the Seller other than the Purchased Assets, including without limitation, all cash, investments, rights pursuant to any leases of real property, equipment, furniture, claims, causes of action, prepaid items, deferred charges, deposits, security deposits and any other property or rights not explicitly included in the definition of Purchased Assets, whether or not used in the conduct of the Business. "Financial Statements" shall have the meaning ascribed such term in Section 4.2 of this Agreement. "Imagesetter" shall have the meaning ascribed such term in the preamble to this Agreement. "Indemnified Party" shall have the meaning ascribed such term in Section 10.3 of this Agreement. "Indemnifying Party" shall have the meaning ascribed such term in Section 10.3 of this Agreement. "Intellectual Property" shall have the meaning ascribed such term in Section 4.8 of this Agreement. "Know-How" shall mean all factual knowledge or information developed or derived by Seller over time pertaining to the Business or marketing or sale of Seller's products and provision of its services which is embodied in a tangible medium including but not limited to trade secrets, inventions, designs, drawings, specifications, marketing information, vendor lists, customer lists and associated data. "knowledge of Seller", "Seller's knowledge" and like phrases or variations thereof shall refer to the actual knowledge of James Armstrong, William L. Irwin and James C. Haefner. "Labelon" shall have the meaning ascribed such term in the preamble to this Agreement. "Material Adverse Effect" means a material adverse effect on the business, operations, property, condition or prospects of the Purchased Assets and the Business, taken as a whole. 2 "Material Contracts" shall have the meaning ascribed such term in Section 4.6 of this Agreement. "Permitted Liens" shall have the meaning ascribed such term in Section 4.5 of this Agreement. "Proprietary Rights" shall mean all scientific, technical and other information existing in printed or graphic form including but not limited to drawings, blueprints, design information, spare part and component lists, diagrams, charts and other data and information, including any information embodied in any patents, patent rights or patent applications used in the Business and printed material disseminated to customers of the Business and all goodwill, Know-How, trade secrets, whether or not in writing, that are connected with the products of the Business, including technical information and all other information which is used in the Business regardless of whether such information is patentable or otherwise protectable or whether such information constitutes or contains trade secrets, and all Proprietary Software. "Proprietary Software" shall mean software described in Schedule 1.2 that Seller has developed or customized for its use in connection with the Business or the Imagesetter. "Purchased Assets" shall have the meaning ascribed such term in Section 2.1 of this Agreement. "Purchase Price" shall have the meaning ascribed such term in Section 3.1 of this Agreement. "Purchase Price Adjustment" shall have the meaning ascribed such term in Section 3.2 of this Agreement. "Purchaser" shall have the meaning ascribed such term in the preamble to this Agreement. "Retained Liabilities" shall mean all liabilities and obligations of Seller of any kind that are not Assumed Liabilities. "Schedules" shall mean the various schedules attached hereto and made a part hereof. The term "Schedule" shall mean any one of such Schedules as specified. "Seller" shall have the meaning ascribed such term in the preamble to this Agreement. "Seller Disclosure Schedule" shall mean Schedules 4.2 through 4.18 inclusive. 1.2 Interpretation. (a) Unless the context of this Agreement requires otherwise, the plural includes the singular, the singular includes the plural, and "including" has the inclusive meaning of "including without limitation". The words "hereof", "herein", "hereby", "hereunder" and other similar terms of this Agreement refer to this Agreement as a whole 3 (including the Schedules) and not exclusively to any particular provision of this Agreement. All pronouns and any variations thereof shall be deemed to refer to masculine, feminine, or neuter, singular or plural, as the identity of the person or persons may require. (b) Article, Section and other headings are for convenience of reference only, and shall not affect the interpretation or meaning of any provision of this Agreement. (c) A reference to a person in this Agreement includes the successors and assigns of such person, but such reference shall not modify in any way the provisions in this Agreement governing the assignment of rights and obligations under or the binding effect of any provision of this Agreement. ARTICLE 2 SALE AND PURCHASE OF ASSETS 2.1 Purchased Assets. Subject to the terms and conditions of this Agreement, on the Closing Date, Seller shall sell, assign, transfer, convey and deliver to Purchaser, and Purchaser shall purchase, acquire and accept from Seller all Seller's right, title and interest, free and clear of all liens and encumbrances of any nature (except Permitted Liens) in and to all assets of the Seller other than the Excluded Assets (the "Purchased Assets"). The Purchased Assets include the following assets of Seller as shown or reflected on the unaudited December 30, 2000 balance sheet of the Seller attached as Schedule 4.2 (the "Balance Sheet") subject to changes thereafter in the ordinary course of business between the date of the Balance Sheet and the Closing Date, except to the extent such assets are Excluded Assets: (a) all inventories of the Seller wherever located, which have been acquired by Seller in connection with the conduct by Seller of the Business including finished goods, packaging and supplies; (b) all accounts receivable of the Seller which are attributable to the Business; (c) all spare parts, repair parts and refurbished imagesetters on hand as of the Closing Date; (d) all office supplies, advertising and promotional materials and supplies and other miscellaneous supplies, used by the Seller primarily in the conduct of the Business; (e) all of the rights and benefits accruing to the Seller under all sales orders, sales contracts, supply contracts (including those certain Supply Agreements by and between Seller and each of Labelon Corporation and Imaging Systems Group, Inc.), distributor agreements, agency agreements, employment agreements, purchase orders and purchase commitments made by or to the Seller in the conduct of the Business; (f) all operating, transportation and other licenses (including licenses of computer software) and permits of every kind and variety issued to or relied upon by the Seller with respect to the Business to the extent transferable by Seller; 4 (g) all Seller's rights in and to agreements relating to the Business to which the Seller is a party or by which the Seller is bound, including without limitation, the right to collect accounts receivable (excluding leases and agreements pertaining to real property, such as utility service agreements, maintenance and cleaning agreements, etc., all of which are Excluded Assets); (h) all operating data and records, whether printed or electronic, which are used by the Seller primarily with respect to the Business, including, without limitation, customer lists, financial accounting and credit reports, personnel files, records pertaining to suppliers, distributors, customers and governmental agencies, correspondence, budgets and all other files, documents and records of or pertaining to the Business; (i) all Proprietary Rights and Intellectual Property owned by the Seller with respect to the Business or used by the Seller primarily in the conduct of the Business, including all names, marks, slogans, caricatures, logos, sales brochures, instruction manuals and promotional graphics used by the Seller in the conduct of the Business; (j) all transferable licenses, permits and authorizations issued or granted to Seller by any governmental or other public agencies or authorities or by private parties, in each case, relating to the use or operation of the above described Purchased Assets or the conduct of the Business; (k) all rights of Seller in and to in-process research and development; and (l) all goodwill and going concern value of the Business. 2.2 Consent to Assignment. Except for the consent of Congress Financial Corporation (New England), no approvals, consents or waivers of any party or parties is necessary to permit Seller to convey to Purchaser the Purchased Assets as required by this Agreement. Seller shall use commercially reasonable efforts, and Purchaser shall cooperate with Seller, to obtain the consent of Congress Financial Corporation (New England) as soon as is reasonably practicable in order to permit the Closing to occur as contemplated by this Agreement. ARTICLE 3 PAYMENT 3.1 Purchase Price. Purchaser shall pay Seller consideration in the amount of $2,000,000.00 (the "Purchase Price") by wire transfer on the Closing Date of immediately available funds in accordance with the wire instructions set forth in Schedule 3.1 hereto. 3.2 Purchase Price Adjustment. (a) Not later than ninety-five days following the Closing Date, Purchaser shall in good faith and in accordance with generally accepted accounting principals, consistently applied, determine the net value of the Purchased Assets less the Assumed Liabilities and shall promptly provide Seller a written statement of such determination in such detail as to permit Seller to evaluate such determination; provided that all accounts 5 receivable included in the Purchased Assets that have not been collected within ninety days of closing shall be deemed to be of no value and shall be assigned back to Seller; and provided further that obsolete or impaired inventory shall be deemed to be of no value and shall be assigned back to Seller. (b) If Purchaser determines the value of the net assets to exceed $360,000.00, or to be less than $360,000.00, an upward or downward adjustment shall be made to the Purchase Price, respectively, in the amount of the difference between the value of the net assets and $360,000.00 (the "Purchase Price Adjustment"). (c) If the Purchase Price Adjustment is an upward adjustment, Purchaser shall, not later than thirty days after delivery of the written statement of Purchaser's determination of net assets referred to above, pay the amount of the Purchase Price Adjustment to Seller by wire transfer of immediately available funds pursuant to wire instructions to be provided by Seller for such purpose or, at the election of Seller, by delivery to Seller of a certified check in the amount of the Purchase Price Adjustment. If the Purchase Price Adjustment is a downward adjustment, Seller shall, not later than thirty days after delivery of the written statement of Purchaser's determination of net assets referred to above, pay the amount of the Purchase Price Adjustment to Purchaser by wire transfer of immediately available funds pursuant to wire instructions to be provided by Purchaser for such purpose or, at the election of Purchaser, by delivery to Seller of a certified check in the amount of the Purchase Price Adjustment. 3.3 Assumption of Liabilities. Upon the terms and subject to the conditions of this Agreement, Purchaser agrees, effective as of the Closing, to assume and to pay, perform and discharge when due all obligations, contracts and liabilities of the Seller listed on Schedule 3.3 arising from and after the Closing Date (the "Assumed Liabilities"). 3.4 Allocation of Purchase Price. The Purchase Price shall be allocated among the various classes of assets to be purchased hereunder as the Purchaser and the Seller shall agree within ten days of Purchaser delivering the notice required by Section 3.2, and such allocation shall be used by the parties in reporting the transaction contemplated by this Agreement for federal, state and local tax purposes. Purchaser and Seller shall prepare and timely file all such reports and returns as may be required by Section 1060 of the Internal Revenue Code of 1986, as amended (or any similar provision of state or local law) to report such allocation. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF LABELON AND SELLER Labelon and Seller jointly and severally represent and warrant to Purchaser that, except as otherwise set forth in the Seller Disclosure Schedule: 4.1 Corporate Status; Power and Authority. The Seller is a corporation duly organized, presently existing and in good standing under the laws of the State of New York. The Seller has the corporate power to own or lease its properties and the Purchased Assets and to carry on the Business as it is now being conducted and is (and has been since required by law) duly qualified to do business and is in good standing in every jurisdiction in which the failure to 6 do so would have a Material Adverse Effect. Labelon is a corporation duly organized, presently existing and in good standing under the laws of the State of New York. Each of Labelon and the Seller has the full corporate power and authority to enter into and perform its respective obligations under this Agreement. Labelon has the full corporate power and authority to enter into and perform its obligations under the Distribution Agreement. 4.2 Financial Standing and Documents. (a) Set forth in Schedule 4.2 are the Balance Sheet and unaudited income statements for Seller's fiscal years ended September 30, 2000 and September 25, 1999 and Seller's unaudited interim balance sheet and income statement for the three (3) month period ended December 30, 2000 (collectively the "Financial Statements"). (b) The Financial Statements (i) are true and correct in all material respects and present fairly the information contained therein as of the respective dates indicated as a result of operations for the respective periods indicated; (ii) are in accordance with the books and records of the Seller and reflect only bona fide transactions of the Seller relating to the Business; and (iii) have been prepared in accordance with generally accepted accounting principles consistently applied. 4.3 No Liabilities. Seller has no material indebtedness or liability (absolute or, to its knowledge, after due inquiry, contingent) arising out of or associated with the Business except for indebtedness or liabilities arising from leases, purchase or sales agreements, contracts or other obligations disclosed in this Agreement or the Seller Disclosure Schedule. 4.4 Taxes. With regard to all taxes other than sales taxes, Seller has filed all tax reports and returns of any nature whatsoever that are required to be filed prior to the date (including valid extensions) hereof and has made timely payments of all taxes, license and registration fees, charges or withholdings of any and every nature whatsoever due and payable in respect of such returns and reports. Seller has not executed any waiver of any statute of limitations on the assessment or collection of any taxes on or affecting the Business or the Assets. With regard to sales taxes, the Seller has filed all sales tax reports and returns that are required to be filed prior to the date hereof and has made timely payments of all sales taxes payable in respect of such returns and reports, or to the extent of any such failure, Seller will correct such failure promptly upon notice of the same. 4.5 No Encumbrances. Seller has good and valid title to each item of the Purchased Assets, free and clear of any liens, changes or encumbrances other than liens, financing statements and encumbrances of Congress Financial Corporation (New England) which shall be released or terminated prior to Closing ("Permitted Liens"). 4.6 Material Contracts. Schedule 4.6 contains a list of all oral and written contracts and other agreements relating to the Purchased Assets or the Business (including all Membership Agreements) to which the Seller is a party, or by or to which it or its assets or properties are bound or subject, of the following types: (a) customer and supplier contracts, except for contracts and commitments providing for payments of less than One Thousand Dollars ($1,000), (b) extended service contracts of Seller, (c) any contracts entered into outside the ordinary course of 7 the Business, (d) any contracts providing for the sale by Seller of products at less than Seller's cost, (e) any contract for which Seller's liability for consequential damages or lost profits is not expressly waived and (f) any contract not terminable by Seller without penalty within 60 days (collectively the "Material Contracts"). Seller has provided Purchaser with a true, correct and complete copy of each written Material Contract and has included on Schedule 4.6 a true, correct and complete description of the material terms of each oral Material Contract. 4.7 The Purchased Assets. With respect to the Purchased Assets, the Seller represents and warrants that: (a) The Purchased Assets are located at 4085 East LaPalma Avenue, Anaheim, California 92807-1702 and Nieuwesluisweg 250, 3197 KV Rotterdam (Botlek), The Netherlands. (b) The Purchased Assets are in good operating condition and repair, normal wear and tear excepted, and are suitable to the uses to which they are being put in connection with the Business. (c) All accounts receivable to be included in the Purchased Assets will represent valid obligations collectible in the ordinary course of the Business (but in no event later than 90 days from the due date), are fully transferable to Purchaser and are not subject to any offset or other defenses to the payment thereof (d) Except as set forth in Schedule 4.7(d), the Purchased Assets do not include any obsolete, slow-moving, damaged or otherwise impaired inventory. (e) Except for Permitted Liens, none of the Purchased Assets is held under any lease, security agreement, conditional sales contract, or other title retention or security arrangement or is subject to any mortgage, lien or other encumbrance. The Seller owns outright all the personal property used by Seller in the conduct of the Business, in each case free and clear of all mortgages, liens, security interests, or other encumbrances. 4.8 Intellectual Property. (a) Schedule 4.8 includes a list of all rights of the Seller in and to trademarks, trade names, trade secrets, know-how, copyrights, computer software systems, patents and applications for patents related to the Business or the Purchased Assets owned by or registered in the name of, or used by, the Seller (collectively the "Intellectual Property"). (b) Each item comprising the Intellectual Property is transferable to the Purchaser. The Seller owns all the Intellectual Property, has the right to use those computer software systems used by the Seller in the conduct of the Business, pays no royalty to anyone under any of them, and has the right to bring actions for the infringement thereof. To the best of Seller's knowledge after due inquiry, no other person is infringing upon the Intellectual Property. 8 (c) Seller has not received any notice to the effect that, and after due inquiry has no knowledge that, any service rendered, any product manufactured or sold, or any process, computer software system, method, part or material employed in the service rendered or in the manufacture of any product made or sold, or in the marketing or use by the Seller of any product in connection with the Business (including the Proprietary Software), may infringe any franchise, trademark, trade name, copyright, computer software system or patent of another. There is no pending or, to the best of Seller's knowledge, after due inquiry, threatened claim or litigation against the Seller contesting the right to use any of the Intellectual Property or Proprietary Software or the validity thereof, or asserting the misuse thereof which would deprive it of its right to assert its rights thereunder or would prevent the performance of any service provided by it or the manufacture or sale of any product manufactured or sold by it. 4.9 Litigation and Claims. Except as set forth on Schedule 4.9: (a) No order, writ, injunction or decree of any court or Federal, state or municipal or other governmental department, commission, board, bureau, agency or instrumentality against or affecting the Seller, the Business or the Purchased Assets is outstanding or, to Seller's knowledge after due inquiry, threatened; (b) No suit, action, claim, arbitration, or legal, administrative, or other proceeding, or governmental investigation related to the Seller, the Business or the Purchased Assets is pending or, to the best of Seller's knowledge, after due inquiry, threatened, and Seller has no knowledge of any pending or threatened action against any third party which would adversely affect the Business or the Assets. 