Form 10-K for the Year Ended 09/30/2003

-----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, UTdoO1p7FrijGf1ZkKMQ5Jgnp4QsFXHH3rb18EmJno6y/+rBuKivfKsP6tgiY4id pHmrVGDyQx6fUdCpNMV1tw== 0001193125-03-088882.txt : 20031203 0001193125-03-088882.hdr.sgml : 20031203 20031203165701 ACCESSION NUMBER: 0001193125-03-088882 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031203 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-36727 FILM NUMBER: 031035726 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-K 1 d10k.htm FORM 10-K FOR THE YEAR ENDED 09/30/2003 Form 10-K for the Year Ended 09/30/2003

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Fiscal Year Ended September 30, 2003

¨	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

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

7007 Pinemont Drive

Houston, Texas 77040-6601

(Address of Principal Executive Offices)

(713) 986-4444

(Registrant’s telephone number, including area code)

Securities Registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock		NASDAQ National Market

Securities Registered pursuant to Section 12(g) of the Act: NONE

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 ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x

There were 5,554,874 shares of the Registrant’s Common Stock outstanding as of the close of business on December 1, 2003. The aggregate market value of the Registrant’s Common Stock held by non-affiliates was approximately $23 million (based upon the closing price of $9.50 on March 31, 2003, as reported by the NASDAQ Stock Market, Inc.)

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the Registrant’s 2004 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

PART I

Item 1. Business

Company Overview

We design and manufacture instruments and equipment used in the acquisition and processing of seismic data. We have been in the seismic instrument and equipment business since 1980, marketing our products primarily to the oil and gas industry worldwide. We also design and manufacture thermal imaging equipment and distribute dry thermal film products to the commercial graphics industry. We have been serving the commercial graphics industry since 1995.

Seismic Industry

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 by combining a seismic energy source and a data recording system. The 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 simultaneously 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 output devices are 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 an integral part of the streamers. The streamers simultaneously transmit the electrical impulses back to the vessel via telemetric cable included within the streamers, and the seismic data is recorded and processed in much the same manner as it is on land.

An estimated one to two-thirds of the reserves found with every oil and gas discovery will be left behind in the reservoir, not recoverable either economically or at times even identified. Reservoir characterization and management programs, in which the reservoir is carefully imaged and monitored throughout its economic life by seismic instruments and equipment, are now seen as vital tools for improving production recovery rates. Seismic surveys repeated over selected time intervals show dynamic changes within the reservoir and can be used to monitor the effects of production. We now provide products and services for use in the reservoir monitoring and characterization marketplace and expect to incur significant future research and development expenditures aimed at the development of additional seismic acquisition products used for high definition reservoir characterization in both land and marine environments.

While orders for our products can vary substantially from quarter to quarter, reservoir characterization projects, especially deepwater projects, require the use of more equipment over a longer period of time than is required by conventional surface seismic systems. Revenue recognition in accordance with generally accepted accounting principles for these large-scale projects has the potential to result in substantial fluctuations in our quarterly performance. These variations may impact our operating results and cash flow, manufacturing capability and expense levels in any given quarter. Furthermore, because of the scale and nature of reservoir characterization projects, there may be delays in their implementation and uncertainties about their final course.

Commercial Graphics Industry

Our entry into the commercial graphics business occurred in 1995 as we leveraged our thermal imaging product technology, originally designed for seismic data processing applications, into new markets. With minor product modifications, we were successful in adapting these products for use in the commercial graphics industry.

Our commercial graphics business segment manufactures and sells thermal imaging equipment and dry thermal film primarily to the screen print, point of sale, signage and textile market sectors. Our thermal imaging equipment is capable of producing data images ranging in size from 12 to 54 inches wide, with resolution ranging from 400 to 1,200 dpi (dots per inch). This business segment has some sales to customers in the seismic industry.

In April 2002, we purchased for $2.3 million certain intellectual property rights from our then primary supplier of dry thermal film (the “Former Primary Film Supplier”). Such purchase gave us exclusive ownership of all technology used by the Former Primary Film Supplier to manufacture dry thermal film used in the thermal imaging equipment we manufacture. Such purchase included technology then existing and any dry thermal film technology thereafter developed by the Former Primary Film Supplier for use in our equipment. We also entered into an amended supply agreement pursuant to which the Former Primary Film Supplier agreed to provide us with the dry thermal film. In connection with the purchase, we agreed to license the technology to the Former Primary Film Supplier on a perpetual basis so long as it could meet predefined quality and delivery requirements. If the Former Primary Film Supplier could not meet such requirements, the agreement provided us with the right to use the technology ourselves or to license the technology to any third party to manufacture dry thermal film.

On July 3, 2002, the Former Primary Film Supplier filed a Chapter 11 reorganization petition in Federal Bankruptcy Court for the Western District of New York. At the date of such bankruptcy filing, we had $3.4 million of long-term assets carried on our balance sheet as a result of the prior transactions with the Former Primary Film Supplier (including the $2.3 million investment in intellectual property acquired from such Former Primary Film Supplier described above). The Former Primary Film Supplier advised us that, in connection with its bankruptcy filing, it was seeking a buyer for its business that would assume its relationship and contracts with us, and it was our intention to cooperate in such efforts to the extent our on-going interest could be served thereby. We no longer believe that a buyer can be found to operate the Former Primary Film Supplier’s business.

During the fiscal year ended September 30, 2003, the Former Primary Film Supplier failed to meet substantially all of our purchase orders and has ceased providing us with dry thermal film. As a result, we are currently purchasing a large quantity of dry thermal film from an alternative film supplier (the “Other Film Supplier”), and we are using the technology we purchased from the Former Primary Film Supplier to manufacture dry thermal film internally.

As a result of the bankruptcy filing by the Former Primary Film Supplier, we recorded a charge in our third quarter of fiscal year 2002 of approximately $1.2 million due to the ultimate uncertainty of realization of value on certain assets, particularly certain prepaid purchase benefits and similar benefits under the amended supply contract with the Former Primary Film Supplier. We do not believe there has been any impairment in the value of the intellectual property we acquired from the Former Primary Film Supplier because of our ability to utilize the intellectual property to have thermal film manufactured either internally or elsewhere.

No claims have been made against us or by us at present in connection with the Former Primary Film Supplier’s bankruptcy, except that on December 10, 2002, we received a notice of claim for alleged preferential payments made by the Former Primary Film Supplier to us in the period before filing of the bankruptcy proceeding in the approximate amount of $260,000. We intend to vigorously defend against such claim under the overall circumstances of our relationship with the Former Primary Film Supplier. At present we do not know whether we will make any claims against the Former Primary Film Supplier and we are unable to predict whether any additional claims will be made against us in connection with the Former Primary Film Supplier’s bankruptcy proceeding as to any aspect of our relationship with such Former Primary Film Supplier. We are unable at this time to predict the outcome and effects of this situation. We have, nevertheless, made provision for existing claims that we believe are adequate at this time, although we are unable to make such predictions with any certainty.

Acquisitions

OYO-GEO Impulse International, LLC

Effective November 8, 2001, we increased our equity ownership from 44% to 85% in OYO-GEO Impulse International, LLC (“OYO-GEO Impulse”), a Russian joint venture we formed more than ten years ago with Geophyspribor Ufa Production Association, Bank Vostock and Chori Co., Ltd. Subsequent to the effectiveness of such increase in ownership, the operating results of the reorganized entity have been consolidated with those of our Company. At that time, Geophyspribor Ufa Production Association and Chori Co., Ltd. continued as minority shareholders of OYO-GEO Impulse.

In exchange for the additional equity ownership, we forgave a debt of $1.2 million owed to us by OYO-GEO Impulse. At the time of the acquisition, the debt owed to us and a related prior equity investment had been written-off due to prior concerns regarding realization of those assets and had no carrying value in our financial statements. In connection with this acquisition, we recorded an extraordinary gain of $686,000, net of income taxes of $85,000. This extraordinary gain represents the negative goodwill that resulted from the acquisition of the additional equity interest of OYO-GEO Impulse. SFAS 141 requires negative goodwill resulting from new business combinations to be recorded as an extraordinary gain.

On September 12, 2003, we purchased for $164,000 an additional 12% ownership interest in OYO-GEO Impulse from Geophyspribor Ufa Production Association, thereby increasing our ownership interest to 97%. Chori Co., Ltd. continues as a 3% minority shareholder of OYO-GEO Impulse.

Based in Ufa, Bashkortostan, Russia, OYO-GEO Impulse has been in operation since 1990, manufacturing sensors for the Russian seismic marketplace. At September 30, 2003, OYO-GEO Impulse owned two facilities in Ufa containing a total of 161,000 square feet and employed approximately 357 people. Our seismic equipment manufacturing subsidiary in Houston is managing the expansion of OYO-GEO Impulse’s operations to produce international-standard sensors and additional products that will broaden its market scope.

EcoPRO Imaging

In February 2001, we acquired the operating assets and business of EcoPRO for $1.9 million of cash from the Former Primary Film Supplier. The EcoPRO business distributes EcoPRO brand name thermal imagers and dry thermal film. The operations of EcoPRO have been combined with our commercial graphics business segment.

Products and Product Development

Seismic Products

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, marine seismic cable retrieval devices, marine seismic cable steering devices, and small data acquisition systems targeted at niche markets. Our seismic products are compatible with most major seismic data acquisition systems currently in use. We believe that our seismic products are among the most technologically advanced instruments and equipment available for seismic data acquisition.

Our products used in marine seismic data acquisition include our patented marine seismic cable retrieval devices. Occasionally, streamers are severed and become disconnected from the vessel as a result of inclement weather, vessel traffic or human or technological error. Our seismic cable retrieval devices, which are attached to the streamers, contain air bags that are designed to inflate automatically at a given depth, bringing the severed cable to the surface. This can save the seismic contractor significant time and money compared to the alternative of losing the seismic streamer. We also produce seismic streamer “birds”, which are finlike devices that attach to the streamer and help maintain the streamer at a certain desired depth as it is towed through the water.

Other product developments include the HDSeis^™ product line and a suite of borehole and reservoir characterization products and services. Our HDSeis^™ System is a high definition seismic data acquisition system with flexible architecture that can be configured as a borehole seismic system or as a subsurface system for land or marine reservoir-monitoring projects.

The scalable architecture of the HDSeis^™ System enables custom designed system configuration for applications ranging from low-channel engineering and environmental-scale surveys requiring a minimum number of recording channels to high-channel surveys required to efficiently conduct permanent deepwater reservoir imaging and monitoring. Modular architecture allows virtually unlimited channel expansion with global positioning systems and fiber-optic synchronization. In addition, multi-system synchronization features make the HDSeis^™ System well suited for multi-well or multi-site acquisition, simultaneous surface and downhole acquisition and continuous reservoir monitoring projects.

Reservoir characterization requires special purpose or custom designed systems in which portability becomes less critical and functional reliability assumes greater importance. This reliability factor helps assure successful operations in inaccessible locations over a considerable period of time. Additionally, reservoirs located in deepwater or hostile environments require special instrumentation and new techniques for life-of-field performance.

Reservoir characterization also requires high-bandwidth, high-resolution seismic data for engineering project planning and management. Seismic data acquired at reservoir level, through seismic sources and acoustic receivers within a wellbore, has a bandwidth of several kilohertz, which is capable of yielding the requisite high-resolution images.

We believe our HDSeis^™ System and tools, designed for cost-effective deployment and lifetime performance, will make borehole and seabed seismic acquisition a cost-effective, reliable process for the challenges of reservoir characterization and monitoring.

Other new 3-D seismic product developments include introduction of an omnidirectional geophone for use in reservoir monitoring; a new compact marine three-component or four-component gimbaled sensor and new special-purpose connectors, connector arrays and cases.

In order to leverage our cable manufacturing facilities and capabilities, we are designing and selling cable products to the offshore oil and gas and offshore construction industries. The production of marine cables requires specialized design capabilities and manufacturing equipment, which we also utilize for deepwater reservoir characterization products.

We are also working to diversify our existing seismic product lines and adapt our manufacturing capabilities for uses in industries other than the seismic industry.

Commercial Graphics Products

We have adapted our thermal imaging technology, which we originally developed for the seismic industry, for commercial applications in the newsprint, silkscreen and corrugated box printing industries. Our thermal imaging equipment is capable of producing data images ranging in size from 12 to 54 inches wide, with resolution ranging from 400 to 1,200 dpi (dots per inch). We believe that our wide format thermal printers, which use dry thermal film technology, are a cost-effective alternative to conventional equipment and imaging solutions.

We expect to continue our research and development activities to expand the markets for our thermal imaging products and increase the image clarity of our thermal imaging equipment and dry thermal film.

Competition

We believe that we are one of the world’s largest manufacturers and distributors of seismic related products. The principal competitors in our seismic business segment for geophones, hydrophones, geophone string connectors, leader wire and telemetry cable are Input/Output, Sercel and Steward Cable. Furthermore, an entity in China manufactures an older model geophone having the same design and specifications as our GS-20 DX geophone. In addition to these competitors, certain manufacturers of marine streamers also manufacture hydrophones for their own use.

We believe that the principal competitive factors in the seismic instruments and equipment market are technological superiority, product durability and reliability and customer service and support. Since price and product delivery are also important considerations for customers, pricing terms may become more significant during an industry downturn. These factors can be offset by a customer’s preference for standardization. In general, particular customers prefer to standardize geophones and hydrophones, particularly if they are used by a single seismic crew or multiple crews that can support each other. Customer directed standardization makes it more difficult for a geophone or hydrophone manufacturer to gain market share from other such manufacturers.

A key competitive factor for seismic instruments and equipment is durability under harsh field conditions. Instruments and equipment must not only meet rigorous technical specifications regarding signal integrity and sensitivity, but must also be extremely rugged and durable to withstand the rigors of field use, often in harsh environments.

With respect to our marine seismic data products, we know of no other company that manufactures a product similar to our patented seismic streamer retrieval device. Our primary competitor in the manufacture of our streamer depth positioning device is Input/Output.

Our primary competitors for our deepwater reservoir characterization systems are traditional seismic equipment manufacturers such as Schlumberger, Input/Output and Sercel.

Our primary competitors for downhole high definition seismic data acquisition services are Paulson Geophysical and Core Laboratories.

We believe that the primary competitors in our commercial graphics business segment are Ricoh, Xante, Gerber Scientific, iSys Group, Cypress Tech. and Atlantek, as well as alternative technologies such as inkjet printing. Also, as we advance the resolution capabilities of direct thermal technology, we expose ourselves to additional competitors in the more traditional wet-film imagesetting marketplace.

Suppliers

A Japanese manufacturer unaffiliated with us is currently the only supplier (the “Japanese Supplier”) of wide format thermal printheads that we use to manufacture our wide format thermal imaging equipment. Over the years we have experienced some quality control issues with these printheads and have returned significant quantities of these products to the Japanese Supplier for repair, testing and quality assurance review. We are also aware that the Japanese Supplier is experiencing operating difficulties and consider it possible that such supplier may be forced to dispose of or discontinue this line of business. In this regard, we have publicly available information as to the Japanese Supplier that it has incurred significant operating losses in recent periods. We are not presently experiencing any significant supply or quality control problems with the Japanese Supplier. However, unforeseen problems with the Japanese Supplier, if they develop, could have a significant effect on our ability to meet future production and sales commitments. If the Japanese Supplier were to discontinue supplying these printheads or was unable or unwilling to supply printheads in sufficient quantities to meet our requirements, our ability to compete in the thermal imaging marketplace could be severely damaged, adversely affecting our financial performance. We are not able to evaluate the implications, if any, of that situation at present. We believe we maintain an adequate inventory of these printheads to continue production for two to six months should our source of supply be disrupted.

Our Former Primary Film Supplier had been the primary manufacturer of the dry thermal film used by our customers in the thermal imaging equipment we sell. On July 3, 2002, the Former Primary Film Supplier filed a Chapter 11 reorganization petition in Federal Bankruptcy Court for the Western District of New York. Around that time, the Former Primary Film Supplier advised us that, in connection with its bankruptcy filing, it was seeking a buyer for its business that would assume its relationship and contracts with us, and it was our intention to cooperate in such efforts to the extent our on-going interest could be served thereby. We no longer believe that a buyer can be found to operate the Former Primary Film Supplier’s business.

During the fiscal year ended September 30, 2003, the Former Primary Film Supplier failed to meet substantially all of our purchase orders and has ceased providing us with dry thermal film. As a result, we are currently purchasing a large quantity of dry thermal film from our Other Film Supplier and we are using the technology we purchased from the Former Primary Film Supplier to manufacture dry thermal film internally. Except for the Other Film Supplier, we know of no other source for dry thermal film that performs well in our thermal imaging equipment.

If we are unable to economically manufacture dry thermal film internally using the technology we purchased from our Former Primary Film Supplier or if our Other Film Supplier were to discontinue supplying dry thermal film or became unable to supply dry thermal film in sufficient quantities to meet our requirements, our ability to compete in the thermal imaging marketplace could be severely damaged, adversely affecting our financial performance.

Product Manufacturing

Our manufacturing and product assembly operations consist of machining or molding the necessary component parts, configuring these parts along with components received from various vendors and assembling a final product. With regards to dry thermal film, we mix and react various chemicals to formulate a reactive layer that is then coated onto a clear polyester film. The film is then coated with a protective topcoat that produces the final product. Upon completion, we test our final products to the functional and environmental extremes of product specifications and inspect the products for quality assurance. We normally manufacture and ship based on customer orders and therefore, typically do not maintain significant inventories of finished goods.

Markets and Customers

Our principal seismic customers are seismic contractors, many of which are at present experiencing significantly lessened demand for their services and consequently financial difficulties, and major independent and government-owned oil and gas companies that either operate their own seismic crews or specify seismic instrument and equipment preferences to contractors. Our commercial graphics customers primarily consist of direct users of our equipment as well as specialized resellers that focus on the newsprint, silkscreen and corrugated box printing industries.

Intellectual Property

We seek to protect our intellectual property by means of patents, trademarks, trade secrets and other measures. Although we do not consider any single patent essential to our success, we consider our patent regarding our marine seismic cable retrieval devices to be of particular value to us. This patent is scheduled to expire in 2012. We have dry thermal film technology patents that expire at varying dates beginning in 2013.

Research and Development

We expect to incur significant future research and development expenditures aimed at the development of additional seismic data acquisition products used for high definition reservoir characterization in both land and marine environments. For a summary of our research and development expenditures over the past five years, see Item 6, Selected Consolidated Financial Data, contained in Part II to this Report on Form 10-K.

Employees

As of September 30, 2003 we employed approximately 650 people on a full-time basis, of which approximately 253 were employed in the United States. We have never experienced a work stoppage and consider our relationship with our employees to be satisfactory. Our employees are not unionized.

Financial Information by Geographic Area

For a discussion of financial information by geographic area, see Note 17 to the Consolidated Financial Statements contained in this Report on Form 10-K.

Item 2. Properties

As of September 30, 2003, our operations included the following locations:

Location	Owned/Leased	Approximate Square Footage	Use
Houston, Texas	Owned	208,000	(1	)
Stafford, Texas	Owned	20,000	(2	)
Houston, Texas	Owned	77,000	(3	)
Houston, Texas	Leased	58,000	(4	)
Houston, Texas	Owned	18,000	(5	)
Ufa, Bashkortostan, Russia	Owned	120,000	Manufacturing
Ufa, Bashkortostan, Russia	Owned	41,000	Manufacturing
Calgary, Alberta, Canada	Owned	21,000	Sales and service
Luton, Bedfordshire, England	Owned	8,000	Sales and service

We believe that our facilities are adequate for our current and immediately projected needs.

(1)

This property is located at 7007 Pinemont Drive in Houston, Texas (the “Pinemont Facility”). It was purchased in September 2003 at a cost of $3.8 million, $3.0 million of which was financed by a 7-year mortgage. The Pinemont Facility is currently being refurbished and modified for our needs at an estimated cost of $0.8 million. The Pinemont Facility will eventually consolidate in one location all manufacturing, engineering, and selling and marketing and administrative activities for OYO Geospace in the United States. The Pinemont Facility will also serve as OYO Geospace’s world-wide headquarters. Such consolidation is a critical element in our strategic restructuring initiative aimed at making our operations more efficient in the face of continuing pricing pressure on our traditional seismic businesses.

(2)	This property was utilized as our world-wide headquarters and for certain research and development operations. These operations were relocated to the Pinemont Facility in November 2003. We are seeking to sell this property.

(3)

This property contains a manufacturing operation and certain support functions. We are in the process of relocating such operations to the Pinemont Facility and expect to conclude such relocation in December 2003. We plan to lease or sell this facility depending on local real estate market conditions and other factors.

(4)	This property serves as a manufacturing operation. We are in the process of relocating this operation to the Pinemont Facility. The lease for this property expires on December 31, 2003 and will not be renewed.

(5)	This property served as a manufacturing operation. We transferred this operation to the Pinemont Facility in November 2003 and the property was sold on December 1, 2003.

Item 3. Legal Proceedings

From time to time we are a party to what we believe is routine litigation and proceedings that may be considered as part of the ordinary course of our business. We are not aware of any current or pending litigation or proceedings that could have a material adverse effect on our results of operations, cash flows or financial condition, although we continue to monitor developments in the bankruptcy proceeding by our Former Primary Film Supplier and its existing claim against us as is described in the section entitled “Business—Company Overview—Commercial Graphics Industry” contained in this Report on Form 10-K.

In the course of shipping several heavy reels of undersea sensor cable to the North Sea pursuant to a contract with a major oil company, the reels were mishandled by a third party during discharge from the vessel. Our customer then rejected the cables. We have made a claim in the amount of $1.7 million with the insurance company writing the policy covering the cargo during transit. To date, the insurance company is still conducting its due diligence and has not accepted or rejected our claim. In the event we are unable to reach an accommodation with the insurance company, we are prepared to bring suit to enforce our rights under the policy.

Item 4. Submission of Matters to Vote of Security Holders

None.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Our common stock is traded on the Nasdaq National Market under the symbol “OYOG”. On November 30, 2003, there were approximately 59 holders of record of our common stock.

The following table presents the range of high and low bid quotations for our common stock during the two fiscal years ended September 30, 2003 and September 30, 2002, as reported by The NASDAQ Stock Market, Inc.

	Low		High
*Year Ended September 30, 2003:*
Fourth Quarter	$	10.06	$	13.75
Third Quarter		9.50		14.00
Second Quarter		6.72		9.50
First Quarter		7.60		12.95

*Year Ended September 30, 2002:*
Fourth Quarter	$	9.60	$	16.00
Third Quarter		8.75		14.20
Second Quarter		11.95		14.98
First Quarter		9.75		15.25

Historically, we have not paid dividends, and we do not intend to pay cash dividends on our common stock in the foreseeable future. We presently intend to retain earnings for use in our business, with any future decision to pay cash dividends dependent upon our growth, profitability, financial condition and other factors the Board of Directors may deem relevant. Our existing credit agreement also has covenants which materially limit our ability to pay dividends. For a more complete discussion of our credit agreement, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources” contained in this Report on Form 10-K.

The following equity plan information is provided as of September 30, 2003

Equity Compensation Plan Information

Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a)	Weighted-average Exercise Price of Outstanding Options, Warrants and Rights (b)	Number of Securities Remaining Available for Future Issuances Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c)
Equity Compensation Plans Approved by Security Holders	729,300	$12.89	80,605

Equity Compensation Plans Not Approved by Security Holders	N/A	N/A	N/A

Item 6. Selected Consolidated Financial Data

The following table sets forth certain selected historical financial data on a consolidated basis. The selected consolidated financial data was derived from our consolidated financial statements. The selected consolidated financial data should be read in conjunction with our consolidated financial statements appearing elsewhere in this Form 10-K.

	Year Ended September 30,
	2003			2002			2001			2000			1999
	(in thousands, except share and per share amounts)
Statement of Operations Data:
Sales	$	50,854		$	65,049		$	63,618		$	53,474		$	42,031
Cost of sales		38,337			46,484			42,957			39,042			25,536

Gross profit		12,517			18,565			20,661			14,432			16,495
Operating expenses:
Selling, general and administrative		11,273			11,538			12,528			10,090			9,682
Research and development		5,226			5,347			6,277			6,146			6,246
Impairment of assets		—			1,246			—			—			—

Total operating expenses		16,499			18,131			18,805			16,236			15,928

Income (loss) from operations		(3,982	)		434			1,856			(1,804	)		567
Other income (expense), net		69			(770	)		(226	)		41			84

Income (loss) before income taxes, minority interest and extraordinary gain		(3,913	)		(336	)		1,630			(1,763	)		651
Income tax expense (benefit)		(1,399	)		(857	)		292			(572	)		(187	)

Income (loss) before minority interest, and extraordinary gain		(2,514	)		521			1,338			(1,191	)		838
Minority interest		(19	)		(88	)		—			—			—

Income (loss) before extraordinary gain		(2,533	)		433			1,338			(1,191	)		838
Extraordinary gain, net of tax of $85		—			686			—			—			—

Net income (loss)	$	(2,533	)	$	1,119		$	1,338		$	(1,191	)	$	838

Basic earnings (loss) per share:
Income (loss) before extraordinary gain	$	(0.46	)	$	0.08		$	0.24		$	(0.22	)	$	0.16
Extraordinary gain		—			0.12			—			—			—

Net income (loss) per share	$	(0.46	)	$	0.20		$	0.24		$	(0.22	)	$	0.16

Diluted earnings (loss) per share:
Income (loss) before extraordinary gain	$	(0.46	)	$	0.08		$	0.24		$	(0.22	)	$	0.15
Extraordinary gain		—			0.12			—			—			—

Net income (loss) per share	$	(0.46	)	$	0.20		$	0.24		$	(0.22	)	$	0.15

Weighted average shares outstanding—Basic		5,550,216			5,535,979			5,489,251			5,431,901			5,384,530
Weighted average share outstanding—Diluted		5,550,216			5,547,774			5,598,597			5,431,901			5,449,404

Other Financial Data:
Depreciation, amortization and stock-based compensation	$	4,268		$	4,852		$	4,444		$	4,014		$	4,319
Capital expenditures		6,045			4,729			4,909			6,004			3,656

	As of September 30,
	2003			2002			2001			2000			1999
	(in thousands)
Balance Sheet Data:
Working capital	$	24,937		$	28,130		$	27,891		$	28,505		$	32,231
Total assets		71,435			68,126			73,000			65,108			63,419
Short-term debt		5,889			714			1,033			198			169
Long-term debt		6,232			3,544			3,772			3,984			4,182
Stockholders’ equity		52,471			54,129			52,791			50,709			51,398

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of the major elements of our consolidated financial statements. You should read this discussion and analysis together with our consolidated financial statements and accompanying notes and other detailed information appearing elsewhere in this Form 10-K. The discussion of our financial condition and results of operations includes various forward-looking statements about our markets, the demand for our products and services and our future plans and results. These statements are based on assumptions that we consider to be reasonable, but that could prove to be incorrect. For more information regarding our assumptions, you should refer to the section entitled “Forward-Looking Statements and Risks” contained in this Item 7.

Industry Overview

Seismic

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.

quarterly performance. These variations may impact our operating results and cash flow, manufacturing capability and expense levels in any given quarter. Furthermore, because of the scale and nature of reservoir characterization projects, there may be delays in their implementation and uncertainties about their final course.

During our fiscal year ended September 30, 2002, we delivered a reservoir characterization and monitoring system to a major oil company, for installation in one of its fields in the North Sea. In accordance with the terms of the contract, we recognized $15.8 million of revenues in our fiscal year ended September 30, 2002 and $2.5 million of revenues in our fiscal year ended September 30, 2003. The contract provides for additional revenue of $3.6 million based upon the sucessful performance of the system through December 31, 2003. Provided the system continues to perform sucessfully through December 31, 2003, we will recognize such revenue in the first quarter of fiscal year 2004. All costs related to this sale, including estimated costs for warranty and delivery, were recorded in the fiscal year ended September 30, 2002.

We believe that our reservoir characterization systems, including the system referenced above, are important new technologies in our industry and our ability to develop and market them will be a key determinant of our success in the future.

Commercial Graphics

Our commercial graphics business segment manufactures and sells thermal imaging equipment and distributes dry thermal film primarily to the screen print, point of sale, signage and textile market sectors. Our thermal imaging equipment is capable of producing data images ranging in size from 12 to 54 inches wide, with resolution ranging from 400 to 1,200 dpi. This business segment has some sales to customers in the seismic industry.

Results of Operations

We report and evaluate financial information for two segments: Seismic and Commercial Graphics.

Summary financial data by business segment follows (in thousands):

	Years Ended
	September 30, 2003			September 30, 2002			September 30, 2001
Seismic
Net sales	$	37,619		$	51,800		$	50,433
Operating income (loss)		(833	)		4,311			5,381

Commercial Graphics
Net sales		13,333			13,490			13,557
Operating income (loss)		231			(399	)		27

Corporate
Net sales		—			—			—
Operating (loss)		(3,380	)		(3,336	)		(3,552	)

Eliminations
Net sales		(98	)		(241	)		(372	)
Operating (loss)		—			(142	)		—

Consolidated Totals
Net sales		50,854			65,049			63,618
Operating income (loss)		(3,982	)		434			1,856

Overview

As discussed under “Item 2. Properties”, we purchased the Pinemont Facility, having 208,000 square feet, which will house our worldwide headquarters and all U.S. manufacturing, engineering, selling, marketing, and administrative activities. We have begun the move into such facility and expect it to be completely occupied by early 2004. The purchase price for the Pinemont Facility was $3.8 million, of which $3.0 million was financed by a 7-year mortgage. We expect to incur $0.8 million of capitalized costs for the remodeling of the facility. In addition, we expect to incur charges of $0.4 million in the first quarter of fiscal year 2004 to relocate our operations into the Pinemont Facility. We sold one of our former facilities in December 2003, and we will allow a lease to expire on December 31, 2003 on another facility, and will hold our remaining facilities in Texas for sale or lease. At September 30, 2003, the net book value of assets to be sold or leased was $6.8 million. We expect the results of the move and restructuring to be the elimination of substantial manufacturing and operating expenses in future periods, which should easily offset the one-time costs of the move and justify the capital expenditures made with respect to the Pinemont Facility.

Fiscal Year 2003 Compared to Fiscal Year 2002.

Consolidated net sales for the year ended September 30, 2003 decreased $14.2 million, or 21.8% from fiscal year 2002. The decrease in net sales resulted primarily from the prior fiscal year containing a $15.8 million sale of a reservoir characterization and monitoring system compared to only $2.5 million of similar sales in fiscal year 2003. In addition, sales of our marine-based seismic products also declined significantly during fiscal year 2003, partially offset by increased sales of our new offshore cable products and certain land-based seismic products. Due to the continued soft demand for traditional seismic equipment, we expect these sales to remain weak in the near term. However, we also expect continued growth and acceptance of our new deepwater reservoir characterization and our offshore cable products, although we cannot predict the exact timing thereof or the periods in which we will specifically see growth and acceptance of these products.

Consolidated gross profits for the year ended September 30, 2003 decreased by $6.0 million, or 32.6% from fiscal year 2002. The lower gross profits in fiscal year 2003 are primarily the result the large sale of a reservoir characterization and monitoring system in fiscal year 2002, which yielded a higher than average gross profit margin. In addition, we recorded charges of $0.7 million in fiscal year 2003 to write-off defective dry thermal film inventories and obsolete borehole seismic assets. Finally, competitive pricing pressures in the seismic industry resulting from manufacturing over-capacity and the under-absorption of fixed manufacturing costs are expected to continue to have an unfavorable impact upon the gross profit margins we realized from sales of our traditional seismic products. In light of the current environment, we are taking steps to consolidate and reorganize our manufacturing operations in order to improve our gross profit margins.

Consolidated operating expenses for the year ended September 30, 2003 decreased $1.6 million, or 9.0% from fiscal year 2002. The prior year period includes a $1.2 million asset impairment charge relating to the bankruptcy of the Former Primary Film Supplier. Excluding the asset impairment charge, our operating expenses for fiscal year 2003 decreased $0.4 million, or 2.2% from fiscal year 2002, primarily due to the lower level of sales and actions taken to reduce operating costs in response to current market conditions. We are undertaking additional cost-cutting actions to consolidate and reorganize our business operations in an effort to increase efficiency.

The United States statutory tax rate for the periods reported was 34%. The effective tax rate for the year ended September 30, 2003 was 35.8% compared to an effective tax rate of 255.1% (benefit) in fiscal year 2002. The fiscal year 2002 benefit primarily resulted from the resolution of contingent tax matters and extraterritorial income deductions. During the fiscal year 2003, we filed amended tax returns for certain prior year periods and also completed our fiscal 2002 federal tax filing. Upon completion of such filings, we identified $0.8 million of additional tax benefits that are available for possible use in future periods. These additional benefits are related to foreign tax credits. Based upon the current seismic industry environment and our projections of future taxable

income, we have reviewed our deferred tax assets and recorded a valuation allowance of approximately $0.8 million against the foreign tax credits. Including the valuation allowance, we have net deferred tax assets of $3.1 million at September 30, 2003. We will continue to evaluate our deferred tax position on a regular basis to determine whether additions to or reversal of a valuation is needed. Further operating losses could result in additional valuation allowances being recorded in future periods.