4.10 Compliance with Laws. Seller is in material compliance with all laws, ordinances, regulations and orders of the United States and any state, agency, instrumentality or subdivision of any of them applicable to the Business or the Purchased Assets and has no notice or knowledge of any claimed violations thereof or investigations with respect thereto which would result in a Material Adverse Effect. 4.11 Accuracy. No representation or warranty by the Seller or Labelon contained in this Agreement nor any statement or certificate furnished or to be furnished pursuant hereto by the Seller contains or shall contain any untrue statement of a material fact or omits or shall omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances in which they are made, not misleading. 4.12 Conduct of Business. Since the date of the Balance Sheet, there has not been any change in the operations, prospects, properties, assets or condition, financial or otherwise, of the Business, which individually or in the aggregate have been materially adverse to the Business or the Purchased Assets. Except as agreed to by the Purchaser and the Seller, the Seller agrees that from and after the date hereof and until the Closing, it will operate the Business in the ordinary course and in accordance with past practices and shall not take or permit any action that will result in any of the Purchased Assets becoming subject to any lien, nor execute, amend or terminate any agreement or Material Contract (other than in the ordinary course of business and as contemplated by this Agreement) relating to the Purchased Assets or the Business. 9 4.13 Labor Disputes. Seller is not a party to any collective bargaining agreement and has not received notice of any proposed union certification or recognition election. There are no labor disputes pending or to the Seller's knowledge after due inquiry threatened, involving employees of the Seller. 4.14 Absence of Restrictions. Except as provided in Section 2.2 of this Agreement, the Seller is not subject to the provisions of any charter, bylaw, mortgage, agreement, instrument or other restriction of any kind or character which would prevent, or which requires the consent of any other party to, its execution or performance of this Agreement or consummation of the transactions contemplated hereby. 4.15 No Consent Required. Except as provided in Section 2.2 of this Agreement, no consent, approval or authorization of, or exemption by, or filing with, any party is required to effect Seller's execution, delivery and performance of this Agreement or the taking of any other action contemplated hereby, excluding, however, consents, approvals, authorizations, exemptions and filings, if any, that Purchaser is required to obtain or make. 4.16 Due Authorization. Each of Labelon's and Seller's execution, delivery and performance of this Agreement have been duly authorized by all necessary action on its part. Each of Labelon and Seller has duly and validly executed and delivered this Agreement, which constitutes its valid and binding obligation enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors rights and remedies generally and subject, as to enforceability, to general principles of equity. The execution, delivery and performance of this Agreement by each of Labelon and Seller and consummation by each of Labelon and Seller of the transactions contemplated hereby, and the execution, delivery and performance of the Distribution Agreement by Labelon and consummation by Labelon of the transactions contemplated thereby will not, with or without the giving of notice or the lapse of time, or both, subject to obtaining any required consents, approvals, authorizations or exemptions, (i) violate any provision of law, rule or regulation to which either is subject, (ii) violate any order, judgment or decree applicable to either or (iii) conflict with, or result in a breach or default under, either's certificate of incorporation or bylaws or any of either's contracts; except, in each case, for violations, conflicts, breaches or defaults which in the aggregate would not result in a Material Adverse Effect. 4.17 Employee Benefit Plans. The Purchaser shall not by reason of this Agreement or the transactions contemplated hereby, incur or otherwise assume any liability under any employee benefit plan maintained by Seller. 4.18 Employees. Schedule 4.18 sets forth (a) the name of each employee, consultant, agent or other representative of the Seller whose current annual rate of compensation (including bonuses and commissions) exceeds Five Thousand Dollars ($5,000), (b) the amount of compensation (including bonuses and commissions) paid to such person by Seller during Seller's fiscal year 2000 and (c) a list of each employment agreement or contract to which the Seller is a party. 10 4.19 Key Employees. The Seller hereby acknowledges that the opportunity for Purchaser to employ certain people currently employed by Seller comprises a portion of the goodwill of the Business being transferred to Purchaser. As such, Seller agrees to use reasonable efforts to encourage employees to accept offers of employment with Purchaser, if and to the extent such offers are made by Purchaser. 4.20 Real Property. None of the Purchased Assets includes any interest in any real property. Seller has never, and does not currently, own any real property. Seller presently leases office space located at 4085 East LaPalmas Avenue, Suite A, Ananheim California 92807-1702 which is used by Seller in the conduct of the Business. Seller's rights with respect to such office space is an Excluded Asset and is not being sold or otherwise transferred to Purchaser in connection with the transactions contemplated by this Agreement. Seller's liabilities and obligations with respect to such office space are Retained Liabilities and are not being assumed or otherwise transferred to Purchaser in connection with the transactions contemplated by this Agreement. 4.21 Customers and Suppliers. Seller is not engaged in any material dispute with any customer or supplier associated with the Business except for disputes which occur in the ordinary course of business and disputes between customers or suppliers of any of the Seller which, individually or in the aggregate, will not have a Material Adverse Effect. 4.22 Brokers. Except for The Dratt-Campbell Company, whose fees shall be paid by Seller, no agent, broker, finder, investment banker, or other firm or person has acted directly or indirectly on behalf of Seller or Labelon in connection with the transactions contemplated hereby, and no such person is entitled to any broker's or finder's fee or similar concession in respect thereof based on any agreements, arrangements or understandings made by or on behalf of Seller or Labelon. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER Purchaser represents and warrants to Seller as follows: 5.1 Organization, Standing and Authority. Purchaser is a limited partnership duly organized and validly existing under the laws of the State of Texas and has full power and authority to enter into and to perform this Agreement. 5.2 Effect of Agreement. Purchaser's execution, delivery and performance of this Agreement and the Distribution Agreement have been duly authorized by all necessary action on its part. Purchaser has duly and validly executed and delivered this Agreement, which constitutes its valid and binding obligation enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors, rights and remedies generally and subject, as to enforceability, to general principles of equity. The execution, delivery and performance of this Agreement and the Distribution Agreement by Purchaser and consummation by Purchaser of the transactions contemplated hereby and thereby will not, with or without the giving of notice or the lapse of time, or both, (i) violate any provision of law, rule or regulation to which it is subject, 11 (ii) violate any order, judgment or decree applicable to it or (iii) conflict with, or result in a breach or default under, its charter documents or any of its contracts; except, in each case, for violations, conflicts, breaches or defaults which in the aggregate would not have a Material Adverse Effect. 5.3 Consents. No consent, approval or authorization of, or exemption by, or filing with, any party is required to effect Purchaser's execution, delivery and performance of this Agreement or the taking of any other action contemplated hereby. 5.4 Litigation. There are no judicial or administrative actions, proceedings or investigations pending or, to Purchaser's knowledge, threatened that question the validity of this Agreement or any action taken or to be taken by it in connection with this Agreement or that, if adversely determined, would have a material adverse effect upon its ability to perform its obligations under this Agreement. 5.5 Brokers. No agent, broker, finder, investment banker, or other firm or person has acted directly or indirectly on behalf of Purchaser in connection with the transactions contemplated hereby, and no such person is entitled to any broker's or finder's fee or similar concession in respect thereof based on any agreements, arrangements or understandings made by or on behalf of Purchaser. ARTICLE 6 FURTHER AGREEMENTS OF THE PARTIES 6.1 Conduct of the Business Pending Closing. Until the Closing, except as otherwise permitted herein: (a) Seller shall operate the Business and the Purchased Assets in the ordinary course in all material respects; and (b) Seller shall use reasonable efforts to maintain and preserve, in all material respects, the value of the Business and the Purchased Assets and to maintain the relationships of the Business with its material customers, suppliers and others having material business dealings with it. 6.2 Conduct of the Business After Closing. (a) From and after the Closing, unless and until instructed by Purchaser that Purchaser is prepared to operate the Business and the Purchased Assets (but in no event beyond March 31, 2001), Seller shall continue to operate the Business and the Purchased Assets as provided in Sections 6.1(a) and (b) hereof. Seller shall be reimbursed by Purchaser for Seller's actual direct operating costs incurred in performing its obligations pursuant to this Section 6.2(a), including without limitation, actual costs of occupancy for Seller's facility in Anaheim during such period and payroll and benefits paid in the ordinary course of and consistent with the past practices of the Business by Seller to Seller's personnel, prorated to reflect only the portion of such payroll and benefits attributed to performance of Seller's obligations pursuant to this Section 6.2(a). 12 (b) As soon as practicable following Closing, Seller shall notify customers having outstanding and unpaid invoices to remit payment to Purchaser. Payments received by Seller after Closing will be deposited in Seller's account and amounts will be deducted therefrom to reimburse Seller's expenses pursuant to Section 6.2(a) hereof. Each week, Seller shall remit to Purchaser the balance remaining, if any, from such payments received after deduction of Seller's expenses. If Seller's expenses in accordance with Section 6.2(a) hereof shall in any week exceed the aggregate payments received by Seller during such period, Seller shall so notify Purchaser and Purchaser shall promptly thereafter remit to Seller an amount equal to any shortfall. 6.3 Other Action. Each party hereto shall use commercially reasonable efforts to cause the fulfillment of all of the conditions to its respective obligations and to consummate the transactions contemplated hereby as soon as practicable. 6.4 Expenses. Except as otherwise expressly provided for herein, each of Purchaser and Seller shall bear its own expenses incurred in connection with this Agreement and in connection with the performance of its obligations hereunder. 6.5 Publicity. Except as may otherwise be required by applicable law or governmental or the Nasdaq National Market rules or regulations, neither party, nor any affiliate of any party, shall issue any press release or public announcement of any kind concerning this Agreement or the transactions contemplated hereby without the prior written consent of the other party. 6.6 Access to Information. During the period commencing with the date hereof and continuing until the earlier of the date on which this Agreement terminates in accordance with its terms or the Closing Date, Seller shall disclose and make available to Purchaser all books, agreements, papers and records relating to the ownership and operations of Seller and shall afford to Purchaser, its accountants, legal counsel, lenders, financial advisors, and other representatives reasonable access, during normal business hours (or any other reasonable time), to conduct due diligence relating to the financial condition, results of operations, properties or prospects of Seller, and to inspect the Purchased Assets and the Business. 6.7 Confidentiality. Each of Seller and Purchaser covenants and agrees that it shall, and shall cause its subsidiaries and affiliates to, maintain the confidentiality of all information it receives from the Purchaser and Seller, respectively, which is identified as being confidential or non-public information. 6.8 Name. Seller shall, within one business day following Closing, file a certificate of amendment to its certificate of incorporation changing its corporate name to a name that does not include "EcoPRO" or any words confusingly similar thereto. ARTICLE 7 CONDITIONS TO CLOSING 7.1 Conditions to Obligations of Purchaser. The obligation of Purchaser to consummate the transactions contemplated by this Agreement is subject, at the option of Purchaser, to the satisfaction or waiver of the following conditions: 13 (a) The representations and warranties of Seller set forth in this Agreement shall be true and correct in all material respects; (b) Seller shall have performed all material obligations required to be performed by it under this Agreement; (c) Seller shall have obtained all required consents as described in Section 2.2; (d) There shall have been no material adverse change in the financial condition, results of operations, properties or prospects of the Seller from the date of completion of Purchaser's due diligence review thereof and the Closing Date; (e) Purchaser shall have received all of the items called for in Section 8.1 below; and (f) Purchaser shall have completed to its satisfaction its due diligence investigation of the Business and Purchased Assets. 7.2 Conditions to Obligations of Seller. The obligation of Seller to consummate the transactions contemplated by this Agreement is subject, at the option of Seller, to the satisfaction or waiver of the following conditions: (a) The representations and warranties of Purchaser set forth in this Agreement shall be true and correct in all material respects; (b) Purchaser shall have performed all material obligations required to be performed by it under this Agreement prior to the Closing Date; and (c) Purchaser shall have received all of the items called for in Section 8.2 below. 7.3 Closing. Closing of the transactions contemplated hereby (the "Closing") shall be held at the offices of Fulbright & Jaworski L.L.P., Houston, Texas, at 9:00 a.m., local time, on the date of this Agreement, or at such other place and time as the parties may mutually agree (the "Closing Date"). ARTICLE 8 DOCUMENTS TO BE DELIVERED AT THE CLOSING 8.1 Documents to be Delivered by Seller. At Closing, Labelon and Seller shall deliver or caused to be delivered to Purchaser the following: (a) Bills of sale, certificates of title, and assignment and assumption agreements, dated as of the Closing Date, transferring to Purchaser all of Seller's right, title and interest in and to the Purchased Assets each in a form reasonably satisfactory to Purchaser; 14 (b) A copy of resolutions authorizing Labelon's and Seller's execution, delivery and performance of this Agreement and the Distribution Agreement, as applicable, and a certificate of its secretary or assistant secretary, or other officer dated the Closing Date, that such resolutions were duly adopted and are in full force and effect; (c) A certificate, dated as of the Closing Date, and signed by one of its executive officers, certifying that the conditions set forth in Section 7.1(a) through (d) have been satisfied; (d) The consent of Congress Financial Corporation (New England) to the conveyance of the Purchased Assets as identified in Section 2.2 and the release by Congress Financial Corporation (New England) of any liens or encumbrances on any Purchased Assets, together with a UCC-3 termination statement reflecting such release; (e) A certificate of the Secretary of State of the state of New York evidencing that Seller is a subsisting corporation; and (f) A duly executed copy of the Distribution Agreement. 8.2 Documents to be Delivered by Purchaser. At Closing, Purchaser shall deliver, or cause to be delivered, the following: (a) Payment of the Purchase Price by wire transfer of immediately available funds in an amount equal to the Purchase Price; (b) A duly executed Assignment and Assumption Agreement in form and substance reasonably satisfactory to Labelon and Seller; and (c) A copy of resolutions authorizing its execution, delivery and performance of this Agreement and the Distribution Agreement, and a certificate of its secretary or assistant secretary, or other officer dated the Closing Date, that such resolutions were duly adopted and are in full force and effect; (d) A certificate dated as of the Closing Date, and signed by one of its executive officers, certifying that the conditions set forth in Section 7.2(a) and (b) have been satisfied; (e) A duly executed copy of the Distribution Agreement; and (f) A Certificate of Existence issued by the Secretary of State of the state of Texas; and ARTICLE 9 INDEMNIFICATION 9.1 Survival of Representations and Warranties. The representations and warranties of Labelon and Seller contained in Sections 4.4, 4.5, and 4.8(b) hereof shall survive the Closing Date for an indefinite time, and the remaining representations, warranties and agreements of 15 Seller and Purchaser contained in this Agreement shall survive the Closing for twenty four (24) months after the Closing Date. Notwithstanding any contrary provision contained herein, no indemnification claim may be made under this Article 9 unless such claim is asserted prior to the expiration of such period. 