Fiscal Year 2002 Compared to Fiscal Year 2001.

Consolidated revenues for fiscal year 2002 increased $1.4 million, or 2.3%, from fiscal year 2001. The increase in revenues was primarily due to a $15.8 million sale of a reservoir characterization and monitoring system to a major oil company and the acquisition of an additional interest in OYO-GEO Impulse, which contributed $4.1 million in revenues in fiscal year 2002. Such increases were largely offset by a significant decrease in sales of our traditional land-based seismic products, resulting from a softening in the demand for seismic equipment along with significant competition in pricing due to excess manufacturing capacity in our seismic business segment.

Our consolidated gross profits for fiscal year 2002 decreased by $2.1 million, or 10.1%, from fiscal year 2001. While the sale of the reservoir characterization system to a major oil company had a favorable impact on our consolidated gross profits and gross profit margins, the continued depressed state of the seismic industry adversely affected gross profit margins for our land-based seismic products. In response to these market conditions, we recorded a charge of $0.9 million in fiscal year 2002 to reflect the impairment of slow moving inventories and the underutilization of certain manufacturing plant assets.

Our consolidated operating expenses for fiscal year 2002 decreased $0.7 million, or 3.6%, from fiscal year 2001. Included in our consolidated operating expenses for fiscal year 2002 is a $1.2 million impairment charge related to the Chapter 11 reorganization petition filed by our Former Primary Film Supplier. In this regard, see the discussion in Note 18 to the Consolidated Financial Statements included in this Report on Form 10-K and “Business—Company Overview—Commercial Graphics Industry”. Excluding the impact of the impairment charge, our consolidated operating expenses for fiscal year 2002 decreased by $1.9 million, or 10.2%, from the prior fiscal year.

The lower expenses are a result of our effort to reduce expenses in our seismic business segment in response to market conditions.

Our effective tax rate for fiscal year 2002 was a benefit of 255.1% compared to an expense of 17.9% for fiscal year 2001. The United States statutory tax rate for each of these periods was 34%. For the current year and the prior year period, the difference between our effective tax rate and the statutory tax rate resulted from the recording of tax benefits for the resolution of contingent tax matters from prior years. Excluding these benefits, our effective tax rate for fiscal year 2002 would have been a benefit of 86.0% and a provision of 34.1% in fiscal years 2002 and 2001, respectively. The benefit of 86.0% in fiscal year 2002 largely resulted from the exclusion from taxable income of certain profits earned on export sales. In addition, we recorded a tax expense of $85,000 related to an extraordinary gain that occurred in the first quarter of 2002.

Seismic

Our seismic product lines currently consist of high definition reservoir characterization products and services, geophones and hydrophones, including multi-component geophones and hydrophones, seismic leader wire, geophone string connectors, seismic telemetry cable, marine seismic cable retrieval devices and small data acquisition systems targeted at niche markets.

Fiscal Year 2003 Compared to Fiscal Year 2002.

Net Sales

Sales of our seismic products for fiscal year 2003 decreased $14.2 million, or 27.4% from fiscal year 2002. The decrease in sales principally resulted from fiscal year 2002 containing a $15.8 million sale of a large deepwater reservoir characterization and monitoring system compared to only $2.5 million of similar sales in fiscal year 2003. In addition, sales of our marine-based seismic products also declined significantly during fiscal year 2003, partially offset by increased sales of our new offshore cable products and certain land-based seismic products.

Operating Income (Loss)

Operating income (loss) for fiscal year 2003 decreased $5.1 million, or 119.3% from fiscal year 2002. The decrease is primarily attributable to the gross profit associated with the $15.8 million sale of the deepwater reservoir characterization and monitoring system in fiscal year 2002. In addition, the decline in sales and gross profits from our higher profit margin marine-based seismic products unfavorably impacted our operating income (loss) in fiscal year 2003.

Fiscal Year 2002 Compared to Fiscal Year 2001.

Net Sales

Sales of our seismic products for fiscal year 2002 increased $1.4 million, or 2.7% from fiscal year 2001. The increase in sales was primarily due to a $15.8 million sale of a reservoir characterization and monitoring system to a major oil company and inclusion of revenues in fiscal year 2002 resulting from our acquisition of an additional interest in OYO-GEO Impulse and consequent consolidation of the operating results of OYO-GEO Impulse with us, which contributed $4.1 million in revenues in fiscal year 2002. Such increases were largely offset by a significant decrease in sales of our traditional land-based seismic products, resulting from a softening in the demand for seismic equipment, along with downward pricing pressure exerted by significant competition due to excess manufacturing capacity in the industry.

Operating Income

Operating income for fiscal year 2002 decreased $1.1 million from fiscal year 2001. As a percentage of total sales, operating income decreased to 8.3% in fiscal year 2002 from 10.7% in fiscal year 2001. While the sale of the reservoir characterization system had a favorable impact on our consolidated gross profits and gross profit margins, the continued depressed state of the seismic industry adversely affected gross profit margins for our land-based seismic products. In response to these market conditions, we recorded a charge of $0.9 million in fiscal year 2002 to reflect the impairment of slow moving inventories and the underutilization of certain manufacturing plant assets. The lower gross profits in fiscal year 2002 were partially offset by decreased operating expenses.

Commercial Graphics

Fiscal Year 2003 Compared to Fiscal Year 2002.

Net Sales

Sales of our commercial graphics products for fiscal year 2003 decreased $0.2 million, or 1.2% from fiscal year 2002. The decrease in sales primarily resulted from a decline in sales of equipment and accessories, partially offset by increasing sales of dry thermal film.

Operating Income (Loss)

Our operating income for fiscal year 2003 increased $0.6 million from fiscal year 2002. Fiscal year 2002 included a $1.2 million asset impairment charge relating to the bankruptcy of Former Primary Film Supplier. Excluding the $1.2 million asset impairment charge in fiscal 2002, our operating income in fiscal 2003 decreased $0.6 million. This reduction in operating income primarily resulted from (i) increased manufacturing and operating costs associated with the self-manufacture of dry thermal film, including the write-off of $0.6 million of defective dry thermal film inventories, (ii) increased research and development expenses associated with a newly introduced 1200 dpi thermal imaging device and (iii) amortization expenses resulting from the $2.3 million purchase of intellectual property from our Former Primary Film Supplier (see “Item 1. Business—Company Overview”) in April 2002 (being amortized on a straight basis over five years).

Fiscal Year 2002 Compared to Fiscal Year 2001.

Net Sales

Sales of our commercial graphics products for fiscal year 2002 decreased $67,000, or 0.5%, from fiscal year 2001. The decrease in sales is primarily a result of a decline in thermal imaging equipment sales, although these sales were partially offset by increased sales of our dry thermal film products, primarily reflecting the impact of our acquisition of substantially all of the assets of EcoPRO in February 2001.

Operating Income

Operating income for fiscal year 2002 decreased $0.4 million from fiscal year 2001. Our operating loss in fiscal year 2002 was 3.0% of total sales compared to operating income of 0.2% of total sales in fiscal year 2001. The fiscal year 2002 results include an impairment charge of $1.2 million related to the bankruptcy filing of the Former Primary Film Supplier. Excluding the impairment charge, operating income for the fiscal year 2002 would be $0.8 million, an increase of $0.8 million over fiscal year 2001. The increase in operating income is due to increased sales of dry thermal film products and the impact of our acquisition of substantially all of the assets of EcoPRO.

Acquisitions

OYO-GEO Impulse International, LLC

Effective November 8, 2001, we increased our equity ownership from 44% to 85% in OYO-GEO Impulse, a Russian joint venture we formed more than ten years ago with Geophyspribor Ufa Production Association, Bank Vostock and Chori Co., Ltd. Upon the effectiveness of the increase in ownership, the operating results of the reorganized entity were consolidated with those of our company. At that time, Geophyspribor Ufa Production Association and Chori Co., Ltd. continued as minority shareholders of OYO-GEO Impulse.

In exchange for the additional equity ownership, we forgave a debt of $1.2 million owed to us by OYO-GEO Impulse. At the time of the acquisition, the debt owed to us and a related prior equity investment had been written-off due to prior concerns regarding realization of those assets. As a result, these assets had no carrying value in our financial statements. In connection with this acquisition, we recorded an extraordinary gain of $686,000, net of income taxes of $85,000. This extraordinary gain represents the negative goodwill that resulted from the acquisition of the additional equity interest of OYO-GEO Impulse. Accounting principles generally accepted in the United States require negative goodwill resulting from new business combinations to be recorded as an extraordinary gain.

Based in Ufa, Bashkortostan, Russia, OYO-GEO Impulse has been in operation since 1990, manufacturing sensors for the Russian seismic marketplace. At September 30, 2003, OYO-GEO Impulse owned two facilities in Ufa containing a total of 161,000 square feet and employed approximately 357 people. Our seismic equipment manufacturing operation in Houston is managing the expansion of OYO-GEO Impulse’s operations to produce international-standard sensors and additional products that will broaden its market scope.

EcoPRO Imaging

In February 2001, we acquired the operating assets and business of EcoPRO for $1.9 million of cash from the Former Primary Film Supplier. The EcoPRO business distributes EcoPRO brand name thermal imagers and dry thermal film. The operations of the EcoPRO business were combined with our other commercial graphics operations.

Liquidity and Capital Resources

At September 30, 2003, we had $0.7 million in cash and cash equivalents. For the fiscal year ended September 30, 2003, we used approximately $2.6 million of cash used in operating activities principally resulting from our net loss of $2.5 million, which included a $1.0 million deferred tax benefit. In addition, we increased our inventories by $1.1 million principally for completed orders awaiting shipment and to build ample stocks of dry thermal film. We increased our prepaid expenses by $1.5 million, primarily reflecting an outstanding insurance claim for goods damaged in transit to a customer (see Item 3. Legal Proceedings). We decreased our accounts payable by $1.2 million as a result of a recent decline in purchases of raw material inventories. Finally, we reduced our income taxes payable by $1.1 million primarily related to the payment of foreign income taxes. Such uses of cash were offset by a $4.3 million charge for depreciation and amortization, a $2.4 million decrease in accounts and notes receivable due to a decline in sales, and a $1.0 million decrease in accrued expenses and other items.

For the year ended September 30, 2003, we used approximately $6.2 million of cash in investing activities, principally consisting of $6.0 million of capital expenditures and a $0.2 million investment in OYO-GEO Impulse. Included in the capital expenditures is a $3.8 million investment in the new Pinemont Facility in September 2003.

For the year ended September 30, 2003, cash from financing activities increased approximately $7.9 million, consisting of $4.9 million of borrowings under our credit facility and $3.0 million of mortgage borrowings to purchase the Pinemont Facility. We estimate that our capital expenditures in fiscal year 2004 will range from $2.0 to $3.0 million, which we expect to fund through operating cash flows and borrowings under our credit facility as needed.

At September 30, 2002, we had $1.5 million in cash and cash equivalents. For the fiscal year ended September 30, 2002, we generated approximately $6.5 million of cash in operating activities principally resulting from our net income of $1.1 million and adjustments of $6.1 million of net non-cash charges for depreciation, amortization and impairment charges. In addition, our inventories decreased $7.6 million principally as a result of the sale of a reservoir characterization and monitoring system to a major oil company. Such cash flows were offset by $6.7 million of increases in other working capital accounts, including an increase in accounts receivable and decreases in accounts payable, accrued expenses and deferred revenue. Approximately $3.8 million of our accounts receivable at September 30, 2002 resulted from the sale of a reservoir characterization and monitoring system to a major oil company. Such receivable was collected in monthly installments through June 2003. Accounts payable decreased $1.0 million primarily due to decreased purchases of raw materials, resulting from lower activity in our land-based seismic equipment business. The decrease in deferred revenues primarily resulted from the revenue recognition of $4.9 million of deferred revenues in connection with the sale of the reservoir characterization and monitoring system.

For the fiscal year ended September 30, 2002, we used $5.5 million of cash and cash equivalents in investing activities, consisting of $4.7 million of capital expenditures, and a $2.3 million purchase of intellectual property rights from the Former Primary Film Supplier, offset by proceeds of $0.6 million from the sale of fixed assets and $0.9 million of cash we consolidated into our balance sheet in connection with the acquisition of an additional equity interest in OYO-GEO Impulse.

We used $0.5 million of cash for financing activities for the fiscal year ended September 30, 2002, reflecting net borrowings of $0.3 million under our credit facility, and $0.2 million for the repayment of long-term debt.

At September 30, 2001, we had approximately $0.9 million in cash and cash equivalents. For the fiscal year ended September 30, 2001, we generated approximately $2.6 million of cash and cash equivalents from operating activities, principally resulting from our net income, adjusted for non-cash expenses such as depreciation and amortization, and increases in accrued expenses and deferred revenue. These sources of cash were partially offset by increases in trade accounts and notes receivable, inventories and decreases in accounts payable.

For the fiscal year ended September 30, 2001, we used approximately $6.5 million of cash and cash equivalents in investing activities, consisting of capital expenditures of approximately $4.9 million and business acquisition expenditures of $1.9 million, offset by proceeds of $0.3 million from the sale of fixed assets.

Financing activities for the fiscal year ended September 30, 2001 generated $1.0 million of cash, reflecting $0.4 million received from the exercise of stock options and net borrowings of $0.8 million under the credit facility, offset by the repayment of long-term debt of $0.2 million.

Under our credit agreement with a bank, at present, we can borrow up to $10.0 million secured by our accounts receivable and inventories (the “Credit Agreement”). However, the Credit Agreement, as amended, expires in January 2004. Borrowings under the Credit Agreement are subject to borrowing base restrictions based on (i) consolidated net income plus consolidated interest expense, income taxes, depreciation and amortization (“EBITDA”) and (ii) levels of eligible accounts receivable, notes receivable and inventories. The Credit Agreement limits the incurrence of additional indebtedness, requires the maintenance of certain financial amounts and contains other covenants customary in agreements of this type. As a result of operating losses through September 30, 2003, we failed to meet certain covenants for the year ended September 30, 2003, relating to the maintenance of specified ratios of EBITDA to interest expense and senior debt to EBITDA. We received a waiver of these covenant violations from our bank as of such date in consideration for a fee of $10,000, the exclusion of eligible notes receivable from our borrowing base and an increase in interest rates for future borrowings. On August 11, 2003, our LIBOR-based borrowing rate increased by 1.0% and, effective October 1, 2003, our prime-based borrowing rate increased by 1.0%. As of September 30, 2003 there were borrowings of $5.4 million outstanding under the Credit Agreement, and additional borrowings available under the Credit Agreement of $4.6 million. Our borrowing interest rate at September 30, 2003 was 4.6% for our LIBOR-based borrowings and 4.0% for our prime-based borrowings.

We are seeking to extend the credit facility with our existing lender and expect to be able to do so, but have no assurances that we will be able to do so. We anticipate that the existing cash balance as of September 30, 2003, cash flow from operations and borrowing availability under our existing credit facility, assuming it is extended, or borrowing availability under a new credit facility will provide adequate cash flows and liquidity for fiscal year 2004. We expect that the liquidity from such amounts and cash flows from operations in fiscal year 2004 will satisfy the capital expenditures, scheduled debt payments, and operational budgets for the upcoming year.

A summary of future payments owed for contractual obligations and commercial commitments as of September 30, 2003 are shown in the table below (in thousands):

	Total		Less Than 1 Year		1 – 3 Years		4 – 5 Years		After 5 Years
Contractual Obligations:
Long-term debt	$	6,697	$	465	$	849	$	957	$	4,426
Operating leases		76		64		9		3		—

Total contractual obligations		6,773		529		858		960		4,426

Commercial Commitments:
Lines of Credit		5,424		5,424		—		—		—

Total Contractual Obligations and Commercial Commitments	$	12,197	$	5,953	$	858	$	960	$	4,426

We believe that the combination of existing cash reserves, cash flows from operations and borrowing availability under our existing credit facility, assuming it is extended, or borrowing availability under a new credit facility, should provide us sufficient capital resources and liquidity to fund our planned operations through fiscal year 2004. However, there can be no assurance that we will be able to successfully extend our existing credit facility or that such sources of capital will be sufficient to support our capital requirements in the long-term, and we may be required to issue additional debt or equity securities in the future to meet our capital requirements. There can be no assurance we would be able to issue additional equity or debt securities in the future on terms that are acceptable to us or at all.

Off-Balance Sheet Arrangements

We do not have any obligations which meet the definition of an off-balance sheet arrangement and which have or are reasonably likely to have a material effect on our financial statements.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We consider many factors in selecting appropriate operational and financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. We continually evaluate our estimates, including those related to bad debt reserves, inventory obsolescence reserves, self-insurance reserves, product warranty reserves, intangible assets and deferred income tax assets. We base our estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different conditions or assumptions.

Revenue is primarily derived from the sale, and short-term rental under operating leases, of seismic instruments and equipment and commercial graphics products. Sales revenues are generally recognized when our products are shipped and title and risk of loss have passed to the customer. Rental revenues are recognized as earned over the rental period. Rentals of our equipment are short term and generally range from daily rentals to rental periods of up to six months. Products are generally sold without any customer acceptance provisions and our standard terms of sale do not allow customers to return products for credit. Most of our products do not require installation assistance or sophisticated instruction. We offer a standard product warranty obligating us to repair or replace equipment with manufacturing defects. We maintain a reserve for future warranty costs based on historical experience. We record a write-down of inventory when the cost basis of any item (including any estimated future costs to complete the manufacturing process) exceeds its net realizable value.

New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”. SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. We adopted the provisions of SFAS 141 effective October 1, 2001. Among the provisions of SFAS 141 is the requirement to record as an extraordinary gain all negative goodwill resulting from new business combinations. As a result, we recorded an extraordinary gain of $686,000, net of income taxes of $85,000, relating to our acquisition of an additional equity interest in OYO-GEO Impulse in November 2001.

Also in July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed for impairment. Intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives; however, no maximum life applies. We adopted the provisions of SFAS 142 effective October 1, 2002. At September 30, 2003, we had goodwill, net of accumulated amortization, of $1.8 million. Adoption of SFAS 142 resulted in a $165,000 reduction of amortization expense for the year ended September 30, 2003.

In August 2001, the FASB issued SFAS No. 143—“Accounting for Asset Retirement Obligations”. This statement requires us to recognize the fair value of a liability associated with the cost we would be obligated to incur in order to retire an asset at some point in the future. The liability would be recognized in the period in which it is incurred and can be reasonably estimated. The standard is effective for fiscal years beginning after June 15, 2002. We adopted this standard effective October 1, 2002. The adoption of SFAS No. 143 did not have a material effect on our financial position and results of operations.

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets”. SFAS No. 144 develops an accounting model, based upon the framework established in SFAS No. 121, for long-lived assets to be disposed of by sales. The accounting model applies to all long-lived assets, including discontinued operations, and it replaces the provisions of APB Opinion No. 30, “Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for disposal of segments of a business. SFAS No. 144 requires long-lived assets held for disposal to be measured at the lower of carrying amount or fair values less costs to sell, whether reported in continuing operations or in discontinued operations. The statement is effective for fiscal years beginning after December 15, 2001. We adopted this standard effective October 1, 2002. The adoption of SFAS No. 144 did not have a material effect on our financial position and results of operations.

In April 2002, the FASB issued SFAS No. 145, “Recission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. This statement clarifies guidance related to the reporting of gains and losses from extinguishment of debt and resolves inconsistencies related to the required accounting treatment of certain lease modifications. The provisions of this statement relating to extinguishment of debt became effective for financial statements issued for fiscal years beginning after May 15, 2002. The provisions of this statement relating to lease modification are effective for transactions occurring after May 15, 2002. We adopted this standard effective October 1, 2002. The adoption of SFAS No. 145 did not have a material effect on our financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This statement revises the accounting and reporting for costs associated with exit or disposal activities to be recognized when a liability for such costs is incurred rather than when the entity commits to an exit plan. SFAS No. 146 is effective for exit or disposal activities initiated after June 30, 2003. Adoption of SFAS No. 146 did not have a material effect on our financial position and results of operations.

clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies (FAS 5), relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. We are implementing the disclosure requirements of this standard this year and will disclose the measurement and other provisions of FIN 45 in our fiscal year 2004 financial statements; this disclosure has been included in Note 1 to the Consolidated Financial Statements. We offer a standard product warranty obligating us to repair or replace equipment with manufacturing defects. We maintain a reserve for future warranty costs based on historical experience.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation and Disclosure—an amendment of FASB Statement No. 123”. This statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative transition methods for a voluntary change to the fair value of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of FASB Statement No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. At September 30, 2003, we had two stock-based employee compensation plans. We account for the plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost has been reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. In its October 29, 2003 meeting, the FASB voted to make the expensing of stock options mandatory beginning in 2005. The guidance regarding this change is expected to be released in early 2004. Additionally, the FASB voted to specify the approach that companies can use in making the transition to the expensing of options, allowing companies to include previously granted unvested options in their calculations as well as the ones granted in the current year. When the rules are finalized, we will evaluate the impact on our financial position, results of operations and cash flows.

The FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which we adopted effective January 31, 2003. This statement addresses the consolidation of variable interest entities (“VIEs”) by business enterprises that are primary beneficiaries thereof. A VIE is an entity that does not have sufficient equity investment at risk to permit it to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the enterprise that has the majority of the risks or rewards associated with the VIE. We believe we have no material interests in VIEs that will require disclosure or consolidation under FIN 46.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. Statement 149 amends and clarifies financial accounting and reporting of derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”. This statement is effective for contracts entered into or modified after June 30, 2003, except for certain hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on our financial position and results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” SFAS No. 150 specifies that freestanding financial instruments within its scope constitute obligations of the issuer and that, therefore, the issuer must classify them as liabilities. Such freestanding financial instruments include mandatory redeemable financial instruments, obligations to repurchase the issuer’s equity shares by transferring assets, and certain obligations to issue a variable number of shares. SFAS No. 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS No. 150 is effective at the beginning of the third quarter of 2003. The adoption SFAS No. 150 did not have a material effect on our financial position or results of operations.

Forward-Looking Statements and Risks

Certain of the statements we make in this document and in documents incorporated by reference herein, including those made under the captions “Business”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and in “Management’s Current Outlook”, which follows, are forward-looking statements for purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such statements include projections of our expectations regarding our future capital expenditures, research and development expenses, expansion of product lines, growth of product markets and other statements that relate to future events or circumstances. These statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied by such forward-looking statements, including the risks and factors described below. You are cautioned to consider the following factors and risks in connection with evaluating any such forward-looking statements or otherwise evaluating an investment in our company.

Management’s Current Outlook.

Our estimates as to future results and industry trends, to the extent described in this document, are generally based on assumptions regarding the future level of seismic exploration activity and seismic reservoir monitoring projects and, in turn, their effect on the demand and pricing of our products and services. Our analysis of the market and its impact on us is based upon the following outlook for fiscal year 2004:

•

The impact of political conditions and hostilities around the world, including those of the Middle East, which may have a significant impact on the oil and gas commodity prices, will not cause a significant increase or further significant decrease in demand for our seismic products during fiscal year 2004.

•

On the other hand, political conditions and hostilities around the world, which have a significant impact on the oil and gas industry, will remain and present serious economic risks for our seismic business.

•

Customer consolidations, the ample supply of seismic data stored in libraries, and overall industry weakness will cause demand for our traditional land-based seismic products to remain at or below fiscal year 2003 levels.

•

Deep-water marine seismic exploration activity will remain constrained and sales of our marine-based products are expected to remain at or below fiscal year 2003 levels.

•

Our new high definition reservoir characterization products and services are expected to become more widely accepted by the industry. Sales in fiscal year 2004 are expected to be higher than fiscal year 2003 levels based on current order levels and pending quotations.

•

Sales of our new offshore cable products are expected to increase in fiscal year 2004.

•

Pricing for many of our land-based seismic products will continue to be subject to pressures due to industry-wide manufacturing over-capacity.

•

Demand for our products used in the commercial graphics industry is expected to increase slightly in fiscal year 2004 with continued market acceptance of our dry thermal film and new product introductions.

Our outlook is based on various macro-economic factors and our internal assessments, and actual market conditions could vary materially from those assumed.

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.

In particular, we have incurred substantial expenditures to develop our recently introduced HDSeis^™ product line for borehole and reservoir characterization applications. For a discussion of particular factors and risks relating to projects in the reservoir characterization area, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Industry Overview” in this Report on Form 10-K. We cannot assure you that we will realize our expectations regarding market acceptance and revenues from these products and services.

A Decline in Industry Conditions Could Affect our Projected Results.

Any unexpected material changes in oil and gas prices or other market trends that would impact seismic exploration activity would likely affect the forward-looking information contained in this document. In addition, the oil and gas industry is extremely volatile and subject to change based on political and economic factors outside our control. In fact, our results for fiscal year 2003 and results from our land based seismic activity in particular, were adversely affected by the downturn in the industry, particularly as the industry has continued to limit exploration activities and to be cautious in spending notwithstanding some improvements in, or some relative stabilization of, oil and gas commodity prices.

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”. Thus 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 Credit Risks Could Increase as our Customers Continue to Face Difficult Economic Circumstances.

We believe, and have assumed that our allowance for bad debts at September 30, 2003 is adequate in light of known circumstances. However, we cannot assure you that additional amounts attributable to uncollectible receivables and bad debt write-offs will not have a material adverse effect on our future results of operations. Many of our customers, particularly seismic contractors, have suffered from lower revenues and experienced liquidity challenges resulting from the economic difficulties throughout our industry. We have in the past incurred significant write-offs in our accounts receivable due to customer credit problems. We have found it necessary from time to time to extend trade credit and promissory notes to long-term customers and others where some risks of non-payment or late payment exist. Given recent industry conditions, some of our customers have experienced liquidity difficulties, which increases those credit risks.

Demand for Our Products is Volatile.

Demand for our products depends primarily on the level of worldwide oil and gas exploration activity. That activity, in turn, depends primarily on prevailing oil and gas prices and availability of seismic data. Historically, the markets for oil and gas have been volatile, and those markets are likely to continue to be volatile. Oil and gas prices are subject to wide fluctuation in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors that are beyond our control. These factors include the level of consumer demand, weather conditions, domestic and foreign governmental regulations, price and availability of alternative fuels, political conditions and hostilities in the Middle East and other significant oil-producing regions, foreign supply of oil and gas, prices of foreign imports and overall economic conditions. Continued low demand for our products could materially and adversely affect our results of operations and liquidity. For a further discussion on this, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Industry Overview”.

We Have a Relatively Small Public Float, and Our Stock Price May be Volatile.

We have approximately 2.4 million shares outstanding held by non-affiliates. This small float results in a relatively illiquid market for our common stock. Our average daily trading volume during fiscal year 2003 was approximately 2,500 shares. Our small float and daily trading volumes has in the past caused, and may in the future result in, greater volatility of our stock price.

Our Industry is Characterized by Rapid Technological Development and Product Obsolescence.

Our instruments and equipment are constantly undergoing rapid technological improvement. Our future success depends on our ability to continue to:

•

improve our existing product lines

•

address the increasingly sophisticated needs of our customers

•

maintain a reputation for technological leadership

•

maintain market acceptance

•

anticipate changes in technology and industry standards

•

respond to technological developments on a timely basis.

Current competitors or new market entrants may develop new technologies, products or standards that could render our products obsolete. We cannot assure you that we will be successful in developing and marketing, on a timely and cost effective basis, product enhancements or new products that respond to technological developments, that are accepted in the marketplace or that comply with industry standards.

We Operate in Highly Competitive Markets.

The markets for our products are highly competitive. Many of our existing and potential competitors have substantially greater marketing, financial and technical resources than we do. Additionally, three competitors in our seismic business segment currently offer a broader range of instruments and equipment for sale and market this equipment as “packaged” data acquisition systems. We do not now offer for sale such a complete “packaged” data acquisition system. Further, certain of our competitors offer financing arrangements to customers on terms that we may not be able to match. In addition, new competitors may enter the market and competition could intensify.

We cannot assure you that sales of our products will continue at current volumes or prices if current competitors or new market entrants introduce new products with better features, performance, price or other characteristics than our products. Competitive pressures or other factors also may result in significant price competition that could have a material adverse effect on our results of operations.

We Have a Limited Market.

In our seismic business segment, we market our products to contractors and large, independent and government-owned oil and gas companies. We estimate that, based on published industry sources, fewer than 30 seismic contracting companies are currently operating worldwide (excluding those operating in Russia and the former Soviet Union, India, the People’s Republic of China and certain Eastern European countries, where seismic data acquisition activity is difficult to verify). We estimate that fewer than ten seismic contractors are engaged in marine seismic exploration. Due to these market factors, a relatively small number of customers, some of whom are experiencing financial difficulties, have accounted for most of our sales. From time to time these seismic contractors have sought to vertically integrate and acquire our competitors, which has influenced their supplier decisions before and after such transactions. The loss of a small number of these customers for whatever reason could materially and adversely impact our sales. For a further discussion on this, see “Business—Markets and Customers”.

We Cannot Be Certain of Patent Protection of Our Products.

We have applied for and hold certain patents relating to our seismic data acquisition and other products. We also acquired several patents which relate to the development of dry thermal film from our Former Primary Film Supplier. We cannot assure you that our patents will prove enforceable, that any patents will be issued for which we have applied or that competitors will not develop functionally similar technology outside the protection of any patents we have or may obtain.

Our Foreign Marketing Efforts Face Additional Risks and Difficulties.

Net sales outside the United States accounted for approximately 60% of our net sales during fiscal year 2003. See Note 17 to the Consolidated Financial Statements contained in this Report on Form 10-K for further information on our sales outside of the United States. Substantially all of our sales from the United States are made in U.S. dollars, but from time to time we may make sales in foreign currencies and may, therefore, be subject to foreign currency fluctuations on our sales. In addition, net assets reflected on the balance sheets of our Russian, Canadian and U.K. subsidiaries are subject to currency fluctuations. Significant foreign currency fluctuations could adversely impact our results of operations.

Foreign sales are subject to special risks inherent in doing business outside of the United States, including the risk of war, terrorist activities, civil disturbances, embargo and government activities and foreign attitudes about conducting business activities with United States or, with reference to our Japanese parent OYO Corporation, Japanese trading partners, all of which may disrupt markets. Foreign sales are also generally subject to the risk of compliance with additional laws, including tariff regulations and import and export restrictions. Sales in certain foreign countries require prior United States government approval in the form of an export license. We cannot assure you that we will not experience difficulties in connection with future foreign sales. Also, should we experience substantial growth in certain markets, for example Russia, we may not be able to transfer cash balances to the United States to assist with debt servicing obligations.

We Rely on Key Suppliers for Significant Product Components.

A Japanese manufacturer unaffiliated with us is currently the only supplier (the “Japanese Supplier”) of wide format thermal printheads that we use to manufacture our wide format thermal imager equipment. Over the years we have experienced some quality control issues with such printheads and have returned significant quantities of these products to the Japanese Supplier for repair, testing and quality assurance review. We have publicly available information as to the Japanese Supplier that it has incurred significant operating losses in recent periods and consider it possible that such supplier may be forced to dispose of or discontinue this line of business. We are not at present experiencing any significant supply or quality control problems with the Japanese Supplier. However, unforeseen problems with the Japanese Supplier, if they develop, could have a significant effect on our ability to meet future production and sales commitments. If the Japanese Supplier were to discontinue supplying these printheads or was unable or unwilling to supply printheads in sufficient quantities to meet our requirements, our ability to compete in the thermal imaging marketplace could be severely damaged, adversely affecting our financial performance. We are not able to evaluate the implications, if any, of that situation at present. We believe we maintain an adequate inventory of certain printheads to continue production for two to six months should our source of supply be disrupted.

Our Former Primary Film Supplier had been the primary supplier of dry thermal film used by our customers in the thermal imaging equipment we manufacture. On July 3, 2002, the Former Primary Film Supplier filed a Chapter 11 reorganization petition in Federal Bankruptcy Court for the Western District of New York. The Primary Film Supplier advised us that, in connection with its bankruptcy filing, it was seeking a buyer for its business that would assume its relationship and contracts with us. We no longer believe that a buyer can be found to operate the Former Primary Film Supplier’s business.

During fiscal year 2003, our Former Primary Film Supplier has failed to meet substantially all of our purchase orders and has ceased to provide us with dry thermal film. As a result, we are currently purchasing a large quantity of dry thermal film from our Other Film Supplier and we are using the technology we purchased from the Former Primary Film Supplier to manufacture dry thermal film internally. Except for our Other Film Supplier, we know of no other source for dry thermal film that performs well in our thermal imaging equipment.

If we are unable to economically manufacture dry thermal film internally using the technology we purchased from our Former Primary Film Supplier or if our Other Film Supplier were to discontinue supplying dry thermal film or were unable to supply dry thermal film in sufficient quantities to meet our requirements, our ability to compete in the thermal imaging marketplace could be severely damaged, adversely affecting our financial performance.

We Are Subject to Control by a Principal Stockholder.

OYO Corporation, a Japanese corporation, owns indirectly in the aggregate approximately 51.3% of our common stock. Accordingly, OYO Corporation, through its wholly owned subsidiary OYO Corporation U.S.A., is able to elect all of our directors and to control our management, operations and affairs. We currently have, and may continue to have, a variety of contractual relationships with OYO Corporation and its affiliates.

Our Success Depends Upon A Limited Number of Key Personnel.

Our success depends on attracting and retaining highly skilled professionals. A number of our employees are highly skilled engineers and other professionals. If we fail to continue to attract and retain such professionals, our ability to compete in the industry could be adversely effected. In addition, our success depends to a significant extent upon the abilities and efforts of several members of our senior management.

A General Downturn in the U.S. Economy in Fiscal 2004 May Adversely Affect our Business.

A general downturn in the U.S. economy in Fiscal 2004 could adversely affect our business in ways that we cannot yet identify. The economic downturn, which has been experienced for the last several years, may continue to adversely affect the demand for oil and gas generally or cause volitility in oil and gas prices and, therefore, adversely affect the demand for our services to the oil and gas industry and related service industry. It could also adversely affect the demand for consumer products, which could in turn adversely affect our commercial graphics business. To the extent these factors adversely affect other seismic companies in the industry, we could see an oversupply of products and services and continued downward pressure on pricing for seismic products and services that would also adversely affect us.

Sarbanes-Oxley Act of 2002.

In response to several high profile cases of accounting irregularities, the Sarbanes-Oxley Act of 2002 (“the Act”) was enacted into law on July 30, 2002. We are required to begin to comply with the annual requirements of Section 404 of the Act effective with its fiscal year beginning October 1, 2004. The Act, and rules promulgated thereunder, as well as new Nasdaq listing standards addressing corporate governance issues, endeavor to provide greater accountability and promote investor confidence by imposing specific corporate governance requirements, by requiring more stringent controls and certifications by corporate management and by utimately imposing new auditor attestations. The Act and new Nasdaq rules affect how audit committees, corporate management and auditors of publicly traded companies carry out their respective responsibilities and interact with each other and mandate composition of audit committees by independent directors. The Act will likely result in higher expenses for publicly traded companies as a result of higher audit and review fees, higher director fees, higher internal costs to document and test internal controls and higher legal fees. The Act, together with the financial scandals

and difficult economic enviroment of recent years have also led to substantially increased premiums for director and officer liability insurance. These increased premiums for director and officer insurance will begin to affect us in the first quarter of fiscal year 2004 when we renew our coverage. These likely increased expenses will affect smaller public companies, like us, disproportionately from their effects on companies with larger revenue and operating income bases with which to absorb such increased costs.

We may not enjoy the expected benefits of our move to a new facility and other internal restructurings.

While we have recently purchased a large new facility to house all our existing U.S. operations and activities and have taken other measures, all with the expectation of improving our efficiency and margins, we cannot assure you that our efforts will be successful or that we will enjoy the full benefit of capital and operating expenditures incurred in connection with such measures.

We may not be able to extend or replace our existing credit agreement.

Our existing credit agreement with a bank expires in January 2004. While we are attempting to extend or replace our credit agreement, we have no assurance that we will be able to do so or to do so on terms that are commercially satisfactory to us. While we do not believe that we will experience any significant liquidity problems on account of the expiration of such credit agreement, we regard it as an important security measure to have in place an adequate credit arrangement to assure stability in our cash flow cycles, and the failure to extend or renew such credit agreement will lessen our security as to liquidity.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The following discussion of our exposure to various market risks contains “forward looking statements” that involve risks and uncertainties. These projected results have been prepared utilizing certain assumptions considered reasonable in light of information currently available to us. Nevertheless, because of the inherent unpredictability of foreign currency rates, as well as other factors, actual results could differ materially from those projected in this forward looking information. For a description of our significant accounting policies associated with these activities, see Note 1 to the Consolidated Financial Statements.

We do not have any market risk with respect to sensitive instruments entered into for trading purposes and have only very limited risk as to arrangements entered into other than for trading purposes. Further, we do not engage in commodity or commodity derivative instrument purchasing or selling transactions.

Foreign Currency Exchange Rate Risk

We purchase printheads from OYO Corporation, which purchases them from the Japanese Supplier, pursuant to terms under which such purchases are denominated in Japanese yen. We routinely attempt to hedge our 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 variability of cash flows associated with foreign currency exchanges on amounts payable in Japanese yen. Our forward contracts with the bank are considered derivatives. Accounting principles generally accepted in the United States require that we record these foreign currency forward contracts on the balance sheet and mark them to fair value at each reporting date. Our aggregate dollar exposure to forward yen contracts usually does not exceed $0.5 million and such contracts ordinarily are settled within 10 months. Resulting gains and losses are reflected in income and were not material for our fiscal year ended September 30, 2003. At September 30, 2003, we had $0.4 million of yen denominated foreign currency forward contracts, and we had $0.4 million of yen-denominated accounts payable.

Foreign Currency and Operations Risk

We have a subsidiary located in Russia. Therefore, our financial results may be affected by factors such as changes in foreign currency exchange rates, weak economic conditions in Russia or changes in Russia’s political

climate. Our consolidated balance sheet at September 30, 2003 reflected approximately $1.2 million of net working capital related to our Russian subsidiary. This subsidiary both receives its income and pays its expenses primarily in rubles. To the extent that transactions of this subsidiary are settled in rubles, a devaluation of the ruble versus the U.S. dollar could reduce any contribution from our Russian subsidiary to our consolidated results of operations as reported in U.S. dollars. We do not hedge the market risk with respect to our operations in Russia; therefore, such risk is a general and unpredictable risk of future disruptions in the valuation of Russian rubles versus U.S. dollars to the extent such disruptions result in any reduced valuation of the Russian subsidiary’s net working capital or future contributions to our consolidated results of operations.

Interest Rate Risk

We have a revolving credit agreement and a real estate mortgage agreement with banks, each with floating interest rates. These floating interest rates subject us to the risk of increased interest costs associated with any upward movements in bank market interest rates. Under the revolving credit agreement, our borrowing interest rate is the bank’s prime rate or a LIBOR rate plus 350 basis points, whichever we select. Under the real estate mortgage agreement, our borrowing rate was a LIBOR rate plus 250 basis points with a minimum rate of 4.0%. As of September 30, 2003, we had borrowed $5.4 million under our revolving credit agreement at an average borrowing rate of 4.2% and $3.0 million borrowed under our real estate mortgage agreement at a borrowing rate of 4.0%. Due to the amount of borrowings outstanding under these facilities, any increased interest costs associated with movements in market interest rates could be material to our financial condition, results of operation or cash flow.

Item 8. Financial Statements and Supplementary Data

Our consolidated financial statements, including the reports thereon, the notes thereto and supplementary data begin at page F-1 of this Form 10-K and are incorporated herein by reference.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2003, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

Changes in Internal Control

There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of the evaluation of our disclosure controls and procedures referred to in the preceding paragraph.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this Item is contained in our definitive Proxy Statement to be distributed in connection with our 2004 Annual Meeting of Stockholders under the captions “Election of Directors”, “Executive Officers and Compensation” and “Compliance With Section 16(a) of The Securities Exchange Act of 1934” and is incorporated herein by reference.

Item 11. Executive Compensation

The information required by this Item is contained in our definitive Proxy Statement to be distributed in connection with our 2004 Annual Meeting of Stockholders under the caption “Executive Officers and Compensation” and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this Item is contained in our definitive Proxy Statement to be distributed in connection with our 2004 Annual Meeting of Stockholders under the caption “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information required by this Item is contained in our definitive Proxy Statement to be distributed in connection with our 2004 Annual Meeting of Stockholders under the caption “Certain Relationships and Transactions” and is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information required by this Item is contained in our definitive Proxy Statement to be distributed in connection with our 2004 Annual Meeting of Stockholders under the caption “Relationship with Independent Auditors” and is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Financial Statements and Financial Statement Schedules

The financial statements and financial statement schedules listed on the accompanying Index to Financial Statements (see page F-1) are filed as part of this Form 10-K.

(b) Reports on Form 8-K

On July 28, 2003, the Company filed a current report on Form 8-K pursuant to Item 12 reporting the earnings for the third quarter.

(c) Exhibits

Exhibit Number		Description of Documents

3.1	(a)	Restated Certificate of Incorporation of the Registrant.

3.2	(a)	Restated Bylaws of the Registrant.

10.1	(a)	Employment Agreement dated as of August 1, 1997 between the Company and Gary D. Owens.

10.2	(a)	Employment Agreement dated as of August 1, 1997 between the Company and Michael J. Sheen.

10.3	(c)	OYO Geospace Corporation 1997 Key Employee Stock Option Plan.

10.4	(d)	Amendment No. 1 to OYO Geospace Corporation 1997 Key Employee Stock Option Plan, dated February 2, 1998.

10.5	(d)	Amendment No. 2 to OYO Geospace Corporation 1997 Key Employee Stock Option Plan, dated November 16, 1998.

10.6	(c)	OYO Geospace Corporation 1997 Non-Employee Director Plan.

10.7	(a)	Printhead Purchase Agreement dated November 10, 1995 between the Company and OYO Corporation.

10.8	(a)	Master Sales Agreement dated November 10, 1995 between the Company and OYO Corporation.

10.9	(e)	Form of Director Indemnification Agreement.

10.10	(b)	Promissory Note, dated as of June 23, 1998, made by the Company payable to Ameritas Life Insurance Corp.

10.11	(f)	Asset Purchase Agreement, dated February 8, 2001, between the Company and EcoPRO Imaging Corporation.

10.12	(f)	Business Loan Agreement, dated February 16, 2001, made by and between the Company and Southwest Bank of Texas, N.A.

10.13	(f)	Promissory Note, dated February 16, 2001, made by and between the Company and Southwest Bank of Texas, N.A.

10.14	(g)	Second Amendment to Loan Agreement, dated as of January 15, 2002, by and between Concord Technologies, LP, Geospace Engineering Resources International, LP, Geo Space, LP, OYO Instruments, LP and OYOG Operations, LP and Southwest Bank of Texas, N.A.

10.15	(h)	Third Amendment to Loan Agreement, dated as of January 14, 2003, by and between Concord Technologies, LP, Geospace Engineering Resources International, LP, Geo Space, LP, OYO Instruments, LP and OYOG Operations, LP and Southwest Bank of Texas, N.A.

Exhibit Number		Description of Documents

10.16	(h)	Promissory Note, dated January 14, 2003, made by Concord Technologies, LP, Geospace Engineering Resources International, LP, Geo Space, LP, OYO Instruments, LP and OYOG Operations, LP payable to the order of Southwest Bank of Texas, N.A.

10.17		Deed of Trust, Security Agreement, Assignment of Rents and Financing Statement, dated September 10, 2003, by and between OYOG Operations, LP and Compass Bank.

10.18		Promissory Note, dated September 10, 2003, made by OYOG Operations, LP payable to Compass Bank.

10.19		Guaranty Agreement, dated September 10, 2003, by and between OYO Geospace Corporation and Compass Bank.

10.20		Earnest Money Contract, dated May 27, 2003, by and between Cooper Tools, Inc. and OYOG Operations, L.P.

10.21		First Amendment to Earnest Money Contract, dated July 14, 2003, by and between Cooper Tools, Inc. and OYOG Operations, LP.

10.22		Second Amendment to Earnest Money Contract, dated August 14, 2003, by and between Cooper Tools, Inc. and OYOG Operations, LP.

10.23		Third Amendment to Earnest Money Contract, dated August 22, 2003, by and between Cooper Tools, Inc. and OYOG Operations, LP.

10.24		Fourth Amendment to Loan Agreement, dated as of March 31, 2003, by and between Concord Technologies, LP, Geospace Engineering Resources International, LP, Geo Space, LP, OYO Instruments, LP and OYOG Operations, LP and Southwest Bank of Texas, N.A.

14.1		OYO Geospace Corporation General Code of Business Conduct and Supplemental Code of Ethics for CEO and Senior Financial Officers

21.1		Subsidiaries of the Registrant.

23.1		Consent of Independent Accountants

31.1		Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the Company’s Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the Company’s Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(a)	Incorporated by reference to the Registrant’s Registration Statement on Form S-1 filed September 30, 1997 (Registration No. 333-36727).

(b)	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998 (File No. 001-13601).

(c)	Incorporated by reference to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 filed November 5, 1997 (Registration No. 333-36727).

(d)	Incorporated by reference to Registrant’s Annual Report on Form 10-K for the year ended September 30, 1998 (File No. 001-13601).

(e)	Incorporated by reference to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 filed November 18, 1997 (Registration No. 333-36727).

(f)	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001 (File No. 001-13601).

(g)	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2001 (File No. 001-13601).

(h)	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2002 (File No. 333-36727).

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

By:		/s/ GARY D. OWENS
		Gary D. Owens, Chairman of the Board President and Chief Executive Officer

		December 2, 2003

Pursuant to the requirements of the Securities Exchange Act, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ GARY D. OWENS Gary D. Owens	Chairman of the Board President and Chief Executive Officer (Principal Executive Officer)	December 2, 2003

/s/ THOMAS T. MCENTIRE Thomas T. McEntire	Chief Financial Officer (Principal Financial and Accounting Officer)	December 2, 2003

/s/ SATORU OHYA Satoru Ohya	Director	December 2, 2003

/s/ KATSUHIKO KOBAYASHI Katsuhiko Kobayashi	Director	December 2, 2003

/s/ ERNEST M. HALL, JR. Ernest M. Hall, Jr.	Director	December 2, 2003

/s/ MICHAEL J. SHEEN Michael J. Sheen	Director	December 2, 2003

/s/ THOMAS L. DAVIS Thomas L. Davis	Director	December 2, 2003

/s/ CHARLES H. STILL Charles H. Still	Director	December 2, 2003

OYO GEOSPACE CORPORATION AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

Report of Independent Auditors		F-2

Consolidated Balance Sheets as of September 30, 2003 and 2002		F-3

Consolidated Statements of Operations for the Years Ended September 30, 2003, 2002 and 2001		F-4

Consolidated Statement of Stockholders’ Equity for the Years Ended September 30, 2003, 2002 and 2001		F-5

Consolidated Statements of Cash Flows for the Years Ended September 30, 2003, 2002 and 2001		F-6

Notes to Consolidated Financial Statements		F-7

Report of Independent Auditors on Financial Statement Schedule		F-31

Schedule II—Valuation and Qualifying Accounts		F-32

F-1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and

Stockholders of OYO Geospace Corporation:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of OYO Geospace Corporation and subsidiaries at September 30, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

Houston, Texas

November 24, 2003

F-2

OYO Geospace Corporation and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share amounts)

	AS OF SEPTEMBER 30,
	2003			2002
ASSETS
Current assets:
Cash and cash equivalents	$	671		$	1,538
Trade accounts receivable, net of allowance of $478 and $474		7,849			11,686
Notes receivable, net of allowance of $0		2,129			899
Inventories, net		22,929			21,801
Deferred income tax		1,233			1,135
Prepaid expenses and other		2,739			1,261

Total current assets		37,550			38,320
Rental equipment, net		2,175			2,044
Property, plant and equipment, net		22,379			20,243
Patents, net of accumulated amortization of $2,153 and $1,458		3,861			4,556
Goodwill, net of accumulated amortization of $921		1,843			1,843
Deferred income tax		1,869			931
Other assets		1,758			189

Total assets	$	71,435		$	68,126

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt	$	5,889		$	714
Accounts payable:
Trade		2,418			4,023
Related parties		383			24
Accrued expenses and other		3,758			4,162
Deferred revenue		138			146
Income tax payable		27			1,121

Total current liabilities		12,613			10,190
Long-term debt		6,232			3,544
Deferred income tax		—			—

Total liabilities		18,845			13,734

Minority interest in consolidated subsidiary		119			263

Stockholders’ equity:
Preferred stock, 1,000,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $.01 par value, 20,000,000 shares authorized, 5,554,874 and 5,546,795 shares issued and outstanding		56			55
Additional paid-in capital		30,636			30,566
Retained earnings		21,799			24,332
Accumulated other comprehensive loss		(16	)		(819	)
Unearned compensation-restricted stock awards		(4	)		(5	)

Total stockholders’ equity		52,471			54,129

Total liabilities and stockholders’ equity	$	71,435		$	68,126

The accompanying notes are an integral part of the consolidated financial statements.

F-3

OYO Geospace Corporation and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

	YEAR ENDED SEPTEMBER 30,
	2003			2002			2001
Net sales	$	50,854		$	65,049		$	63,618
Cost of sales		38,337			46,484			42,957

Gross profit		12,517			18,565			20,661

Operating expenses:
Selling, general and administrative expenses		11,273			11,538			12,528
Research and development expenses		5,226			5,347			6,277
Impairment of assets		—			1,246			—

Total operating expenses		16,499			18,131			18,805

Income (loss) from operations		(3,982	)		434			1,856

Other income (expense):
Interest expense		(464	)		(666	)		(380	)
Interest income		329			177			255
Other, net		204			(281	)		(101	)

Total other income (expense), net		69			(770	)		(226	)

Income (loss) before income taxes, minority interest and extraordinary gain		(3,913	)		(336	)		1,630
Income tax expense (benefit)		(1,399	)		(857	)		292

Income (loss) before minority interest, and extraordinary gain		(2,514	)		521			1,338
Minority interest		(19	)		(88	)		—

Income (loss) before extraordinary gain		(2,533	)		433			1,338
Extraordinary gain, net of tax of $85		—			686			—

Net income (loss)	$	(2,533	)	$	1,119		$	1,338

Basic earnings (loss) per share:
Income before extraordinary gain	$	(0.46	)	$	0.08		$	0.24
Extraordinary gain		—			0.12			—

Net income (loss)	$	(0.46	)	$	0.20		$	0.24

Diluted earnings (loss) per share:
Income before extraordinary gain	$	(0.46	)	$	0.08		$	0.24
Extraordinary gain		—			0.12			—

Net income (loss)	$	(0.46	)	$	0.20		$	0.24

Weighted average shares outstanding:
Basic		5,550,216			5,535,979			5,489,251

Diluted		5,550,216			5,547,774			5,598,597

The accompanying notes are an integral part of the consolidated financial statements.

F-4

OYO Geospace Corporation and Subsidiaries

Consolidated Statement of Stockholders’ Equity

For the years ended September 30, 2003, 2002 and 2001

(In thousands, except share amounts)

	Common Stock				Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Unearned Compensation— Restricted Stock Awards			Total
	Shares		Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)						Total
Balance at September 30, 2000	5,512,713		$	55	$	30,088		$	21,875		$	(679	)	$	(630	)	$	50,709
Comprehensive income:
Net income	—			—		—			1,338			—			—			1,338
Foreign currency translation Adjustments	—			—		—			—			(186	)		—			(186	)

Total comprehensive income																		1,152
Issuance of common stock pursuant to restricted stock awards	500			—		8			—			—			(8	)		—
Issuance of common stock pursuant to Director Plan	992			—		25			—			—			—			25
Termination of restricted stock grants	(2,725	)		—		(45	)		—			—			45			—
Issuance of common stock pursuant to exercise of options, net of tax	27,100			—		454			—			—			—			454
Unearned compensation Amortization	—			—		—			—			—			451			451

Balance at September 30, 2001	5,538,580			55		30,530			23,213			(865	)		(142	)		52,791
Comprehensive income:
Net income	—			—		—			1,119			—			—			1,119
Foreign currency translation Adjustments	—			—		—			—			46			—			46

Total comprehensive income																		1,165
Issuance of common stock pursuant to Director Plan	1,890			—		25			—			—			—			25
Termination of restricted stock grants	(1,000	)		—		(8	)		—			—			8			—
Issuance of common stock pursuant to exercise of options, net of tax	7,325			—		19			—			—			—			19
Unearned compensation Amortization	—			—		—			—			—			129			129

Balance at September 30, 2002	5,546,795			55		30,566			24,332			(819	)		(5	)		54,129
Comprehensive income:
Net (loss)	—			—		—			(2,533	)		—			—			(2,533	)
Foreign currency translation Adjustments	—			—		—			—			803			—			803

Total comprehensive (loss)																		(1,730	)
Issuance of common stock pursuant to Director Plan	3,604			1		25			—			—			—			26
Termination of restricted stock grants	—			—		—			—			—			—			—
Issuance of common stock pursuant to exercise of options, net of tax	4,475			—		45			—			—			—			45
Unearned compensation Amortization	—			—		—			—			—			1			1

Balance at September 30, 2003	5,554,874		$	56	$	30,636		$	21,799		$	(16	)	$	(4	)	$	52,471

The accompanying notes are an integral part of the consolidated financial statements.

F-5

OYO Geospace Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

	YEAR ENDED SEPTEMBER 30,
	2003			2002			2001
Cash flows from operating activities:
Net income (loss)	$	(2,533	)	$	1,119		$	1,338
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred income tax expense (benefit)		(1,036	)		(1,381	)		81
Depreciation, amortization and stock-based compensation		4,268			4,852			4,444
Impairment of assets		—			1,246			—
Extraordinary gain, net of tax		—			(686	)		—
Minority interest		20			88			—
(Gain) loss on disposal of property, plant and equipment		22			192			(1	)
Bad debt expense		229			146			214
Effects of changes in operating assets and liabilities:
Trade accounts and notes receivable		2,377			(626	)		(3,217	)
Inventories		(1,128	)		7,622			(6,550	)
Prepaid expenses and other assets		(1,478	)		262			478
Accounts payable		(1,246	)		(1,030	)		(926	)
Accrued expenses and other		(995	)		(786	)		1,368
Deferred revenue		(8	)		(4,713	)		4,859
Income tax payable		(1,094	)		241			523

Net cash provided by (used in) operating activities		(2,602	)		6,546			2,611

Cash flows from investing activities:
Proceeds from the sales of property, plant and equipment		33			616			286
Capital expenditures		(6,045	)		(4,729	)		(4,909	)
Purchase of intangible assets		—			(2,267	)		—
Business acquisitions, net of cash acquired		(164	)		913			(1,925	)

Net cash used in investing activities		(6,176	)		(5,467	)		(6,548	)

Cash flows from financing activities:
Increase in notes payable to banks		32,570			29,266			30,840
Principal payments on notes payable to banks		(24,706	)		(29,812	)		(30,217	)
Proceeds from exercise of stock options		39			77			393

Net cash provided by (used in) financing activities		7,903			(469	)		1,016

Effect of exchange rate changes on cash		8			46			(186	)

Increase (decrease) in cash and cash equivalents		(867	)		656			(3,107	)
Cash and cash equivalents, beginning of period		1,538			882			3,989

Cash and cash equivalents, end of period	$	671		$	1,538		$	882

The accompanying notes are an integral part of the consolidated financial statements.

F-6

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies:

The Company

OYO Geospace Corporation (“OYO”) designs, manufactures and distributes instruments and equipment used primarily in the acquisition and processing of seismic data for the oil and gas industry. OYO also manufactures and distributes equipment and dry thermal film products to the commercial graphics industry. As of September 30, 2003, OYO Corporation U.S.A. (“OYO USA” or “Parent”) owned approximately 51.3% of OYO’s common stock. OYO USA is a wholly owned subsidiary of OYO Corporation, a Japanese corporation (“OYO Japan”).

OYO and its subsidiaries are referred to collectively as the “Company”. The significant accounting policies followed by the Company are summarized below.

Basis of Presentation

The accompanying financial statements present the consolidated financial position, results of operations and cash flows of the Company in accordance with generally accepted accounting principles. All intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company considers many factors in selecting appropriate operational and financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. The Company continually evaluates its estimates, including those related to bad debt reserves, inventory obsolescence reserves, self-insurance reserves, product warranty reserves, intangible assets and deferred income tax assets. The Company bases its estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different conditions or assumptions.

Cash and Cash Equivalents

The Company considers all highly liquid debt securities purchased with an original or remaining maturity at the time of purchase of three months or less to be cash equivalents.

Concentrations of Credit Risk

The Company maintains its cash in bank deposit accounts that, at times, exceed federally insured limits. Management believes that the financial strength of the financial institutions that hold such deposits minimizes the credit risk of such deposits. The Company anticipates that the existing cash balance as of September 30, 2003, cash flow from operations and borrowing availability under our existing credit facility, assuming it is extended, or borrowing availability under a new credit facility will provide adequate cash flows and liquidity for 2004. Management expects that the liquidity from such amounts and cash flows from operations in 2004 will satisfy the capital expenditures, schedules debt payments, and operational budgets of the Company for the upcoming year.

The Company sells products to customers throughout the United States and various foreign countries. The Company’s normal credit terms for trade receivables are 30 days. In certain situations, credit terms may be extended to 60 days or longer. The Company performs ongoing credit evaluations of its customers and generally

F-7

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

does not require collateral for its trade receivables. Additionally, the Company provides long-term financing in the form of promissory notes when competitive conditions require such financing. In such cases, the Company may require collateral. Allowances are recognized for potential credit losses.

A Japanese manufacturer unaffiliated with the Company is currently the only supplier (the “Japanese Supplier”) of wide format thermal printheads that are used to manufacture wide format thermal imaging equipment. Over the years the Company has experienced some quality control issues with such printheads and has returned significant quantities of these products to the Japanese Supplier for repair, testing and quality assurance review.

The Company has publicly available information as to the Japanese Supplier that it has incurred significant operating losses in recent periods and consider it possible that such supplier may be forced to dispose of or discontinue this line of business. The Company is not at present experiencing any significant supply or quality control problems with the Japanese Supplier. However, unforeseen problems with the Japanese Supplier, if they develop, could have a significant effect on the Company’s ability to meet future production and sales commitments. If the Japanese Supplier were to discontinue supplying these printheads or was unable or unwilling to supply printheads in sufficient quantities to meet the Company’s requirements, its ability to compete in the thermal imaging marketplace could be severely damaged, adversely affecting its financial performance. The Company is not able to evaluate the implications, if any, of that situation at present. The Company believes that it maintains an adequate inventory of certain printheads to continue production for two to six months should its source of supply be disrupted.

The Company has a subsidiary located in Russia. Therefore, the Company’s financial results may be affected by factors such as changes in foreign currency exchange rates, weak economic conditions in Russia or changes in Russia’s political climate. The Company’s consolidated balance sheet at September 30, 2003 reflected approximately $1.2 million of net working capital related to its Russian subsidiary. This subsidiary both receives its income and pays its expenses primarily in rubles. To the extent that transactions of this subsidiary are settled in rubles, a devaluation of the ruble versus the U.S. dollar could reduce any contribution from the Company’s Russian subsidiary to its consolidated results of operations as reported in U.S. dollars. The Company does not hedge the market risk with respect to its operations in Russia; therefore, such risk is a general and unpredictable risk of future disruptions in the valuation of Russian rubles versus U.S. dollars to the extent such disruptions result in any reduced valuation of the Russian subsidiary’s net working capital or future contributions to its consolidated results of operations.

Inventories

The Company records a write-down of its inventory when the cost basis of any manufactured product (including any estimated future costs to complete the manufacturing process) exceeds its net realizable value. Inventories are stated at the lower of cost (as determined by the first-in, first-out method) or market value.

Prepaid Expenses and Other Assets

Prepaid expenses and other current assets includes prepayments for insurance and inventory purchases, assets held for sale, manufacturing supplies and other current assets. At September 30, 2003, this category of assets also included an insurance claim of $1.1 million, representing the cost basis of inventories mishandled while in transit to a customer. See Note 15 for additional information relating to the insurance claim.

F-8

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Property, Plant and Equipment and Rental Equipment

Property, plant and equipment and rental equipment are stated at cost. Depreciation expense is provided by the straight-line method over the following estimated useful lives:

		Years
Rental equipment		3-5
Property, plant and equipment:
Machinery and equipment		3-15
Buildings		25-40
Other		5-10

Expenditures for renewals and betterments are capitalized. Repairs and maintenance are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and any gain or loss thereon is reflected in the statement of operations.

Patents

Patents are amortized over the life of the patent or the estimated life of the patent, whichever is shorter. Intellectual property is being amortized using the straight-line method over five years.

Impairment of Long-lived Assets

Property, plant and equipment and goodwill are reviewed for impairment whenever an event or change in circumstances indicates the carrying amount of an asset or group of assets may not be recoverable. The impairment review includes comparison of future cash flows expected to be generated by the asset or group of assets with the associated assets’ carrying value. If the carrying value of the asset or group of assets exceeds the expected future cash flows (undiscounted and without interest changes), an impairment loss is recognized to the extent that the carrying amount of the asset exceeds its fair value.

Goodwill

Goodwill represents the excess of the purchase price of purchased businesses over the estimated fair value of the acquired business’ net assets. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed for impairment. Intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives; however, no maximum life applies. The Company adopted the provisions of SFAS 142 effective October 1, 2002. In accordance with the provisions of SFAS 142, the Company no longer records goodwill amortization expense. Adoption of SFAS 142 resulted in a $165,000 reduction of amortization expense for the fiscal year ended September 30, 2003. The Company will continue to review the carrying value of goodwill and other long-lived assets to determine whether there has been an impairment since the date of acquisition. There was no impairment recognized upon the adoption of SFAS 142. The Company’s goodwill is related to prior acquisitions of manufacturers of seismic connector products.

Other Assets

Other assets includes $1.3 million of long-term notes receivable. Payments are scheduled to be received by the company over the next 3 years.

Revenue Recognition

F-9

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Company’s products are shipped and title and risk of loss have passed to the customer. Rental revenues are recognized as earned over the rental period. Rentals of the Company’s equipment are short term and generally range from daily rentals to rental periods of up to six months. Products are generally sold without any customer acceptance provisions and the Company’s standard terms of sale do not allow customers to return products for credit. Most of the Company’s products do not require installation assistance or sophisticated instruction.

Research and Development Costs

The Company expenses research and development costs as incurred. Reaearch and development costs include salaries, employee benefit costs, department supplies, and other related costs.

Product Warranties

The Company offers a standard product warranty obligating it to repair or replace equipment with manufacturing defects. The Company maintains a reserve for future warranty costs based on historical experience or, in the absence of historical product experience, management’s estimates. Changes in the warranty reserve are contained in the following table (in thousands):

Balance at the beginning of the period (October 1, 2002)	$	841
Accruals for warranties issued during the period		795
Accruals related to pre-existing warranties (including changes in estimates)		—
Settlements made (in cash or in kind) during the period		(759	)

Balance at the end of the period (September 30, 2003)	$	877

Stock-Based Compensation

The Company measures compensation expense related to stock-based employee compensation plans using the intrinsic value method as prescribed in Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”. Accordingly, compensation cost for stock-based awards is measured as the excess, if any, of the fair market value of the Company’s stock at the date of grant over the exercise price of the award. Compensation cost determined at the grant date is recognized as expense over the related vesting period.

Financial Instruments

Fair value estimates are made at discrete points in time based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. The Company believes that the carrying amounts of its financial instruments, consisting of cash and cash equivalents, accounts and notes receivable, accounts payable and long-term debt, approximate the fair values of such items.

Foreign Currency Gains and Losses

The assets and liabilities of OYO’s foreign subsidiaries have been translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations have been translated using the average exchange rates during the year. Resulting translation adjustments have been recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Foreign currency transaction gains and losses are included in the results of operations as they occur.

F-10

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Derivatives

The Company records 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 Japan 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 variability of cash flows associated with foreign currency exchange rates on amounts payable in Japanese yen. The Company’s forward contracts with the bank are considered derivatives. The Company has recorded these foreign currency forward contracts on the balance sheet and marked them to fair value at each reporting date. Resulting gains and losses are reflected in other income and deductions – within the accompanying consolidated financials and were not material for the fiscal years ended September 30, 2003, 2002 and 2001. At September 30, 2003, the Company had $0.4 million of yen-denominated foreign currency forward contracts, and had $0.4 million of yen-denominated accounts payable.

Income Taxes

The Company follows the liability method of accounting for income taxes whereby deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”. SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. The Company adopted the provisions of SFAS 141 effective October 1, 2001. Among the provisions of SFAS 141 is the requirement to record as an extraordinary gain all negative goodwill resulting from new business combinations. As a result, the Company recorded an extraordinary gain of $686,000, net of income taxes of $85,000, relating to our acquisition of an additional equity interest in OYO-GEO Impulse in November 2001.

Also in July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed for impairment. Intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives; however, no maximum life applies. The Company adopted the provisions of SFAS 142 effective October 1, 2002. At September 30, 2003, the Company had goodwill, net of accumulated amortization, of $1.8 million. Adoption of SFAS 142 resulted in a reduction of amortization expense for the year ended September 30, 2003 of $165,000.

In August 2001, the FASB issued SFAS No. 143—“Accounting for Asset Retirement Obligations”. This statement requires us to recognize the fair value of a liability associated with the cost the Company would be obligated to incur in order to retire an asset at some point in the future. The liability would be recognized in the period in which it is incurred and can be reasonably estimated. The standard is effective for fiscal years beginning after June 15, 2002. The Company adopted this standard effective October 1, 2002. The adoption of SFAS No. 143 did not have a material effect on the Company’s financial position and results of operations.

F-11

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets”. SFAS No. 144 develops an accounting model, based upon the framework established in SFAS No. 121, for long-lived assets to be disposed of by sales. The accounting model applies to all long-lived assets, including discontinued operations, and it replaces the provisions of APB Opinion No. 30, “Reporting Results of Operations—Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for disposal of segments of a business. SFAS No. 144 requires long-lived assets held for disposal to be measured at the lower of carrying amount or fair values less costs to sell, whether reported in continuing operations or in discontinued operations. The statement is effective for fiscal years beginning after December 15, 2001. The Company adopted this standard effective October 1, 2002. The adoption of SFAS No. 144 did not have a material effect on the Company’s financial position and results of operations.