9.2 Indemnification. (a) After the Closing Date, Labelon and Seller shall jointly and severally indemnify and hold harmless Purchaser, its affiliates and their respective stockholders, partners, members, directors, officers, employees, agents, consultants, representatives, successors transferees and assignees (collectively, the "Parties to be Indemnified by Labelon") from and against any claims, causes of action, demands, judgements, assessments, encumbrances, fines, penalties, administrative orders, deficiencies, duties, liabilities, obligations, costs, losses, damages, or expenses, including, without limitation, interest, reasonable legal fees and expenses (collectively, "Damages"), arising out of or resulting from (i) any breach by Labelon or Seller of any representations, warranties or covenants contained in this Agreement or (ii) any Retained Liability; provided however, that neither Labelon nor Seller shall have any liability pursuant to this Article 9 unless and until the aggregate amount of Damages incurred by the Parties to be Indemnified by Labelon exceeds $20,000.00 (the "Basket"), and then such liability shall include those Damages comprising the Basket amount. (b) After the Closing Date, Purchaser shall indemnify and hold harmless Labelon, Seller, their affiliates and their respective stockholders, partners, members, directors, officers, employees, agents, consultants, representatives, successors transferees and assignees (collectively, the "Parties to be Indemnified by Purchaser") from and against Damages arising out of or resulting from any breach by Purchaser of any representations, warranties or covenants contained in this Agreement; provided however, that Purchaser shall have no liability pursuant to this Article 9 unless and until the aggregate amount of Damages incurred by the Parties to be Indemnified by Purchaser exceeds the Basket, and then such liability shall include those Damages comprising the Basket amount. 9.3 Claims for Indemnification. Whenever any claim for indemnification shall arise under this Article 9, the party seeking indemnification (the "Indemnified Party") shall promptly notify the party from whom indemnification is sought (the "Indemnifying Party") of the claim and, when known, the facts constituting the basis for such claim. If any such claim for indemnification results from or is in connection with any claim or legal proceedings by a third party, the notice to the Indemnifying Party shall specify, if known, the amount or an estimate of the amount of the liability arising therefrom. The Indemnified Party shall not settle or compromise any claim by a third party for which it is entitled to indemnification hereunder without the prior written consent of the Indemnifying Party. 16 ARTICLE 10 TERMINATION 10.1 Termination. Provided Closing has not occurred prior to February 28, 2001, either Seller or Purchaser may terminate this Agreement by giving written notice of termination to the other on or after such date and prior to Closing. If this Agreement is terminated pursuant to the terms of the preceding sentence, all obligations of either party hereto shall cease, except that Purchaser and Seller agree to return to the other any information, data, software, business plans, specifications, trade secrets, copyrightable material or other confidential information that they received in contemplation of this transaction and to maintain the confidential nature of such information. ARTICLE 11 MISCELLANEOUS 11.1 Payment of Sales, Use or Similar Taxes. Any United States or federal, state or local, sales, use, transfer, transfer gains or similar taxes payable in connection with the sale and purchase of the Business or any Asset shall be paid by Seller. At the Closing, Seller will provide Purchaser with appropriate resale certificates with respect to inventory of Seller included in the Purchased Assets. 11.2 Entire Agreement. This Agreement (including the Schedules and any exhibits hereto) contains the entire agreement between the parties with respect to those matters contained herein and expresses the complete and final understanding with respect to the subject matter hereof. 11.3 Governing Law. This Agreement shall be governed by and construed in accordance with the substantive laws of the State of Texas applicable to contracts made and performed wholly within Texas by Texas residents. 11.4 Notices. All notices and other communications under this Agreement shall be in writing and shall be deemed given when delivered personally, or, if mailed by registered mail, return receipt requested, three business days after such mailing. Notices shall be given to the parties at the following addresses (or to such other address as a party may have specified by notice given to the other party pursuant to this provision): If to Purchaser: OYO Instruments, LP 9777 West Gulf Bank, Suite 10 Houston, Texas 77040 Attn: Mr. Lance Heap With a copy to: Fulbright & Jaworski L.L.P. 1301 McKinney, Suite 5100 Houston, Texas 77010-3095 Attn: Joseph C. Henry 17 If to Labelon: Labelon Corporation 10 Chapin Street Canandaigua, NY 14424 Attn: Will Irwin With a copy to: Nixon Peabody LLP Clinton Square P.O. Box 31051 Rocheser, New York 14603 Attn: James A. Locke, III, Esq. If to Seller: Eco PRO Imaging Corporation 10 Chapin Street Canandaigua, NY 14424 Attn: Will Irwin With a copy to: Nixon Peabody LLP Clinton Square P.O. Box 31051 Rocheser, New York 14603 Attn: James A. Locke, III, Esq. 11.5 Severability. If any provision of this Agreement is held to be invalid or unenforceable by a court of competent jurisdiction, the balance of this Agreement shall remain in effect. 11.6 Waiver. Any party entitled to the benefit of any provision of this Agreement may waive observance or performance thereof. No waiver of any provision shall be construed as a waiver of any other provision nor shall any failure to insist on strict compliance with any obligation operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Any waiver must be in writing. 11.7 Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. No assignment of this Agreement or of any rights or obligations hereunder may be made by any party (by operation of law or otherwise) without the prior written consent of the other and any attempted assignment without consent shall be void. 11.8 Further Assurances. At any time or from time to time after the Closing Date, any party shall, at the request of another party and at such other party's expense, execute and deliver any further instruments or documents and take all such further actions as such party reasonably may request in order to consummate and make effective the transactions contemplated hereby. 18 11.9 Counterparts. This Agreement may be executed in counterparts which, taken together, shall constitute a single document. 11.10 Resolution of Disputes. If a dispute arises under this Agreement between Labelon or Seller, on one hand, and Purchaser, on the other, either party deliver a written notice to the other stating the grounds for the dispute in reasonable detail (a "Dispute Notice"). If the parties are unable to resolve the dispute among themselves within 30 days of the Dispute Notice, the parties agree that the dispute shall be submitted to binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), as modified or clarified by the following: (a) The arbitral panel shall consist of a single arbitrator to be selected by the AAA. (b) The seat of the arbitration shall be in Houston, Texas if the Dispute Notice is delivered by Labelon or Seller. The seat of the arbitration shall be in Rochester, New York if the Dispute Notice is delivered by Purchaser. (c) The arbitrator shall use his or her best efforts to render an award within six months of the Dispute Notice. (d) The arbitrator shall issue a reasoned award. (e) The arbitrator shall not be authorized to award special, punitive, consequential or lost profits damages. (f) For purposes of enforcement of an arbitral award, the parties agree to submit to the jurisdiction of the United States District Court for the district in which the seat of arbitration is located pursuant to (b), above. IN WITNESS WHEREOF, this Agreement has been duly executed and delivered as of the date first written above. LABELON CORPORATION By: /s/ James C. Haefner ------------------------------ Vice President-Chief Financial Officer ECO PRO IMAGING CORPORATION By: /s/ James C. Haefner ------------------------------ Treasurer OYO INSTRUMENTS, LP By: /s/ Lance Heap ------------------------------ 19 EX-2.2 3 dex22.txt BUSINESS LOAN AGREEMENT LOAN AGREEMENT THIS LOAN AGREEMENT, dated as of February 16, 2001 (this "Agreement"), is between CONCORD TECHNOLOGIES, LP, a Texas limited partnership ("Concord"), GEOSPACE ENGINEERING RESOURCES INTERNATIONAL, LP, a Texas limited partnership ("Engineering"), GEO SPACE, LP, a Texas limited partnership ("Geo Space"), OYO INSTRUMENTS, LP, a Texas limited partnership ("Instruments"), and OYOG OPERATIONS, LP, a Texas limited partnership ("Operations", and together with Concord, Engineering, Geo Space and Instruments, the "Borrowers"), jointly and severally, and SOUTHWEST BANK OF TEXAS, N.A., a national banking association ("Lender"). R E C I T A L S : Borrowers have requested that Lender extend credit to Borrowers in the form of a revolving line of credit in the amount of $10,000,000.00 under which Borrowers may request (a) advances and (b) letters of credit (subject to a $5,000,000.00 sublimit). Lender is willing to make such extensions of credit to Borrowers upon the terms and conditions hereinafter set forth. NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I. Definitions Section I.1. Definitions. As used in this Agreement, the following terms have the following meanings: "Advance" means an advance of funds by Lender to Borrowers pursuant to Article II. "Advance Request Form" means a certificate, in substantially the form of Exhibit "K" hereto, properly completed and signed by an Authorized Representative requesting an Advance. "Affiliate" means, with respect to any Person, any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, including, (a) any Person which beneficially owns or holds ten percent (10%) or more of any class of voting stock of such Person or ten percent (10%) or more of the equity interest in such Person, (b) any Person of which such Person beneficially owns or holds ten percent (10%) or more of any class of voting shares or in which such Person beneficially owns or holds ten percent (10%) or more of the equity interests in such Person, and (c) any officer or director of such Person. "Annualized" means with respect to the calculation of EBITDA and, in the calculation of the Ratio of EBITDA to Interest Expense, Interest Expense (such amounts are referred to as the "Tested Amount" in this definition), (a) for the fiscal quarter ended December 31, 2000, the Tested Amount times four (4), (b) for the fiscal quarter ending March 31, 2001, (i) the sum of the Tested Amount for the fiscal quarter ending March 31, 2001 plus the Tested Amount for the fiscal quarter ending December 31, 2000 (ii) multiplied by two (2), and (c) for the fiscal quarter ending June 30, 2001, (i) the sum of the Tested Amount for the fiscal quarter ending June 30, 2001, plus the Tested Amount for the fiscal quarter ending March 30, 2001, plus the Tested Amount for the fiscal quarter ended December 31, 2000, (ii) multiplied by four thirds (4/3). "Arbitration Agreement" means the Arbitration Agreement executed by Borrowers and Guarantors in substantially the form of Exhibit "S" hereto, as the same may be amended, supplemented, or modified. "Authorized Representative" means any officer or employee of Borrowers who has been designated in writing by Borrowers to Lender to be an Authorized Representative. "Autopay Agreement" means that certain Southwest Autopay Agreement between Operations and Lender, and all modifications, amendments and supplements thereto and all restatements and replacements thereof. "Borrowing Base" means, at any particular time, an amount equal to the sum of (a) eighty percent (80%) of Eligible Accounts plus (b) the lesser of (i) fifteen percent (15%) of Eligible Inventory and (ii) $2,000,000.00 plus (c) eighty percent (80%) of Eligible Notes. "Borrowing Base Certificate" means a certificate in the form of Exhibit "L" hereto, fully completed and executed by Borrowers. 2 "Business Day" means any day on which commercial banks are not authorized or required to close in Houston, Texas. "Capital Expenditures" means, for any Person, all expenditures for assets which, in accordance with GAAP, are required to be capitalized and so shown on the balance sheet of such Person. "Capital Lease Obligations" means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property, which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP. "Closing Date" means the date on which this Agreement has been executed and delivered by the parties hereto and the conditions set forth in Section 5.1 have been satisfied. "Collateral" has the meaning specified in Section 4.1. "Commitment" means the obligation of Lender to make Advances and issue Letters of Credit hereunder in an aggregate principal amount at any time outstanding up to but not exceeding $10,000,000.00. "Concord" has the meaning given to such term in the first paragraph of this Agreement. "Contribution Agreement" means the Contribution Agreement executed by Guarantors in substantially the form of Exhibit "I" hereto, as the same may be amended, supplemented, or modified. "Debt" means for any Person, without duplication, (a) all indebtedness, whether or not represented by bonds, debentures, notes, securities, or other evidences of indebtedness, for the repayment of money borrowed, (b) all indebtedness representing deferred payment of the purchase price of property or assets (other than trade payables), (c) all Capital Lease Obligations, (d) all indebtedness under guaranties, endorsements, assumptions, or other contingent obligations, in respect of, or to purchase or otherwise acquire, indebtedness of others, (e) all indebtedness secured by a Lien existing on property owned, subject to such Lien, whether or not the indebtedness secured thereby shall have been assumed by the owner thereof, and (f) any obligation to redeem or repurchase any of such Person's capital stock, warrants, or stock equivalents. 3 "Default Rate" means the lesser of (a) the sum of the Prime Rate in effect from day to day plus two percent (2.0%) or (b) the Maximum Rate. "Domestic Receivables" means accounts receivable of any Borrower which are owed by a Person that is a citizen of or organized under the laws of the United States of America or any State thereof and are not owed by a Foreign Person. "EBITDA" means for Parent and its Subsidiaries, on a consolidated basis, for any period, the sum of (a) Net Income for such period, plus (b) depreciation, amortization and other non cash charges for such period, plus (c) Interest Expense for such period, plus (d) income tax expense for such period. "Eligible Accounts" means the aggregate of all accounts receivable of Borrowers that satisfy the following conditions: (a) are due and payable within sixty (60) days; (b) have been outstanding less than ninety (90) days past the original date of invoice; (c) have arisen in the ordinary course of business from services performed by any Borrower to or for the account debtor or from the sale by any Borrower of goods in which one or more Borrowers had sole ownership where such goods have been shipped or delivered to the account debtor; (d) represent complete bona fide transactions which require no further act under any circumstances on the part of any Borrower to make such accounts receivable payable by the account debtor; (e) the goods the sale of which gave rise to such accounts receivable were shipped or delivered to the account debtor on an absolute sale basis and not on consignment, a sale or return basis, a guaranteed sale basis, a bill and hold basis, or on the basis of any similar understanding; (f) the goods the sale of which gave rise to such accounts receivable were not, at the time of sale thereof, subject to any Lien, except the security interest in favor of Lender created by the Loan Documents; (g) are not subject to any provisions prohibiting assignment or requiring notice of or consent to such assignment; (h) are subject to a perfected, first priority security interest in favor of Lender and are not subject to any other Lien; (i) are not subject to setoff, counterclaim, defense, allowance, dispute, or adjustment other than normal discounts for prompt payment, and the goods of sale which gave rise to such accounts receivable have not been returned, rejected, repossessed, lost, or damaged; (j) the account debtor is not insolvent or the subject of any bankruptcy or insolvency proceeding and has not made an assignment for the benefit of creditors, suspended 4 normal business operations, dissolved, liquidated, terminated its existence, ceased to pay its debts as they become due, or suffered a receiver or trustee to be appointed for any of its assets or affairs; (k) except for Eligible Notes, are not evidenced by chattel paper or any instrument of any kind; (l) are Domestic Receivables; (m) are Foreign Receivables and Lender has not delivered to any Borrower notice that either (i) such Foreign Receivables do not constitute Eligible Accounts or (ii) the accounts receivable of the Foreign Person who is the account debtor with respect to such Foreign Receivables do not constitute Eligible Accounts; (n) if any accounts receivable are owed by the United States of America or any department, agency, or instrumentality thereof, the Federal Assignment of Claims Act shall have been complied with; and (o) are not owed by an Affiliate of any Borrower other than OYO Japan. No account receivable owed by an account debtor to any Borrower shall be included as an Eligible Account if more than twenty percent (20%) of the balances then outstanding on accounts receivable owed by such account debtor and its affiliates to Borrowers have remained unpaid for more than eighty-nine (89) days from the dates of their original invoices. The amount of any Eligible Accounts owed by an account debtor to Borrowers shall be reduced by the amount of all "contra accounts" and other obligations owed by any Borrower to such account debtor. In the event that at any time the accounts receivable from any account debtor and its affiliates to Borrowers exceed twenty percent (20%) the accounts receivable of Borrowers, the accounts receivable from such account debtor and its affiliates shall not constitute Eligible Accounts to the extent to which such accounts receivable exceed twenty percent (20%) of the accounts receivable of Borrowers; provided, however, that with respect to Persons which have been specifically approved by Lender, the twenty percent (20%) limitation contained in this sentence shall be a fifty percent (50%) limitation. "Eligible Inventory" means, at any time, all inventory of raw materials, work-in-process and finished goods then owned by (and in the possession or under the control of) any Borrower, located in the State of Texas, and held for sale or disposition in the ordinary course of any Borrower's business, in which Lender has a perfected, first priority security interest, valued at the lower of actual cost or fair market value. Eligible Inventory shall not include (a) inventory that has been shipped or delivered to a customer on consignment, a sale or return basis, or on the basis of any similar understanding (b) inventory with respect to which a claim exists disputing any Borrower's title to or right to possession of such inventory, (c) inventory that is not in good condition or does not comply with any applicable laws, rules, or regulations or the standards 5 imposed by any governmental authority with respect to its manufacture, use, or sale, and (d) inventory that Lender, in its reasonable sole discretion, has determined to be unmarketable. "Eligible Notes" means promissory notes executed by any Person to evidence such Person's obligation to pay Borrower for the sale of goods or the provision of services by Borrower to such Person, which have been specifically approved by Lender to be Eligible Notes and which have been endorsed to Lender (in a manner satisfactory to Lender) and delivered to Lender. "Engineering" has the meaning given to such term in the first paragraph of this Agreement. "Environmental Laws" means any and all federal, state and local laws, regulations, and judicially enforceable requirements pertaining to occupational health and safety, or the environment, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. (S) 9601 et seq., the Resource Conservation and Recovery Act of 1976, 42 U.S.C. (S) 6901 et seq., the Occupational Safety and Health Act, 29 U.S.C. (S) 651 et seq., the Clean Water Act, 33 U.S.C. (S) 1251 et seq., the Toxic Substances Control Act, 15 U.S.C. (S) 2601 et seq., and all similar laws, regulations, and judicially enforceable requirements of any governmental authority or agency having jurisdiction over any Borrower, any Guarantor or any Subsidiary or any of their respective properties or assets, as such laws, regulations, and judicially enforceable requirements may be amended or supplemented. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereunder. "Event of Default" has the meaning specified in Section 10.1. "Field Audits" means audits, verifications and inspections of the accounts receivable and inventory of Borrowers conducted by an independent third Person selected by Lender. "Foreign Person" any Person organized under the laws of a jurisdiction located outside of the United States of America. 6 "Foreign Receivables" means accounts receivable of any Borrower which are owed by a Foreign Person. "GAAP" means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants or in statements of the Financial Accounting Standards Board or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a "consistent basis" when the accounting principles observed in a current period are comparable in all material respects to those accounting principles applied in a preceding period. "Geo Space" has the meaning given to such term in the first paragraph of this Agreement. "General Partner" means OYOG, LLC, a Delaware limited liability company, and its successors and assigns. "Guarantors" means General Partner, Limited Partner and Parent. "Guaranty-General Partner" means the Guaranty Agreement executed by General Partner in favor of Lender in substantially the form of Exhibit "F" hereto, as the same may be amended, supplemented or modified. "Guaranty-Limited Partner" means the Guaranty Agreement executed by Limited Partner in favor of Lender in substantially the form of Exhibit "G" hereto, as the same may be amended, supplemented or modified. "Guaranty-Parent" means the Guaranty Agreement executed by Parent in favor of Lender in substantially the form of Exhibit "H" hereto, as the same may be amended, supplemented or modified. "Guaranty Agreements" means the Guaranty-General Partner, the Guaranty-Limited Partner and the Guaranty-Parent. "Hazardous Substance" means any substance, product, waste, pollutant, material, chemical, contaminant, constituent, or other material which is or becomes listed or regulated as a hazardous or toxic material under any Environmental Law, including, without limitation, asbestos, petroleum, and polychlorinated biphenyls. 7 "Instruments" has the meaning given to such term in the first paragraph of this Agreement. "Interest Expense" means for any Person for any period, the sum of all cash interest expense paid or accrued, or required to be accrued in accordance with GAAP consistently applied. "Letter of Credit" means any letter of credit issued by Lender for the account of Borrowers pursuant to Article II. "Letter of Credit Liabilities" means, at any time, the aggregate face amounts of all outstanding Letters of Credit. "Lien" means any lien, mortgage, security interest, tax lien, financing statement, pledge, charge, hypothecation, assignment, preference, priority, or other encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or title retention agreement), whether arising by contract, operation of law, or otherwise. "Limited Partner" means OYOG Limited Partner, LLC, a Nevada limited liability company, and its successors and assigns. "Loan Documents" means this Agreement and all promissory notes, security agreements, deeds of trust, assignments, letters of credit, guaranties, and other instruments, documents, and agreements executed and delivered pursuant to or in connection with this Agreement, as such instruments, documents, and agreements may be amended, modified, renewed, extended, or supplemented. "Material Adverse Effect" means a material adverse effect on (a) the business, operations, property or condition (financial or otherwise) of any Borrower and its Subsidiaries, taken as a whole, or any Guarantor and its Subsidiaries, taken as a whole, (b) the ability of Borrowers to pay the Obligations or the ability of any Borrower or any Guarantor to perform its respective obligations under this Agreement or any of the other Loan Documents, or (c) the validity or enforceability of this Agreement or any of the other Loan Documents, or the rights or remedies of Lender hereunder or thereunder. "Maximum Rate" means the maximum rate of nonusurious interest permitted from day to day by applicable law, including Chapter 303 of the Texas Finance Code (the "Code") (and as the same may be incorporated 8 by reference in other Texas statutes). To the extent that Chapter 303 of the Code is relevant to Lender for the purposes of determining the Maximum Rate, Lender elects to determine such applicable legal rate pursuant to the "weekly ceiling," from time to time in effect, as referred to and defined in Chapter 303 of the Code; subject, however, to the limitations on such applicable ceiling referred to and defined in the Code, and further subject to any right Lender may have subsequently, under applicable law, to change the method of determining the Maximum Rate. "Net Income" means, for any Person for any period, the consolidated net income (or loss) of such Person for such period, calculated in accordance with GAAP applied consistently. "No Default Certificate" means a certificate in the form of Exhibit "M" hereto, fully completed and executed by Borrowers and Parent. "Note" means the promissory note executed by Borrowers payable to the order of Lender, in substantially the form of Exhibit "A" hereto, as the same may be renewed, extended or modified and all promissory notes executed in renewal, extension, modifications or substitution thereof. "Obligations" means all obligations, indebtedness, and liabilities of Borrowers to Lender now existing or hereafter arising under this Agreement and the other Loan Documents (including, without limitation, all of Borrowers' contingent reimbursement obligations in respect of Letters of Credit), and all interest accruing thereon and all attorneys' fees and other expenses incurred in the enforcement or collection thereof. "Operations" has the meaning given to such term in the first paragraph of this Agreement. "Organizational Documents" means, for any Person, (a) the articles of incorporation and bylaws of such Person if such Person is a corporation, (b) the articles of organization and regulations of such Person if such Person is a limited liability company, (c) the limited partnership agreement of such Person if such Person is a limited partnership, or (d) the documents under which such Person was created and is governed if such person is not a corporation, limited liability company or limited partnership. "Parent" means OYO Geospace Corporation, a Delaware corporation, and its successors and assigns. 9 "Partners" means General Partner and Limited Partner. "Person" means any individual, corporation, limited liability company, business trust, association, company, partnership, joint venture, governmental authority, or other entity. "Prime Rate" means that variable rate of interest per annum established by Lender from time to time as its prime rate which shall vary from time to time. Such rate is set by Lender as a general reference rate of interest, taking into account such factors as Lender may deem appropriate, it being understood that many of Lender's commercial or other loans are priced in relation to such rate, that it is not necessarily the lowest or best rate charged to any customer and that Lender may make various commercial or other loans at rates of interest having no relationship to such rate. "Ratio of EBITDA to Interest Expense" means for Parent and its Subsidiaries, on a consolidated basis, for any period, (a) EBITDA for such period, divided by (b) Interest Expense for such period. "Ratio of Senior Debt to EBITDA" means for Parent and its Subsidiaries, on a consolidated basis, for any period (a) Senior Debt as of the last day of such period, divided by (b) EBITDA for such period. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented. "Regulatory Change" means, with respect to Lender, any change after the date of this Agreement in United States federal or state laws or regulations (including Regulation D or the adoption or making after such date any interpretations, directives, or requests applying to a class of banks including Lender) of or under any United States federal or state laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Security Agreement-Concord" means the Security Agreement executed by Concord in favor of Lender in substantially the form of Exhibit "B" hereto, as the same may be amended, supplemented or modified. 10 "Security Agreement-Engineering" means the Security Agreement executed by Engineering in favor of Lender in substantially the form of Exhibit "C" hereto, as the same may be amended, supplemented or modified. "Security Agreement-Geo Space" means the Security Agreement executed by Geo Space in favor of Lender in substantially the form of Exhibit "D" hereto, as the same may be amended, supplemented or modified. "Security Agreement-Instruments" means the Security Agreement executed by Instruments in favor of Lender in substantially the form of Exhibit "E" hereto, as the same may be amended, supplemented or modified. "Security Agreement-Operations" means the Security Agreement executed by Operations in favor of Lender in substantially the form of Exhibit "N" hereto, as the same may be amended, supplemented or modified. "Security Agreements" means the Security Agreement-Concord, the Security Agreement-Engineering, the Security Agreement-Geo Space, the Security Agreement-Instruments and the Security Agreement-Operations. "Senior Debt" means, at any time, for Parent and its Subsidiaries, on a consolidated basis, (a) all indebtedness for borrowed money, other than Subordinated Debt, whether or not evidenced by bonds, debentures, notes or similar instruments, including the Note, (b) all obligations to pay the deferred purchase price of property or services (but excluding trade accounts payable or trade notes in the ordinary course of business that are not past due by more than 90 days), (c) all Capital Lease Obligations, and (d) all indebtedness secured by a Lien (other than landlord's Liens) on the property of Parent or its Subsidiaries. "Subordinated Debt" means Debt of Parent or any of its Subsidiaries to any Person, the payment of which has been subordinated to the payment of the Senior Debt in a manner satisfactory to Lender and by a document satisfactory to Lender. "Subsidiary" means any Person of which or in which Parent and its other Subsidiaries own or control, directly or indirectly, fifty percent (50%) or more of (a) the combined voting power of all classes having general voting power under ordinary circumstances to elect a majority of 11 the directors or equivalent body of such Person, if it is a corporation, (b) the capital interest or profits interest of such Person, if it is a partnership, limited liability company, joint venture or similar entity, or (c) the beneficial interest of such Person, if it is a trust, association or other unincorporated association or organization. "Tangible Net Worth" means, at any particular time, all amounts which, in conformity with GAAP, would be included as stockholders' equity on a consolidated balance sheet of Parent and its Subsidiaries; provided, however, there shall be excluded therefrom (a) any amount at which shares of capital stock of Parent appear as an asset on Parent's or any Subsidiary's balance sheet, (b) goodwill, including any amounts, however designated, that represent the excess of the purchase price paid for assets or stock over the value assigned thereto, (c) patents, trademarks, trade names, and copyrights, (d) deferred expenses, (e) loans and advances to any stockholder, director, officer, or employee of Parent or any Subsidiary or any Affiliate, and (f) all other assets which are properly classified as intangible assets. "Termination Date" means 11:00 a.m., Houston, Texas time on February 15, 2002, or such earlier date on which the Commitment terminates as provided in this Agreement. "Unmatured Event of Default" means the occurrence of an event or the existence of a condition which, with the giving of notice or the passage of time would constitute an Event of Default. Section I.2. Other Definitional Provisions. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. The words "hereof", "herein", and "hereunder" and words of similar import referring to this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all Article and Section references pertain to this Agreement. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. Terms used herein that are defined in the Uniform Commercial Code as adopted by the State of Texas, unless otherwise defined herein, shall have the meanings specified in the Uniform Commercial Code as adopted by the State of Texas. 12 ARTICLE II. Advances and Letters of Credit Section II.1. Advances. Subject to the terms and conditions of this Agreement, Lender agrees to make one or more Advances to Borrowers from time to time from the date hereof to and including the Termination Date in an aggregate principal amount at any time outstanding up to but not exceeding the Commitment; provided that the aggregate amount of all Advances at any time outstanding shall not exceed the lesser of (a) the Commitment minus the outstanding Letter of Credit Liabilities or (b) the Borrowing Base minus the outstanding Letter of Credit Liabilities. Lender shall have no obligation to make any Advance if an Event of Default or an Unmatured Event of Default has occurred and is continuing. Subject to the foregoing limitations, and the other terms and provisions of this Agreement, Borrowers may borrow, repay, and reborrow hereunder. Section II.2. The Note. The obligation of Borrowers to repay the Advances shall be evidenced by the Note executed by Borrowers, payable to the order of Lender, in the principal amount of the Commitment. Section II.3. Repayment of Advances; Extensions. Borrowers shall repay the unpaid principal amount of all Advances on the earlier of (a) the Termination Date or (b) such other dates on which the Advances are or may be required to be paid pursuant to this Agreement. Prior to the Termination Date, Lender will review such matters as it may deem appropriate in its sole discretion and may, in its sole and absolute discretion, determine whether to extend the Termination Date. Section II.4. Interest. The unpaid principal amount of the Advances shall bear interest prior to maturity at a varying rate per annum equal from day to day to the lesser of (a) the Maximum Rate or (b) the Prime Rate in effect from day to day, and each change in the rate of interest charged on the Advances shall become effective, without notice to any Borrower, on the effective date of each change in the Prime Rate or the Maximum Rate, as the case may be; provided, however, if at any time the rate of interest specified in clause (b) preceding shall exceed the Maximum Rate, thereby causing the interest on the Advances to be limited to the Maximum Rate, then any subsequent reduction in the Prime Rate shall not reduce the rate of interest on the Advances below the Maximum Rate until the aggregate amount of interest actually accrued on the Advances equals the amount of interest which would have accrued on the Advances if the interest rate specified in clause (b) preceding had at all times been in effect. Accrued and unpaid interest on the Advances shall be payable on the first day of each month commencing on April 1, 2001, and on the earlier of the Termination Date or any other date on which the principal amount of the Advances is paid (whether as a result of optional or mandatory prepayment or acceleration). If an Event of Default has occurred 13 and is continuing, all principal of the Advances and all past due interest thereon shall bear interest at the Default Rate. Section II.5. Requests for Advances. (a) As long as the Autopay Agreement is in effect, Advances may be made as provided in the Autopay Agreement, and Borrowers shall not be required to request an Advance directly from Lender by means of an Advance Request Form. (b) If Borrowers so choose, or if the Autopay Agreement is not in effect, or if the Available Amount (as defined in the Autopay Agreement) is, or has been declared to be, equal to zero, the procedures set forth in this paragraph (b) shall apply. Borrowers shall give Lender notice of each requested Advance by delivery to Lender of an Advance Request Form executed by an Authorized Representative, properly completed and containing the information required therein. Prior to making any Advance, Lender may require that Borrowers deliver a Borrowing Base Certificate dated a recent date acceptable to Lender evidencing that the amount of the outstanding Advances plus the requested Advance plus the Letter of Credit Liabilities is less than the lesser of (a) the Commitment or (b) the Borrowing Base. Assuming that each Advance Request Form or request for Advance is in proper form, if Lender receives an Advance Request Form or request for Advance prior to 1:00 p.m. on any Business Day, Lender will make the requested Advance on the same Business Day, and if Lender receives an Advance Request Form or request for Advance after 1:00 p.m., Lender will make the requested Advance on the next Business Day. Section II.6. Use of Proceeds. The proceeds of Advances shall be used to refinance existing indebtedness and for working capital purposes. Section II.7. Mandatory Prepayment. If at any time the outstanding principal amount of the Advances plus the Letter of Credit Liabilities exceeds the Borrowing Base, Borrowers shall immediately prepay the outstanding Advances by the amount of the excess plus accrued and unpaid interest on the amount so prepaid or, if no (or insufficient) Advances are outstanding, Borrowers shall immediately pledge to Lender cash or cash equivalent investments in an amount equal to the excess as security for the Letter of Credit Liabilities. Section II.8. Letters of Credit. Subject to the terms and conditions of this Agreement, Lender agrees to issue one or more Letters of Credit for the account of Borrowers from time to time from the date hereof to and including the Termination Date; provided, however, that the outstanding Letter of Credit Liabilities shall not at any time exceed the least of (a) $5,000,000.00, (b) the 14 Commitment minus the outstanding Advances, or (c) the Borrowing Base minus the outstanding Advances. Each Letter of Credit shall have an expiration date which shall not be more than one year after the Termination Date. Each Letter of Credit shall be payable in United States dollars, shall support a transaction that is entered into in the ordinary course of any Borrower's business, and shall otherwise be satisfactory in form and substance to Lender. No Letter of Credit shall require any payment by Lender to the beneficiary thereunder pursuant to a drawing prior to the end of the Business Day next following presentment of a draft and any related documents to Lender. Notwithstanding any provision of this Agreement to the contrary, in the event that any Borrower should request that Lender issue, and Lender should issue, a letter of credit, the face amount of which is fully secured by cash or cash equivalent securities acceptable to Lender, such letter of credit shall not constitute a Letter of Credit under this Agreement. Section II.9. Procedure for Issuing Letters of Credit; Fully Cash Secured Letters of Credit. Each Letter of Credit shall be issued upon receipt by Lender of written notice from an Authorized Representative requesting the issuance of such Letter of Credit, which notice shall be received by Lender at least three (3) Business Days prior to the requested date of issuance of such Letter of Credit. Such notice shall be accompanied by Lender's standard application for issuance of Letters of Credit (commercial or standby) as then in effect and such other documents and instruments as Lender may require. Such notice and application (both front and back sides) may be sent by fax, provided that Borrowers hold Lender harmless with respect to actions taken by Lender based upon notices and applications sent by fax. Each request for a Letter of Credit shall constitute a representation by Borrowers to Lender as to each of the matters set forth in the Borrowing Base Certificate, including representations that (a) the sum of (i) the outstanding Advances plus (ii) the Letter of Credit Liabilities plus (iii) the face amount of the requested Letter of Credit does not exceed the lesser of the Borrowing Base or the Commitment, and (b) no Event of Default exists. Prior to Issuing any Letter of Credit, Lender may request a Borrowing Base Certificate from Borrowers dated of a recent date acceptable to Lender evidencing that the statements contained in the preceding sentence are correct. Section II.10. Payments Constitute Advances. Each payment by Lender pursuant to a drawing under a Letter of Credit shall constitute and be deemed an Advance by Lender to Borrowers under the Note and this Agreement as of the day and time such payment is made by Lender and in the amount of such payment. 