In April 2002, the FASB issued SFAS No. 145, “Recission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. This statement clarifies guidance related to the reporting of gains and losses from extinguishment of debt and resolves inconsistencies related to the required accounting treatment of certain lease modifications. The provisions of this statement relating to extinguishment of debt became effective for financial statements issued for fiscal years beginning after May 15, 2002. The provisions of this statement relating to lease modification are effective for transactions occurring after May 15, 2002. The Company adopted this standard effective October 1, 2002. The adoption of SFAS No. 145 did not have a material effect on the Company’s financial position or results of operations.

In June 2002, the FASB issued SFAS (SFAS) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This statement revises the accounting and reporting for costs associated with exit or disposal activities so as to provide recognition of such costs when a liability is incurred rather than when the entity commits to an exit plan. SFAS No. 146 is effective for exit or disposal activities initiated after June 30, 2003. Adoption of SFAS No. 146 did not have a material effect on the Company’s financial position and results of operations.

On November 25, 2002, the FASB issued FASB interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB interpretation No. 34. FIN 45 clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies (FAS 5),” relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The Company is implementing the disclosure requirements of this standard this year and will disclose the measurement and other provisions of FIN 45 in its fiscal year 2004 financial statements. The Company offers a standard product warranty obligating it to repair or replace equipment with manufacturing defects. The Company maintains a reserve for future warranty costs based on historical experience.

F-12

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

	Year Ended
	September 30, 2003			September 30, 2002			September 30, 2001
Net income (loss), as reported	$	(2,533	)	$	1,119		$	1,338
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(443	)		(428	)		(951	)

Pro forma income (loss)	$	(2,976	)	$	691		$	387

Earnings (loss) per share:
Basic-as reported	$	(0.46	)	$	0.20		$	0.24
Basic-pro forma	$	(0.54	)	$	0.12		$	0.07

Diluted-as reported	$	(0.46	)	$	0.20		$	0.24
Diluted-pro forma	$	(0.54	)	$	0.12		$	0.07

In its October 29, 2003 meeting, the FASB voted to make the expensing of stock options mandatory beginning in 2005. The guidance regarding this change is expected to be released in early 2004. Additionally, the FASB voted to specify the approach that companies can use in making the transition to the expensing of options, allowing companies to include previously granted unvested options in their calculations as well as the ones granted in the current year. When the rules are finalized, the Company will evaluate the impact on its financial position, results of operations and cash flows.

For a further discussion of the Company’s stock-based employee compensation plans, see Note 11 to the Consolidated Financial Statements.

The FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which the Company adopted effective January 31, 2003. This statement addresses the consolidation of variable interest entities (“VIEs”) by business enterprises that are primary beneficiaries. A VIE is an entity that does not have sufficient equity investment at risk to permit it to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the enterprise that has the majority of the risks or rewards associated with the VIE. The Company believes it has no material interests in VIEs that will require disclosure or consolidation under FIN 46.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” Statement 149 amends and clarifies financial accounting and reporting of derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement is effective for contracts entered into or modified after June 30, 2003, except for certain hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company’s financial position and results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 specifies that freestanding financial instruments within its scope constitute obligations of the issuer and that, therefore, the issuer must classify them as liabilities. Such freestanding financial instruments include mandatory redeemable financial instruments, obligations to

F-13

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

repurchase the issuer’s equity shares by transferring assets, and certain obligations to issue a variable number of shares. SFAS No. 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS No. 150 is effective at the beginning of the third quarter of 2003. The adoption of SFAS No. 150 did not have a material effect on the Company’s financial position and results of operations.

2. Acquisitions:

Effective November 8, 2001, the Company increased its equity ownership from 44% to 85% in a Russian joint venture formed more than ten years ago with Geophyspribor Ufa Production Association, Bank Vostock and Chori Co., Ltd. Since the increase in ownership, the operating results of the reorganized entity, now known as OYO-GEO Impulse, have been consolidated with those of the Company. Geophyspribor Ufa Production Association and Chori Co., Ltd. continue as minority equity holders of OYO-GEO Impulse.

In exchange for the additional equity ownership, the Company forgave a debt of $1.2 million owed to it by OYO-GEO Impulse. At the time of the restructuring, the debt owed the Company and a related prior equity investment had been written-off and had no carrying value in the Company’s financial statements.

The Company recorded an extraordinary gain of $686,000, net of income taxes of $85,000. This extraordinary gain resulted from the Company’s acquisition of an additional equity interest of OYO-GEO Impulse. Accounting principles generally accepted in the United States require negative goodwill resulting from new business combinations to be recorded as an extraordinary gain.

On September 12, 2003, the Company purchased for $164,000 an additional 12% ownership interest in OYO-GEO Impulse from Geophyspribor Ufa Production Association, thereby increasing its ownership interest to 97%. Chori Co., Ltd. continues as a 3% minority shareholder of OYO-GEO Impulse.

On February 8, 2001, the Company acquired substantially all of the assets of EcoPRO Imaging Corporation (“EcoPRO”) for $1.9 million and entered into a three-year global dry thermal film and distribution alliance with the seller of the EcoPRO assets (hereinafter referred to as the “Former Primary Film Supplier”).

The allocation of the purchase price for the fiscal year 2002 acquisition of OYO-GEO Impulse and the fiscal year 2001 acquisition of EcoPRO, including related direct costs, and a reconciliation of the purchase price to the cash used for these business acquisitions during fiscal years 2002 and 2001, respectively, are as follows (in thousands):

	OYO-GEO Impulse			EcoPRO
Fair values of assets and liabilities:
Net current assets, excluding cash acquired	$	1,134		$	501
Deferred purchasing benefits		—			1,640
Net current liabilities		(1,186	)		(216	)
Minority interest		(175	)		—
Negative goodwill		(686	)		—

Cash (provided by) used for business acquisition	$	(913	)	$	1,925

F-14

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The consolidated results of operations of the Company include the results of acquired businesses from the dates of acquisition. The revenues and net income of acquired businesses prior to the acquisition dates were not material to the Company’s consolidated results of operations and, therefore, no proforma consolidated results of operations as if the acquisitions had occurred at the beginning of the respective years has been presented.

3. Inventories:

Inventories consisted of the following (in thousands):

	AS OF SEPTEMBER 30,
	2003			2002
Finished goods	$	4,900		$	4,527
Work in progress		3,241			3,619
Raw materials		15,841			14,586
Obsolescence reserve		(1,053	)		(931	)

	$	22,929		$	21,801

Inventory obsolescence expense was approximately $0.2 million, $1.0 million and $0.9 million during fiscal years 2003, 2002 and 2001, respectively.

4. Notes Receivable:

At September 30, 2003 and 2002, the Company had outstanding notes receivable from customers in the amount of $3.4 million (including $1.3 million classified as long-term) and $0.9 million, respectively. The notes receivable outstanding at September 30, 2003 bear interest at rates up to 10.0% and are collectible in monthly installments through May 2005. At September 30, 2003 and 2002, the reported amount of notes receivable was net of an allowance for doubtful accounts of zero.

5. Rental Equipment:

Rental equipment consisted of the following (in thousands):

	AS OF SEPTEMBER 30,
	2003			2002
Geophones and related products	$	8,198		$	7,373
Less accumulated depreciation		(6,023	)		(5,329	)

	$	2,175		$	2,044

F-15

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

6. Property, Plant and Equipment:

Property, plant and equipment consisted of the following (in thousands):

	AS OF SEPTEMBER 30,
	2003			2002
Land	$	3,366		$	1,877
Buildings		12,205			10,052
Machinery and equipment		17,872			17,235
Furniture and fixtures		1,580			1,575
Transportation equipment		212			210
Tools and molds		1,679			1,693
Leasehold improvements		943			1,108
Construction in progress		418			477

		38,275			34,227
Accumulated depreciation		(15,896	)		(13,984	)

	$	22,379		$	20,243

Depreciation expense was $3.6 million, $3.9 million and $3.6 million in fiscal years 2003, 2002 and 2001, respectively. At September 30, 2003, the Company recorded $0.3 million, in property held for sale, for raw land that was sold during October 2003.

As discussed under “Item 2. Properties” the Company purchased a facility located at 7007 Pinemont Drive in Houston, Texas (“the Pinemont Facility”) having 208,000 square feet, which will house its worldwide headquarters and all U.S. manufacturing, engineering, selling, marketing, and administrative activities. The Company has begun the move into such facility and expect it to be completely occupied by early 2004. The purchase price for the Pinemont Facility was $3.8 million, of which $3.0 million was financed by a 7-year mortgage. The Company expects to incurr $0.8 million of capitalized costs for the remodeling of the facility. In addition, the Company expects to incur charges of $0.4 million in the first quarter of fiscal 2004 to relocate its operations into the Pinemont Facility. The Company sold one of its former facilities in December 2003, and it will allow a lease to expire on December 31, 2003 on another facility, and will hold its remaining Texas-based facilities for sale or lease. At September 30, 2003, the net book value of assets to be sold or leased was $6.8 million. The Company expects the results of the move and restructuring to be the elimination of substantial manufacturing and operating expenses in future periods, which should easily offset the one-time costs of the move and justify the capital expenditures made with respect to the Pinemont Facility.

7. Other Assets:

In April 2002, the Company purchased certain intellectual property rights from the Former Primary Film Supplier for $2.3 million. Such purchase gave the Company exclusive ownership of all technology used by the Former Primary Film Supplier to manufacture dry thermal film used in the thermal imaging equipment the Company manufactures. The purchase included then existing technology and any film technology later developed by the Former Primary Film Supplier for use in the Company’s equipment. In connection with the purchase, the Company agreed to license the technology to the Former Primary Film Supplier on a perpetual basis, so long as it could meet predefined quality and delivery requirements. The Company and the Former Primary Film Supplier also entered into an amended supply agreement pursuant to which the Former Primary Film Supplier agreed to provide the Company with the dry thermal film. If the Former Primary Film Supplier

F-16

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

could not meet such requirements, the Company had the right to self-manufacture or license to any third party the right to manufacture dry thermal film.

On July 3, 2002, the Former Primary Film Supplier filed a Chapter 11 reorganization petition in Federal Bankruptcy Court for the Western District of New York. As a result of such bankruptcy filing, the Company provided an impairment charge of approximately $1.2 million due to the ultimate uncertainty of its ability to realize the value of the deferred purchasing benefits and certain other assets during fiscal year 2002. See Note 18 for additional information relating to the Former Primary Film Supplier’s bankruptcy filing.

8. Notes Payable and Long-Term Debt:

Notes payable and long-term debt consisted of the following (in thousands):

	AS OF SEPTEMBER 30,
	2003			2002
Mortgage note payable, due in monthly installments of $31 with interest at 7.0% through January 2014, collateralized by certain land and building	$	2,771		$	2,947
Mortgage note payable, due in monthly installments of $9 with interest at 7.6% through July 2013, collateralized by certain land and building		773			824
Mortgage note payable, due in monthly installments of $10 with interest at 4.0% through September 2010, with remaining principal and interest due September, collateralized by certain land and building		3,040			—
OYO-GEO Impulse note payable, with interest at 18.0%, due December 2003		113			—
Working capital line of credit		5,424			487

		12,121			4,258
Less current portion		(5,889	)		(714	)

	$	6,232		$	3,544

During September 2003, the Company obtained a $3.0 million mortgage from a bank to purchase the Pinemont Facility. The mortgage will mature in September 2010.

The Company has entered into a credit agreement pursuant to which it can borrow up to $10.0 million secured by its accounts receivable and inventories (the “Credit Agreement”). The Credit Agreement, as amended, expires in January 2004. Borrowings under the Credit Agreement are subject to borrowing base restrictions based on (i) consolidated net income plus consolidated interest expense, income taxes, depreciation and amortization (“EBITDA”) and (ii) levels of eligible accounts receivable, notes receivable and inventories. The Credit Agreement limits the incurrence of additional indebtedness, requires the maintenance of certain financial amounts and contains other covenants customary in agreements of this type. As a result of operating losses through September 30, 2003, the Company failed to meet certain covenants for the year ended September 30, 2003, relating to specified ratios of EBITDA, as defined, to interest expense and senior debt to EBITDA. The Company received a waiver of these covenants from the bank as of such date in consideration for a fee of $10,000, the exclusion of eligible notes receivable from the Company’s borrowing base and an increase in borrowing rates for future borrowings. On August 11, 2003, the Company’s LIBOR-based borrowing rate increased by 1.0% and, effective October 1, 2003, the Company’s prime-based borrowing rate increased by 1.0%. As of September 30, 2003 there were borrowings of $5.4 million outstanding under the Credit Agreement, and additional borrowings available under the Credit Agreement of $4.6 million. The Company’s borrowing interest rate at September 30, 2003 was 4.6% for its LIBOR-based borrowings and 4.0% for its prime-based

F-17

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

borrowings. The Company is seeking to extend the credit facility with its existing lender and expects to be able to do so, but has no assurances that it will be able to do so.

The Company anticipates that the existing cash balance as of September 30, 2003, cash flow from operations and borrowing availability under our existing credit facility, assuming it is extended, or borrowing availability under a new credit facility will provide adequate cash flows and liquidity for fiscal year 2004. The Company expects that the liquidity from such amounts and cash flows from operations in fiscal year 2004 will satisfy the capital expenditures, scheduled debt payments, and operational budgets of the Company for the upcoming year.

The Company’s long-term debt will mature as follows (in thousands):

YEAR ENDING SEPTEMBER 30,
2004	$	5,889
2005		412
2006		437
2007		464
2008		493
Thereafter		4,426

	$	12,121

9. Accrued Expenses and Other:

Accrued expenses consisted of the following (in thousands):

	AS OF SEPTEMBER 30,
	2003		2002
Employee bonuses	$	17	$	431
Product warranty		877		853
Compensated absences		544		562
Legal and professional fees		308		283
Payroll		312		229
Property taxes		723		597
Medical claims		225		262
Other		752		945

Accrued expenses and other	$	3,758	$	4,162

The Company is self-insured for certain losses related to employee medical claims. The Company has purchased stop-loss coverage for individual claims in excess of $75,000 per claimant per year in order to limit its exposure to any significant levels of employee medical claims. Self-insured losses are accrued based on the Company’s estimates of aggregate liability for uninsured claims incurred using certain actuarial assumptions followed in the insurance industry and the Company’s historical experience.

10. Employee Benefits:

The Company’s employees are participants in the OYO Geospace Corporation Employee’s 401(k) Retirement Plan (the “Plan”), which covers substantially all eligible employees in the United States. The Plan is a

F-18

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

qualified salary reduction plan in which all eligible participants may elect to have a percentage of their compensation contributed to the Plan, subject to certain guidelines issued by the Internal Revenue Service. The Company’s share of discretionary matching contributions was approximately $0.3 million in each of fiscal years 2003, 2002 and 2001.

11. Stockholders’ Equity:

In September 1997, the board of directors approved the 1997 Key Employee Stock Option Plan, as amended (the “Employee Plan”), and reserved an aggregate of 875,000 shares of common stock for issuance thereunder. In November 1997, the board of directors and stockholders approved the Company’s 1997 Non-Employee Director Plan (the “Director Plan”) and reserved an aggregate of 75,000 shares of common stock for issuance thereunder. At September 30, 2003 the shares of common stock available for grant under the Employee Plan and Director Plan were 52,625 and 11,880, respectively.

Under the Employee Plan, the Company is authorized to issue nonqualified and incentive stock options to purchase common stock and restricted stock awards of common stock to key employees of the Company. Options have a term not to exceed ten years, with the exception of incentive stock options granted to employees owning ten percent or more of the outstanding shares of common stock, which have a term not to exceed five years. The exercise price of any option may not be less than the fair market value of the common stock on the date of grant. In the case of incentive stock options granted to an employee owning ten percent or more of the outstanding shares of common stock, the exercise price of such option may not be less than 110% of the fair market value of the common stock on the date of grant. Options vest over a four-year period commencing on the date of grant in 25% annual increments. Under the Employee Plan, the Company may issue shares of restricted stock to employees for no payment by the employee or for a payment below the fair market value on the date of grant. The restricted stock is subject to certain restrictions described in the Employee Plan, with no restrictions continuing for more than ten years from the date of the award.

The Company established the Director Plan pursuant to which options to purchase shares of common stock are granted annually to non-employee directors and pursuant to which one-half of the annual fees paid for the services of such non-employee directors is paid in shares of common stock based on the fair market value thereof at the date of grant. Options granted under the Director Plan have a term of ten years. The exercise price of each option granted is the fair market value of the common stock on the date of grant. Options vest over a one-year period commencing on the date of grant.

Effective November 5, 1999, the board of directors approved the OYO Geospace Corporation 1999 Broad-Based Option Plan (the “Broad-Based Plan”) and reserved an aggregate of 50,000 shares for issuance thereunder. Under the Broad-Based Plan, the Company is authorized to issue to all employees (except executive officers and employee directors) nonqualified stock options to purchase common stock of the Company. These options have a term not to exceed ten years. The exercise price of any broad-based option may not be less than the fair market value of the common stock on the date of grant. These options vest over a one-year period commencing on the date of grant. There were 16,100 shares available for grant under this plan at September 30, 2003.

F-19

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

A summary of the activity with respect to stock options is as follows:

	Shares		Weighted Average Exercise Price
Outstanding at September 30, 2000	489,700		14.64
Granted	118,600		18.96
Exercised	(27,000	)	14.49
Forfeited	(22,775	)	17.96
Expired	—		—

Outstanding at September 30, 2001	558,525		15.43
Granted	34,000		12.73
Exercised	(7,425	)	10.61
Forfeited	(28,125	)	15.66
Expired	—		—

Outstanding at September 30, 2002	556,975		15.32
Granted	227,500		7.54
Exercised	(4,475	)	8.87
Forfeited	(50,700	)	15.89
Expired	—		—

Outstanding at September 30, 2003	729,300		12.89

The following table summarizes information about stock options outstanding and exercisable at September 30, 2003:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Shares	Weighted Average Remaining Term (in years)	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
$ 6.81 to $13.49	296,900	8.8	$	8.09	60,337	$	9.67
$13.50 to $19.99	407,400	5.6		15.60	344,150		15.35
$20.00 to $27.63	25,000	6.0		25.85	23,500		26.08

	729,300	6.9		12.89	427,987		15.14

The Company granted zero shares, zero shares and 500 shares of restricted stock during fiscal years 2003, 2002 and 2001, respectively. As partial compensation for services of its outside directors, the Company issued 3,604 shares, 1,890 shares and 992 shares of common stock to directors during fiscal years 2003, 2002 and 2001, respectively.

The amortization of unearned compensation related to stock-based employee compensation included in the consolidated results of operations was $1,000, $0.1 million and $0.5 million for each of fiscal years 2003, 2002 and 2001, respectively, pursuant to the provisions of APB 25. Unearned compensation included in stockholders’ equity related to unlapsed restrictions on grants of restricted stock was approximately $4,000 and $5,000 as of September 30, 2003 and 2002, respectively.

Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”) requires that stock-based awards be measured and recognized at fair value. Adoption of the cost

F-20

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

recognition provisions of SFAS 123 with respect to stock-based awards to employees is optional and the Company decided not to elect those provisions. As a result, the Company continues to apply APB 25 and related interpretations in accounting for the measurement and recognition of its employee stock-based awards. However, the Company is required to provide pro forma disclosure as if the cost recognition provisions under the fair value method of SFAS 123 had been adopted. Under SFAS 123, compensation cost is measured at the grant date based on the fair value of the awards and is recognized over the service period, which is usually the vesting period. The fair value of options granted during the fiscal years ended September 30, 2003, 2002 and 2001 were estimated using the Black-Scholes option-pricing model with a dividend yield of zero for each of the three years. This estimation assumed risk-free interest rates of 4.2%, 3.8% and 5.6%; and expected volatility of 65%, 54% and 43%; with an expected option term of 5 years for 2003, 2002 and 2001, respectively.

The weighted average fair values per share of stock-based award grants were as follows:

	YEAR ENDED SEPTEMBER 30,
	2003		2002		2001
Options	$	7.54	$	6.44	$	8.60
Restricted stock		—		—		16.00
Director’s common stock		6.94		13.73		25.25

The pro forma disclosures as if the Company had adopted the cost recognition requirements of SFAS 123 are presented below (in thousands, except per share amounts):

	YEAR ENDED SEPTEMBER 30,
	2003			2002		2001
Net income (loss):
As reported	$	(2,533	)	$	1,119	$	1,338
Pro forma		(443	)		691		387
Basic earnings (loss) per common share:
As reported	$	(0.46	)	$	0.20	$	0.24
Pro forma		(0.54	)		0.12		0.07
Diluted earnings (loss) per common share:
As reported	$	(0.46	)	$	0.20	$	0.24
Pro forma		(0.54	)		0.12		0.07

The effects of applying SFAS 123 in the above pro forma disclosure are not indicative of future amounts since the Company anticipates making awards in the future under the Employee and Director Plans.

12. Income Taxes:

Components of income(loss) before income taxes, minority interest and extraordinary gain were as follows (in thousands):

	YEAR ENDED SEPTEMBER 30,
	2003			2002			2001
United States	$	(4,334	)	$	(1,642	)	$	1,290
Foreign		421			1,306			340

	$	(3,913	)	$	(336	)	$	1,630

F-21

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The provision (benefit) for income taxes consisted of the following (in thousands):

	YEAR ENDED SEPTEMBER 30,
	2003			2002			2001
Current:
Federal	$	(345	)	$	(169	)	$	85
Foreign		(28	)		769			123
State		10			(76	)		3

		(363	)		524			211

Deferred:
Federal		(1,198	)		(1,430	)		(166	)
Foreign		162			49			247
State		—			—			—

		(1,036	)		(1,381	)		81

	$	(1,399	)	$	(857	)	$	292

The differences between the effective tax rate reflected in the total provision (benefit) for income taxes and the statutory federal tax rate of 34% were as follows (in thousands):

	YEAR ENDED SEPTEMBER 30,
	2003			2002			2001
Provision for U.S. federal income tax at statutory rate	$	(1,330	)	$	(114	)	$	555
Effect of foreign income taxes		(10	)		(10	)		78
Tax benefit from export sales		(24	)		(271	)		(172	)
State income taxes, net of federal income tax benefit		7			2			2
Nondeductible expenses		28			104			66
Resolution of prior years’ tax matters		(70	)		(568	)		(264	)
Other, net		—			—			27

	$	(1,399	)	$	(857	)	$	292

		(35.8	)%		(255.1	)%		17.9	%

F-22

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Deferred income taxes under the liability method reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred income tax asset were as follows (in thousands):

	AS OF SEPTEMBER 30,
	2003			2002
Deferred income tax assets:
Allowance for doubtful accounts	$	132		$	119
Inventory		617			540
Capitalized research and development costs		1,426			—
AMT carryforward		272			175
NOL carryforward and tax credits		2,214			1,759
Accrued product warranty		298			286
Accrued compensated absences		185			191
Net foreign operating loss carryforwards and deferrals		41			203

		5,185			3,273
Deferred income tax liabilities:
Property, plant and equipment and other		(1,283	)		(1,207	)

Net deferred income tax asset before valuation allowance		3,902			2,066
Valuation allowance		(800	)		—

Net deferred income tax asset	$	3,102		$	2,066

Deferred income taxes are reported as follows in the accompanying consolidated balance sheet (in thousands):

	AS OF SEPTEMBER 30,
	2003		2002
Current deferred income tax asset	$	1,233	$	1,135
Noncurrent deferred income tax asset		1,869		931
Noncurrent deferred tax liability		—		—

	$	3,102	$	2,066

During the fiscal year 2003, the Company filed amended tax returns for certain prior year periods and also completed its fiscal 2002 federal tax filing. Upon completion of such filings, the Company identified $0.8 million of additional tax benefits that are available for potential use in future periods. These additional benefits are related to foreign tax credits. Based upon the current industry environment and the Company’s projections of future taxable income, the Company has reviewed its deferred tax assets and recorded a valuation allowance of approximately $0.8 million against the foreign tax credits.

Under the liability method, a valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on the Company’s historical taxable income record, and the expectation that the deductible temporary differences will reverse during periods in which the Company generates net taxable income or during periods in which losses can be carried back to offset prior year taxes, management believes that the Company will realize the benefit of the net deferred income tax asset after consideration of the valuation allowance.

F-23

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The financial reporting bases of investments in foreign subsidiaries exceed their tax basis. A deferred tax liability is not recorded for this temporary difference because the investment is essentially permanent. A reversal of the Company’s plans to permanently invest in the operations would cause the excess to become taxable. At September 30, 2003 and 2002 the temporary difference related to undistributed earnings for which no deferred taxes have been provided was approximately $2.8 million and $2.6 million, respectively.

From time to time the Company is the subject of audits by various tax authorities that can result in claims and assessments and additional tax payments, penalties and interest. At present, there are no pending audits of the Company’s past tax returns.

As of September 30, 2003, the Company had $3.8 million in net operating loss (“NOLs”) carryforwards. These NOLs may be carried forward for a period of 20 years and are available as an offset to future taxable income. These NOLs will begin to expire in fiscal year 2023. The company also has certain tax credit carryforwards available to offset future federal income taxes payable. As of September 30, 2003, the Company had $0.9 million in foreign tax credits that can be carried forward for five years. These foreign tax credits begin to expire in fiscal year 2005. Furthermore, the Company’s current general business credits of $46,000 will begin to expire in fiscal year 2013. In addition, the Company has alternative minimum tax carryforwards of $0.3 million that have no expiration date.

13. Earnings Per Common Share:

Basic earnings per share are computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined on the assumption that outstanding dilutive stock options have been exercised and the aggregate proceeds as defined were used to reacquire common stock using the average price of such common stock for the period.

F-24

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The following table summarizes the calculation of net earnings and weighted average common shares and common equivalent shares outstanding for purposes of basic and diluted earnings per share (in thousands, except share and per share amounts):

	YEAR ENDED SEPTEMBER 30,
	2003			2002		2001
Income (loss) before extraordinary item	$	(2,533	)	$	433	$	1338
Extraordinary gain, net of tax of $85		—			686		—

Net earnings (loss) available to common stockholders	$	(2,533	)	$	1,119	$	1,338

Weighted average common shares and common share equivalents:
Common shares		5,550,216			5,535,979		5,489,251
Common share equivalents		—			11,795		109,346

Total weighted average common shares and common share equivalents		5,550,216			5,547,774		5,598,597

Basic earnings (loss) per share:
Income (loss) before extraordinary gain	$	(0.46	)	$	0.08	$	0.24
Extraordinary gain		—			0.12		—

Net income (loss)	$	(0.46	)	$	0.20	$	0.24

Diluted earnings (loss) per share:
Income (loss) before extraordinary gain	$	(0.46	)	$	0.08	$	0.24
Extraordinary gain		—			0.12		—

Net income (loss)	$	(0.46	)	$	0.20	$	0.24

Options totaling 729,300, 474,800 and 33,700 shares of common stock in fiscal years 2003, 2002 and 2001 respectively, were not included in the calculation of weighted average shares for diluted earnings per share because their effects were antidilutive.

14. Related Party Transactions:

Sales to OYO Japan and other affiliated companies were approximately $0.3 million, $0.1 million and $0.2 million during fiscal years 2003, 2002 and 2001, respectively. Purchases of inventory and equipment from OYO Japan were approximately $1.8 million, $0.6 million and $1.7 million during fiscal years 2003, 2002 and 2001, respectively.

15. Commitments and Contingencies:

Operating Leases

The Company leases certain office space and equipment under noncancelable operating leases. The approximate future minimum rental commitments under noncancelable operating leases are as follows (in thousands):

YEAR ENDING SEPTEMBER 30,
2004	$	64
2005		9
2006		3

	$	76

F-25

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Rent expense was approximately $0.6 million, $0.7 million, and $0.6 million for fiscal years 2003, 2002 and 2001, respectively.

Legal Proceedings

From time to time the Company is a party to what it believes is routine litigation and proceedings that may be considered as part of the ordinary course of its business. The Company is not aware of any current or pending litigation or proceedings that could have a material adverse effect on the Company’s results of operations, cash flows or financial condition, although the Company continues to monitor developments in the bankruptcy proceeding by its Former Primary Film Supplier and the Former Primary Film Supplier’s existing claim against the Company described in Note 18.

In the course of shipping several heavy reels of undersea sensor cable to the North Sea pursuant to a contract with a major oil company, the reels were mishandled by a third party during discharge from the vessel. Our customer then rejected the cables. The Company has made a claim in the amount of $1.7 million with the insurance company writing the policy covering the cargo during transit. To date the insurance company is still conducting its due diligence and has not accepted or rejected the Company’s claim. In the event the Company is unable to reach an accommodation with the insurance company, it is prepared to bring suit to enforce its rights under the policy.

16. Supplemental Cash Flow Information:

Supplemental cash flow information is as follows (in thousands):

	YEAR ENDED SEPTEMBER 30,
	2003		2002			2001
Cash paid (refund received) for:
Interest	$	116	$	585		$	378
Income taxes		199		(153	)		(1,148	)
Noncash investing and financing activities:
Common stock issued pursuant to Employee and Director Plan		25		25			25

17. Segment and Geographic Information:

In fiscal year 2001, the Company expanded its commercial graphics operations through the acquisition of substantially all of the assets of EcoPRO and through the reorganization of its United Kingdom subsidiary to focus on the growing commercial graphics marketplace in Europe. At that time, the Company began reporting information for two business segments: Seismic and Commercial Graphics. The Commercial Graphics business segment primarily sells products into the commercial graphics industry; however, it also has some minor sales into the seismic industry.

F-26

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The Company’s 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, marine seismic cable retrieval devices and small data acquisition systems targeted at niche markets. Commercial graphics products include thermal imaging equipment and dry thermal film. The following tables summarize the Company’s segment information:

	YEAR ENDED SEPTEMBER 30,
	2003			2002			2001
Net sales:
Seismic	$	37,619		$	51,800		$	50,433
Commercial Graphics		13,333			13,490			13,557
Eliminations		(98	)		(241	)		(372	)

Total		50,854			65,049			63,618

Income (loss) from operations:
Seismic		(833	)		4,311			5,381
Commercial Graphics		231			(399	)		27
Corporate		(3,380	)		(3,336	)		(3,552	)
Eliminations		—			(142	)		—

Total		(3,982	)		434			1,856

Total assets:
Seismic		47,391			51,308
Commercial Graphics		14,256			12,610
Corporate		9,788			4,208

Total	$	71,435		$	68,126

Corporate consists primarily of corporate overhead expenses and unallocated corporate assets. Unallocated corporate assets consist of the Company’s corporate office building and equipment.

The Company has operations in the United States, Canada, United Kingdom and Russia. Summaries of net sales by geographic area for fiscal years 2003, 2002 and 2001 are as follows (in thousands):

	YEAR ENDED SEPTEMBER 30,
	2003		2002		2001
Asia (excluding Japan and Middle East)	$	9,778	$	7,386	$	10,005
Canada		6,503		9,058		11,697
Europe		11,501		16,094		11,768
Japan		618		436		948
Middle East		1,255		918		605
United States		20,221		30,137		27,507
Other		978		1,020		1,088

	$	50,854	$	65,049	$	63,618

Net sales are attributed to countries based on the ultimate destination of the product sold, if known. If the ultimate destination is not known, net sales are attributed to countries based on the geographic location of the initial shipment.

F-27

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Sales information for the Company is as follows (in thousands):

	YEAR ENDED SEPTEMBER 30,
	2003			2002			2001
United States	$	41,335		$	61,238		$	62,348
Canada		5,608			4,492			6,715
United Kingdom		3,105			6,526			2,583
Russia		4,836			4,061			—
Eliminations		(4,030	)		(11,268	)		(8,028	)

	$	50,854		$	65,049		$	63,618

Long-lived assets were as follows (in thousands):

	AS OF SEPTEMBER 30,
	2003		2002
United States	$	25,646	$	24,143
Canada		3,800		2,569
United Kingdom		517		509
Russia		2,053		1,654

	$	32,016	$	28,875

The Company had no customers comprising more than 10% of sales for the fiscal year 2003 and one customer comprising 24.5% of annual sales for the fiscal year 2002. The Company had no customers comprising more than 10% of sales for the fiscal year 2001.

During fiscal year 2002, the Company delivered a reservoir characterization and monitoring system to a major oil company. In accordance with the terms of the contract, the Company recognized $15.8 million of revenues in its fiscal year ended September 30, 2002 and $2.5 million in its fiscal year ended September 30, 2003. The contract provides for additional revenue of $3.6 million based upon the system’s performance and, assuming successful performance, the Company will to recognize such revenue in the first fiscal quarter of fiscal year 2004. All costs related to this sale, including estimated costs for warranty and delivery, have been recorded in the fiscal year ended September 30, 2002.

18. Film Supplier Developments:

On July 3, 2002, the Former Primary Film Supplier filed a Chapter 11 reorganization petition in Federal Bankruptcy Court for the Western District of New York. At the date of such bankruptcy filing, the Company had $3.4 million of long-term assets carried on its balance sheet as a result of the prior transactions with the Former Primary Film Supplier (including the $2.3 million investment in intellectual property acquired from such Former Primary Film Supplier described above). Around that time, the Former Primary Film Supplier advised the Company that, in connection with its bankruptcy filing, it was seeking a buyer for its business that would assume its relationship and contracts with, and it was the Company’s intention to cooperate in such efforts to the extent its on-going interest could be served thereby. The Company no longer believe that a buyer can be found to operate the Former Primary Film Supplier’s business.

During the fiscal year ended September 30, 2003, the Former Primary Film Supplier failed to meet substantially all of our purchase orders and has ceased providing the Company with dry thermal film. As a result,

F-28

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

the Company is currently purchasing a large quantity of dry thermal film from an alternative film supplier (the “Other Film Supplier”) and the Company is using the technology it purchased from the Former Primary Film Supplier to manufacture dry thermal film internally.

As a result of the bankruptcy filing by the Former Primary Film Supplier, the Company recorded a charge in its third quarter of fiscal year 2002 of approximately $1.2 million due to the ultimate uncertainty of realization of value on certain assets, particularly certain prepaid purchase benefits and similar benefits under the amended supply contract with the Former Primary Film Supplier. We do not believe there has been any impairment in the value of the intellectual property the Company acquired from the Former Primary Film Supplier because of the Company’s ability to utilize the intellectual property to have thermal film manufactured either internally or elsewhere.

No claims have been made against the Company or by the Company at present in connection with the Former Primary Film Supplier’s bankruptcy, except that on December 10, 2002, the Company received a notice of claim for alleged preferential payments made by the Former Primary Film Supplier to the Company in the period before filing of the bankruptcy proceeding in the approximate amount of $260,000. The Company intends to vigorously defend against such claim under the overall circumstances of its relationship with the Former Primary Film Supplier. At present the Company does not know whether it will make any claims against the Primary Film Supplier and the Company is unable to predict whether any additional claims will be made against it in connection with the Former Primary Film Supplier’s bankruptcy proceeding as to any aspect of the Company’s relationship with such Former Primary Film Supplier. The Company is unable at this time to predict the outcome and effects of this situation. The Company has, nevertheless, made provision for existing claims that it believes are adequate at this time, although it is unable to make such predictions with any certainty.

F-29

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

19. Selected Quarterly Information (Unaudited):

The following table represents summarized data for each of the quarters in fiscal years 2003 and 2002 (in thousands, except per share amounts).

	2003
	Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Net sales	$	11,421		$	12,855		$	16,517		$	10,061
Gross profit		2,908			2,704			4,596			2,309
Income (loss) from operations		(823	)		(1,402	)		149			(1,906	)
Other income (expense), net		(58	)		88			(72	)		(4	)
Income (loss) before extraordinary gain		(494	)		(759	)		38			(1,318	)
Extraordinary gain, net of tax of $85		—			—			—			—
Net income (loss)		(494	)		(759	)		38			(1,318	)

Basic earnings (loss) per share:
Income (loss) from operations	$	(0.09	)	$	(0.14	)	$	0.01		$	(0.24	)
Extraordinary gain		—			—			—			—
Basic earnings (loss) per share	$	(0.09	)	$	(0.14	)	$	0.01		$	(0.24	)


Diluted earnings (loss) per share:
Income (loss) from operations	$	(0.09	)	$	(0.14	)	$	0.01		$	(0.24	)
Extraordinary gain		—			—			—			—
Diluted earnings (loss) per share	$	(0.09	)	$	(0.14	)	$	0.01		$	(0.24	)


	2002
	Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Net sales	$	13,648		$	24,668	(a)	$	13,833		$	12,900
Gross profit		2,911			6,764			4,855			4,035
Income (loss) from operations		(1,161	)		1,261			255			79
Other income (expense), net		(145	)		(132	)		(397	)		(96	)
Income (loss) before extraordinary gain		(604	)		1,156			(80	)		(39	)
Extraordinary gain, net of tax of $85		—			—			—			686
Net income (loss)		(604	)		1,156			(80	)		647

Basic earnings (loss) per share:
Income (loss) from operations	$	(0.11	)	$	0.21		$	(0.01	)	$	(0.01	)
Extraordinary gain		—			—			—			0.13
Basic earnings (loss) per share	$	(0.11	)	$	0.21		$	(0.01	)	$	0.12


Diluted earnings (loss) per share:
Income (loss) from operations	$	(0.11	)	$	0.21		$	(0.01	)	$	(0.01	)
Extraordinary gain		—			—			—			0.13
Diluted earnings (loss) per share	$	(0.11	)	$	0.21		$	(0.01	)	$	0.12

(a)

Includes revenues of $15.8 million recognized related to the sale of a reservoir characterization system. The Company expects to recognize up to $3.6 million of additional revenues related to this trasnsaction during the first quarter of fiscal year 2004 depending on the system’s future performance through December 31, 2003.

F-30

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and

Stockholders of OYO Geospace Corporation:

Our audits of the consolidated financial statements referred to in our report dated November 24, 2003 appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 15(a) of this Form 10-K. In our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PRICEWATERHOUSECOOPERS LLP

Houston, Texas

November 24, 2003

F-31

Schedule II

OYO Geospace Corporation and Subsidiaries

Valuation and Qualifying Accounts

(In Thousands)

	Balance at Beginning of Period		Charged (Credited) to Costs and Expenses		Charged to Other Assets		Deductions			Balance at End of Period
Year ended September 30, 2003
Allowance for doubtful accounts on accounts and notes receivable	$	474	$	229	$	—	$	(225	)	$	478

Year ended September 30, 2002
Allowance for doubtful accounts on accounts and notes receivable		470		146		—		(142	)		474

Year ended September 30, 2001
Allowance for doubtful accounts on accounts and notes receivable		353		214		—		(97	)		470

	Balance at Beginning of Period		Charged (Credited) to Costs and Expenses		Charged to Other Assets		Deductions			Balance at End Of Period
Year ended September 30, 2003
Inventory obsolescence reserve	$	931	$	234	$	—	$	(112	)	$	1,053

Year ended September 30, 2002
Inventory obsolescence reserve		1,089		970		—		(1,128	)		931

Year ended September 30, 2001
Inventory obsolescence reserve		1,742		1,073		—		(1,726	)		1,089