15 Section II.11. Letter of Credit Fees. Borrowers shall pay to Lender a letter of credit fee payable on the date each Letter of Credit is issued in an amount equal to the greater of (a) one percent (1.0%) per annum of the stated amount of such Letter of Credit for the period during which such Letter of Credit will remain outstanding, based on a 360 day year and the actual number of days to elapse, and (b) $300.00. In addition, Borrowers shall pay to Lender (a) at the time of issuance of any Letter of Credit, all out-of-pocket costs incurred by Lender in connection with the issuance of such Letter of Credit (b) upon the payment of any Letter of Credit, all applicable payment fees, and (c) upon the amendment (including the extension) of any Letter of Credit, all applicable amendment fees. Section II.12. Obligations Absolute. The obligations of Borrowers under this Agreement and the other Loan Documents, including without limitation the obligation of Borrowers to reimburse Lender for payment of drawings under any Letter of Credit, shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and the other Loan Documents under all circumstances, including (a) any lack of validity or enforceability of any Letter of Credit or any other Loan Document, (b) the existence of any claim, set-off, counterclaim, defense or other rights which any Borrower, any Obligated Party or any other Person may have at any time against any beneficiary of any Letter of Credit, Lender, or any other Person, whether in connection with this Agreement or any other Loan Document or any unrelated transaction, (c) if any statement, draft or other document presented under any Letter of Credit proves to be forged, fraudulent, invalid or insufficient in any respect or any statement therein is untrue or inaccurate in any respect whatsoever, (d) payment by Lender under any Letter of Credit against presentation of a draft or other document which does not comply with the terms of such Letter of Credit in a manner which is not material (but which in any event complies with the requirements of Section 5.108(a) of the Texas Uniform Commercial Code), (e) any amendment or waiver of, or any consent to departure from, any Loan Document or (f) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. Section II.13. Limitation of Liability. Borrowers assume all risks of the acts or omissions of any beneficiary of any Letter of Credit with respect to its use of such Letter of Credit. Neither Lender or any of its officers, employees or directors shall have any responsibility or liability to any Borrower or any other Person for (a) the failure of any draft to bear any reference or adequate reference to any Letter of Credit, or the failure of any documents to accompany any draft at negotiation (provided such documents are otherwise timely presented), or the failure of any Person to surrender or to take up any Letter 16 of Credit or to send documents apart from drafts as required by the terms of any Letter of Credit (provided such documents are otherwise timely presented), or the failure of any Person to note the amount of any instrument on any Letter of Credit, each of which requirements, if contained in any Letter of Credit itself, it is agreed may be waived by Lender, (b) errors, omissions, interruptions or delays in transmission or delivery of any messages, (c) the validity, sufficiency or genuineness of any draft or other document, or any endorsement thereon, even if any such draft, document or endorsement should in fact prove to be in any and all respects invalid, insufficient, fraudulent or forged or any statement therein is untrue or inaccurate in any respect or (d) payment by Lender to the beneficiary of any Letter of Credit against presentation of any draft or other document that does not comply with the terms of the Letter of Credit in a respect which is not material (but which in any event complies with the requirement of Section 5.108(a) of the Texas Uniform Commercial Code). Lender may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. Notwithstanding the foregoing, Lender shall be liable to Borrowers to the extent of any direct, but not consequential, damages suffered by Borrowers which Borrowers prove in a final nonappealable judgment were caused by (i) Lender's willful misconduct or negligence in determining whether documents presented under any Letter of Credit complied with the terms thereof or (ii) Lender's willful failure to pay under any Letter of Credit after presentation to it of documents strictly complying with the terms and conditions of such Letter of Credit. Section II.14. Cash Deposit Prior to Termination Date. If Letters of Credit are to be outstanding after the Termination Date, not later than five (5) Business Days prior to the Termination Date, Borrowers will deposit with Lender cash, or pledge to Lender (in an manner satisfactory to Lender) cash equivalent investments or other collateral acceptable to Lender, or a combination thereof, in an amount equal to the sum of the face amounts of the Letters of Credit which will remain outstanding after the Termination Date. 17 ARTICLE III. Payments Section III.1. Method of Payment. All payments of principal, interest, and other amounts to be made by Borrowers under this Agreement, the Note or any other Loan Documents shall be made to Lender at its designated office, without setoff, deduction, or counterclaim in immediately available funds. Whenever any payment under this Agreement, the Note or any other Loan Document shall be stated to be due on a day that is not a Business Day, such payment may be made on the next Business Day, and interest shall continue to accrue during such extension. Section III.2. Voluntary Prepayment. Borrowers may prepay the Note in whole at any time or from time to time in part without premium or penalty but with accrued interest to the date of prepayment on the amount so prepaid. Section III.3. Computation of Interest. Interest on the indebtedness evidenced by the Note shall be computed on the basis of a year of 365 days and the actual number of days elapsed (including the first day but excluding the last day) unless such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be. Section III.4. Additional Costs in Respect of Letters of Credit. If as a result of any Regulatory Change there shall be imposed, modified, or deemed applicable any tax, reserve, special deposit, or similar requirement against or with respect to or measured by reference to Letters of Credit issued or to be issued hereunder or Lender's commitment to issue Letters of Credit hereunder, and the result shall be to increase the cost to Lender of issuing or maintaining any Letter of Credit or its commitment to issue Letters of Credit hereunder or reduce any amount receivable by Lender hereunder in respect of any Letter of Credit (which increase in cost, or reduction in amount receivable, shall be the result of Lender's reasonable allocation of the aggregate of such increases or reductions resulting from such event), then, upon demand by Lender, Borrowers agree to pay to Lender from time to time as specified by Lender, such additional amounts as shall be sufficient to compensate Lender for such increased costs or reductions in amount. A statement in reasonable detail as to such increased costs or reductions in amount incurred by Lender, submitted by Lender to Borrowers, shall be conclusive as to the amount thereof, provided that the determination thereof is made on a reasonable basis. 18 Section III.5. Joint and Several Obligations. The obligations of Borrowers under this Agreement shall be joint and several in all respects. Section III.6. Subrogation and Contribution. (a) If any Borrower makes a payment in respect of the Obligations, it shall be subrogated to the rights of Lender (or any other payee) against the other Borrowers, as appropriate, with respect to such payment and shall have the rights of contribution set forth below against the other Borrowers; provided that such Borrower shall not enforce its rights to any payment by way of subrogation or by exercising its rights of contribution until all the Obligations shall have been paid in full and Lender has no Commitment to make Advances or issue Letters of Credit hereunder. If any Borrower makes a payment in respect of the Obligations so that the amount of its then current Net Payments is less than the amount of its then current Contribution Obligation, any Borrower making such proportionately smaller payment shall, when permitted by the preceding sentence, pay to the other Borrowers an amount such that the Net Payments made by the Borrowers in respect of the Obligations shall be shared among the Borrowers pro rata in proportion to their respective Contribution Percentage. If any Borrower receives any payment by way of subrogation or contribution so that the amount of its then current Net Payments is greater than the amount of its then current Contribution Obligation, the Borrower receiving such proportionately greater payment shall, when permitted by the second preceding sentence, pay to the other Borrowers an amount such that the Net Payments received by the Borrowers shall be shared among the Borrowers pro rata in proportion to their respective Contribution Percentage. If any Borrower makes a payment in respect of the Obligations so that the amount of its then current Net Payments is greater than the amount of its then current Contribution Obligation, any Borrower making such proportionately larger payment shall, when permitted by the third preceding sentence, receive from the other Borrowers an amount such that the Net Payments made by the Borrowers in respect of the Obligations shall be shared amount the Borrowers pro rata in proportion to their respective Contribution Percentage, unless otherwise agreed to by the Borrowers. (b As used in this Section 3.7, the term "Contribution Obligation" shall mean an amount equal, at any time and from time to time and for each respective Borrower, to the product of (i) such Borrower's Contribution Percentage, times (ii) the sum of all payments made previous to or at the time of calculation by all Borrowers in respect of the Obligations (less the amount of any such payments previously returned to any Borrower by operation of law or otherwise, but not including payments received by any Borrower by way of its rights of subrogation and contribution hereunder). Notwithstanding anything to the contrary contained in this Section or in this Agreement, no liability or obligation of any Borrower that shall accrue pursuant to this Agreement shall be paid nor shall it be deemed owed 19 pursuant to this Agreement until all of the Obligations shall be paid in full and Lender shall have no Commitment to make Advances or issue Letter of Credit hereunder. (c As used in this Section 3.7, the term "Net Payments" shall mean an amount equal, at any time and from time to time and for each respective Borrower, to the difference of (i) the sum of all payments made previous to or at the time of calculation by such Borrower in respect of the Obligations and in respect of its obligations contained in this Agreement, less (ii) the sum of all such payments previously returned to such Borrower by operation of law or otherwise and including payments received by such Borrower by way of its rights of subrogation and contribution hereunder. (d As used in this Section 3.7, the term "Contribution Percentage" shall mean, for any applicable date as of which such percentage is being determined an amount equal to the quotient of (i) the Net Worth of such Borrower as of such date, divided by (ii) the sum of the Net Worth of all the Borrowers as of such date. (e As used herein, the term "Net Worth" shall mean for any Borrower, calculated on and as of any applicable date on which such amount is being determined, the difference between (i) the sum of all such Borrower's property (other than its equity interest in another Borrower, at a fair valuation as of such date, minus (ii) the sum of all such Borrower's debts, at a fair valuation as of such date excluding the Obligations. ARTICLE IV. Collateral Section IV.1. Collateral. To secure full and complete payment and performance of the Obligations, Borrowers shall execute and deliver or cause to be executed and delivered the documents described below covering the property and collateral described therein and in this Section 4.1 (which, together with any other property and collateral which may now or hereafter secure the Obligations or any part thereof, is sometimes herein called the "Collateral"): (a Each Borrower shall grant to Lender a first priority security interest in all of its accounts, accounts receivable, general intangibles (but excluding patents, trademarks, trade names and other intellectual property), inventory, chattel paper, documents, instruments and all investment securities, cash and financial assets arising therefrom, 20 whether now owned or hereafter acquired, and all products and proceeds thereof, pursuant to the Security Agreement executed by such Borrower. (b Borrowers shall execute and cause to be executed such further documents and instruments, including without limitation, Uniform Commercial Code financing statements, as Lender, in its sole discretion, deems necessary or desirable to evidence and perfect its liens and security interests in the Collateral. Section IV.2. Setoff. Upon the occurrence of an Event of Default, Lender shall have the right to set off and apply against the Obligations in such a manner as Lender may determine, at any time and without notice to any Borrower, any and all deposits (general, time or demand, provisional or final) or other sums at any time credited by or owing from Lender to any Borrower whether or not the Obligations are then due. The rights and remedies of Lender hereunder are in addition to other rights and remedies (including, without limitation, to the rights of setoff) which Lender may have. Section IV.3. Guaranty Agreements. Guarantors shall unconditionally and irrevocably guarantee payment and performance of the Obligations by execution and delivery of the Guaranty Agreements, respectively. ARTICLE V. Conditions Precedent Section V.1. Initial Extension of Credit. The obligation of Lender to make the initial Advance or issue the initial Letter of Credit is subject to the condition precedent that prior thereto Lender shall have received all of the documents set forth below in form and substance satisfactory to Lender. (a Certificate - Each Borrower. For each Borrower, a certificate of an officer of such Borrower acceptable to Lender certifying (i) resolutions of the General Partner which authorize the execution, delivery and performance by such Borrower of this Agreement and the other Loan Documents to which such Borrower is or is to be a party, and (ii) the names of the officers of such Borrower authorized to sign this Agreement and each of the other Loan Documents to which such Borrower is or is to be a party together with specimen signatures of such Persons. 21 (b Organizational Documents - Each Borrower. The Limited Partnership Agreement of each Borrower and the Certificate of Limited Partnership of each Borrower certified by an officer of such Borrower acceptable to Lender. (c Governmental Certificates - Each Borrower. A certificate issued by the appropriate government official of the state of organization of each Borrower as to the existence of such Borrower. (d Certificate - Parent. A certificate of the Secretary or another officer of Parent acceptable to Lender certifying (i) resolutions of the board of directors of Parent which authorize the execution, delivery and performance by Parent of the Guaranty-Parent and the other Loan Documents to which Parent is or is to be a party, and (ii) the names of the officers of Parent authorized to sign the Guaranty-Parent and each of the other Loan Documents to which Parent is or is to be a party together with specimen signatures of such officers. (e Organizational Documents - Parent. The articles of incorporation and the bylaws of Parent certified by the Secretary or another officer of Parent acceptable to Lender. (f Governmental Certificates - Parent. Certificates issued by the appropriate government officials of (i) the state of incorporation of Parent as to the existence and good standing of Parent and (ii) the state of Texas as to the existence and good standing of Parent as a foreign corporation in such states. (g Certificate - Each Partner. A certificate of a Manager or another officer of each Partner acceptable to Lender certifying (i) resolutions of the Members of such Partner which authorize the execution, delivery and performance by such Partner of the Guaranty Agreement to which such Partner is a party and the other Loan Documents to which such Partner is or is to be a party, and (ii) the names of the Managers or other officers of such Partner authorized to sign the Guaranty Agreement to which such Partner is a party and the other Loan Documents to which such Partner is or is to be a party together with specimen signatures of such Persons. (h Organizational Documents - Each Partner. The articles of organization and the regulations of each Partner certified by a Manager or another officer of such Partner acceptable to Lender. 