EX-10.17 3 dex1017.txt DEED OF TRUST EXHIBIT 10.17 After recording return to: William Johnson Nathan Sommers Lippman Jacobs & Gorman 2800 Post Oak Blvd., 61st Floor Houston, Texas 77056 DEED OF TRUST, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND FINANCING STATEMENT STATE OF TEXAS ) ) KNOW ALL MEN BY THESE PRESENTS: COUNTY OF HARRIS ) THIS DEED OF TRUST, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND FINANCING STATEMENT is dated as of September 10, 2003, by OYOG OPERATIONS, LP, a Texas limited partnership, whose address is 12750 South Kirkwood, Suite 200, Stafford, Texas 77477, to Ben H. Riggs of Harris County, Texas, as Trustee, for the benefit of COMPASS BANK, with offices at 24 Greenway Plaza, Suite 1601, Houston, Texas, 77046, as follows: A. DEFINITIONS. The following terms shall have the defined meaning ascribed to such terms, as set forth below: 1. "Beneficiary" shall mean Compass Bank, as well as any subsequent holder or holders of the Note (as defined below). 2. "Claims" shall mean all liabilities, actions, demands, penalties, losses, costs or expenses (including reasonable consultants' fees, reasonable investigation and reasonable laboratory fees, reasonable attorneys' fees, expenses and remedial costs), suits, costs of any settlement or judgment and claims of any kind. 3. "Code" shall mean the Texas Business and Commerce Code, as now written or as hereafter amended or succeeded. 4. "Deed of Trust" shall mean this Deed of Trust, Security Agreement, Assignment of Rents and Financing Statement, as the same may be amended, modified or supplemented from time to time. 5. "Event of Default" shall mean the occurrence at any time and from time to time of any Event of Default as defined in the Note. 6. "Fixtures" shall mean all materials, supplies, equipment, apparatus and other items now or hereafter attached to, installed in or used (temporarily or permanently) in connection with any of the Improvements (as defined below) or the Land (as defined below), and all renewals, replacements, and substitutions thereof and additions thereto, including, without limitation, any and all partitions, ducts, shafts, pipes, radiators, conduits, wiring, window screens and shades, drapes, rugs and other floor coverings, awnings, motors, engines, boilers, stokers, pumps, dynamos, transformers, generators, fans, blowers, vents, switchboards, elevators, mail conveyors, escalators, compressors, furnaces, cleaning, call and sprinkler systems, fire extinguishing apparatus, water tanks, heating, ventilating, plumbing, laundry, incinerating, air conditioning and air cooling systems, water, gas and electric equipment, disposals, dishwashers, washers, dryers, refrigerators and ranges, cafeteria equipment, and recreational equipment and facilities of all kinds, all of which property and things are hereby declared to be permanent accessions to the Land, excluding, however, trade fixtures not necessary for the use and enjoyment of the Improvements. 7. "Governmental Authority" shall mean any and all governmental or quasi-governmental entities of any nature whatsoever, whether federal, state, county, district, city or otherwise, and whether now or hereafter in existence. 8. "Grantor" shall mean the party or parties, whether one or more, who execute this Deed of Trust and who are identified first in the initial paragraph of this Deed of Trust, as well as the successors, assigns, heirs and legal representatives of such party or parties. 9. "Impositions" shall mean all rates and charges (including deposits), insurance, taxes (both realty and personalty), water, gas, sewer, electricity, telephone and other utilities any easement, license or agreement maintained for the benefit of the Property, and all other charges, and any interest, costs or penalties with respect thereto, of any nature whatsoever which may now or hereafter be assessed, levied or imposed upon the Property or the Rents (as defined below) or the ownership, use, occupancy or enjoyment thereof. 10. "Improvements" shall mean any and all buildings, parking areas and other improvements, and any and all additions, alterations, or appurtenances thereto, now or at any time hereafter placed or constructed upon the Land or any part thereof. 11. "Land" shall mean the real estate (or interest therein) described in Exhibit "A", attached hereto and incorporated herein by this reference, all Improvements and Fixtures, and all rights, titles and interests appurtenant thereto. 12. "Leases" shall mean all leases (including, oil, gas and other mineral leases), subleases, licenses, concessions, contracts or other agreements (written or oral, now or hereafter in effect) which grant a possessory interest in and to, or the right to use, any portion of the Property, or which relate to the use or construction of the Improvements. 13. "Legal Requirements" shall mean any and all of the following that may now or hereafter be applicable to Grantor or the Property: judicial decisions, statutes, rulings, rules, regulations, permits, certificates or ordinances of any Governmental Authority; Grantor's Bylaws and Articles of Incorporation, Agreement of Partnership, Limited Partnership, or Joint Venture, Trust -2- Declarations or other agreements pertaining to Grantor's business entity; restrictions of record; and other written agreements or promises enforceable by Governmental Authority of any nature. 14. "Loan Documents" shall mean the Note, this Deed of Trust and all promissory notes, security agreements, deeds of trust, assignments, guaranties, and other instruments, documents, and agreements executed and delivered pursuant to or in connection with the Note, or this Deed of Trust, as such instruments, documents, and agreements may be amended, modified, renewed, extended, or supplemented from time to time. 15. "Note" shall mean collectively (a) that certain promissory note, dated September 10, 2003, in the original principal amount of $3,040,000.00, maturing on September 1, 2010, executed by Grantor and payable to the order of Beneficiary, and (b) all extensions, renewals and modifications thereof and all other notes given in substitution therefor. 16. "Obligations" shall mean: (a) the obligations and indebtedness of Grantor to Beneficiary evidenced by the Note; (b) the obligations and indebtedness of Grantor to Beneficiary under the Loan Documents; (c) all future advances by Beneficiary to Grantor pursuant to the Loan Documents; (d) all reasonable costs and expenses, including, without limitation, all reasonable attorneys' fees and legal expenses, incurred by Beneficiary to preserve and maintain the lien created hereby, collect the obligations herein described, and enforce this Deed of Trust; and (e) all extensions, renewals, and modifications of any of the foregoing and all promissory notes given in renewal, extension, modification or substitution of any of the foregoing. 17. "Obligated Party" shall mean any guarantor, surety, endorser, partner of Grantor or other person that guarantees or secures payment or performance of any portion of the Obligations or otherwise directly or indirectly is obligated, primarily or secondarily, for the payment or performance of any portion of the Obligations. 18. "Permitted Encumbrances" shall mean those encumbrances listed on Exhibit "B" hereto. 19. "Property" shall mean the Land, Improvements, and Fixtures, together with all or any part of, and any interest in, the following: rights, privileges, tenements, hereditaments, rights-of-way, easements, appendages, and appurtenances in any way pertaining thereto, and rights, titles, and interests of Grantor in and to any streets, ways, alleys, strips of land adjoining the Land or any part thereof; additions, substitutions, replacements and revisions thereof and thereto and all reversions and remainders therein; and other security and collateral of any nature whatsoever, now or hereafter given for the payment, performance and discharge of the Obligations. -3- 20. "Rents" shall mean all consideration, whether money or otherwise, paid or payable for the use or occupancy of the Property, including, without limitation, the proceeds of all hydrocarbons or other minerals produced from the Property and all delay rentals and bonuses from any oil, gas or other mineral lease. 21. "Trustee" shall mean the party identified second in the initial paragraph of this Deed of Trust, and his or its substitutes, successors and assigns. B. GRANT. To secure the full and timely payment and performance of the Obligations, and in consideration of the sum of TEN AND NO/100 DOLLARS ($10.00) and other valuable consideration in hand paid by Beneficiary to Grantor, the receipt and legal sufficiency of which are hereby acknowledged, Grantor has GRANTED, BARGAINED, ASSIGNED, SOLD and CONVEYED, and by these presents does GRANT, BARGAIN, ASSIGN, SELL and CONVEY, unto Trustee the Property in trust hereunder, for the use and benefit of Beneficiary, TO HAVE AND TO HOLD the Property unto Trustee forever. C. WARRANTIES, REPRESENTATIONS, COVENANTS AND OTHER AGREEMENTS. Grantor unconditionally warrants, represents, covenants and agrees that: 1. The Loan Documents to which Grantor is a party are legal, valid and binding obligations of Grantor, enforceable against Grantor in accordance with their terms, and the execution and delivery of, and performance under, the Loan Documents: are within Grantor's powers and have been duly authorized by all requisite action (corporate, partnership, trust or otherwise); have received all requisite approval by applicable Governmental Authorities; and will not violate, conflict with, breach or constitute a default under, any Legal Requirement or result in the imposition of any lien, charge or encumbrance of any nature upon any of Grantor's assets, except as contemplated in the Loan Documents. 2. Grantor has good and indefeasible title to the Land, Improvements and Fixtures, free and clear of any liens, encumbrances, security interests or adverse claims except for Permitted Encumbrances. This Deed of Trust shall constitute a valid, subsisting, first lien on the Land, Improvements and Fixtures and a valid, subsisting, perfected and prior security interest in and to the Personalty and Leases subject only to Permitted Encumbrances, all in accordance with the terms hereof. 3. The Property forms no part of any property owned, used or claimed by Grantor as a residence or business homestead, is not exempt from forced sale under the laws of the State of Texas, and Grantor hereby disclaims and renounces all and every claim to the Property as a homestead. 4. Grantor is now solvent, and no bankruptcy or insolvency proceedings are pending or contemplated by or against any of them, and all reports, statements, cost estimates and other data, furnished by or on behalf of it are true and correct. -4- 5. Grantor will promptly and fully comply with all present and future Legal Requirements and Leases, and all Improvements included or to be included in the Property comply or will comply with all Legal Requirements. 6. Grantor will duly and punctually: pay and perform the Obligations, as and when called for in the Loan Documents; and cause each of the Impositions to be paid and discharged not later than the due dates thereof and furnish Beneficiary with evidence of such payment. 7. Grantor will cause the Property to be maintained and operated in first-class order and condition, and will make all interior and exterior repairs, replacements, additions, improvements and alterations thereof and thereto, both structural and non-structural, which are reasonably appropriate to keep same in such first-class order and condition. 8. Grantor will keep the Property insured against fire, tornado, flood (if the Property is located in an identified "flood hazard area", in which flood insurance has been made available, pursuant to the National Flood Insurance Act of 1968), hail, explosion and such other risks, and in such amounts and with such companies, all as may be acceptable to Beneficiary, with loss made payable to Beneficiary by mortgage clauses of standard form. Such policies of insurance shall be delivered to Beneficiary promptly as issued, containing written undertakings from such insurance companies to provide Beneficiary with at least thirty (30) days written notice prior to cancellation of any such policy. All renewal and substitute policies of insurance shall be delivered at the office of Beneficiary, with evidence of premiums paid, at least fifteen (15) days before termination of any existing policies. In case of loss, Beneficiary, at its option, shall be entitled to receive and retain the proceeds of the insurance policies, applying the same against the Obligations or to apply such proceeds to the repair or restoration of the Improvements. If any loss shall occur at any time when Grantor shall be in default as to the performance of this covenant, Beneficiary shall nonetheless be entitled to the benefit of all insurance held by or for Grantor, to the same extent as if it had been made payable to Beneficiary. 9. Upon request from time to time and at any time during the existence of an Event of Default, Grantor will deposit with Beneficiary each month in advance a monetary sum estimated by Beneficiary to equal on a monthly basis all or such portion of the Impositions as Beneficiary may require. At least thirty (30) days prior to the date on which any tax or insurance premium must be paid to prevent delinquency thereof, Grantor will, on the request of Beneficiary, deliver to Beneficiary a statement or statements showing the amount of tax or premium required to be paid and the concern or authority to which same is payable and will, at the same time, deposit with Beneficiary such amount as will, when added to the amount of such deposits previously made and then remaining available for the purpose, be sufficient to pay such insurance or tax obligations. Beneficiary shall have the right (but not the obligation) to apply any or all of the foregoing deposits in payment of such insurance, tax and other Impositions. -5- 10. Grantor will duly and punctually perform and comply with all representations, warranties, covenants and agreements binding upon it under the Leases, not voluntarily terminate or waive its rights under any of the Leases, use all reasonable efforts to maintain each of the Leases in force and effect during the full term thereof, and appear in and defend any action or proceeding in any manner connected with any of the Leases. 11. Grantor will permit Trustee or Beneficiary, and their agents, attorneys, representatives and employees, to enter upon and inspect the Property at all reasonable times and intervals. 12. Grantor will indemnify, defend and hold Beneficiary harmless from any action, proceeding or Claim affecting the Property or the Loan Documents or the lien or security interests created thereby. Further, Grantor will notify Beneficiary, in writing, promptly of the commencement of any legal proceedings affecting the Property, or any part thereof, and will take such action as necessary to preserve Beneficiary's rights affected thereby; and Beneficiary may, at its election, take such action in behalf of and in the name of Grantor, and at Grantor's expense if Grantor fails to promptly do so. 13. Grantor will promptly pay all debts and liabilities of any character, including, without limitation, all debts and liabilities for labor, material and equipment incurred in the construction, operation or development of the Property, and will complete in a good and workmanlike manner any Improvements that may be constructed or repaired thereon. 14. Upon reasonable request from time to time and at any time, Grantor will promptly correct any defect, error or omission, which may be discovered in the contents of this Deed of Trust or the Loan Documents, and will execute and deliver any and all additional instruments as may be reasonably requested by Beneficiary to correct such defect, error or omission or to identify any additional properties which are or become subject to this Deed of Trust. 15. Grantor will give immediate written notice to Beneficiary of any condemnation proceeding or casualty loss affecting the Property and in each such instance, afford Beneficiary an opportunity to participate in any such proceeding or in the settlement of any awards thereunder. 16. Grantor will not use or occupy, or permit any use or occupancy of, the Property in any manner which violates any Legal Requirements, may be dangerous, constitutes a public or private nuisance, or makes void or voidable any of the Leases or any insurance on the Property. 17. Grantor will not permit any waste or deterioration of any part of the Property, any alterations or additions to the Property of a material nature, or any of the Fixtures or Personalty to be removed at any time from the Land or Improvements unless the removed item is removed temporarily for maintenance and repair or, if removed permanently, is replaced by an article of at least equal suitability and value, and owned by Grantor free and clear of any other lien or security interest. -6- 18. Grantor will not, without the prior written consent of Beneficiary create, place or permit to be created or placed, or allow to remain, any mortgage, pledge, lien (statutory, constitutional or contractual), security interest, encumbrance or charge, or conditional sale or other title retention agreement other than Permitted Encumbrances, regardless of whether same are expressly subordinate to the liens and security interests of the Loan Documents, with respect to the Property, or sell, lease, exchange, assign, convey, transfer possession of or otherwise dispose of all or any portion of the Property, or any interest therein, but if ownership of the Property or any part thereof or interest therein becomes vested in any person or entity other than Grantor, Beneficiary or any other holder of the Obligations may, without notice to Grantor, deal with such successor or successors in interest with reference to this Deed of Trust and the Obligations in the same manner as with Grantor without in any way discharging Grantor or any Obligated Party from the Obligations. Without limiting the right of Beneficiary to withhold its consent or to make other requirements prior to granting its consent, Beneficiary may require evidence satisfactory to Beneficiary that transferee is creditworthy and has such management ability as Beneficiary shall deem in its sole discretion to be necessary and may require transferee to execute such written modification and assumption agreements with regard to the Loan Documents as Beneficiary shall deem necessary or desirable, including, without limitation, provisions increasing the interest rate on the Note. No transfer of the Property, no forbearance by Beneficiary and no extension of the time for the payment or performance of the Obligations granted by Beneficiary shall release, discharge or affect in any way Grantor's or any Obligated Party's liability hereunder. 19. Environmental representations and notification requirements are contained in the Environmental Indemnity Agreement between Beneficiary and Grantor, attached hereto as Exhibit "C" (the "Environmental Indemnity"). D. DEFAULT AND FORECLOSURE. To the fullest extent permitted in equity or at law, by statute or otherwise: 1. If an Event of Default shall occur, Beneficiary may, at Beneficiary's sole election and by or through Trustee or otherwise, exercise any or all of the following: (a) Declare all unpaid amounts under the Note and any other unpaid portion of the Obligations immediately due and payable, without further notice, presentment, protest, demand or action of any nature whatsoever (each of which is hereby expressly waived by Grantor), whereupon the same shall become immediately due and payable. (b) Enter upon the Property and take exclusive possession thereof and of all books, records and accounts relating thereto, and, if necessary to obtain such possession, Beneficiary may invoke any and all legal remedies to dispossess Grantor, including specifically one or more actions for forcible entry and detainer, trespass to try title and writ of restitution. (c) Hold, lease, manage, operate or otherwise use or permit the use of the Property, either itself or by other persons, firms or entities, in such manner, for such time and upon such other terms as Beneficiary may deem prudent under the circumstances -7- (making such repairs, alterations, additions and improvements thereto and taking such other action from time to time as Beneficiary shall deem necessary or desirable), and apply all Rents collected in connection therewith in accordance with the provisions of Paragraph 7 of this Section D. (d) Sell or offer for sale the Property in such portions, order and parcels as Beneficiary may determine, with or without having first taken possession of same, to the highest bidder for cash at public auction. Such sale shall be made at the location designated by the commissioner's court of the county where the Land is situated pursuant to V.T.C.A. Property Code Section 51.002 or if no such designation has been made, at the courthouse door of the county where the Land is situated (or if the Land is situated in more than one county, then the Property shall be sold at the designated location or the courthouse door of any of such counties as designated in the notices of sale provided for herein) on the first Tuesday of any month between 10:00 A.M. and 4:00 P.M. after giving adequate legal notice of the time, place and terms of sale, by posting or causing to be posted written or printed notices thereof for at least twenty-one (21) consecutive days preceding the date of said sale at the courthouse door of the foregoing county, and if the Land is situated in more than one county, one notice shall be posted at the courthouse door of each county in which the Land is situated, and by Beneficiary serving written notice of such proposed sale on each debtor obligated to pay the Obligations, at least twenty-one (21) days preceding the date of said sale by certified mail at the most recent address for such parties in the records of Beneficiary, or by accomplishing all or any of the aforesaid in such manner as permitted or required by V.T.C.A. Property Code Section 51.002 (as now written or as hereafter amended or succeeded) relating to the sale of real estate and/or by Chapter 9 of the Code relating to the sale of collateral after default by a debtor, or by any other present or subsequent laws. At any such sale (i) Trustee shall not be required to have physically present, or to have constructive possession of, the Property (Grantor hereby covenants and agrees to deliver to Trustee any portion of the Property not actually or constructively possessed by Trustee immediately upon demand by Trustee) and the title to and right of possession of any such property shall pass to the purchaser thereof as completely as if the same had been actually present and delivered to purchaser at such sale; (ii) each instrument of conveyance executed by Trustee shall contain a general warranty of title, binding upon Grantor; (iii) each and every recital contained in any instrument of conveyance made by Trustee shall conclusively establish the truth and accuracy of the matters recited therein, including, without limitation, nonpayment of the Obligations, advertisement and conduct of such sale in the manner provided herein and otherwise by law and by appointment of any successor Trustee hereunder; (iv) any and all prerequisites to the validity of such sale shall be conclusively presumed to have been performed; (v) the receipt of Trustee or of such other party making the sale shall be a sufficient discharge to the purchaser for his purchase money and no such purchaser, or his assigns or personal representatives, shall thereafter be obligated to see to the application of such purchase money or be in any way answerable for any loss, misapplication or nonapplication thereof; (vi) Grantor shall be completely and irrevocably divested of all of its right, title, interest, claim and demand whatsoever, either at law or in equity, in and to the property sold and such sale shall be a perpetual bar both at law -8- and in equity against Grantor, and against any and all other persons claiming or to claim the property sold or any part thereof; and (vii) Beneficiary may be a purchaser at any such sale. (e) Upon, or at any time after, commencement of foreclosure of the lien and security interest provided for herein, or any legal proceedings hereunder, make application to a court of competent jurisdiction as a matter of strict right and without notice to Grantor or regard to the adequacy of the Property for the repayment of the Obligations, for appointment of a receiver of the Property and Grantor does hereby irrevocably consent to such appointment. Any such receiver shall have all the usual powers and duties of receivers in similar cases. (f) Exercise any and all other rights, remedies and recourses granted under the Loan Documents or as may be now or hereafter existing in equity or at law, by virtue of statute or otherwise. 2. Should the Property be sold in one or more parcels as permitted by Paragraph l(d) of this Section D, the right of sale arising out of any Event of Default shall not be exhausted by any one or more such sales, but other and successive sales may be made until all of the Property has been sold or until the Obligations have been fully satisfied. 3. All rights, remedies and recourses of Beneficiary granted in the Loan Documents or otherwise available at law or equity shall be cumulative and concurrent, may be pursued separately, successively or concurrently against Grantor or any Obligated Party, or against the Property, or against any one or more of them, at the sole discretion of Beneficiary, may be exercised as often as occasion therefor shall arise, it being agreed by Grantor that the exercise or failure to exercise any of same shall in no event be construed as a waiver or release thereof or of any other right, remedy or recourse, and shall be non-exclusive. 4. Beneficiary may release, regardless of consideration, any part of the Property without, as to the remainder, in any way impairing, affecting, subordinating or releasing the lien or security interests evidenced by the Loan Documents or affecting the obligations of Grantor or any Obligated Party to pay or perform, as their interests may appear, the Obligations. For payment of the Obligations, Beneficiary may resort to any of the security therefor in such order and manner as Beneficiary may elect. No security heretofore, herewith or subsequently taken by Beneficiary shall in any manner impair or affect the security given by the Loan Documents, and all security shall be taken, considered and held as cumulative. 5. Grantor hereby irrevocably and unconditionally waives and releases all benefits that might accrue to Grantor by virtue of any present or future law exempting the Property from attachment, levy or sale on execution or providing for any appraisement, valuation, stay of execution, exemption from civil process, redemption or extension of time for payment, all notices of any Event of Default or of Trustee's exercise of any right, remedy or recourse provided for under the Loan Documents, and any right to a marshalling of assets or a sale in inverse order of alienation. -9- 6. In case Beneficiary shall have proceeded to invoke any right, remedy or recourse permitted under the Loan Documents and shall thereafter elect to discontinue or abandon same for any reason, Beneficiary shall have the unqualified right so to do and, in such event, Grantor and Beneficiary shall be restored to their former positions with respect to the Obligations, the Loan Documents, the Property and otherwise, and the rights, remedies, recourses and powers of Beneficiary shall continue as if same had never been invoked. 7. Any proceeds of any sale of, and any Rents, except as otherwise provided in Paragraph 2 of Section G, or other amounts generated by the holding, leasing, operation or other use of, the Property shall be applied in the following orders of priority: first, to the payment of all costs and expenses of taking possession of the Property and of holding, leasing, operating, using, repairing, improving and selling the same, including, without limitation, reasonable fees of the Trustee and attorneys retained by Beneficiary or Trustee; reasonable fees of any receiver or accountants; recording and filing fees; court costs; costs of advertisement, and the payment of any and all Impositions, liens, security interests or other rights, titles or interests equal or superior to the lien and security interest of this Deed of Trust (except those to which the Property has been sold subject to and without in any way implying Beneficiary's consent to the creation thereof); second, to the payment of all accrued and unpaid interest due on the Note; third, to the payment of the unpaid principal balance of the Note; fourth, to the payment of all amounts, other than unpaid principal and accrued interest on the Note, which may be due to Beneficiary under the Loan Documents, together with interest thereon as provided therein; fifth, to the payment of the unpaid Obligations; sixth, to Grantor. 8. In addition to the remedies set forth in this Section D, upon the occurrence of an Event of Default the Beneficiary and Trustee shall, in addition, have available to them the remedies set forth in Sections F and G herein, as well as all other remedies available to them at law or in equity. E. CONDEMNATION AND OTHER AWARDS. All judgments, decrees or awards now or hereafter made for injury or damage to the Property, or awards, settlements or other compensation now or hereafter made by any Governmental Authority, including those for any variation of, or change of grade in, any streets affecting the Land or the Improvements, are hereby assigned in their entirety to Beneficiary, who may apply the same to the Obligations in such manner as Beneficiary may elect and Beneficiary is hereby authorized, in the name of Grantor, to execute and deliver valid acquittances for, and to appeal from, any such award, judgment or decree. F. SECURITY AGREEMENT. Grantor hereby grants to Beneficiary a security interest in and to certain property as follows: 10 This Deed of Trust shall also constitute and serve as a "Security Agreement" on personal property within the meaning of, and shall constitute a first and prior security interest under Chapter 9 of the Code, with respect to the Fixtures and Leases, subject only to Permitted Encumbrances. To this end, Grantor has granted, bargained, conveyed, assigned, transferred and set over, and by these presents does grant, bargain, convey, assign, transfer and set over, unto Trustee, -10- for the benefit of Beneficiary as a secured party, a first and prior security interest (subject only to Permitted Encumbrances) and all of Grantor's right, title and interest in, to and under the Fixtures and Leases, in trust, to secure the full and timely payment and performance of the Obligations. 20 Grantor agrees to execute and deliver to Beneficiary, in form and substance reasonably satisfactory to Beneficiary, such financing statements and such further assurances as Beneficiary may, from time to time, consider necessary to create, perfect, and preserve the security interest herein granted, and Beneficiary may cause such statements and assurances to be recorded and filed, at such times and places as may be required or permitted by law to create, perfect and preserve such security interest. 30 Beneficiary, as well as Trustee on Beneficiary's behalf, shall have all the rights, remedies and recourses with respect to the Fixtures and Leases afforded a "Secured Party" by Chapter 9 of the Code, in addition to, and not in limitation of, the other rights, remedies and recourses afforded Beneficiary or Trustee by the Loan Documents. 40 The security interest herein granted shall not be deemed or construed to constitute Trustee or Beneficiary as a party in possession of the Property, to obligate Trustee or Beneficiary to lease the Property, or to take any action, incur any expenses or perform any obligation whatsoever under any of the Leases or otherwise. 50 Upon the occurrence of an Event of Default and at any time thereafter: (a) Trustee or Beneficiary shall have, with regard to the Fixtures and Leases the remedies provided in this Deed of Trust and in the Code (no such remedy granted by the Code being excepted, modified or waived herein). Trustee or Beneficiary may use his or its discretion in exercising the rights and electing the remedies; provided, however, all acts shall be in compliance with the standards of the Code, where applicable and required. For purposes of the notice requirements of the Code and this Section F, it is agreed that notice sent or given not less than ten (10) calendar days prior to the taking of the action to which the notice relates, is reasonable notice. (b) Trustee or Beneficiary shall be entitled, acting in his or its sole discretion, to apply the proceeds of any disposition of the Fixtures and Leases in the order set forth in Chapter 9 of the Code, or, if allowed by the Code, in the order set forth in Paragraph 7 of Section D hereof. (c) Notwithstanding anything herein to the contrary, Beneficiary, or the Trustee acting on Beneficiary's behalf, may at its or his option, dispose of the Fixtures and other items of personal property covered by this Deed of Trust in accordance with Beneficiary's rights and remedies in respect of the Land pursuant to the provisions of this Deed of Trust, in lieu of proceeding under the Code. -11- 60 Beneficiary may require Grantor to assemble the Fixtures and Leases and make them available to Beneficiary or Trustee at a place to be designated by Beneficiary that is reasonably convenient to both parties. All expenses of retaking, holding, preparing for sale, lease or other use or disposition, selling, leasing or otherwise using or disposing of the Fixtures and Leases and the like which are incurred or paid by Beneficiary as authorized or permitted hereunder, including also all attorneys' fees, legal expenses and costs, shall be added to the Obligations and Grantor shall be liable therefor. 70 As to the Fixtures and Leases, this Deed of Trust shall be effective as a financing statement when filed for record in the Deed of Trust Records of any county in which any portion of the Land is located. The record owner of the Land is Grantor, whose mailing address for purposes of such financing statement is set forth in the opening recital hereinabove. Information concerning the security interest created by this instrument may be obtained from Beneficiary at its address similarly set forth in such opening recital. G. ASSIGNMENT OF RENTS. Grantor does hereby absolutely and unconditionally assign, transfer and convey to Beneficiary, as well as to Trustee on Beneficiary's behalf, all Rents under the following provisions: 1 Grantor reserves the right, unless and until an Event of Default occurs, to collect the Rents as a trustee for the benefit of Beneficiary, and Grantor shall apply the Rents so collected in the order set forth in Paragraph 7 of Section D hereof. 2 Beneficiary, or Trustee on Beneficiary's behalf, may at any time, and without notice, either in person, by agent, or by receiver to be appointed by a court, enter and take possession of the Property or any part thereof, and in its own name, sue for or otherwise collect such Rents. Grantor hereby agrees with Beneficiary that the other parties under the Leases may, upon notice from Trustee or Beneficiary of the occurrence of an Event of Default, thereafter pay directly to Beneficiary the Rents due and to become due under the Leases and attorn to all other obligations thereunder direct to Beneficiary, or Trustee on Beneficiary's behalf, without any obligation on their part to determine whether an Event of Default does in fact exist or has in fact occurred. All Rents collected by Beneficiary, or Trustee acting on Beneficiary's behalf, shall be applied as provided for in Paragraph 7 of Section D above; provided, however, that if the reasonable costs, expenses and reasonable attorneys' fees shall exceed the amount of Rents collected, the excess shall be added to the Obligations, shall bear interest as provided in Paragraph 5 of Section L below and shall be immediately due and payable. The entering upon and taking possession of the Property, the collection of Rents, and the application thereof as aforesaid shall not cure or waive any Event of Default or notice of default, if any, hereunder nor invalidate any act done pursuant to such notice, except to the extent any such default is fully cured. Failure or discontinuance of Beneficiary, or Trustee on Beneficiary's behalf, at any time or from time to time, to collect said Rents shall not in any manner impair the subsequent enforcement by Beneficiary, or Trustee on Beneficiary's behalf, of the right, power and authority herein conferred upon it. Nothing contained herein, nor the exercise of any right, power or authority herein granted to Beneficiary, or Trustee on Beneficiary's behalf, shall be or be construed to be, an affirmation by it of any tenancy, lease, or option, nor an -12- assumption of liability under nor the subordination of the lien or charge of this Deed of Trust, to any such tenancy, lease, or option. 3 Grantor will not (a) execute an assignment of any of its right, title or interest in the Rents, or (b) except where the lessee is in default thereunder, terminate or consent to the cancellation or surrender of any Lease affecting the Property or any part thereof, now or hereafter existing, having an unexpired term of one year or more except that any Lease may be cancelled, provided that promptly after the cancellation or surrender thereof a new Lease is entered into with a new lessee acceptable to Beneficiary in its sole judgment, on substantially the same terms as the terminated or cancelled Lease, or (c) modify any Lease affecting the Property or any part thereof so as to shorten the unexpired term thereof or so as to decrease the amount of the Rents, or (d) accept prepayments of any Rents in excess of sixty (60) days, except prepayments in the nature of security for the performance of the lessee under any Lease, or (e) in any other manner impair the value of the Property or the security of this Deed of Trust. Grantor will not execute any Lease of all or any substantial portion of the Property except for actual occupancy by the lessee thereunder, and will at all times promptly and faithfully perform, or cause to be performed, each covenant, condition and agreement contained in each Lease affecting the Property now or hereafter existing on the part of lessor thereunder to be kept and performed. Grantor shall furnish to Beneficiary, within ten (10) days after a request by Beneficiary to do so, a written statement containing the names of all lessees of the Property, the terms of their respective Leases, the spaces occupied and the rentals payable thereunder. H. THE TRUSTEE. The following provisions shall govern with respect to the Trustee: 10 Trustee shall not be liable for any error of judgment or act done by Trustee in good faith, or be otherwise responsible or accountable to Grantor under any circumstances whatsoever, nor shall Trustee be personally liable in case of entry by him, or anyone entering by virtue of the powers herein granted, upon the Property for debts contracted or liability or damages incurred in the management or operation of the Property. Trustee shall have the right to rely on any instrument, document or signature authorizing or supporting any action taken or proposed to be taken by him hereunder, believed by him in good faith to be genuine. Trustee shall be entitled to reimbursement for expenses incurred by him in the performance of his duties hereunder and to reasonable compensation for such of his services hereunder as shall be rendered. Grantor will, from time to time, pay the compensation due to Trustee hereunder and reimburse Trustee for, and save him harmless against, any and all liability and expenses which may be incurred by him in the performance of his duties. 20 All moneys received by Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated in any manner from any other moneys (except to the extent required by law), and Trustee shall be under no liability for interest on any money received by him hereunder. -13- 30 Trustee may resign at any time with or without notice. If Trustee shall die, resign or become disqualified from acting in the execution of this trust or shall fail or refuse to execute the same when requested by Beneficiary so to do, or if, for any reason, Beneficiary shall prefer to appoint a substitute trustee to act instead of the forenamed Trustee, Beneficiary shall have full power to appoint a substitute trustee and, if preferred several substitute trustees who shall succeed to all the estates rights, powers and duties of the forenamed Trustee. 40 Any new Trustee or Trustees appointed pursuant to any of the provisions hereof shall, without any further act, deed or conveyance, become vested with all the estates, properties, rights, powers and trusts of its, his or their predecessor in the rights hereunder with like effect as if originally named as Trustee herein; but nevertheless, upon the written request of Beneficiary or of the successor Trustee(s), the Trustee ceasing to act shall execute and deliver an instrument transferring to such successor Trustee(s), upon the trusts herein expressed, all the estates, properties, rights, powers and trusts of the Trustee so ceasing to act, and shall duly assign, transfer and deliver any of the property and money held by such Trustee to the successor Trustee(s) so appointed in his place. I. ENVIRONMENTAL MATTERS. Beneficiary's right to conduct site assessments and remove Hazardous Substances shall be governed by the terms of the Environmental Indemnity. J. INDEMNIFICATION. Grantor's obligations to indemnify Beneficiary shall be governed by the terms of the Environmental Indemnity. K. MISCELLANEOUS. The following provisions shall also apply to and govern this Deed of Trust and the interpretation hereof: 1 Each and all of the representations, warranties, covenants and other obligations made or undertaken by Grantor hereunder shall survive the execution and delivery of the Loan Documents and the consummation of the loan called for therein, and shall continue in full force and effect until the Obligations shall have been paid in full. 2 Grantor, upon the request of Trustee or Beneficiary will execute, acknowledge, deliver and record or file such further instruments and do such further acts as may be reasonably necessary, desirable or proper to carry out more effectively the purposes of the Loan Documents and to subject to the liens and security interests thereof any property intended by the terms thereof to be covered thereby, including specifically, but without limitation, any renewals, additions, substitutions, replacements, or appurtenances to the then Property. Grantor will pay all such recording, filing, re-recording and re-filing taxes, fees and other charges, including those for security interest searches. 3 All notices or other communications required or permitted to be given pursuant to this Deed of Trust (except for notices of a foreclosure sale which shall be given in the manner set forth in Paragraph l(d) of Section D hereof) shall be given as provided in the Note. -14- 4 Any failure by Trustee or Beneficiary to insist, or any election by Trustee or Beneficiary not to insist, upon strict performance by Grantor of any of the terms, provisions or conditions of the Loan Documents shall not be deemed to be a waiver of same or of any other term, provision or condition thereof, and Trustee or Beneficiary shall have the right at any time or times thereafter to insist upon strict performance by Grantor of any and all of such terms, provisions and conditions. 5 If Grantor shall fail, refuse or neglect to make any payment or perform any act required by the Loan Documents, then at any time thereafter, and without notice to or demand upon Grantor and without waiving or releasing any other right, remedy or recourse Beneficiary may have because of same, Beneficiary may (but shall not be obligated to) make such payment or perform such act for the account of and at the expense of Grantor, and shall have the right to enter the Land and Improvements for such purpose and to take all such action thereon and with respect to the Property as it may deem necessary or appropriate. Grantor shall indemnify Beneficiary for all Claims incurred or accruing by reason of any acts performed by Beneficiary pursuant to this Paragraph 5 of Section L or by reason of any other provision in the Loan Documents. All sums paid by Beneficiary pursuant to this Paragraph 5 of this Section L and all other sums expended by Beneficiary to which it shall be entitled to be indemnified, together with interest thereon at the Default Rate (as defined in the Note) shall constitute additional Obligations secured by this Deed of Trust. 6 All of the covenants and other obligations made or undertaken by Grantor pursuant to this Deed of Trust are intended by the parties to be, and shall be construed as, covenants running with the Property. 7 All of the terms of the Loan Documents shall apply to, be binding upon and inure to the benefit of the parties thereto, their respective successors, assigns, heirs and legal representatives, and all other persons claiming by, through or under them. 8 The Loan Documents are intended to be performed in accordance with, and only to the extent permitted by, all applicable Legal Requirements. If any provision of any of the Loan Documents or the application thereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, neither the remainder of the instrument in which such provision is contained nor the application of such provision to other persons or circumstances nor the other instruments referred to hereinabove shall be affected thereby, but rather shall be enforced to the greatest extent permitted by law. It is hereby expressly stipulated and agreed to be the intent of Grantor and Beneficiary at all times to comply with the usury, and all other laws relating to the Loan Documents. If, at any time, the applicable Legal Requirements render usurious any amount called for in any Loan Document, then it is Grantor's, Trustee's and Beneficiary's express intent that such document be immediately deemed reformed and the amounts collectible reduced or spread, without the necessity of the execution of any new document, so as to comply with the then applicable law but so as to permit the recovery of the fullest amount otherwise called for in such Loan Documents. -15- 9 This Deed of Trust may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute but one instrument. 10 If any or all of the proceeds of the Note have been used to extinguish, extend or renew any indebtedness heretofore existing against the Property, then, to the extent of such funds so used, the Obligations and this Deed of Trust shall be subrogated to all of the rights, claims, liens, titles and interests heretofore existing against the Property to secure the indebtedness so extinguished, extended or renewed and the former rights, claims, liens, titles and interests, if any, are not waived but rather are continued in full force and effect in favor of Beneficiary and are merged with the lien and security interest created herein as cumulative security for the repayment of the Obligations and the satisfaction of the Obligations. 11 THIS DEED OF TRUST SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. 12 Whenever the context hereof requires, references herein to the singular number shall include the plural, and likewise the plural shall include the singular; words denoting gender shall be construed to include the masculine, feminine and neuter, where appropriate; and specific enumeration shall not exclude the general, but shall be considered as cumulative. 13 All obligations of Grantor hereunder to indemnify Beneficiary against Claims shall apply to Claims which arise as a result of the negligence (sole, joint or contributory) of Beneficiary, but shall not apply to Claims which arise as a result of the gross negligence or willful misconduct of Beneficiary. 14 THIS DEED OF TRUST EMBODIES THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDES 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 HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. EXECUTED and effective as of, although not necessarily on, the day and year first above written. GRANTOR: OYOG OPERATIONS, LP By: OYOG, LLC, its general partner -16- By: OYO Geospace Corporation, its managing member By: /s/ Gary D. Owens ------------------------------------- Name: Gary D. Owens Title: President STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on the 10th day of September, 2003, by Gary D. Owens, President of OYO Geospace Corporation, a Delaware corporation, sole member of OYOG, LLC, a Delaware limited liability company, general partner of OYOG Operations, LP, a Texas limited partnership, on behalf of said limited partnership. /s/ P J Whitworth ---------------------------------- Notary Public in and for The State of T E X A S -17- EXHIBIT "A" Real Property -18- EXHIBIT "B" Permitted Encumbrances 1. Those easements granted in that certain instrument executed by Reed Roller Bit Company to Houston Lighting & Power Co., dated May 26, 1996, and recorded in Volume 6410 at Page 576 of the Deed Records of Harris County, Texas, being (a) an easement for electric power distribution line ten (10) feet wide adjoining the South, Southeast and East lines of the said tract, together with an unobstructed aerial easement five (5) feet wide adjacent thereto, extending upward from a plane twenty (20) feet above the ground, (b) an easement ten (10) feet wide running East to West two hundred (200) feet long for underground conduits, conductors and devices and (c) an unobstructed easement seventeen (17) feet wide by eighteen (18) feet long for a ground type transformer station. 2. An unobstructed aerial easement for power distribution lines twenty (20) feet wide, extending upward from a plane twenty (20) feet above the ground (centered on the ten (10) feet wide easement identified hereinabove), said easement being granted by Reed Roller Bit company to Houston Lighting & Power Co., dated June 19, 1966 and recorded in Volume 6410 at Pag 592 of the Deed Records of Harris County, Texas, the exact location of said easement being shown by the plat attached to the said instrument. 3. An unobstructed easement for electric power distribution lines ten (10) feet wide adjoining the East line of the said tract, together with an unobstructed aerial easement five (5) feet wide adjacent thereto, extending upward from a plane twenty (20) feet above the ground, said easement being granted by Dresser Industries, Inc. to Houston Lighting & Power Co. by instrument dated March 4, 1969, and recorded in Volume 7563 at Page 45 of the Deed Records of Harris County, Texas, the exact location of the said easements being shown on the plat attached to the said instrument. 4. Storm Sewer Easement twenty (20) feet wide along the North property line granted to the City of Houston by instrument(s) recorded in Volume 302, Page 16, of the Map Records of Harris County, Texas, and filed for record in the Office of the County Clerk of Harris County, Texas under Clerk's File No(s). G-956077, and as shown on sketch attached thereto. 5. 1/2 non-participating royalty interest in all of the oil, gas and other minerals in and under the herein described property, as reserved in instrument filed for record in the office of the County Clerk of Harris County, Texas, under Clerk's File No(s). E-135299. 6. The following matters disclosed by survey dated August 8, 2003, made by Fred W. Lawton, Registered Professional Land Surveyor No. 2321: a. Right of adjoining landowner in possession of land lying West of a fence along the West line of the Property; b. Sanitary sewer manhole, inlets, loading docks, and light poles; -19- c. One story brick and tin warehouse, two story brick and tin buildings; and d. Gas tank and ditch. -20- EX-10.18 4 dex1018.txt PROMISSORY NOTE EXHIBIT 10.18 PROMISSORY NOTE $3,040,000.00 Houston, Texas September 10, 2003 FOR VALUE RECEIVED, the undersigned, OYOG OPERATIONS, LP, a Texas limited partnership ("Borrower"), hereby promises to pay to the order of COMPASS BANK an Alabama state banking corporation ("Lender"), at its designated office, in lawful money of the United States of America, the principal sum of THREE MILLION FORTY THOUSAND AND NO/100 DOLLARS ($3,040,000.00), together with interest thereon at the rate set forth below. The outstanding principal balance hereof shall bear interest prior to maturity 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 greater of (i) the Libor Rate (hereinafter defined) in effect from day to day plus two percent (2%) or (ii) three and three-fourths percent (3.75%) per annum, and each change in the rate of interest charged hereunder shall become effective, without notice to Borrower, on the effective date of such change in the Libor 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 Libor Rate will 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. If an Event of Default (hereinafter defined) has occurred and is existing, the principal hereof 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 360 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. Principal of and interest on this Note shall be due and payable in eighty-four (84) installments as follows: (a) Three (3) monthly installments in the amount of accrued and unpaid interest on this Note shall be payable on the first of each month commencing October 1, 2003 and ending on December 1, 2003. (b) Eighty (80) monthly installments in the combined interest and principal amount of Twenty-Two Thousand One Hundred Seven and 56/100 Dollars ($22,107.56) each shall be due and payable on the first day of each month, commencing January 1, 2004 until and including August 1, 2010; and (c) A final installment in the amount of all outstanding principal, plus accrued and unpaid interest, shall be due and payable on September 1, 2010. At any time that there has been an increase in the Libor Rate, Lender may reset the monthly combined principal and interest installment amounts set forth above to an amount which would amortize this Note over a period of fifteen (15) years (but with a final maturity date on September 1, 2010) taking into account such increased Libor Rate as of the date of such increase in the Libor Rate. This Note is (i) secured as provided in the Deed of Trust (hereinafter defined) and (ii) the Assignment of Leases (hereinafter defined). Borrower may prepay the principal of and accrued interest on this Note at any time without premium or penalty, provided that all such prepayments of principal shall be applied to the principal payments due hereon in inverse order of their maturities. As used in this Note, the following terms shall have the respective meanings indicated below: "Assignment of Leases" means the Assignment of Lessor's Interest in Lease and Security Agreement dated of even date herewith, executed by Borrower for the benefit of Lender, as the same may be amended, supplemented, or modified from to time. "Cooper Indemnity" means that certain Environmental Indemnity and Remediation Agreement dated as of September 10, 2003 among Cooper Industries, Inc., Borrower and Cooper Power Tools, Inc. "Debt" means for any Person (a) all indebtedness, whether or not represented by bonds, debentures, notes, securities or other evidences of indebtedness, for the repayment of money borrowed, including, with respect to Borrower, the indebtedness evidenced by this Note, and all other indebtedness of Borrower to Lender, (b) Rate Management Transaction Obligations, (c) all indebtedness representing deferred payment of the purchase price of property or assets, (d) all indebtedness under any lease which, in conformity with GAAP, is required to be capitalized for balance sheet purposes, (e) all indebtedness under guaranties, endorsements, assumptions or other contingent obligations, in respect of, or to purchase or otherwise acquire, indebtedness of others, (f) 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 (g) any obligation to redeem or repurchase any of such Person's capital stock, partnership or membership interests or other ownership interests as applicable. "Deed of Trust" means the Deed of Trust, Security Agreement, Assignment of Rents and Financing Statement dated of even date herewith, executed by Borrower for the benefit of Lender, as the same may be amended, supplemented, or modified from to time. "Default Rate" means the lesser of (a) the greater of (i) the sum of the Libor Rate plus five percent (5%) or (ii) eight percent (8%), or (b) the Maximum Rate. "Event of Default" each of the following shall constitute and be deemed an "Event of Default": (a) Borrower shall fail to pay this Note or any installment of this Note, whether principal or interest, within three (3) days of when due. (b) Any material representation or warranty made or deemed made by Borrower, Guarantor or any of their respective officers in any certificate, report, notice, or financial statement furnished at any time in connection with this Note or any Loan Document shall be false, misleading, or erroneous in any material respect when made or deemed to have been made. (c) Borrower or Guarantor, as applicable, shall fail to perform, observe, or comply with any covenant, agreement or term contained in this Note or any Loan Document and the same shall remain unremedied for thirty (30) days after the earlier of (i) knowledge of such failure by Borrower or Guarantor, as applicable or (ii) notice of such failure from Lender. (d) Borrower or Guarantor, as applicable, 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 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. -2- (e) An involuntary proceeding shall be commenced against Borrower or Guarantor 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) Borrower or Guarantor shall fail to pay when due any principal of or interest on any debt for borrowed money (other than the obligations hereunder), 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. (g) The occurrence or the existence of any default, Event of Default or similar condition or event (however described) with respect to any Rate Management Transaction (h) Any default, Event of Default or similar condition or event (however described) under the Cooper Indemnity. (i) This Note 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 Borrower, or Borrower shall deny that it has any further liability or obligation hereunder prior to payment in full of all obligations hereunder, or the lien created by the Deed of Trust shall cease to be a first priority lien. (j) Borrower or Guarantor 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 $50,000.00 against any of its assets or properties. (k) Borrower or Guarantor shall fail to satisfy and discharge promptly any final judgement against it for the payment of money in an aggregate amount in excess of $50,000.00. "GAAP" means generally accepted accounting principles in the United States of America consistently applied. "Guarantor" means OYO Geospace Corporation, a Delaware corporation. "Guaranty" means the Guaranty Agreement executed by Guarantor in favor of Lender, as the same may be amended, supplemented, or modified from time to time. "Libor Rate" means, on any day, the London Interbank Offered Rate (Libor) for a one (1) month period as published in The Wall Street Journal on that day under the section "Money Rates." If such section of The Wall Street Journal reflects more than one rate as being the London Interbank Offered Rate (Libor) for a one (1) month period, then the highest rate shall be the Libor Rate. On days when The Wall Street Journal is not published, the Libor shall be the London Interbank Offered Rate (Libor) for a one (1) month period stated in the most recently published edition of The Wall Street Journal. In the event The Wall Street Journal ceases to be published altogether, or ceases to publish the London Interbank Offered Rate (Libor) for a one (1) month period, then Lender or its successors or assigns shall establish and use a new Libor Rate, in the exercise of its sole discretion, without any notice to the Borrower or any person being required. The Libor Rate shall automatically fluctuate, upward and downward, without notice to Borrower or any other person, as and in the amount the said published London Interbank Offered Rate (Libor) for a one (1) month period shall fluctuate. The Libor Rate is a reference rate and does not necessarily represent Lender's best or lowest rate or a favored rate, and Lender disclaims any statement, representation or warranty to the contrary. -3- "Loan Documents" means this Note and all security agreements, deeds of trust, pledge agreements, assignments, letters of credit, guaranties, certificates and other instruments, documents, and agreements, if any, executed and delivered pursuant to or in connection with this Note, as such instruments, documents, and agreements may be amended, modified, renewed, extended, or supplemented from time to time. "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. "Obligations" means all obligations, indebtedness, and liabilities of Borrower to Lender under this Note (including the payment of principal and interest hereon), the Rate Management Transaction Obligations and the other Loan Documents and all interest accruing thereon and all attorneys' fees and other expenses incurred in the enforcement or collection thereof. "Person" means any individual, corporation, limited liability company, business trust, association, company, partnership, joint venture, governmental authority, or other entity. "Rate Management Transaction" means any transaction (including an agreement with respect thereto) now existing or hereafter entered into between Borrower and Lender which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures. "Rate Management Transaction Obligations" means any and all obligations, contingent or otherwise, whether now existing or hereafter arising, of Borrower to Lender arising under or in connection with any Rate Management Transaction. "Real Property" means the real property and interests in real property described in the Deed of Trust, and all improvements and fixtures thereon and all appurtenances thereto. The proceeds of this Note shall be used for the purchase of land and building located at 7007 Pinemont, Houston, Texas for use in operations of Borrower. Borrower may not use the proceeds of this Note for any other purpose without first obtaining the consent of Lender. Borrower agrees to deliver to Lender: (a) Financial Statements for Borrower. As soon as available, and in any event within one hundred twenty (120) days after the end of each fiscal year of Borrower beginning with the fiscal year ending September 30, 2003, a copy of the annual company prepared financial statements of Borrower for such fiscal year containing balance sheets and statements of income as at the end of such fiscal year and for the 12-month period then ended, all in reasonable detail, prepared in accordance with generally accepted accounting principals consistently applied, and certified by an officer of Borrower acceptable to Lender. -4- (b) Financial Statements for Guarantor. As soon as available, and in any event within one hundred twenty (120) days after the end of each fiscal year of Guarantor, beginning with the fiscal year ending September 30, 2003, a copy of the annual audit report of Guarantor for such fiscal year containing balance sheets, statements of income 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 generally accepted accounting principals consistently applied, and audited and certified without qualification by independent certified public accountants of recognized standing acceptable to Lender. (c) Quarterly Financial Statements for Guarantor. As soon as available, and in any event within sixty (60) days after the end of each quarter of each fiscal year of Guarantor, a copy of the financial statements of Guarantor as of the end of such fiscal quarter and for the portion of the fiscal year then ended, containing balance sheets, statements of income and statements of 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 and certified by an officer of Guarantor acceptable to Lender to fairly and accurately present the financial condition and results of operations of Guarantor at the date and for the periods indicated therein. Borrower agrees with Lender that Borrower will not, without Lender's prior written consent, (a) become a party to a merger, consolidation, partnership or joint venture or purchase or otherwise acquire all or a substantial part of the assets of any Person or any shares or other evidence of beneficial ownership of any Person, (b) dissolve or liquidate, (c) sell, lease, assign, transfer or otherwise dispose of substantially all of its assets, or (d) enter into any agreement to do any of the foregoing. Borrower agrees with Lender that promptly after the commencement thereof, Borrower will give Lender notice of all actions, suits and proceedings before any court or governmental department, commission, board, agency or instrumentality, domestic or foreign, affecting Borrower which could have a material adverse effect on the financial condition of Borrower. Borrower agrees with Lender that Borrower will maintain with financially sound 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 and as required by the Deed of Trust. Each insurance policy covering the Real Property shall name Lender as lender loss Lender and provide that such policy will not be cancelled without thirty (30) days prior written notice to Lender. Borrower will deliver to Lender copies of all insurance policies required by this paragraph, together with loss payable endorsements in favor of Lender with respect to all insurance policies covering the Real Property. Borrower agrees with Lender that Borrower will comply in all material respects with all laws and regulations and all agreements, contracts and instruments binding on it or affecting its properties or business except where the failure to comply could not reasonably be expected to have a material adverse effect on the business or financial condition of Borrower. Borrower agrees with Lender that Borrower will 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. Borrower agrees with Lender that Borrower will execute and deliver such further instruments as may be requested by Lender to carry out the provisions and purposes of this Note and the other Loan Documents and to preserve and perfect the Liens of Lender in the collateral for this Note. In the event that an Event of Default exists and Lender decides to waive such Event of Default or to forbear from taking action with respect to such Event of Default, Borrower shall pay to Lender, immediately upon demand by -5- Lender, a waiver fee in an amount determined by Lender in its sole discretion. The decision by Lender to waive any Event of Default shall be made by Lender in its sole and absolute discretion, and Lender has no obligation whatsoever to waive any Event of Default. The provisions of this paragraph shall not affect Lender's other rights or remedies. If any payment of principal or interest on this Note is made ten (10) or more days past the date when due, Borrower will pay, immediately upon demand by Lender, and in addition to regularly accruing interest, a delinquency charge in an amount equal to five percent (5.0%) of the amount which was not paid when due. The provisions of this paragraph shall not affect Borrower's rights and remedies arising as a result of such late payment or otherwise. Borrower represents and warrants to Lender that (a) Borrower is a Texas limited partnership, duly organized and validly existing under the laws of the state of Texas, (b) the execution, delivery and performance of this Note and the other Loan Documents are within Borrower's powers, have been duly authorized by all requisite action, and do not and will not contravene its partnership agreement, other organizational document, any law or any agreement or undertaking to which it is a party or by which it is bound, (c) this Note is a legal, binding obligation of Borrower, enforceable against Borrower in accordance with its terms, (d) there are no claims pending, or to Borrower's knowledge threatened, which, if adversely determined, would have a material adverse effect on the financial condition, operations or properties of Borrower, and (e) except as may have been already obtained, no authorization 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 Borrower of this Note and the other Loan Documents. All notices and other communications provided for in this Note 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 paragraph. If to Borrower: OYOG Operations, LP 12750 South Kirkwood, Suite 200 Stafford, TX 77477 Attention: Thomas McEntire Telephone No.: 281-494-8282 Fax No.: 281-494-8310 which address will change to the following after Borrower moves into its new headquarters: 7007 Pinemont Drive Houston, Texas 77040 If to Lender: Compass Bank 24 Greenway Plaza, Suite 1601 Houston, Texas 77046 Attention: Bruce Mercer Telephone No.: 713.966.2301 Fax No.: 713.966.2388 Except as otherwise provided in this Note or any Loan Document, 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, when duly deposited in the mails, in each case given or addressed as aforesaid. 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, -6- the provisions of this paragraph shall govern and prevail, and neither Borrower nor the sureties, guarantors, successors or assigns of 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. 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 Borrower. In determining whether or not the interest paid or payable exceeds the Maximum Rate, Borrower 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 this Note so that the interest for the entire term does not exceed the Maximum Rate. Upon the occurrence of any Event of Default, 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 any Lien granted to Lender to secure payment and performance of the Obligations, (c) offset against this Note any sum or sums owed by the holder hereof to Borrower and (d) take any and all other actions available to Lender under this Note, at law, in equity or otherwise. Failure of the holder hereof to exercise any of the foregoing options shall not constitute a waiver 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, Borrower agrees to pay all reasonable 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. Borrower 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 (except as otherwise expressly provided herein or in any other Loan Document) 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. THIS NOTE, AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT BETWEEN Borrower AND Lender 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 BORROWER AND LENDER. THERE ARE NO ORAL AGREEMENTS BETWEEN BORROWER AND LENDER. -7- OYOG OPERATIONS, LP By: OYOG, LLC, its general partner By: OYO Geospace Corporation, its sole member By: /s/ Gary D. Owens ----------------------------- Name: Gary D. Owens Title: President -8- EX-10.19 5 dex1019.txt GUARANTY AGREEMENT EXHIBIT 10.19 GUARANTY AGREEMENT WHEREAS, the execution of this Guaranty Agreement is a condition to COMPASS BANK, an Alabama state banking corporation ("Lender") making certain loans to OYOG OPERATIONS, LP, a Texas limited partnership ("Borrower"), pursuant to that certain Promissory Note in the principal amount of $3,040,000.00, dated September 10, 2003, executed by Borrower and payable to the order of Lender (such Promissory Note, as it may hereafter be renewed, extended or modified from time to time, and all promissory notes executed in renewal, extension, modification or substitution thereof, is hereinafter referred to as the "Note"); NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the undersigned, OYO GEOSPACE CORPORATION, a Delaware corporation (the "Guarantor"), hereby irrevocably and unconditionally guarantees to Lender the full and prompt payment and performance of the Guaranteed Indebtedness (hereinafter defined). This Guaranty Agreement shall be upon the following terms: I. The term "Guaranteed Indebtedness", as used herein means all of the "Obligations" (as defined in the Note), and shall include, without limitation, all principal of and interest on the Note and all renewals, extensions, increases, decreases or other modifications of any of the foregoing and all promissory notes given in renewal, extension, increase, decrease or other modification thereof. The term "Guaranteed Indebtedness" shall include any and all post-petition interest and expenses (including attorneys' fees) whether or not allowed under any bankruptcy, insolvency, or other similar law. II. This instrument shall be an absolute, continuing, irrevocable, and unconditional guaranty of payment and performance, and not a guaranty of collection, and Guarantor shall remain liable on its obligations hereunder until the payment and performance in full of the Guaranteed Indebtedness. No set-off, counterclaim, recoupment, reduction, or diminution of any obligation, or any defense of any kind or nature which Borrower may have against Lender or any other party, or which Guarantor may have against Borrower, Lender, or any other party, shall be available to, or shall be asserted by, Guarantor against Lender or any subsequent holder of the Guaranteed Indebtedness or any part thereof or against payment of the Guaranteed Indebtedness or any part thereof. III. If Guarantor becomes liable for any indebtedness owing by Borrower to Lender by endorsement or otherwise, other than under this Guaranty Agreement, such liability shall not be in any manner impaired or affected hereby, and the rights of Lender hereunder shall be cumulative of any and all other rights that Lender may ever have against Guarantor. The exercise by Lender of any right or remedy hereunder or under any other instrument, or at law or in equity, shall not preclude the concurrent or subsequent exercise of any other right or remedy. IV. In the event of default by Borrower in payment or performance of the Guaranteed Indebtedness, or any part thereof, when such Guaranteed Indebtedness becomes due, whether by its terms, by acceleration, or otherwise, Guarantor shall promptly pay the amount due thereon to Lender without notice or demand in lawful currency of the United States of America and it shall not be necessary for Lender, in order to enforce such payment by Guarantor, first to institute suit or exhaust its remedies against Borrower or others liable on such Guaranteed Indebtedness, or to enforce any rights against any collateral which shall ever have been given to secure such Guaranteed Indebtedness. Until the Guaranteed Indebtedness is paid in full and a period of ninety (90) days has passed following such payment, Guarantor waives any and all rights it may now or hereafter have under any agreement or at law or in equity (including, without limitation, any law subrogating the Guarantor to the rights of Lender) to assert any claim against or seek contribution, indemnification or any other form of reimbursement from Borrower or any other party liable for payment of any or all of the Guaranteed Indebtedness for any payment made by Guarantor under or in connection with this Guaranty Agreement or otherwise. V. If acceleration of the time for payment of any amount payable by Borrower under the Guaranteed Indebtedness is stayed upon the insolvency, bankruptcy, or reorganization of Borrower, all such amounts otherwise subject to acceleration under the terms of the Guaranteed Indebtedness shall nonetheless be payable by Guarantor hereunder forthwith on demand by Lender. VI. Guarantor hereby agrees that its obligations under this Guaranty Agreement shall not be released, discharged, diminished, impaired, reduced, or affected for any reason or by the occurrence of any event, including, without limitation, one or more of the following events, whether or not with notice to or the consent of Guarantor: (a) the taking or accepting of collateral as security for any or all of the Guaranteed Indebtedness or the release, surrender, exchange, or subordination of any collateral now or hereafter securing any or all of the Guaranteed Indebtedness; (b) any partial release of the liability of Guarantor hereunder, or the full or partial release of any other guarantor from liability for any or all of the Guaranteed Indebtedness; (c) any disability of Borrower, or the dissolution, insolvency, or bankruptcy of Borrower, Guarantor, or any other party at any time liable for the payment of any or all of the Guaranteed Indebtedness; (d) any renewal, extension, modification, waiver, amendment, or rearrangement of any or all of the Guaranteed Indebtedness or any instrument, -2- document, or agreement evidencing, securing, or otherwise relating to any or all of the Guaranteed Indebtedness; (e) any adjustment, indulgence, forbearance, waiver, or compromise that may be granted or given by Lender to Borrower, Guarantor, or any other party ever liable for any or all of the Guaranteed Indebtedness; (f) any neglect, delay, omission, failure, or refusal of Lender to take or prosecute any action for the collection of any of the Guaranteed Indebtedness or to foreclose or take or prosecute any action in connection with any instrument, document, or agreement evidencing, securing, or otherwise relating to any or all of the Guaranteed Indebtedness; (g) the unenforceability or invalidity of any or all of the Guaranteed Indebtedness or of any instrument, document, or agreement evidencing, securing, or otherwise relating to any or all of the Guaranteed Indebtedness; (h) any payment by Borrower or any other party to Lender is held to constitute a preference under applicable bankruptcy or insolvency law or if for any other reason Lender is required to refund any payment or pay the amount thereof to someone else (i) the settlement or compromise of any of the Guaranteed Indebtedness; (j) the non-perfection of any security interest or lien securing any or all of the Guaranteed Indebtedness; (k) any impairment of any collateral securing any or all of the Guaranteed Indebtedness; (l) the failure of Lender to sell any collateral securing any or all of the Guaranteed Indebtedness in a commercially reasonable manner or as otherwise required by law; (m) any change in the corporate existence, structure, or ownership of Borrower; or (n) any other circumstance which might otherwise constitute a defense available to, or discharge of, Borrower or Guarantor. VII. Guarantor represents and warrants to Lender as follows: (1) Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure to so qualify would have a material adverse effect on its business, financial condition, or operations. (2) Guarantor has the corporate power, authority and legal right to execute, deliver, and perform its obligations under this Guaranty Agreement and this Guaranty Agreement constitutes the legal, valid, and binding obligation of Guarantor, enforceable against Guarantor in accordance with its respective terms, except as limited by bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditor's rights. (3) The execution, delivery, and performance by Guarantor of this Guaranty Agreement have been duly authorized by all requisite action on the part of Guarantor and do not and will not violate or conflict with the articles of incorporation or bylaws of Guarantor or any law, rule, or regulation or any order, writ, injunction or decree of any court, governmental authority or agency, 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 upon any assets of Guarantor pursuant to the provisions of any indenture, mortgage, deed of trust, security agreement, franchise, permit, license, or other instrument or agreement to which Guarantor or its properties is bound. (4) No authorization, approval, or consent of, and no filing or registration with, any court, governmental authority, or third party, except which has already been obtained by Guarantor, is necessary for the execution, delivery or performance by Guarantor of this Guaranty Agreement or the validity or enforceability thereof. (5) The value of the consideration received and to be received by Guarantor as a result of Lender making the loan to Borrower evidenced by the Note and Guarantor executing and delivering this Guaranty Agreement is reasonably worth at least as much as the liability and obligation of -3- Guarantor hereunder, and such liability and obligation and the Note have benefitted and may reasonably be expected to benefit Guarantor directly or indirectly. (6) Guarantor represents and warrants to Lender that Guarantor is not insolvent, Guarantor's liabilities do not exceed its assets, and Guarantor will not be rendered insolvent by the execution and performance of this Guaranty Agreement and the Loan Documents. VIII. Guarantor covenants and agrees that, as long as the Guaranteed Indebtedness or any part thereof is outstanding or Lender has any commitment under the Note: (1) Guarantor will deliver to Lender the financial statements of Guarantor described in the Note at the times required by the Note. (2) Guarantor will furnish promptly to Lender written notice of the occurrence of any default under this Guaranty Agreement or an Event of Default as defined in the Note of which Guarantor has knowledge. (3) Guarantor will furnish promptly to Lender such additional information concerning Guarantor as Lender may reasonably request. (4) Guarantor will not (a) become a party to a merger, consolidation or other business combination or acquire all or a substantial part of the assets of any Person (as defined in the Note) or any shares or other evidence of beneficial ownership of any Person unless guarantor is the surviving Person to such transaction, (b) dissolve or liquidate, or (iii) sell, lease, assign, transfer or otherwise dispose of substantially all of its assets, except dispositions of inventory in the ordinary course of business. (5) Guarantor will comply with all of the covenants contained in the Note with which Borrower agrees to in the Note to cause Guarantor to comply. (6) Guarantor will comply with the financial covenants contained on Exhibit "A" attached hereto. IX. Upon the occurrence of an Event of Default (as defined in the Note) Lender shall have the right to set off and apply against this Guaranty Agreement or the Guaranteed Indebtedness or both, at any time and without notice to Guarantor, any and all deposits (general or special, time or demand, provisional or final) or other sums at any time credited by or owing from Lender to Guarantor whether or not the Guaranteed Indebtedness is then due and irrespective of whether or not Lender shall have made any demand under this Guaranty Agreement. In addition to Lender's right of setoff and as further security for this Guaranty Agreement and the Guaranteed Indebtedness, Guarantor hereby grants Lender a security interest in all deposits (general or special, time or demand, provisional or final) and all other accounts of Guarantor now or hereafter on deposit with or held by -4- Lender and all other sums at any time credited by or owing from Lender to Guarantor. The rights and remedies of Lender hereunder are in addition to other rights and remedies (including, without limitation, other rights of setoff) which Lender may have. X. Guarantor hereby agrees that the Subordinated Indebtedness shall be subordinate and junior in right of payment to the prior payment in full of all Guaranteed Indebtedness, and Guarantor hereby assigns the Subordinated Indebtedness to Lender as security for the Guaranteed Indebtedness. If any sums shall be paid to Guarantor by Borrower or any other person or entity on account of the Subordinated Indebtedness, such sums shall be held in trust by Guarantor for the benefit of Lender and shall forthwith be paid to Lender without affecting the liability of Guarantor under this Guaranty Agreement. For purposes of this Guaranty Agreement, the term "Subordinated Indebtedness" means all indebtedness, liabilities, and obligations of Borrower to Guarantor, whether such indebtedness, liabilities, and obligations now exist or are hereafter incurred or arise, or whether the obligations of Borrower thereon are direct, indirect, contingent, primary, secondary, several, joint and several, or otherwise, and irrespective of the person or persons in whose favor such indebtedness, obligations, or liabilities may, at their inception, have been, or may hereafter be created, or the manner in which they have been or may hereafter be acquired by Guarantor. XI. No amendment or waiver of any provision of this Guaranty Agreement or consent to any departure by the Guarantor therefrom shall in any event be effective unless the same shall be in writing and signed by Lender. No failure on the part of Lender to exercise, and no delay in exercising, any right, power, or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. XII. This Guaranty Agreement is for the benefit of Lender and its successors and assigns, and in the event of an assignment of the Guaranteed Indebtedness, or any part thereof, the rights and benefits hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such indebtedness. This Guaranty Agreement is binding not only on Guarantor, but on Guarantor's successors and assigns. XIII. Guarantor recognizes that Lender is relying upon this Guaranty Agreement and the undertakings of Guarantor hereunder in making extensions of credit to Borrower under the Note and further recognizes that the execution and delivery of this Guaranty Agreement is a material inducement to Lender in entering into the Note. Guarantor hereby acknowledges that there are no conditions to the full effectiveness of this Guaranty Agreement. XIV. This Guaranty Agreement is executed and delivered as an incident to a lending transaction negotiated, consummated, and performable in Harris County, Texas, and shall be governed by and construed in accordance with the laws of the State of Texas. Any action or proceeding against Guarantor under or in connection with this Guaranty Agreement may be brought -5- in any state or federal court in Harris County, Texas, and Guarantor 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 such court. Guarantor agrees that service of process upon it may be made by certified or registered mail, return receipt requested, at its address specified in the Note. Nothing herein shall affect the right of Lender to serve process in any other matter permitted by law or shall limit the right of Lender to bring any action or proceeding against Guarantor or with respect to any of Guarantor's property in courts in other jurisdictions. Any action or proceeding by Guarantor against Lender shall be brought only in a court located in Harris County, Texas. XV. Guarantor shall pay on demand all reasonable attorneys' fees and all other reasonable costs and expenses incurred by Lender in connection with the preparation, administration, enforcement, or collection of this Guaranty Agreement. XVI. Guarantor hereby waives promptness, diligence, notice of any default under the Guaranteed Indebtedness, demand of payment, notice of acceptance of this Guaranty Agreement, presentment, notice of protest, notice of dishonor, notice of the incurring by Borrower of additional indebtedness, and all other notices and demands with respect to the Guaranteed Indebtedness and this Guaranty Agreement. XVII. The Note, and all of the terms thereof, are incorporated herein by reference, the same as if stated verbatim herein, and Guarantor agrees that Lender may exercise any and all rights granted to it under the Note and the other Loan Documents (as defined in the Note) without affecting the validity or enforceability of this Guaranty Agreement. Any notices given hereunder shall be given in the manner provided by and to the addresses set forth in the Note. XVIII. Guarantor hereby represents and warrants to Lender that Guarantor has adequate means to obtain from Borrower on a continuing basis information concerning the financial condition and assets of Borrower and that Guarantor is not relying upon Lender to provide (and Lender shall have no duty to provide) any such information to Guarantor either now or in the future. XIX. This notice is being supplied in compliance with 12 C.F.R. 227, Regulation AA, promulgated by the Federal Reserve Board and applies to any Guaranteed Indebtedness which may be a consumer credit obligation as defined in such Regulation AA. You are being asked to guarantee the debt of Borrower now existing or hereafter arising. There is no limit as to the amount unless this Guaranty expressly provides for such limitation. Think carefully before you guarantee the existing and future debts of Borrower. If Borrower doesn't pay any of such debts, you will have to. Be sure that you can afford to pay all such debts if you have to and that you want to accept this responsibility. You may have to pay up to the full amount of all Borrower's debts if Borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount. Lender can collect such debts from you without first trying to collect from Borrower. Lender can use the same collection methods against you that can be used against Borrower, such as suing you, etc. If any such -6- debts is ever in default, that fact may become part of your credit record. This notice is not the contract that makes you liable for Borrower's debts. The Guaranty that is set forth in this instrument is however, a contract that makes you liable for Borrower's debts. XX. THIS GUARANTY AGREEMENT EMBODIES THE FINAL, ENTIRE AGREEMENT OF GUARANTOR AND LENDER WITH RESPECT TO GUARANTOR'S GUARANTY OF THE GUARANTEED INDEBTEDNESS AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OR OTHER EXTRINSIC EVIDENCE OF ANY NATURE. THERE ARE NO ORAL AGREEMENTS BETWEEN GUARANTOR AND LENDER. THIS GUARANTY AGREEMENT MAY NOT BE AMENDED EXCEPT IN WRITING BY GUARANTOR AND LENDER. DATED AND EXECUTED as of September 10, 2003. GUARANTOR: OYO GEOSPACE CORPORATION By: /s/ Gary D. Owens --------------------------- Name: Gary D. Owens Title: President -7- EXHIBIT "A" Financial Covenants OYO Geospace Corporation, a Delaware corporation ("Guarantor") covenants and agrees that, as long as the Guaranteed Indebtedness (as defined in the foregoing Guaranty Agreement) or any part thereof is outstanding, Guarantor will observe and perform the following financial covenants set forth below, unless Lender (as defined in the foregoing Guaranty Agreement) shall otherwise consent in writing. Section A. Tangible Net Worth. Guarantor will at all times maintain Tangible Net Worth in an amount not less than $43,000,000.00 from and after December 31, 2003. Section B. Ratio of Total Liabilities to Tangible Net Worth. Guarantor will at all times maintain a Ratio of Total Liabilities to Tangible Net Worth of not greater than 1.00 to 1.00 from and after December 31, 2003. Section C. Fixed Charge Coverage Ratio. Guarantor will at all times maintain a Fixed Charge Coverage Ratio of not less than 1.25 to 1.00. The Fixed Charge Coverage Ratio shall be calculated and tested quarterly as of the last day of each fiscal quarter of Guarantor, commencing on December 31, 2003, on a cumulative basis for the four quarters ended as of such date. As used in this Exhibit "A", the following terms are defined as follows: "Current Maturities of Long Term Debt" means for Guarantor and its Subsidiaries on a consolidated basis, the required principal payments and mandatory prepayments for the next succeeding twelve month period on Debt of Guarantor and its Subsidiaries for borrowed money which has a final maturity more than twelve months from the date of payment. "Debt" means for any Person (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, (c) all indebtedness under any lease which, in conformity with GAAP, is required to be capitalized for balance sheet purposes, (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, partnership or membership interests or other ownership interests as applicable. "EBITDA" means for Guarantor and its Subsidiaries, on a consolidated basis, the sum of (a) Net Income, plus (b) depreciation, amortization and other non cash charges, plus (c) Interest Expense, plus (d) extraordinary losses, minus (e) extraordinary gains. -8- Fixed Charge Coverage Ratio" means for Guarantor and its Subsidiaries, on a consolidated basis, as of any date (a) EBITDA for the period ended on such date, minus non-financed capital expenditures, minus distributions, divided by (b) the sum of (i) Current Maturities of Long Term Debt for the period ended on such date, plus (ii) Interest Expense for the period ended on such date. "GAAP" means generally accepted accounting principles in the United States of America consistently applied. "Net Income" means, for Guarantor and its Subsidiaries for any period, the consolidated net income (or loss) of Guarantor and its Subsidiaries for such period, calculated in accordance with GAAP. "Person" means any individual, corporation, limited liability company, business trust, association, company, partnership, joint venture, governmental authority, or other entity. "Ratio of Total Liabilities to Tangible Net Worth" means, as of any date, (a) (i) Total Liabilities minus (ii) Subordinated Debt divided by (b) Tangible Net Worth. "Subordinated Debt" collectively means Debt of Guarantor the payment of which is subordinated to the payment of the Guaranteed Indebtedness in a manner acceptable to Lender. "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 Guarantor and its Subsidiaries, plus Subordinated Debt; provided, however, there shall be excluded therefrom (a) goodwill, including any amounts, however designated, that represent the excess of the purchase price paid for assets or stock over the value assigned thereto, (b) patents, trademarks, trade names, and copyrights, (c) deferred expenses, (d) loans and advances to any stockholder, director, officer, or employee of Guarantor or any Subsidiary or any affiliate of Guarantor, and (e) all other assets which are properly classified as intangible assets. "Total Liabilities" means, as of any date, all amounts which, in accordance with GAAP, would be classified as liabilities on a consolidated balance sheet of Guarantor and its Subsidiaries. -9- EX-10.20 6 dex1020.txt EARNEST MONEY CONTRACT EXHIBIT 10.20 EARNEST MONEY CONTRACT May 27, 2003 IN CONSIDERATION OF TEN AND NO/100 ($10.00) DOLLARS, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned Cooper Tools, Inc. ("Seller"), agrees to sell and convey to OYOG Operations, L.P. ("Purchaser"), and Purchaser agrees to buy upon the terms and conditions herein contained (this "Contract"), the property described in Exhibit A attached hereto and located at 7007 Pinemont, Houston, Texas, together with (A) all buildings, improvements, structures, landscaping, trees, fences, fixtures and mechanical systems and other facilities situated therein or thereon including, but only to the extent actually owned by Seller, all boilers, radiators, heaters, furnaces, oil burners, elevators, motors, generators, transformers, storm and screen windows, shades and blinds, all lighting, heating, ventilation, security, air conditioning, sprinkling and plumbing equipment, water and power systems, telephone system, electric fixtures attached to the property, (B) certain personal property identified on Exhibit B attached hereto, and (C) all of Seller's right, title and interest in and to all easements and rights (whether or not of record), tenements, hereditaments, privileges, and appurtenances in any way belonging or pertaining to the property described in Exhibit A, including without limitation, all utility, wastewater and stormwater discharge capacity and rights (collectively the "Property"), under the following terms and conditions: 1. PURCHASE PRICE AND EARNEST MONEY: The total consideration for the sale of the Property is THREE MILLION EIGHT HUNDRED THOUSAND DOLLARS ($ 3,800,000.00). Of that amount, FIFTY THOUSAND DOLLARS ($ 50,000.00) shall be payable as earnest money upon acceptance of the Contract by Seller ("Earnest Money"), which shall be placed, together with a fully executed copy of this Contract, in escrow with Houston Title Company ("Escrow Agent"). Should the terms of this Contract be closed, the Earnest Money shall be applied against the purchase price provided herein, but should Purchaser fail to carry out the terms of this Contract for any reason, except the failure of any condition to Purchaser's obligations hereunder, Seller shall have the right to receive the Earnest Money as liquidated damages and not as a penalty. Seller waives any right to sue for specific performance or damages for breach of Contract. 2. SURVEY: Seller shall furnish to Purchaser and the Escrow Agent within thirty (30) days from the beginning of the Inspection Period (hereinafter defined), two (2) copies each of a survey of the Property and a metes and bounds description, prepared and certified by a surveyor acceptable to the Purchaser, and upon which the Escrow Agent shall delete from the Owner's Title Policy ("Title Policy") the survey exception with respect thereto. The survey shall conform to the requirements of a Category 1A, Condition II Texas Land Title Survey, which survey and the certified field notes thereto shall be dated and certified after the effective date of this Contract. The cost of the survey shall be shared equally by Seller and Purchaser. 3. TITLE COMMITMENT: Seller shall furnish to Purchaser, within twenty (20) days from the beginning of the Inspection Period, a current Title Commitment ("Title Commitment") from the Escrow Agent. Purchaser shall have twenty (20) days from the date of receipt of such Title Commitment to state any objections to title. Exceptions shown on the Title Commitment not objected to by Purchaser by delivery of written notification to Seller within twenty (20) days from the receipt of the Title Commitment, shall be deemed to be acceptable to Purchaser as if specified herein. The foregoing accepted exceptions are collectively referred to herein as the "Permitted Exceptions". Upon receipt of written notice of Purchaser's objections, Seller shall have a reasonable time, not to exceed thirty (30) days from the date of receipt of such written notice, in which to remedy or remove such exception(s) objected to by Purchaser. If Seller is unable or unwilling to remove or remedy any survey matter or title exceptions objected to by Purchaser within thirty (30) days from the date of written notice of such Purchaser's objections, then each of Purchaser and Seller shall have the right to terminate this Contract, unless Purchaser elects to waive any such objections and notifies Seller thirty (30) days before the date of closing (hereinafter defined) that (a) such title objections are now Permitted Exceptions and (b) of Purchaser's intentions to close the transaction contemplated herein. If the Contract is canceled in accordance with this provision, the Purchaser shall be entitled to a refund of the Earnest Money and neither Seller nor Purchaser shall have any other liability to the other. The Seller shall convey the Property to the Purchaser at closing subject only to the Permitted Exceptions. It is specifically understood, however, that no deed of trust lien, mortgage, security interest, mechanic's and materialman's lien, or other lien or security interest securing the payment of money, as may be shown on Schedule C of the Title Commitment, shall be deemed a "Permitted Exception" whether or not objected to by Purchaser; and Seller agrees to cause to be released of record at closing all such monetary liens. Seller further warrants that the Property is presently occupied solely by Seller or an affiliate of Seller, and that at closing there will be no tenants-in-possession, or parties-in-possession, other than Seller as herein permitted. 4. CLOSING: (i) The closing of the transaction contemplated hereby shall be held on or before August 15, 2003, or upon such earlier date as Purchaser and Seller may mutually elect, with the closing to be held in the offices of the Title Company. The terms "closing" and "date of closing" as used in this Contract shall refer to the date and place of closing as determined by the terms of this paragraph. (b) Seller agrees to execute and deliver to Purchaser at closing a Special Warranty Deed ("Deed") conveying the Property subject only to the Permitted Exceptions, if any, and to provide and pay for the Title Policy in the amount of the total consideration for the Property. 2 (c) Except as otherwise stated herein, possession of the Property shall be delivered by Seller to Purchaser on the date of closing. (d) Ad valorem taxes for the year 2003, shall be prorated as of the date of closing. The 2003 ad valorem taxes shall be based on the year 2002 tax bills. Purchaser and the Seller shall promptly re-prorate the taxes at such time as the year 2003 ad valorem taxes are available. The Purchaser shall pay all transfer taxes, if any. This provision shall survive closing, and shall not merge into the Deed. (e) The Seller shall execute and deliver to the Purchaser or the Escrow Agent, as the case may be, in a commercially acceptable form the following documents at or prior to the closing: (i) The Special Warranty Deed; (ii) Real Estate Transfer Tax Declaration (if applicable); (iii) Blanket Bill of Sale as to any personal or intangible property located on the Property, other than any personal or intangible property identified by the Purchaser to be excluded from the conveyance herein; (iv) FIRPTA Affidavit; (v) State of Texas Withholding Tax Affidavit (if applicable); (vi) Owner's Affidavit; (vii) Sale Closing Statement; (viii) Corporate resolution and incumbency certificate authorizing the conveyance of the Property pursuant to the terms hereof and authorizing the respective officers to execute and deliver closing documents with respect to such conveyance; and (ix) Such documents and instruments as are required by the issuer of the Title Policy to issue such Title Policy without exception, except for the Permitted Exceptions. (x) Tax Certificates furnished by the tax collector stating all taxes paid through 2002. (xi) All keys to the Property. (f) The parties shall cooperate with each other to fulfill their respective responsibilities under any applicable law concerning notifications or filings regarding the transfer of property containing environmental contamination. The form and content of all closing documents, including without limitation those listed above, shall be reasonably acceptable to both parties. 