22 (i Governmental Certificates - Each Partner. Certificates issued by the appropriate government officials of (i) the state of Delaware as to the existence and good standing of General Partner and (ii) the state of Nevada as to the existence and good standing of Limited Partner. (j Note. The Note executed by Borrowers. (k Security Agreements. The Security Agreements executed by Borrowers, respectively. (l Financing Statements. Uniform Commercial Code financing statements executed by Borrowers, respectively. (m Guaranty Agreements. The Guaranty Agreements executed by Guarantors, respectively. (n Contribution Agreement. The Contribution Agreement executed by Borrowers and Guarantors. (o Autopay Agreement. The Autopay Agreement executed by Operations. (p Insurance Policies. Copies of all insurance policies or certificates therefor required by Section 7.5, together with loss payable endorsements in favor of Lender with respect to all insurance policies covering Collateral. (q UCC Search. A Uniform Commercial Code search showing all financing statements and other documents or instruments on file against (i) Borrowers and Guarantors in the office of the Secretary of State of Texas, (ii) Parent and General Partner in the office of the Secretary of State of Delaware, and (iii) Limited Partner in the office of the Secretary of State of Nevada. (r Attorneys' Fees and Expenses. Evidence that the costs and expenses (including reasonable attorneys' fees) referred to in Section 11.1, to the extent incurred, have been paid in full by Borrowers. (s Additional Documentation. Such additional approvals, opinions or documents as Lender may reasonably request. Section V.2. All Extensions of Credit. The obligation of Lender to make any Advance or issue any Letter of Credit (including the initial Advance 23 and the initial Letter of Credit) is subject to receipt by Lender of the items required by Section 2.5(b), if applicable, and 2.9, and such additional documents as Lender may reasonably request. ARTICLE VI. Representations and Warranties To induce Lender to enter into this Agreement, each Borrower represents and warrants to Lender that: Section VI.1. Existence. (a) Each Borrower (i) is duly formed and validly existing under the laws of the State of Texas, (ii) has all requisite power and authority to own its assets and carry on its business as now being or as proposed to be conducted and (iii) is qualified to do business in all jurisdictions where such qualification is required by law and where failure to so qualify might reasonably be expected to have a Material Adverse Effect. (b) Each Subsidiary (i) is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, (ii) has all requisite power and authority to own its assets and carry on its business as now being or as proposed to be conducted and (iii) is qualified to do business in all jurisdictions where such qualification is required by law and where failure to so qualify might reasonably be expected to have a Material Adverse Effect. Each Borrower has the power and authority to execute, deliver and perform its obligations under this Agreement and the other Loan Documents to which it is or may become a party. Section VI.2. Financial Statements. Borrowers have delivered to Lender audited consolidated financial statements of Parent and its Subsidiaries as at and for the fiscal year ended September 30, 2000. Such financial statements are true and correct, have been prepared in accordance with GAAP, and fairly and accurately present, on a consolidated basis, the consolidated financial condition of Parent and its Subsidiaries as of the respective dates indicated therein and the consolidated results of operations for the respective periods indicated therein. Neither Parent nor any of its Subsidiaries has any material contingent liabilities, liabilities for taxes, material forward or long-term commitments, or unrealized or anticipated losses from any unfavorable commitments not reflected in such financial statements. There has been no Material Adverse Effect since the effective date of the most recent financial statements referred to in this Section. 24 Section VI.3. Requisite Action; No Breach. The execution, delivery, and performance by each Borrower of this Agreement and the other Loan Documents to which such Borrower is or may become a party have been duly authorized by all requisite action on the part of such Borrower and General Partner and do not and will not violate or conflict with the Organizational Documents of such Borrower or General Partner or any law, rule or regulation or any order, writ, injunction, or decree of any court, governmental authority, or arbitrator, and do not and will not conflict with, result in a breach of, or constitute a default under, or result in the imposition of any Lien (except as provided in this Agreement) upon any of the revenues or assets of such Borrower or any Subsidiary pursuant to the provisions of any indenture, mortgage, deed of trust, security agreement, franchise, permit, license, or other instrument or agreement by which such Borrower or any Subsidiary or any of their respective properties is bound. Section VI.4. Operation of Business. Each Borrower, each Guarantor and each Subsidiary possess all licenses, permits, franchises, patents, copyrights, trademarks, and tradenames, or rights thereto, to conduct their respective businesses substantially as now conducted and as presently proposed to be conducted. Section VI.5. Litigation and Judgments. There is no action, suit, investigation, or proceeding before or by any court, governmental authority, or arbitrator pending, or to the knowledge of any Borrower, threatened against or affecting any Borrower, any Guarantor or any Subsidiary, that would, if adversely determined, have a Material Adverse Effect. There are no outstanding judgments against any Borrower, any Guarantor or any Subsidiary. Section VI.6. Rights in Properties; Liens. Each Borrower, each Guarantor and each Subsidiary have good and indefeasible title to or valid leasehold interests in their respective properties and assets, real and personal, including the properties, assets and leasehold interests reflected in the financial statements described in Section 6.2, and none of the properties, assets or leasehold interests of any Borrower, any Guarantor or any Subsidiary is subject to any Lien, except as permitted by this Agreement. Section VI.7. Enforceability. This Agreement constitutes, and the other Loan Documents to which each Borrower is party, when delivered, shall constitute the legal, valid, and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms, except as enforceability thereof may be limited by (i) bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditor's rights and (ii) by general principles of equity. 25 Section VI.8. Approvals. No authorization, approval, or consent of, and no filing or registration with, any court, governmental authority, or third party is or will be necessary for the execution, delivery, or performance by any Borrower of this Agreement and the other Loan Documents to which any Borrower is or may become a party or the validity or enforceability thereof. Section VI.9. Debt. Neither any Borrower, any Guarantor nor any Subsidiary has any Debt except Debt to Lender and other Debt permitted pursuant to Section 8.1. Section VI.10. Use of Proceeds; Margin Securities. Neither any Borrower, any Guarantor nor any Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T, U, or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any extension of credit under this Agreement will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock. Section VI.11. ERISA. Each Borrower, each Guarantor and each Subsidiary have complied with all applicable minimum funding requirements and all other applicable and material requirements of ERISA, and there are no existing conditions that would give rise to liability thereunder. No Reportable Event (as defined in Section 4043 of ERISA) has occurred in connection with any employee benefit plan that might constitute grounds for the termination thereof by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United States District Court of a trustee to administer such plan. Section VI.12. Taxes. Each Borrower, each Guarantor and each Subsidiary have filed all tax returns (federal, state, and local) required to be filed, including all income, franchise, employment, property, and sales taxes, and have paid all of their liabilities for taxes, assessments, governmental charges, and other levies that are due and payable, and no Borrower knows of any pending investigation of any Borrower, any Guarantor or any Subsidiary by any taxing authority or of any pending but unassessed tax liability of any Borrower, any Guarantor or any Subsidiary. Section VI.13. Disclosure. There is no fact known to any Borrower which has a Material Adverse Effect, or which might in the future have a Material Adverse Effect that has not been disclosed in writing to Lender. 26 Section VI.14. Subsidiaries. Neither any Borrower nor any Guarantor has any Subsidiaries except as shown on the OYO Geospace Corporation Entity Structure Effective October 1, 2000 (Revised 1/8/2001) (the "Corporate Chart") delivered by Borrowers to Lender. Each Borrower and each Guarantor owns the percentage of ownership interests in its Subsidiaries shown on the Corporate Chart. Section VI.15. Compliance with Laws. Neither any Borrower, any Guarantor nor any Subsidiary is in violation in any material respect of any law, rule, regulation, order, or decree of any court, governmental authority, or arbitrator. All inventory of Borrowers has been and will hereafter be produced in compliance with all applicable laws, rules, regulations, and governmental standards, including, without limitation, the minimum wage and overtime provisions of the Fair Labor Standards Act, as amended (29 U.S.C. (S)(S) 201- 219), and the regulations promulgated thereunder. Section VI.16. Compliance with Agreements. Neither any Borrower, any Guarantor nor any Subsidiary is in violation in any material respect of any material document, agreement, contract or instrument to which it is a party or by which it or its properties are bound. Section VI.17. Environmental Matters. Each Borrower, each Guarantor and each Subsidiary, and their respective properties are in compliance with all applicable Environmental Laws and neither any Borrower, any Guarantor nor any Subsidiary is subject to any liability or obligation for remedial action thereunder. There is no pending or, to the knowledge of Borrowers, threatened investigation or inquiry by any governmental authority of any Borrower, any Guarantor or any Subsidiary, or any of their respective properties pertaining to any Hazardous Substance. Except in the ordinary course of business and in material compliance with all Environmental Laws, there are no Hazardous Substances located on or under any of the properties of any Borrower, any Guarantor or any Subsidiary. Except in the ordinary course of business and in material compliance with all Environmental Laws, neither any Borrower, any Guarantor nor any Subsidiary has caused or permitted any Hazardous Substance to be disposed of on or under or released from any of its properties. Each Borrower, each Guarantor and each Subsidiary have obtained all material permits, licenses, and authorizations which are required under and by all Environmental Laws. Section VI.18. Solvency. Each Borrower and its Subsidiaries, on an individual and a consolidated basis, is not insolvent, each Borrower's and its Subsidiaries' assets, on an individual and a consolidated basis, exceed its liabilities, and no Borrower will be rendered insolvent by the execution and 27 performance of this Agreement and the Loan Documents. Each Guarantor and its Subsidiaries, on an individual and a consolidated basis, is not insolvent, each Guarantor's and its Subsidiaries' assets, on an individual and a consolidated basis, exceed its liabilities, and no Guarantor will be rendered insolvent by the execution and performance of this Agreement and the Loan Documents. Section VI.19. Investment Company Act. Neither any Borrower, any Guarantor nor any Subsidiary is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section VI.20. Partners. General Partner owns one percent (1%) of each Borrower and Limited Partner owns ninety-nine percent (99%) of each Borrower. ARTICLE VII. Affirmative Covenants Borrowers covenant and agree that, as long as the Obligations or any part thereof are outstanding or Lender has any Commitment hereunder, Borrowers will perform and observe the covenants set forth below, unless Lender shall otherwise consent in writing. Section VII.1. Reporting Requirements. Borrowers will deliver to Lender: (a Annual Financial Statements - Parent. As soon as available, and in any event within one hundred twenty (120) days after the end of each fiscal year of Parent, beginning with the fiscal year ending September 30, 2001, a copy of the annual audited consolidated financial statements of Parent and its Subsidiaries for such fiscal year on SEC Form 10-K containing, on a consolidated basis, balance sheets, statements of income, statements of stockholders' equity and statements of cash flows as at the end of such fiscal year and for the 12-month period then ended, in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail, prepared in accordance with GAAP, and audited and certified without qualification by independent certified public accountants of recognized standing acceptable to Lender. (b Quarterly Financial Statements - Parent. As soon as available, and in any event within sixty (60) days after the end of each quarter of each fiscal year of Parent, a copy of the consolidated financial 28 statements of Parent and its Subsidiaries as of the end of such fiscal quarter and for the portion of the fiscal year then ended, on SEC Form 10- Q, containing, on a consolidated basis, balance sheets, statements of income and cash flows in each case setting forth in comparative form the figures for the corresponding period of the preceding fiscal year, all in reasonable detail, prepared in accordance with GAAP and reviewed by independent certified public accountants acceptable to Lender. (c No Default Certificate. Together with the financial statements delivered pursuant to Section 7.1(a) and (b), a No Default Certificate as of the last day of the fiscal quarter or year covered by such financial statements, in each case executed by an officer of Parent acceptable to Lender and containing detailed calculations of the covenants contained in Article IX. (d Borrowing Base Certificate. As soon as available, and in any event within thirty (30) days after the end of each month of each fiscal year of Borrowers, a Borrowing Base Certificate as of the last day of such month certified by an officer of each Borrower acceptable to Lender. (e Monthly Accounts Receivable Reports. As soon as available, and in any event within thirty (30) days after the end of each month of each fiscal year of Borrowers, aged accounts receivable reports for Borrowers as of the last day of such month certified by an officer of each Borrower acceptable to Lender. (f Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits and proceedings before any court or governmental department, commission, board, agency or instrumentality, domestic or foreign, affecting any Borrower, any Guarantor or any Subsidiary which if concluded adversely to such Person might reasonably be expected to have a Material Adverse Effect. (g Judgments. Within five (5) days of the rendering thereof, notice of any judgment against any Borrower, any Guarantor or any Subsidiary in an amount which is more than $25,000.00. (h Notice of Default. As soon as possible and in any event within five (5) days after the occurrence of each Event of Default and Unmatured Event of Default, a written notice setting forth the details of such Event of Default or Unmatured Event of Default and the action which Borrowers have taken and propose to take with respect thereto. 29 (i Notice of Material Adverse Effect. As soon as possible, an in any event within five (5) days after any Borrower becomes aware thereof, notice of the occurrence of any event or the existence of any condition which might reasonably be expected to have a Material Adverse Effect. (j Proxy Statements, Etc. As soon as available, one copy of each financial statement, report, notice or proxy statement sent by Parent or any Subsidiary to its stockholders generally and one copy of each regular, periodic or special report, registration statement, or prospectus filed by Parent or any Subsidiary within any securities exchange or the Securities and Exchange Commission or any successor agency. (k General Information. Promptly, such other information concerning any Borrower, any Guarantor or any Subsidiary as Lender may from time to time reasonably request. Section VII.2. Maintenance of Existence; Conduct of Business. Each Borrower will preserve and maintain, and will cause each Guarantor and each Subsidiary to preserve and maintain, its corporate existence and all of its leases, privileges, licenses, permits, franchises, qualifications and rights that are necessary or desirable in the ordinary conduct of its business. Section VII.3. Maintenance of Properties. Each Borrower will maintain, and will cause each Guarantor and each Subsidiary to maintain, its assets and properties in good condition and repair, normal wear and tear excepted. Section VII.4. Taxes and Claims. Each Borrower will pay or discharge, and will cause each Guarantor and each Subsidiary to pay or discharge, at or before maturity or before becoming delinquent (a) all taxes, levies, assessments, and governmental charges imposed on it or its income or profits or any of its property, and (b) all lawful claims for labor, material, and supplies, which, if unpaid, might become a Lien upon any of its property; provided, however, that neither any Borrower, any Guarantor or any Subsidiary shall be required to pay or discharge any tax, levy, assessment, or governmental charge, which is being contested in good faith by appropriate proceedings diligently pursued, and for which adequate reserves have been established to the extent required by GAAP. Section VII.5. Insurance. Each Borrower will maintain, and will cause each Guarantor and each Subsidiary to maintain, with financially sound 30 and reputable insurance companies workmen's compensation insurance, liability insurance, and insurance on its property, assets and business, all at least in such amounts and against such risks as are usually insured against by Persons engaged in similar businesses. Each insurance policy covering Collateral shall name Lender as lender loss payee and provide that such policy will not be cancelled without thirty (30) days prior written notice to Lender. Section VII.6. Inspection; Field Audits. (a) At any reasonable time and from time to time and upon reasonable prior notice from Lender, each Borrower will permit, and will cause each Guarantor and each Subsidiary to permit, representatives of Lender: (a) to examine and make copies of the books and records of, and visit and inspect the properties or assets of Borrowers, Guarantors and any Subsidiary and to discuss the business, operations, and financial condition of any such Persons with their respective officers and employees and with their independent certified public accountants, and (b) to conduct Field Audits; provided that (i) Lender intends to conduct the first such Field Audit within ninety (90) days of the Closing Date (the "Post Closing field audit"), (ii) Borrowers shall pay up to $3,000.00 of the cost of the Post Closing Field Audit, and (iii) Borrower shall pay the cost of all additional Field Audits, but not more than $3,000.00 during any fiscal year of Borrowers. Section VII.7. Keeping Books and Records. Each Borrower will maintain, and will cause each Guarantor and each Subsidiary to maintain, proper books of record and account in which full, true, and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities. Section VII.8. Compliance with Laws. Each Borrower will comply, and will cause each Guarantor and each Subsidiary to comply, in all material respects with all applicable laws, rules, regulations, and orders of any court, governmental authority, or arbitrator. Section VII.9. Compliance with Agreements. Each Borrower will comply, and will cause each Guarantor and each Subsidiary to comply, in all material respects with all material agreements, contracts, and instruments binding on it or affecting its properties or business. Section VII.10. Further Assurances. Each Borrower will execute and deliver, and will cause each Guarantor and each Subsidiary to execute and 31 deliver, such further instruments as may be reasonably requested by Lender to carry out the provisions and purposes of this Agreement and the other Loan Documents and to preserve and perfect the Liens of Lender in the Collateral. Section VII.11. ERISA. Each Borrower will comply, and will cause each Guarantor and each Subsidiary to comply, with all minimum funding requirements, and all other material requirements, of ERISA, if applicable, so as not to give rise to any liability thereunder. Section VII.12. Continuity of Operations. Each Borrower will continue to conduct, and will cause each Guarantor to continue to conduct, its primary businesses as substantially conducted as of the Closing Date and to continue its operations in such businesses. ARTICLE VIII. Negative Covenants Borrowers covenant and agree that, as long as the Obligations or any part thereof are outstanding or Lender has any Commitment hereunder, Borrowers will perform and observe the covenants set forth below, unless Lender shall otherwise consent in writing. Section VIII.1. Debt. No Borrower will incur, create, assume or permit to exist, nor will it permit any Guarantor or any Subsidiary to incur, create, assume, or permit to exist, any Debt, except (a) Debt to Lender, (b) Debt of Borrowers, Guarantors and their Subsidiaries in an aggregate principal amount which does not exceed $2,000,000.00 outstanding at any time, (c Debt described in Schedule 8.1(c), (d) Subordinated Debt, (e) accounts payable in the ordinary course of business, and (f) Debt arising from the endorsement of instruments for collection in the ordinary course of business. Section VIII.2. Limitation on Liens. No Borrower will incur, create, assume or permit to exist, nor will it permit any Guarantor or any Subsidiary to incur, create, assume or permit to exist, any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except (a) Liens in favor of Lender, (b) purchase money Liens securing Debt permitted by Section 8.1(b), which Liens cover only the assets financed with the Debt permitted by Section 8.1(b), but not the Collateral or the machinery, equipment, furniture or fixtures of Borrower, any Guarantor or any Subsidiary, (c) Liens on real property securing Debt permitted by Section 8.1(c), which Liens cover only the real property financed with the Debt permitted by Section 8.1(c), (d) encumbrances consisting of minor easements, zoning restrictions, 32 or other restrictions on the use of real property that do not (individually or in the aggregate) materially affect the value of the assets encumbered thereby or materially impair the ability of any Borrower, any Guarantor or any Subsidiary to use such assets in its business, and none of which is violated in any material aspect by existing or proposed structures or land use, (e) Liens for taxes, assessments, or other governmental charges which are not delinquent or which are being contested in good faith, and for which adequate reserves have been established, and (f) Liens of mechanics, materialmen, warehousemen, carriers or other similar statutory Liens securing obligations that are not yet due and are incurred in the ordinary course of business. Section VIII.3. Negative Pledge on Equipment. No Borrower will incur, create, assume or permit to exist, nor will it permit any Guarantor or any Subsidiary to, incur, create, assume or permit to exist, any Lien upon any of the machinery and equipment of any Borrower, any Guarantor or any Subsidiary, or any portion thereof, whether now owned or hereafter acquired. Section VIII.4. Mergers, Acquisitions, Dissolutions and Disposition of Assets. No Borrower will, nor will it permit any Guarantor or any Subsidiary to, (a) become a party to a merger, consolidation, joint venture or other business combination ("Merger") or purchase or otherwise acquire all or a substantial part of the assets of any Person (other than a Borrower or a Guarantor) or any shares or other evidence of beneficial ownership of any Person (other than a Borrower or a Guarantor) ("Acquisition"), unless (i) such Borrower, such Guarantor or such Subsidiary is the surviving Person to such Merger or Acquisition, (ii) no Event of Default or Unmatured Event of Default exists immediately prior to such Merger or Acquisition, and (iii) no Event of Default or Unmatured Event of Default would arise as a result of such Merger or Acquisition, (b) dissolve or liquidate, (c) sell, lease, assign, transfer or otherwise dispose of substantially all of its assets, except dispositions of inventory in the ordinary course of business, (d) amend its Organizational Documents, (e) create any new Subsidiary, or (f) enter into any agreement to do any of the foregoing; provided, however, notwithstanding the foregoing provisions of this Section 8.4 or any other provision of any Loan Document, Parent and its Subsidiaries may, on a consolidated basis, acquire or purchase a business or its assets involving cash consideration totaling not more than $10,000,000.00 in any period of twelve (12) consecutive months and not more than $5,000,000.00 for any single transaction. Section VIII.5. Restricted Payments. No Borrower will, nor will it permit Parent or any other Guarantor to, declare or pay any dividends or distributions (excluding distributions solely of capital stock or partnership interests) or make any other payment (in cash, property, or obligations) on 33 account of its capital stock or partnership interests, as applicable, or redeem, purchase, retire, or otherwise acquire any of its capital stock, or set apart any money for a sinking or other analogous fund for any dividend or other distribution on its capital stock or for any redemption, purchase, retirement, or other acquisition of any of its capital stock (excluding any net or cashless exercise of stock opinions). No Borrower will, nor will it permit any Guarantor other than Parent to, grant or issue any capital stock or any warrant, right, or option pertaining to its capital stock, or issue any security convertible into capital stock. Section VIII.6. Loans and Advances. No Borrower will make, nor will it permit any Guarantor or any Subsidiary to make, any advance, loan or extension of credit to any Person, including any other Borrower, Guarantor or Subsidiary or any employee, officer or director of any Borrower, any Guarantors or any Subsidiary; provided, however, that any Borrower may make loans and advances to any other Borrower or Guarantor. Section VIII.7. Investments. No Borrower will make, nor will it permit any Guarantor or any Subsidiary to make, any capital contribution to or investment in any Person. No Borrower will purchase, or permit any Guarantor or any Subsidiary to purchase, any stock, bonds, notes, debentures, or other securities of any Person, except (a) readily marketable direct obligations of the United States of America, (b) fully insured certificates of deposit with maturities of one year or less from the date of acquisition of Lender or any commercial bank operating in the United States having capital and surplus in excess of $100,000,000.00, (c) commercial paper of a domestic issuer if at the time of purchase such paper is rated in one of the two highest rating categories of Standard and Poor's Corporation ("S&P") or Moody Investors Service ("Moody"), (d) investments in securities with maturity of one (1) year or less from the date of acquisition issued or fully guaranteed by the United States or any state, commonwealth or territory of the United States, or any political subdivision thereof, and rated at least "A" by S&P or Moody, (e) any money market or similar fund investing solely in the foregoing investments, and (f) investments made through Lender or its affiliates and approved by Lender. Section VIII.8. Compliance with Environmental Laws. No Borrower will, nor will it permit any Guarantor or any Subsidiary to, (a) use (or permit any tenant to use) any of their respective properties or assets for the handling, processing, storage, transportation, or disposal of any Hazardous Substance, except in the ordinary course of business and in compliance with all Environmental Laws, (b) generate any Hazardous Substance, (c) conduct any activity which is likely to cause a release or threatened release of any Hazardous Substance, or (d) otherwise conduct any activity or use any of their 34 respective properties or assets in any manner that is likely to violate any Environmental Law. Section VIII.9. Accounting. No Borrower will make, nor will it permit any Guarantor or any Subsidiary to make, any change in accounting treatment or reporting practices, except as required by GAAP. Section VIII.10. Subordinated Debt. No Borrower will pay, nor will it permit any Guarantor or any Subsidiary to pay, any Subordinated Debt except pursuant to the agreement pursuant to which the payment of such Subordinated Debt is subordinated to the payment of the Obligations. Section VIII.11. Change of Business. No Borrower will enter into, no will it permit any Guarantor or any Subsidiary to enter into, any type of business which is materially different from the business in which such Borrower, such Guarantor or such Subsidiary is presently engaged. ARTICLE IX. Financial Covenants Borrowers covenant and agree that, as long as the Obligations or any part thereof are outstanding or Lender has any Commitment hereunder, Borrowers will observe and perform, and will cause Parent and its Subsidiaries to observe and perform, the financial covenants set forth below, unless Lender shall otherwise consent in writing. Section IX.1. Tangible Net Worth. Parent will at all times maintain Tangible Net Worth in an amount not less than $43,000,000.00. Tangible Net Worth shall be calculated and tested quarterly as of the last day of each fiscal quarter of Parent. Section IX.2. Ratio of EBITDA to Interest Expense. Parent will at all times maintain a Ratio of EBITDA to Interest Expense of not less than 4.00 to 1.00. The Ratio of EBITDA to Interest Expense shall be calculated and tested quarterly as of the last day of each fiscal quarter of Parent on a cumulative basis (rolling four quarter basis) for the four fiscal quarters ended as of the date of calculation; provided, however, that for the fiscal quarters ended December 31, 2000, March 31, 2001 and June 30, 2001, EBITDA and Interest Expense shall be calculated on an Annualized basis. 35 Section IX.3. Ratio of Senior Debt to EBITDA. Parent will at all times maintain a Ratio of Senior Debt to EBITDA of not greater than 2.50 to 1.00. The Ratio of Senior Debt to EBITDA shall be calculated and tested quarterly as of the last day of each fiscal quarter of Parent on a cumulative basis (rolling four quarter basis) for the four fiscal quarters ended as of the date of calculation; provided, however, that for the fiscal quarters ended December 31, 2000, March 31, 2001 and June 30, 2001, EBITDA shall be calculated on an Annualized basis. Section IX.4. Capital Expenditures. Borrowers will not permit the aggregate capital expenditures of Borrowers and their Subsidiaries to exceed $8,000,000.00 during any fiscal year. ARTICLE X. Default Section X.1. Events of Default. Each of the following shall be deemed an "Event of Default": (a Any Borrower shall fail to pay the Obligations or any part thereof when due and such failure shall continue for a period of five (5) days. (b Any representation or warranty made or deemed made by any Borrower or any Guarantor (or any of their respective officers) in any Loan Document or in any certificate, report, notice, or financial statement furnished at any time in connection with this Agreement shall be false, misleading, or erroneous in any material respect when made or deemed to have been made. (c Any Borrower or any Guarantor shall fail to perform, observe, or comply with any covenant, agreement, or term contained in this Agreement or any other Loan Document and such failure shall continue for a period of twenty (20) days. (d Any Borrower, any Guarantor or any Subsidiary shall commence a voluntary proceeding seeking liquidation, reorganization, or other relief with respect to itself or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official of it or a substantial part of its property or shall consent to any 36 such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it or shall make a general assignment for the benefit of creditors or shall generally fail to pay its debts as they become due or shall take any corporate action to authorize any of the foregoing. (e An involuntary proceeding shall be commenced against any Borrower, any Guarantor or any Subsidiary seeking liquidation, reorganization, or other relief with respect to it or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official for it or a substantial part of its property, and such involuntary proceeding shall remain undismissed and unstayed for a period of sixty (60) days. (f Any Borrower, any Guarantor or any Subsidiary shall fail to discharge within a period of thirty (30) days after the commencement thereof any attachment, sequestration, or similar proceeding or proceedings involving an aggregate amount in excess of $25,000.00 against any of its assets or properties. (g Any Borrower, any Guarantor or any Subsidiary shall fail to satisfy and discharge promptly any final judgement or judgements against it for the payment of money in an aggregate amount in excess of $25,000.00. (h Any Borrower, any Guarantor or any Subsidiary shall fail to pay when due any principal of or interest on any Debt (other than the Obligations), or the maturity of any such Debt shall have been accelerated, or any such Debt shall have been required to be prepaid prior to the stated maturity thereof, or any event shall have occurred that permits (or, with the giving of notice or lapse of time or both, would permit) any holder or holders of such Debt or any Person acting on behalf of such holder or holders to accelerate the maturity thereof or require any such prepayment. (i This Agreement or any other Loan Document shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by any Borrower, any Guarantor, any Subsidiary, or any Borrower or any Guarantor shall deny that it has any further liability or obligation under any of the Loan Documents, or any Lien or security interest created by the Loan Documents shall for any reason cease to be a valid, first priority 37 perfected security interest in and Lien upon any of the Collateral purported to be covered thereby. Section X.2. Remedies Upon Default. If any Event of Default shall occur, Lender may do any one or more of the following: (a) declare the outstanding principal of and accrued and unpaid interest on the Notes and the Obligations or any part thereof to be immediately due and payable, and the same shall thereupon become immediately due and payable, without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by Borrowers, (b) terminate the Commitment without notice to any Borrower, (c) foreclose or otherwise enforce any Lien granted to Lender to secure payment and performance of the Obligations, and (d) exercise any and all rights and remedies afforded by the laws of the State of Texas or any other jurisdiction by any of the Loan Documents, by equity or otherwise; provided, however, that upon the occurrence of an Event of Default under Section 10.1(d) or Section 10.1(e), the Commitment shall automatically terminate, and the outstanding principal of and accrued and unpaid interest on the Notes and the other Obligations shall become immediately due and payable without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by Borrowers. Section X.3. Cash Collateral. If any Event of Default shall occur, Borrowers shall, if requested by Lender, immediately deposit with and pledge to Lender, cash or cash equivalent investments in an amount equal to the outstanding Letter of Credit Liabilities as security for the Obligations. Such cash or cash equivalent investment shall bear interest while held by Lender and shall be released on the date on which (a) all Letters of Credit which were outstanding at the time of such Event of Default have expired by their own terms (and have not been extended by Lender) without being drawn, and (b) all the Advances representing drawings on Letters of Credit which were outstanding at the time of such Event of Default have been paid in full. Section X.4. Performance by Lender. If Borrowers shall fail to perform any covenant, duty, or agreement contained in any of the Loan Documents, Lender may perform or attempt to perform such covenant, duty, or agreement on behalf of Borrowers. In such event, Borrowers shall, at the request of Lender, promptly pay any amount expended by Lender in such performance or attempted performance to Lender, together with interest thereon at the Default Rate from the date of such expenditure until paid. Notwithstanding the foregoing, it is expressly agreed that Lender shall not have 38 any liability or responsibility for the performance of any obligation of Borrowers under this Agreement or any other Loan Document. ARTICLE XI. Miscellaneous Section XI.1. Expenses of Lender. Borrowers hereby agree to pay Lender on demand (a) all reasonable costs and expenses incurred by Lender in connection with the preparation, negotiation, and execution of this Agreement and the other Loan Documents and any and all amendments, modifications, renewals, extensions, and supplements thereof and thereto, including, without limitation, the fees and expenses of Lender's legal counsel, (b) all reasonable costs and expenses incurred by Lender in connection with the enforcement of this Agreement or any other Loan Document, including, without limitation, the fees and expenses of Lender's legal counsel, and (c) all other reasonable costs and expenses incurred by Lender in connection with this Agreement or any other Loan Document, including, without limitation, all costs, expenses, taxes (other than income taxes and franchise taxes), assessments, filing fees, and other charges levied by any governmental authority or otherwise payable in respect of this Agreement or any other Loan Document or in obtaining any insurance policy, audit or appraisal in respect of the Collateral. SECTION XI.2. INDEMNIFICATION. BORROWERS HEREBY INDEMNIFY LENDER AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS, AND AGENTS FROM, AND HOLDS EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS' FEES) (COLLECTIVELY, "CLAIMS") TO WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (A) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION, OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS, (B) ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, (C) ANY BREACH BY ANY BORROWER OF ANY REPRESENTATION, WARRANTY, COVENANT, OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS, (D) THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL, OR CLEANUP OF ANY HAZARDOUS SUBSTANCE LOCATED ON, WITHIN, OR MIGRATING FROM ANY OF THE PROPERTIES OR ASSETS OF ANY BORROWER OR ANY SUBSIDIARY, (E) ANY ACT OR OMISSION OF LENDER BASED UPON ANY FAX OR ELECTRONIC TRANSMISSION, OR 39 (F) ANY MATTER RELATED TO ANY LETTER OF CREDIT, OTHER THAN A NON-CONFORMING LETTER OF CREDIT DRAWING PAID AS A RESULT OF LENDER'S ORDINARY NEGLIGENCE, INCLUDING, WITH RESPECT TO ALL OF THE ABOVE, ANY CLAIM WHICH ARISES AS A RESULT OF THE NEGLIGENCE OF LENDER; PROVIDED, HOWEVER, THAT BORROWERS' INDEMNIFICATION OBLIGATIONS UNDER THIS SECTION 11.2 SHALL NOT APPLY TO THE EXTENT THAT THE CLAIMS ARISE AS A RESULT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF LENDER. Section XI.3. Limitation of Liability. Neither Lender nor any affiliate, officer, director, employee, attorney, or agent of Lender shall have any liability with respect to, and each Borrower hereby waives, releases, and agrees not to sue any of them upon, any claim for any special, indirect, incidental, or consequential damages suffered or incurred by any Borrower in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Each Borrower hereby waives, releases, and agrees not to sue Lender or any of Lender's affiliates, officers, directors, employees, attorneys, or agents for punitive damages in respect of any claim in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Section XI.4. No Waiver; Cumulative Remedies. No failure on the part of Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided for in this Agreement and the other Loan Documents are cumulative and not exclusive of any rights and remedies provided by law. Section XI.5. Successors and Assigns. This Agreement is binding upon and shall inure to the benefit of Lender and Borrowers and their respective successors and assigns, except that no Borrower may assign or transfer any of its rights or obligations under this Agreement without prior written consent of Lender. Section XI.6. Survival. All representations and warranties made in this Agreement or any other Loan Document or in any document, statement, or certificate furnished in connection with this Agreement shall survive the execution and delivery of this Agreement and the other Loan Documents, and no investigation by Lender or any closing shall affect the representations and warranties or the right of Lender to rely upon them. Without prejudice to the 40 survival of any other obligation of Borrowers hereunder, the obligations of Borrowers under Sections 11.1 and 11.2 shall survive repayment of the Note and termination of the Commitment and the Letters of Credit. Section XI.7. Amendment. The provisions of this Agreement may be amended or waived only by an instrument in writing signed by the parties hereto. Section XI.8. Maximum Interest Rate. No provision of this Agreement or of any other Loan Documents shall require the payment or the collection of interest in excess of the maximum permitted by applicable law. If any excess of interest in such respect is hereby provided for, or shall be adjudicated to be so provided, in any Loan Documents or otherwise in connection with this loan transaction, the provisions of this Section shall govern and prevail and neither any Borrower nor the sureties, guarantors, successors, or assigns of any Borrower shall be obligated to pay the excess amount of such interest or any other excess sum paid for the use, forbearance, or detention of sums loaned pursuant hereto. In the event Lender ever receives, collects, or applies as interest any such sum, such amount which would be in excess of the maximum amount permitted by applicable law shall be applied as a payment and reduction of the principal of the indebtedness evidenced by the Notes; and, if the principal of the Notes has been paid in full, any remaining excess shall forthwith be paid to Borrowers. In determining whether or not the interest paid or payable exceeds the Maximum Rate, Borrowers and Lender shall, to the extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the indebtedness evidenced by the Notes so that interest for the entire term does not exceed the Maximum Rate. Section XI.9. Notices. All notices and other communications provided for in this Agreement and the other Loan Documents shall be in writing and may be telecopied (faxed), mailed by certified mail return receipt requested, or delivered to the intended recipient at the addresses specified below or at such other address as shall be designated by any party listed below in a notice to the other parties listed below given in accordance with this Section. 41 If to any Borrower: 12750 South Kirkwood, Suite 200 Stafford, Texas 77477 Attention: Tom McEntire Telephone No.: 281-494-8282 Fax No.: 281-494-8310 If to any Guarantor 12750 South Kirkwood, Suite 200 Stafford, Texas 77477 Attention: Tom McEntire Telephone No.: 281-494-8282 Fax No.: 281-494-8310 If to Lender: Southwest Bank of Texas, N.A. Five Post Oak Park 4400 Post Oak Parkway Houston, Texas 77027 Attention: Edward K. Bowdon Telephone No.: 713-888-4623 Fax No.: 713-232-5925 Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopy (fax), subject to confirmation of receipt, when personally delivered or, in the case of a mailed notice, three (3) Business Days after being duly deposited in the mail, in each case given or addressed as aforesaid; provided, however, that notices to Lender pursuant to Article II shall not be effective until received by Lender. Section XI.10. Applicable Law; Venue; Service of Process. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States of America. This Agreement has been entered into in Harris County, Texas and it shall be performable for all purposes in Harris County, Texas. Except as provided in the Arbitration Agreement, any action or proceeding against any Borrower under or in connection with any of the Loan Documents may be brought in any state or federal court in Harris County, Texas, and each Borrower hereby irrevocably submits to the nonexclusive jurisdiction of such courts and waives any objection it may now or hereafter have as to the venue of any such action or proceeding brought in any such court or that any such court is an inconvenient forum. Each Borrower agrees that service of process upon it may be made by certified or registered mail, return receipt requested, at its office specified in this Agreement. Except as provided in the Arbitration Agreement, nothing herein or in any of the other Loan Documents shall affect the right of Lender to serve 42 process in any other manner permitted by law or shall limit the right of Lender to bring any action or proceeding against any Borrower or with respect to any of its property in courts in other jurisdictions. Except as provided in the Arbitration Agreement, any action or proceeding by any Borrower against Lender shall be brought only in a court located in Harris County, Texas. Section XI.11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section XI.12. Severability. Any provision of this Agreement held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal. Section XI.13. Headings. The headings, captions, and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement. Section XI.14. Non-Application of Chapter 346 of Texas Finance Code. The provisions of Chapter 346 of the Texas Finance Code are specifically declared by the parties hereto not to be applicable to this Agreement or any of the other Loan Documents or to the transactions contemplated hereby. Section XI.15. Consent to Participations. Lender shall have the right at any time and from time to time to sell or transfer one or more participation interests in the Notes and the indebtedness evidenced thereby to one or more purchasers ("Purchasers"), whether related or unrelated to Lender. Subject in all respects to the provisions of Section 11.18 of this Agreement, Lender may provide to any one or more Purchasers or potential Purchasers any information, financial statements, data or knowledge Lender may have about any Borrower or about any other matter relating to the Obligations. Borrowers further waive any and all notices of sale of participation interests and notices of repurchases of participation interests. In the event of any such sale by Lender of participation interests to a Purchaser, Lender's obligations under the Loan Documents shall remain unchanged, Lender shall remain solely responsible to Borrowers for the performance of such obligations, Lender shall remain the owner and holder of the Note for all purposes under the Loan Documents, all amounts payable by Borrowers and Guarantors under this Agreement shall be determined as if Lender had not sold such participation interests, and Borrowers and Guarantors shall continue to deal solely and directly with Lender in connection with Lender's rights and obligations under the Loan Documents. Lender shall retain the sole right to approve, without the consent of any 43 Purchaser, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any credit extension or Commitment in which such Purchaser has an interest which (i) forgives principal or interest, or reduces the interest rate or fees payable with respect to any such credit extension, (ii) extends the Termination Date, postpones any date fixed for any regularly-scheduled payment of principal or interest on any credit extension or Commitment in which such Purchaser has an interest, or of any regularly-scheduled payment of fees on any such credit extension or Commitment, (iii) releases any Guarantor of any such credit extension, or (iv) releases all or substantially all of the Collateral. Borrowers agree that each Purchaser shall be deemed to have the right of setoff in respect of its participation interests in amounts owing under the Loan Documents to the same extent as if the amount of its participation interests were owing directly to it as Lender under the Loan Documents. Borrowers further agree that any Purchaser may enforce its interests irrespective of any claims or defenses that any Borrower may have against Lender. SECTION XI.16. ENTIRE AGREEMENT. THIS AGREEMENT, THE NOTES, AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN REPRESENT THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND THEREOF AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. Section XI.17. Confidentiality. Lender agrees to hold any confidential information which it may receive from any Borrower or any Guarantor pursuant to any Loan Document in confidence, except for disclosure (i) to legal counsel, accountants and other professional advisers to Lender, (ii) to regulatory officials, (iii) to any Person as required by law, regulation or legal process, (iv) to any Person in connection with any legal proceeding to which Lender is a party, and (v) as permitted by Section 11.18. Section XI.18. Dissemination of Information. Each Borrower and each Guarantor authorizes Lender to disclose to any Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in Lender's possession concerning the creditworthiness of Borrowers and 44 Guarantors; provided that each Transferee and prospective Transferee first agrees in writing to be bound by Section 11.17 of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. BORROWERS: CONCORD TECHNOLOGIES, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------- Thomas T. McEntire Chief Financial Officer GEOSPACE ENGINEERING RESOURCES INTERNATIONAL, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------- Thomas T. McEntire Chief Financial Officer GEO SPACE, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------- Thomas T. McEntire Chief Financial Officer 45 OYO INSTRUMENTS, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------- Thomas T. McEntire Chief Financial Officer OYOG OPERATIONS, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------- Thomas T. McEntire Chief Financial Officer LENDER: SOUTHWEST BANK OF TEXAS, N.A. By: /s/ Edward K. Bowdon -------------------- Edward K. Bowdon Vice President 46 EX-2.3 4 dex23.txt PROMISSORY NOTE PROMISSORY NOTE --------------- $10,000,000.00 Houston, Texas February 16, 2001 FOR VALUE RECEIVED, the undersigned, CONCORD TECHNOLOGIES, LP, a Texas limited partnership, GEOSPACE ENGINEERING RESOURCES INTERNATIONAL, LP, a Texas limited partnership, GEO SPACE, LP, a Texas limited partnership, OYO INSTRUMENTS, LP, a Texas limited partnership and OYOG OPERATIONS, LP, a Texas limited partnership, jointly and severally ("Maker"), hereby promise to pay to the order of SOUTHWEST BANK OF TEXAS, N.A., a national banking association ("Payee"), at its offices at Five Post Oak Park, 4400 Post Oak Parkway, Houston, Harris County, Texas, or such other address as may be designated by Payee, in lawful money of the United States of America, the principal sum of TEN MILLION AND NO/100 DOLLARS ($10,000,000.00), or so much thereof as may be advanced and outstanding hereunder, together with interest on the outstanding principal balance from day to day remaining, at a varying rate per annum which shall from day to day be equal to the lesser of (a) the Maximum Rate (hereinafter defined) or (b) the Prime Rate (hereinafter defined) of Payee in effect from day to day, and each change in the rate of interest charged hereunder shall become effective, without notice to Maker, on the effective date of each change in the Prime Rate or the Maximum Rate, as the case may be; provided, however, if at any time the rate of interest specified in clause (b) preceding shall exceed the Maximum Rate, thereby causing the interest rate hereon to be limited to the Maximum Rate, then any subsequent reduction in the Prime Rate shall not reduce the rate of interest hereon below the Maximum Rate until the total amount of interest accrued hereon equals the amount of interest which would have accrued hereon if the rate specified in clause (b) preceding had at all times been in effect. Principal of and interest on this Note shall be due and payable as follows: (a) Accrued and unpaid interest on this Note shall be payable monthly, on the first (1st) day of each month commencing on April 1, 2001 and upon the maturity of this Note, however such maturity may be brought about; and (b) All outstanding principal of this Note and all accrued interest hereon shall be due and payable on February 15, 2002. Principal of this Note shall be subject to mandatory prepayment at the times described in the Agreement (hereinafter defined). If an Event of Default (hereinafter defined) has occurred and is existing, the principal hereof and any past due interest hereon shall bear interest at the Default Rate (hereinafter defined). Interest on the indebtedness evidenced by this Note shall be computed on the basis of a year of 365 days, and the actual number of days elapsed (including the first day but excluding the last day) unless such calculation would result in a usurious rate in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be. As used in this Note, the following terms shall have the respective meanings indicated below: "Agreement" means that certain Loan Agreement dated as of February 16, 2001 between Maker and Payee, as the same may be amended or modified from time to time. "Default Rate" means the lesser of (a) the sum of the Prime Rate plus two percent (2.0%), or (b) the Maximum Rate. "Event of Default" shall have the meaning given to such term in the Agreement. "Maximum Rate" means the maximum rate of nonusurious interest permitted from day to day by applicable law, including Chapter 303 of the Texas Finance Code (the "Code") (and as the same may be incorporated by reference in other Texas statutes). To the extent that Chapter 303 of the Code is relevant to any holder of this Note for the purposes of determining the Maximum Rate, each such holder elects to determine such applicable legal rate pursuant to the "weekly ceiling," from time to time in effect, as referred to and defined in Chapter 303 of the Code; subject, however, to the limitations on such applicable ceiling referred to and defined in the Code, and further subject to any right such holder may have subsequently, under applicable law, to change the method of determining the Maximum Rate. "Prime Rate" shall mean that variable rate of interest per annum established by Payee from time to time as its prime rate which shall vary from time to time. Such rate is set by Payee as a general reference rate of interest, taking into account such factors as Payee may deem appropriate, it being understood that many of Payee's commercial or other loans are 2 priced in relation to such rate, that it is not necessarily the lowest or best rate charged to any customer and that Payee may make various commercial or other loans at rates of interest having no relationship to such rate. This Note (a) is the Note provided for in the Agreement and (b) is secured as provided in the Agreement. Maker may prepay the principal of this Note upon the terms and conditions specified in the Agreement. Maker may borrow, repay, and reborrow hereunder upon the terms and conditions specified in the Agreement. Notwithstanding anything to the contrary contained herein, no provisions of this Note shall require the payment or permit the collection of interest in excess of the Maximum Rate. If any excess of interest in such respect is herein provided for, or shall be adjudicated to be so provided, in this Note or otherwise in connection with this loan transaction, the provisions of this paragraph shall govern and prevail, and neither Maker nor the sureties, guarantors, successors or assigns of Maker shall be obligated to pay the excess amount of such interest, or any other excess sum paid for the use, forbearance or detention of sums loaned pursuant hereto. If for any reason interest in excess of the Maximum Rate shall be deemed charged, required or permitted by any court of competent jurisdiction, any such excess shall be applied as a payment and reduction of the principal of indebtedness evidenced by this Note; and, if the principal amount hereof has been paid in full, any remaining excess shall forthwith be paid to Maker. In determining whether or not the interest paid or payable exceeds the Maximum Rate, Maker and Payee shall, to the extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the indebtedness evidenced by this Note so that the interest for the entire term does not exceed the Maximum Rate. If default occurs in the payment of principal or interest under this Note, or upon the occurrence of any other Event of Default, as such term is defined in the Agreement, the holder hereof may, at its option, (a) declare the entire unpaid principal of and accrued interest on this Note immediately due and payable without notice, demand or presentment, all of which are hereby waived, and upon such declaration, the same shall become and shall be immediately due and payable, (b) foreclose or otherwise enforce all liens or security interests securing payment hereof, or any part hereof, (c) offset against this Note any sum or sums owed by the holder hereof to Maker and (d) take any and all other actions available to Payee under this Note, the Agreement, the Loan Documents (as such term is defined in the Agreement) at law, in equity or otherwise. Failure of the holder hereof to exercise any of the foregoing options shall not constitute a waiver 3 of the right to exercise the same upon the occurrence of a subsequent Event of Default. If the holder hereof expends any effort in any attempt to enforce payment of all or any part or installment of any sum due the holder hereunder, or if this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceedings, Maker agrees to pay all costs, expenses, and fees incurred by the holder, including all reasonable attorneys' fees. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS NOTE IS PERFORMABLE IN HARRIS COUNTY, TEXAS. Maker and each surety, guarantor, endorser, and other party ever liable for payment of any sums of money payable on this Note jointly and severally waive notice, presentment, demand for payment, protest, notice of protest and non- payment or dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, diligence in collecting, grace, and all other formalities of any kind, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, and any impairment of any collateral securing this Note, all without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to release or substitute part or all of the collateral securing this Note, or to grant any other indulgences or forbearances whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. CONCORD TECHNOLOGIES, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------- Thomas T. McEntire Chief Financial Officer 4 GEOSPACE ENGINEERING RESOURCES INTERNATIONAL, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------- Thomas T. McEntire Chief Financial Officer GEO SPACE, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------- Thomas T. McEntire Chief Financial Officer OYO INSTRUMENTS, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------- Thomas T. McEntire Chief Financial Officer OYOG OPERATIONS, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------- Thomas T. McEntire Chief Financial Officer 5 EX-15 5 dex15.txt AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS EXHIBIT 15.1 AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS ------------------------------------------- Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: OYO Geospace Corporation Registration on Form S-8 We are aware that our report dated May 7, 2001, on our review of interim financial information of OYO Geospace Corporation as of March 31, 2001 and for the three months and six months ended March 31, 2001 and 2000, and included in the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2001 is incorporated by reference in the Company's registration statement on Form S-8 (Nos. 333-40893 and 333-80003). Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered a part of the registration statement prepared or certified by us within the meaning of Sections 7 and 11 of that Act. /s/ PricewaterhouseCoopers LLP Houston, Texas May 7, 2001 -----END PRIVACY-ENHANCED MESSAGE-----