3 5. EFFECTIVE DATE: This Contract shall be effective upon the date that both Purchaser and Seller have executed and delivered this Contract, and Purchaser has deposited the Earnest Money with the Escrow Agent ("Effective Date"). All critical dates referenced in this Contract shall be calculated from the Effective Date. 6. INSPECTION PERIOD: This Contract is contingent upon Purchaser having a period of forty-five (45) days after the effective date of this Contract in which to conduct an inspection of the Property ("Inspection Period"), including all the electrical systems, mechanical systems and the general structure of the Property. Seller agrees to disclose to Purchaser any and all relevant and material information which, to the best of Seller's knowledge, Seller has in Seller's possession regarding the condition of the Property including, but not limited to, the presence and location of asbestos containing materials, PCB containing equipment, toxic, hazardous or contaminated substances and underground storage tanks, in, on or about the Property. Purchaser shall maintain the confidentiality of all such information received from Seller, and shall not disclose the information to any other person except Purchaser's counsel and environmental consultant. Prior to Seller providing any information regarding the condition of the Property, Purchaser shall execute and return to Seller the Confidentiality Agreement attached hereto as Exhibit C. During said forty-five (45) day Inspection Period Purchaser may have the Property inspected and a written study (the "Study") prepared, to determine the environmental suitability of the Property to Purchaser's intended use. During this inspection, Purchaser may install soil borings and temporary groundwater monitoring wells, conduct percolation tests and other investigation activities to determine the presence of any asbestos, soil or groundwater contamination, radioactivity, methane, radon, volatile hydrocarbons, underground storage tanks or any other substances or conditions which may be deemed hazardous or toxic as same may be defined by any federal, state or local government hereby having jurisdiction over the Property, and Seller encourages and invites Purchaser to conduct its own environmental inspection of the Property; provided, however, as follows: Purchaser must submit to Seller prior to any drilling, testing or other invasive investigation whatsoever on the site, a work plan (the "Work Plan') prepared by Purchaser's environmental consultant showing the location of any proposed testing or drilling and providing the scope of all work to be performed at the site. Seller shall have fifteen (15) days from the receipt of the Work Plan to approve or disapprove, in Seller's sole discretion, Purchaser's continued investigation of the site. In the event Purchaser does not receive Seller's written approval of the Work Plan within fifteen (15) days, this Contract shall be void and the Earnest Money returned to Purchaser. If in Purchaser's sole judgment and discretion the above inspections and review of materials render the Property unacceptable to Purchaser, Purchaser shall notify Seller as such in writing prior to the end of the Inspection Period, whereupon this Contract shall terminate and Purchaser shall receive a full refund of its Earnest Money with no further obligation. Seller reserves the right to continue to conduct its own inspections including additional environmental investigation of the Property during the Inspection Period and, in Seller's sole discretion, cancel this Contract 4 and refund all of the Earnest Money to Purchaser with no further obligation; provided further that, Seller shall reimburse Purchaser for all actual expenses incurred in connection with Purchaser's inspection of the Property, not to exceed TWENTY FIVE THOUSAND AND NO/100 DOLLARS ($25,000.00). Seller and Purchaser may agree (neither being under any obligation to so agree) in writing to a plan of action mutually acceptable to both whereby any condition rendering the Property unacceptable to Purchaser shall be remedied. A Seller's representative may be present during Purchaser's environmental inspection. At Seller's request, Seller shall be given a copy of Purchaser's Study and all other written materials created during Purchaser's environmental inspection immediately upon its completion, without regard for whether or not the transaction contemplated herein is ever closed. Purchaser shall return to Seller, upon Seller's request, the originals and all copies of Purchaser's Study and all other written materials created during Purchaser's environmental inspection, and all copies of all records, studies, reports and other materials which have been supplied to Purchaser by Seller, if this transaction, for whatever reason, should fail to close. Purchaser shall indemnify, defend and hold Seller harmless from and against any and all claims, demands, proceedings, liabilities and obligations arising from or related to environmental conditions that may arise out of or be aggravated by the performance of Purchaser's environmental inspection. Without in any way limiting the indemnity in the immediately preceding sentence, should Purchaser's environmental and/or general inspection cause damage to or aggravate the environmental and/or general condition of the Property, then Purchaser shall unconditionally absorb and pay for, all expenses related to returning the Property to its original condition existing prior to the performance of Purchaser's environmental and/or general inspection, whether or not the transaction contemplated herein ever closes. This paragraph shall survive the delivery of title or termination of this Contract, and shall not merge into the Deed. Prior to the end of the Inspection Period, Purchaser shall notify Seller in writing of any environmental conditions which Purchaser desires Seller to remedy. If Seller is unwilling to remedy such conditions, then each of Purchaser and Seller may terminate this Contract within fifteen (15) days after Seller's receipt of Purchaser's notification of such conditions, in which event both parties will be released and Purchaser's Earnest Money deposit will be returned in full. If it becomes necessary following closing for Seller to investigate or remedy any environmental condition for which Seller is responsible, Seller shall make a written request to Purchaser stating the nature of the environmental investigation or remediation to be performed and the time and date Seller or Seller's consultants/contractors will require access to the Property. In the event Purchaser allows Seller to investigate or remediate an environmental condition as requested by Seller, Seller shall indemnify, defend and hold Purchaser harmless from and against any and all claims, demands, proceedings, liabilities and obligations arising from or related to environmental conditions that may arise out of or be aggravated by Seller's performance of such environmental inspection or remediation. In no event shall Seller be liable to Purchaser for any disruption of Purchaser's business arising from Seller's investigation or remediation of any environmental condition. If Purchaser refuses or in any way restricts Seller's access to the Property, including the failure to timely respond to Seller's written request as stated herein, Purchaser shall indemnify Seller from any claims, liabilities, damages, injuries and costs arising 5 as a consequence of Seller not gaining access to the Property. This paragraph shall survive the delivery of title, and shall not merge into the Deed. Prior to the end of the Inspection Period, Purchaser shall determine if the Property is adequately zoned for Purchaser's intended use. If Purchaser determines the Property is not so zoned, Purchaser may notify Seller thereof prior to the end of the Inspection Period and receive a full refund of the Earnest Money with no further obligation. During the Inspection Period, Seller shall make a reasonable effort to provide to Purchaser certain information regarding the Property including: (a) Summary of property/facility-related costs for the Property for each of the last three calendar years and, to the extent available, the first three months of 2003, including but not limited to, electricity, gas, water, property taxes, factory maintenance, office maintenance, yard maintenance, security and any other ongoing property-related costs. (b) Summary of any fixed asset additions to the Property (including any capitalized repairs and maintenance not included above) for the last three years and the first three months of 2003. (c) To the extent such information is in Seller's actual possession, copies of drawings of the current building layout and any existing surveys. (d) To the extent such information is in Seller's actual possession, an inventory of any and all spare parts for the electrical bussing equipment. (e) To the extent such information is in Seller's actual possession, a certification of the electrical capacity available to the building. (f) To the extent such information is in Seller's actual possession, current plans and specifications on the Property, including all information relative to network cabling. 7. CONTINGENCIES: The obligations of the Purchaser hereunder are subject to the satisfaction of the following conditions precedent: (a) The issuance of the Title Policy in favor of the Purchaser subject only to the Permitted Exceptions; (b) The execution and delivery of the documents and instruments required under Section 4 hereof; and (c) The execution and delivery of broker lien waivers by the Brokers (as hereinafter defined) in form acceptable to the parties. 6 8. LIABILITIES: Purchaser accepts the Property in its "as is, where is" condition. Purchaser assumes, shall be liable for, and will indemnify, defend and hold Seller harmless from and against, any claims, demands, proceedings, liabilities, obligations, damages, injuries and costs arising as a consequence of Purchaser's inspections, ownership, use, occupancy or operation of the Property. Purchaser's use of the Property shall not include any residential, health care, childcare or school uses. The indemnification obligations of this Section 8 shall survive closing, and shall not merge into the Deed. Except with respect to the special warranty of title set forth in the Deed and the representations and warranties of Seller herein expressly made: (A) Purchaser specifically agrees that Seller shall have no statutory, common law or other liability regarding the Property; (B) the Purchaser hereby irrevocably waives any and all rights, claims, causes of action or theories of liability it might otherwise have relating to the purchase of the Property against Seller or its affiliates under or based upon any principle of equity or any federal, state, local or foreign statute, law, ordinance, rule or regulation; and (C) without limiting the foregoing, the Purchaser waives any rights it may have to contribution from the Seller or any of its affiliates under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"). 9. SELLER'S DEFAULT: Should Seller fail to materially comply with any of the requirements of this Contract pending closing, Purchaser may cancel this Contract by giving Seller written notice thereof, and in such event the Earnest Money shall be returned to Purchaser. Purchaser waives any right to sue for specific performance or damages for breach of Contract. However, Purchaser shall be entitled to reimbursement for all actual expenses incurred in connection with Purchaser's inspection of the Property, not to exceed TWENTY FIVE THOUSAND AND NO/100 DOLLARS ($25,000.00). 10. CONDEMNATION OR PROPERTY DAMAGE: If prior to the closing, all or any substantial part of the Property is condemned, damaged or destroyed, Purchaser shall have the option of either (A) applying the proceeds of any condemnation award or insurance policies to reduce the total consideration provided herein or (B) declaring this Contract terminated by delivering written notice of termination pursuant to this paragraph to Seller within ten (10) days of the date Seller notifies Purchaser in writing of such condemnation, damage or destruction. In the event of such termination pursuant to this section, Purchaser shall be entitled to a refund of the Earnest Money. 11. SELLER'S REPRESENTATIONS: Except as disclosed in any Materials (as defined in Exhibit C) provided from Seller to Purchaser, Seller warrants that to the best of its actual knowledge Seller has not received written notice of, nor is aware of, any unresolved (i) requirements from any City, County, State or other governmental authority having jurisdiction, for any work to be done on or affecting the Property 7 or any intent to require or make special improvements to or for the benefit of the Property, or (ii) claims of any governmental authority as to non-compliance with any Environmental Laws (defined below); (iii) claims of any governmental authority that the Property is not in compliance with any zoning or other use requirements or laws; or (iv) pending or threatened condemnation proceedings. Seller further warrants to the best of its actual knowledge that there are no underground storage tanks or hazardous substances or hazardous wastes in, on, under or about the Property, except as may be disclosed in any Materials provided from Seller to Purchaser. As used herein, "Environmental Laws" means all laws, and any rules, regulations, ordinances, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder, of federal, state and local government (and all agencies thereof) concerning pollution or protection of the environment, public health and safety, or employee health and safety, including without limitation CERCLA, the Resource Conservation and Recovery Act of 1976, and the Occupational Safety and Health Act of 1970, each as amended. Seller further warrants that in the event any such notice is received prior to closing, Seller shall submit all such notices to Purchaser for examination and approval. Should Purchaser find any such notice unacceptable and notifies Seller in writing of such finding within five (5) days from the date Purchaser receives such notice, this Contract may be canceled at Purchaser's option without further liability to either party, and Purchaser shall be entitled to a refund of the Earnest Money. 12. ASSIGNMENT BY PURCHASER: This Contract shall not be assignable by Purchaser; provided, however, from the Effective Date until ten (10) business days prior to Closing, Purchaser may, subject to Seller's prior written approval, assign this Contract and all rights hereunder to an affiliate of Purchaser, provided the assignee shall assume in writing all the obligations of Purchaser hereunder, and the Purchaser shall not be relieved of its obligations hereunder. 13. BROKER'S COMMISSION: Purchaser and Seller warrant to the Brokers and to each other that they have dealt with no real estate broker in connection with this sale other than CB Richard Ellis ("Seller's Agent") and Caldwell Watson Real Estate Group ("Purchaser's Agent") (collectively, Seller's Agent and Purchaser's Agent are referred to herein as the "Brokers"), and that no other broker is entitled to any commission on account of this Contract. Seller has agreed to pay a 5% commission as herein below provided, but only if this sale actually closes and not otherwise. Purchaser and the Seller hereby indemnify each other against all claims, damages, fees, causes of action or liabilities whatsoever arising out of the indemnifying party engaging or using any real estate broker, finder or intermediary in connection with the transaction contemplated hereby other than the Brokers. This paragraph shall closing and shall not merge into the Deed. 14. SELLER'S DISCLAIMER: EXCEPT AS EXPRESSLY SET FORTH IN THIS CONTRACT, SELLER DISCLAIMS ANY AND ALL WARRANTIES OR REPRESENTATIONS, WHETHER EXPRESS OR IMPLIED, AS TO THE USE, CONDITION, VALUE OF OR FITNESS OF THE PROPERTY AND BY 8 CLOSING PURCHASER ACCEPTS THE PROPERTY IN ITS "AS IS, WHERE IS" CONDITION, WITH ALL FAULTS. WITHOUT IN ANY WAY LIMITING THE DISCLAIMER IN THE IMMEDIATELY PRECEDING SENTENCE, SELLER FURTHER DISCLAIMS ANY AND ALL WARRANTIES OR REPRESENTATIONS, WHETHER EXPRESS OR IMPLIED, THAT ANY INFORMATION AVAILABLE TO PURCHASER FROM SELLER, THIRD PARTIES (INCLUDING GOVERNMENTAL AGENCIES) OR OTHER SOURCES, FULLY, FAIRLY OR ACCURATELY REPRESENTS THE EXTENT OF ENVIRONMENTAL CONTAMINATION, CONDITIONS AFFECTING ENVIRONMENTAL MATTERS OR COMPLIANCE OR NONCOMPLIANCE WITH ENVIRONMENTAL LAWS. 15. SPECIAL PROVISIONS: NA 16. MISCELLANEOUS: (a) Time is of the essence of this Contract. (b) If any term or condition of this Contract shall be held to be invalid or unenforceable, the remainder of the Contract shall not be affected thereby. (c) This Contract constitutes the entire agreement of the parties hereto and, unless specified otherwise herein, no representation, inducement, promises or prior agreements, oral or written, between the parties or made by any agent on behalf of the parties or otherwise shall be of any force and effect. (d) This Contract shall be construed and interpreted under the laws of the State of Texas. (e) Purchaser and Seller shall at closing execute all other papers and documents that may become necessary in order to close this transaction as may be suggested by the counsel of either party hereto and approved by the other party's counsel, both reasonably acting. (f) Any notice hereunder must be in writing, and shall be effective when deposited in the United States Mail, Certified Return Receipt Requested or otherwise only if and when received by the party to be notified. For purposes of notice, the addresses of the parties shall be as set forth below or as may be designated from time to time. (g) Neither party to this Contract shall make a public announcement regarding the transaction contemplated herein prior to the closing of such transaction, unless first approved in writing by the other party hereto. The provisions of this Section shall not limit the ability of the Purchaser, however, to disclose this Contract to: (i) any of its advisors; and (ii) any of its lenders and their advisors. 9 PURCHASER: SELLER: OYOG OPERATIONS, L.P. COOPER TOOLS, INC. By: /s/ Thomas McEntire By: /s/ Randall Ammerman ----------------------- ----------------------- Name: Thomas T. McEntire Name: Randall B. Ammerman Title: CFO Title: Vice President Address: Address: 127540 South Kirkwood 600 Travis, Suite 5800 Stafford, Texas 77477 Houston, Texas 77002 Attn: Tom McEntire Phone: 713-208-8400 Phone: 281-494-8282 Fax: 713-208-8981 Fax: 281-494-8310 By: /s/ James T. Buccall ------------------------ Name: James T. Buccall Title: Vice President 10 Seller agrees to pay Seller's Agent five percent (5%) of the total consideration provided herein as a commission for services rendered in effecting the sale, payable at the time of closing, Seller's Agent has agreed to pay to Purchaser's Agent one-half (1/2) thereof. Seller's Agent and Purchaser's Agent shall indemnify and hold Seller and Purchaser harmless from any claim arising from payment of the commission due hereunder. AGENT FOR SELLER: AGENT FOR PURCHASER: Broker: CB Richard Ellis Broker: Caldwell Watson Real Estate Group By: /s/ By: /s/ ----------------------------- ------------------------------ Broker ID Number: 0304215 Broker ID Number: 0409575 Phone: 713-840-6678 Phone: 713-690-0000 Received this 30th day of May, 2003, $50,000.00 as Earnest Money, and a fully executed copy of the above Contract. Escrow Agent: P.J. Whitworth, V.P. By: /s/ Michele Bell ---------------------------- Title: Assistant Address: 777 Post Oak Blvd #200 Houston, Tx 77056 Phone: 713-626-9220 x 321 EX-10.21 7 dex1021.txt FIRST AMENDMENT TO EARNEST MONEY CONTRACT EXHIBIT 10.21 FIRST AMENDMENT TO EARNEST MONEY CONTRACT This First Amendment to Earnest Money Contract (this "Amendment") is made to be effective as of the 14th day of July, 2003, by and between COOPER POWER TOOLS, INC. ("Seller"), and OYOG Operations, L.P. ("Purchaser"). RECITALS: A. Seller and Purchaser entered into that certain Earnest Money Contract dated May 27, 2003, but effective as of May 30, 2003 (the "Purchase Agreement"), providing for the sale by Seller to Purchaser of 19.2155 acres of land out of the W. C. Wallace Survey, A-848, Harris County, Texas (the "Land"), said Land being more particularly described in Exhibit A attached to the Purchase Agreement. Each capitalized term used in this Amendment, unless otherwise defined herein, shall have the meaning ascribed to such term in the Purchase Agreement. B. Section 6 of the Purchase Agreement, entitled "Inspection Period," provided Purchaser forty-five (45) day (until July 14, 2003) in which to make certain inspections. C. Seller and Purchaser have agreed to extend the Inspection Period and certain other contract dates upon the terms and conditions set forth below. D. The Purchase Agreement was executed by Seller in the name of "Cooper Tools, Inc." The correct name of Seller, however, is "Cooper Power Tools, Inc." Accordingly, Seller and Purchaser wish to evidence by this Amendment the correct name of Seller. NOW, THEREFORE, premises considered and for Ten Dollars ($10.00) and other good and valuable consideration each paid to the other, receipt of which is hereby acknowledged, Seller and Purchaser agree to amend the Purchase Agreement in the following respects: 1. The Inspection Period is hereby extended thirty (30) days to Thursday, August 14, 2003. Accordingly, the date for the "closing" under Section 4 of the Purchase Agreement is hereby extended from August 15, 2003 to on or before Friday, August 29, 2003. For the avoidance of error, any other deadlines in the Purchase Agreement originally scheduled in reference to or after the expiration of the Inspection Period, are hereby extended by a 14-day period. 2. Seller and Purchaser each acknowledge that the correct name of Seller is "Cooper Power Tools, Inc." The parties hereby amend the Purchase Agreement to replace, wherever it appears, the name "Cooper Tools, Inc." with the correct name, "Cooper Power Tools, Inc." 3. Each party acknowledges and agrees that all obligations and duties of the other party under the Purchase Agreement (as hereby amended) required to be performed prior to the date hereof, have been satisfactorily performed. 4. Seller and Purchaser ratify and confirm the Purchase Agreement, as hereby amended, as continuing in full force and effect. EXECUTED to be effective as of the date first hereinabove written. PURCHASER: OYOG Operations, L.P. By: /s/ THOMAS MCENTIRE ------------------------- Name: Thomas T. McEntire Title: CFO SELLER: COOPER POWER TOOLS, INC. By: /s/ RANDALL AMMERMAN ------------------------- Name: Randall B. Ammerman Title: Vice President -2- EX-10.22 8 dex1022.txt SECOND AMENDMENT TO EARNEST MONEY CONTRACT EXHIBIT 10.22 SECOND AMENDMENT TO EARNEST MONEY CONTRACT This Second Amendment to Earnest Money Contract (this "Amendment") is made to be effective as of the 14th day of August, 2003, by and between COOPER POWER TOOLS, INC. ("Seller"), and OYOG Operations, L.P. ("Purchaser"). RECITALS: A. Seller and Purchaser entered into that certain Earnest Money Contract dated May 27, 2003, but effective as of May 30, 2003, as amended by First Amendment to Earnest Money Contract dated effective as of July 14, 2003 (as amended, the "Purchase Agreement"), providing for the sale by Seller to Purchaser of 19.2155 acres of land out of the W. C. Wallace Survey, A-848, Harris County, Texas (the "Land"), said Land being more particularly described in Exhibit A attached to the Purchase Agreement. Each capitalized term used in this Amendment, unless otherwise defined herein, shall have the meaning ascribed to such term in the Purchase Agreement. B. Section 6 of the Purchase Agreement, entitled "Inspection Period," now provides until August 14, 2003 in which to make certain inspections. C. Seller and Purchaser have agreed to extend the Inspection Period upon the terms and conditions set forth below. NOW, THEREFORE, premises considered and for Ten Dollars ($10.00) and other good and valuable consideration each paid to the other, receipt of which is hereby acknowledged, Seller and Purchaser agree to amend the Purchase Agreement in the following respects: 1. The Inspection Period is hereby extended to Friday, August 22, 2003. The date for the "closing" under Section 4 of the Purchase Agreement remains on or before Friday, August 29, 2003. For the avoidance of error, any other deadlines in the Purchase Agreement originally scheduled in reference to or after the expiration of the Inspection Period, are hereby extended to August 22, 2003. 2. Each party acknowledges and agrees that all obligations and duties of the other party under the Purchase Agreement (as hereby amended) required to be performed prior to the date hereof, have been satisfactorily performed. 3. Seller and Purchaser ratify and confirm the Purchase Agreement, as hereby amended, as continuing in full force and effect. EXECUTED to be effective as of the date first hereinabove written. PURCHASER: OYOG Operations, L.P. By: /s/ THOMAS MCENTIRE ----------------------------- Name: Thomas T. McEntire Title: CFO SELLER: COOPER POWER TOOLS, INC. By: /s/ RANDALL AMMERMAN ----------------------------- Name: Randall B. Ammerman Title: Vice President -2- EX-10.23 9 dex1023.txt THIRD AMENDMENT TO EARNEST MONEY CONTRACT EXHIBIT 10.23 THIRD AMENDMENT TO EARNEST MONEY CONTRACT This Third Amendment to Earnest Money Contract (this "Amendment") is made to be effective as of the 22th day of August, 2003, by and between COOPER POWER TOOLS, INC. ("Seller"), and OYOG Operations, L.P. ("Purchaser"). RECITALS: A. Seller and Purchaser entered into that certain Earnest Money Contract dated May 27, 2003, but effective as of May 30, 2003, as amended by First Amendment to Earnest Money Contract dated effective as of July 14, 2003, and as amended by Second Amendment to Earnest Money Contract dated effective as of August 14, 2003 (as amended, the "Purchase Agreement"), providing for the sale by Seller to Purchaser of 19.2155 acres of land out of the W. C. Wallace Survey, A-848, Harris County, Texas (the "Land"), said Land being more particularly described in Exhibit A attached to the Purchase Agreement. Each capitalized term used in this Amendment, unless otherwise defined herein, shall have the meaning ascribed to such term in the Purchase Agreement. B. Section 6 of the Purchase Agreement, entitled "Inspection Period," now provides until August 22, 2003 in which to make certain inspections. C. Seller and Purchaser have agreed to extend the Inspection Period upon the terms and conditions set forth below. NOW, THEREFORE, premises considered and for Ten Dollars ($10.00) and other good and valuable consideration each paid to the other, receipt of which is hereby acknowledged, Seller and Purchaser agree to amend the Purchase Agreement in the following respects: 1. The Inspection Period is hereby extended to Friday, August 29, 2003. The date for the "closing" under Section 4 of the Purchase Agreement shall be on or before Friday, September 5, 2003. For the avoidance of error, any other deadlines in the Purchase Agreement originally scheduled in reference to or after the expiration of the Inspection Period, are hereby extended to August 29, 2003. 2. Each party acknowledges and agrees that all obligations and duties of the other party under the Purchase Agreement (as hereby amended) required to be performed prior to the date hereof, have been satisfactorily performed. 3. Seller and Purchaser ratify and confirm the Purchase Agreement, as hereby amended, as continuing in full force and effect. EXECUTED to be effective as of the date first hereinabove written. PURCHASER: OYOG Operations, L.P. By: /s/ THOMAS MCENTIRE -------------------------------- Name: Thomas T. McEntire Title: CFO SELLER: COOPER POWER TOOLS, INC. By: /s/ RANDALL AMMERMAN -------------------------------- Name: Randall B. Ammerman Title: Vice President -2- EX-10.24 10 dex1024.txt FOURTH AMENDMENT TO LOAN AGREEMENT EXHIBIT 10.24 FOURTH AMENDMENT TO LOAN AGREEMENT THIS FOURTH AMENDMENT TO LOAN AGREEMENT (this "Amendment"), dated as of March 31, 2003, is between CONCORD TECHNOLOGIES, LP, a Texas limited partnership ("Concord"), GEOSPACE ENGINEERING RESOURCES INTERNATIONAL, LP, a Texas limited partnership ("Engineering"), GEOSPACE TECHNOLOGIES, LP, a Texas limited partnership, formerly known as Geo Space, LP ("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"). RECITALS: A. Geo Space was formerly named Geo Space, LP. On March 5, 2003, Geo Space changed its name from "Geo Space, LP" to "Geospace Technologies, LP." B. Borrowers and Lender entered into that certain Loan Agreement dated as of February 16, 2001, as amended by First Amendment to Loan Agreement dated as of February 17, 2001, Second Amendment to Loan Agreement dated as of January 15, 2002 and Third Amendment to Loan Agreement dated as of January 14, 2003 (the "Agreement"). C. Pursuant to the Agreement, OYOG, LLC, a Delaware limited liability company, OYO Geospace Corporation, a Delaware corporation, and OYOG Limited Partner, LLC, a Nevada limited liability company ("Guarantors"), executed those certain Guaranty Agreements dated as of January 15, 2002 (the "Guaranty Agreements"), pursuant to which Guarantors guaranteed to Lender the payment and performance of the Obligations (as defined in the Agreement). D. Borrowers and Lender now desire to amend the Agreement as herein set forth. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I. Definitions Section 1.1. Definitions. Capitalized terms used in this Amendment, to the extent not otherwise defined herein, shall have the meanings given to such terms in the Agreement, as amended hereby. ARTICLE II. Amendments Section 2.1. Amendment to Loan Documents. All references to "Geo Space, LP" contained in each of the Loan Documents are amended to read "Geospace Technologies, LP". Section 2.2. Amendment to Section 9.2. Section 9.2 contained in the Agreement is amended to read in its entirety as follows: Section 9.2. Ratio of EBITDA to Interest Expense. Parent will at all times maintain a Ratio of EBITDA to Interest Expense of not less than (a) 4.00 to 1.00 as of March 31, 2003, (b) 3.00 to 1.00 as of June 30, 2003, and (c) 4.00 to 1.00 as of September 30, 2003, and at all times thereafter. 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. Section 2.3. Amendment to Section 9.3. Section 9.3 contained in the Agreement is amended to read in its entirety as follows: Section 9.3. Ratio of Senior Debt to EBITDA. Parent will maintain a Ratio of Senior Debt to EBITDA of not greater than (a) 2.75 to 1.00 as of March 31, 2003, (b) 7.75 to 1.00 as of June 30, 2003, (c) 4.50 to 1.00 as of September 30, 2003, and (d) 2.50 to 1.00 as of December 31, 2003, and at all times thereafter. 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. Section 2.4. Amendment to Exhibits. Exhibit "M" to the Agreement (No Default Certificate) is amended to conform in its entirety to Annex "B" to this Amendment. -2- ARTICLE III. Conditions Precedent Section 3.1. Conditions. The effectiveness of this Amendment is subject to the receipt by Lender of the following in form and substance satisfactory to Lender: (a) Certificate - Borrowers. A certificate of the Secretary or the Assistant Secretary (or another officer acceptable to Lender) of each Borrower certifying resolutions of the board of directors of the General Partner as general partner of each Borrower which authorize the execution, delivery and performance by each Borrower of this Amendment and the other Loan Documents to which such Person is or is to be a party. (b) Amendment to Security Agreement-Geo Space. A Second Amendment to Security Agreement-Geo Space executed by Geo Space substantially in the form of Annex "A" hereto. (c) Additional Information. Such additional documents, instruments and information as Lender may request. Section 3.2. Additional Conditions. The effectiveness of this Amendment is also subject to the satisfaction of the additional conditions precedent that (a) the representations and warranties contained herein and in all other Loan Documents, as amended hereby, shall be true and correct as of the date hereof as if made on the date hereof, (b) all proceedings, corporate or otherwise, taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be satisfactory to Lender. ARTICLE IV. Agreement, Ratifications, Representations, and Warranties Section 4.1. Geo Space's Name Change. Borrowers and Lender agree that although Geo Space has changed its name from "Geo Space, LP" to "Geospace Technologies, LP", Geo Space is and remains the same legal entity as it was on the date of the Agreement, and all of the obligations, covenants and agreements contained in the Agreement and the Liens created by the Security Agreement-Geo Space remain in full force and effect, notwithstanding the change of Geo Space's name. Section 4.2. Ratifications. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Agreement and except as expressly modified and superseded by this Amendment, the terms and provisions of -3- the Agreement are ratified and confirmed and shall continue in full force and effect. Borrowers and Lender agree that the Agreement as amended hereby shall continue to be the legal, valid and binding obligation of such Persons enforceable against such Persons in accordance with its terms. Section 4.3. Representations, Warranties and Agreements. Each Borrower hereby represents and warrants to Lender that (a) the execution, delivery, and performance of this Amendment and any and all other Loan Documents executed or delivered in connection herewith have been authorized by all requisite action on the part of such Borrower and General Partner and will not violate the Organizational Documents of such Borrower, (b) the representations and warranties contained in the Agreement as amended hereby, and all other Loan Documents are true and correct on and as of the date hereof as though made on and as of the date hereof, (c) no Event of Default or Unmatured Event of Default has occurred and is continuing, (d) Borrower is in full compliance with all covenants and agreements contained in the Agreement as amended hereby, (e) Borrower is indebted to Lender pursuant to the terms of the Notes, as the same may have been renewed, modified, extended and rearranged, (f) the liens, security interests, encumbrances and assignments created and evidenced by the Loan Documents are, respectively, valid and subsisting liens, security interests, encumbrances and assignments and secure the Notes as the same may have been renewed, modified or rearranged and (g) Borrower has no claims, credits, offsets, defenses or counterclaims arising from the Loan Documents or Lender's performance under the Loan Documents. ARTICLE V. Miscellaneous Section 5.1. Reference to Agreement. Each of the Loan Documents, including the Agreement and any and all other agreements, documents, or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Agreement, as amended hereby, are hereby amended so that any reference in such Loan Documents to the Agreement shall mean a reference to the Agreement, as amended hereby. Section 5.2. Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. Section 5.3. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN HOUSTON, HARRIS COUNTY, TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. -4- Section 5.4. Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Lender and Borrowers and their respective successors and assigns, except no Borrower may assign or transfer any of its rights or obligations hereunder without the prior written consent of Lender. Section 5.5. Counterparts. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument. Section 5.6. Effect of Waiver. No consent or waiver, express or implied, by Lender to or for any breach of or deviation from any covenant, condition or duty by Borrowers shall be deemed a consent or waiver to or of any other breach of the same or any other covenant, condition or duty. Section 5.7. ENTIRE AGREEMENT. THIS AMENDMENT AND ALL OTHER INSTRUMENTS, DOCUMENTS, AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS AMENDMENT EMBODY 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 HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO. Executed as of the date first written above. BORROWERS: CONCORD TECHNOLOGIES, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------------------- Thomas T. McEntire Vice President and Chief Financial Officer -5- GEOSPACE ENGINEERING RESOURCES INTERNATIONAL, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------------------- Thomas T. McEntire Vice President and Chief Financial Officer GEOSPACE TECHNOLOGIES, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ------------------------------------ Thomas T. McEntire Vice President and Chief Financial Officer OYO INSTRUMENTS, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ----------------------------------- Thomas T. McEntire Vice President and Chief Financial Officer -6- OYOG OPERATIONS, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ----------------------------------- Thomas T. McEntire Vice President and Chief Financial Officer LENDER: SOUTHWEST BANK OF TEXAS, N.A. By: /s/ Edward K. Bowdon --------------------------------------- Edward K. Bowdon Vice President -7- Each of the undersigned Guarantors hereby consents and agrees to this Amendment and agrees that the Guaranty Agreement executed by such person shall remain in full force and effect and shall continue to be the legal, valid and binding obligations of such Guarantor, enforceable against such Guarantor in accordance with its terms and shall evidence such Guarantor's guaranty of the Notes, as renewed and extended from time to time. OYOG, LLC By: /s/ Thomas T. McEntire ------------------------------------- Thomas T. McEntire Vice President and Chief Financial Officer OYOG LIMITED PARTNER, LLC By: /s/ Thomas T. McEntire -------------------------------------- Thomas T. McEntire Manager OYO GEOSPACE CORPORATION By: /s/ Thomas T. McEntire -------------------------------------- Thomas T. McEntire Vice President and Chief Financial Officer -8- LIST OF ANNEXES Annex Document ----- --------- A Second Amendment to Security Agreement -Geo Space B No Default Certificate -9- ANNEX "A" Second Amendment to Security Agreement - Geo Space -10- ANNEX "B" No Default Certificate -11- EX-14.1 11 dex141.txt GENERAL CODE OF BUSINESS CONDUCT EXHIBIT 14.1 OYO GEOSPACE CORPORATION GENERAL CODE OF BUSINESS CONDUCT AND SUPPLEMENTAL CODE OF ETHICS FOR CEO AND SENIOR FINANCIAL OFFICERS TABLE OF CONTENTS PAGE ---- 1. Foreword............................................................... 1 2. Internal Accounting Controls........................................... 3 3. Antitrust.............................................................. 7 4. Political Participation............................................... 10 5. Employee Loyalty...................................................... 11 6. Securities Trading and Disclosure..................................... 14 7. Human Resources....................................................... 21 8. Substance Abuse....................................................... 21 9. Health, Safety and Environment........................................ 23 10. International Trade Restrictions and Boycotts......................... 23 11. Confidentiality of Corporate Information.............................. 24 12. Records Retention/Destruction......................................... 25 13. Community Involvement................................................. 25 14. Government and Third Party Investigations............................. 25 15. The Follow-Through.................................................... 26 General Code of Business Conduct Form of Agreement.......................... 29 Supplemental Code of Ethics for CEO and Senior Financial Officers........... 31 -i- OYO GEOSPACE CORPORATION GENERAL CODE OF BUSINESS CONDUCT 1. FOREWORD The Board of Directors and senior management of OYO Geospace Corporation ("OYO Geospace" or the "Company"), believe it is critically important for you as an employee to know and understand the basic principles of law, ethics and sound business management by which OYO Geospace conducts its business. While we insist on compliance with all laws applicable to us, we also conduct our business based on adherence to ethical business standards and rational business management practices that go beyond minimal legal requirements. In brief, our philosophy is that OYO Geospace and its employees will comply with all applicable laws and regulations, will adhere to the highest ethical and business management standards and will act as responsible members of the community. This General Code of Business Conduct (the "Code") has been prepared to help you understand and abide by the philosophy outlined above. It also highlights several specific policies and laws of which you should be specifically aware in conducting your business activities. We do not expect you to become a legal expert in these areas as a result of having read this booklet; the examples included here do not represent every instance where laws apply to Company activities. However, we do expect you to comply with this Code, to be aware of commonly applicable laws and regulations, to be able to recognize sensitive areas and issues and to seek advice when necessary. Further, this Code does not purport to present a full exposition of the laws specifically noted herein or the Company's full understanding of such laws. Additionally, this Code demands conduct that may exceed legal minimums. Finally, with respect to the Code, the Company has a separate Code of Ethics for our Chief Executive and Financial Officers (appended at the end of this Code) in order to address certain requirements flowing from the Sarbanes-Oxley Act of 2002. Remember, it is always better to seek advice before a course of action is begun or a commitment is made so that the Company's standards and applicable legal requirements can be reviewed and difficulties avoided. If you have questions about the Company's standards or the laws governing your activities on behalf of the Company, consult with your supervisor, the Company's Chief Executive Officer or the Company's Chief Financial Officer. While the Company will have follow-through procedures to attempt to monitor compliance with this Code, it is your personal responsibility to be informed and to comply with this Code. We encourage you to ask questions to help meet this goal. OYO Geospace's goal is to maximize the value of its stockholders' investment in the Company. We will do that by adhering to our Mission Statement and Core Values: Mission - Our goal is to provide customers with the best products and services available in the industry. To accomplish this, we find ways to add value for the customer by creating profits for them. We do not operate in isolation but within communities, which have placed their trust in our abilities. We are accountable for how well we serve them. Our community of employees serves a community of customers by providing equipment and services to help them make a profit. Our business activities serve a community of suppliers, lenders and shareholders who have put their trust in us by investing in our business. We best achieve our goal by operating from a set of Core Values: Integrity--Integrity is our most valued principle. We will maintain high ethical standards in everything we do. We must be known for our honest and sincere spirit. We are dedicated to complying with both the spirit and the letter of the rules and laws that govern us. Our continued success requires unswerving adherence to these standards. Teamwork--We are all in this together. As long as we work together, there is no limit to the possibilities. The sum of our collaborative effort is much larger than the sum of our individual efforts, and in this manner our customers are best served. Loyalty--We will be loyal to our customers. We will honor their secrets and confidences and earn their respect and loyalty in return. Flexibility--The work we do is highly technical and changes very rapidly. To be effective, we must be change hardy. "The way it's always been done" will not be sufficient to bring us future success. We must be a flexible organization that is willing to learn, create new ideas and adapt to the new environments. Responsibility--The responsibility of solving customers' problems belongs to everyone. We place no limits on employee initiative in serving customers. We must each be trustworthy and accountable to reliably serve the needs of the customer and each other. Excellence--We take great pride in the quality of our work and are determined to achieve excellence in everything we do. Excellence is reflected by how we conduct ourselves as individuals and as a company. It is reflected in the quality of the solutions we develop for our customers and the value they receive from our products and services. We seek to identify and recruit the very best person for every job. Excellence is a shared responsibility for every employee. To embrace excellence, we emphasize education, training and development of employees and teams. Striving for excellence is a continuing quest. Respect--We respect other people. This creates an environment that promotes open communication, diverse ideas and approachable people. A respectful environment allows customers to express their needs with the expectation that we will listen. It also allows thoughtful responsiveness to customers' needs. -2- Profitability--Profits are the fuel to our success. They create value for all stakeholders. It is our practice to share our profits with all who help create them. Enthusiasm--We are enthusiastic! This allows us to focus on our opportunities to serve the customer. Enlightened optimism creates an environment conducive to meeting and exceeding our customers' needs. Creativity--Fulfilling our customers' needs is the most important ingredient of our corporate well being. Our collective creativity generates solutions for our customers and is the essence of differentiating us from our competitors. Social Responsibility--We do not exist in isolation. We operate in communities who have placed their trust in us. They provide employees and suppliers a friendly environment for growth and success. We pledge to conduct ourselves in a most responsible manner in each community. In pursuit of our Mission and these Core Values, the Company and employees will comply with this Code. This Code and any related policies and procedures apply to OYO Geospace, all divisions, subsidiaries and partnerships in which OYO Geospace holds a majority interest (if any) and all officers, employees and agents of these entities. Persons who violate this Code and any related policies are acting outside the scope of their employment or agency and are subject to the full range of disciplinary action by the Company, including termination. Further, we expect supervisors to take reasonable steps to help assure compliance and detect noncompliance by subordinates. Supervisors may themselves be disciplined for their failure to meet reasonable expectations in performing these duties. Adherence to Law--OYO Geospace and its employees will abide by all applicable laws and regulations and will act in such a manner that the full disclosure of all facts related to any activity will benefit the Company and never reflect adversely upon the Company. Adherence to High Ethical Standards--OYO Geospace and its employees will adhere to the highest ethical standards of conduct in all business activities and will act in a manner that enhances OYO Geospace's standing as a vigorous and ethical competitor within the business community. Responsible Business Citizenship--OYO Geospace and its employees will act as responsible citizens in the communities where the Company does business. 2. INTERNAL ACCOUNTING CONTROLS This section of the Code describes the internal accounting controls that have been established to govern management of the Company's assets and liabilities. OYO Geospace has adopted these controls in accordance with generally accepted accounting principles, the guidelines of the Financial Accounting Standards Board, our internal needs, stockholder needs and the requirements of various laws and regulations which apply to the Company. Two of these laws, the Foreign Corrupt Practices Act of 1977, and the Sarbanes-Oxley Act of 2002 deserve further explanation because of their far-reaching provisions. -3- Foreign Corrupt Practices Act--In 1977 the federal government enacted the Foreign Corrupt Practices Act (the "FCPA"). All American citizens, residents and companies, whether publicly traded or privately held, are subject to certain key provisions of the FCPA. The FCPA has two basic parts: (1) the antibribery provisions (which apply to both individuals and entities) and (2) the accounting, recordkeeping and internal controls requirements (which are most directly applicable to publicly-owned companies, such as OYO Geospace). The antibribery provisions prohibit certain payments to foreign officials, foreign political parties, candidates for foreign political office and other persons known to be conduits to such recipients. Prohibited payments or "bribes" under the FCPA include anything of value given, offered or promised to any such person to assist the Company in obtaining business, retaining business or for directing business to any person. "Anything of value" can include things of value other than cash, such as free vacation trips, services and jobs for relatives. Despite its title, the FCPA's accounting, recordkeeping and internal control provisions apply to both domestic and foreign operations of publicly-traded American companies. These FCPA requirements were intended to act as a control system to complement the antibribery provisions by preventing the creation of unreported slush funds, illegal payments and other instances of false books and records, but they are actually much broader in scope. The provisions of the FCPA have been used by the U.S. government to challenge a wide range of questionable accounting and recordkeeping practices unrelated to illegal payments or foreign operations. In any instance, it is important to understand that accuracy in documentation and reporting is required since the FPCA's provisions can be interpreted to apply to relatively small sums, such as sums from petty cash funds. Penalties--Any director, officer, employee, or agent of OYO Geospace, or any stockholder acting on behalf of OYO Geospace, who is convicted of violating the antibribery provisions of the FCPA is subject to fines of up to $100,000 and/or imprisonment of up to five years for a single count. If convicted, the Company is subject to fines of up to $2,000,000 for a single count. In addition to possible criminal actions, civil enforcement actions may be brought against the Company and its personnel and civil penalties assessed against individuals. Other possible penalties and serious enforcement remedies can be applied to violations of the FCPA's accounting provisions. Sarbanes-Oxley Act--In 2002 the federal government enacted the Sarbanes-Oxley Act, a sweeping measure addressing corporate and accounting reform in the wake of highly publicized scandals in corporate America. Such Act and rules and regulations promulgated by the SEC thereunder contain a number of provisions affecting public companies like the Company, including (i) provisions requiring specific individual management certifications as to the accuracy of the Company's periodic reporting (Forms 10-Q and 10-K) to the Securities and Exchange Commission (the "SEC") and specific individual management certifications to the SEC as to the design, implementation and evaluation as to effectiveness of the Company's disclosure controls and procedures intended to assure timely and accurate periodic reporting. Further, such Act requires reports and certifications to the SEC as to the effectiveness of the Company's internal control over financial reporting, as well as other matters pertaining to internal controls, and will also require as of our 2005 fiscal year end that our independent -4- auditors report on and attest to management's assessments as to internal control over financial reporting. Internal Control Guidelines--Under the Sarbanes-Oxley Act and the rules and regulations promulgated thereunder "internal control over financial reporting" consists of a company's policies and procedures that are designed and operated to provide reasonable assurance about the reliability of the company's financial reporting and its processes for preparing financial statements in accordance with generally accepted accounting principles. It also includes policies and procedures that pertain to the maintenance of accounting records, the authorization of receipts and disbursements and the safeguarding of assets. To be effective, internal controls must be designed properly and all the controls necessary to provide reasonable assurance about the fairness of a company's financial statements should be in place and performed by qualified people who have the authority to implement them. Specifically, the rules under the Sarbanes-Oxley Act contemplate, as internal controls, policies and procedures that . pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the company's transactions and dispositions of assets . provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures are being made only in accordance with authorizations of management and directors . provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements. OYO Geospace has established accounting policies, systems, controls and records for authorizing, executing and recording, accurately, fairly and in reasonable detail, all transactions involving the Company's assets and liabilities. In addition, the Company has established physical and administrative controls for access to its assets and will periodically reconcile its recorded and existing assets. Further, the Company has in place procedures and controls as to its disclosure process. These policies and controls have been established according to the Company's internal needs, generally accepted accounting principles and various laws and regulations, including the FCPA and the Sarbanes-Oxley Act and rules and regulations under both such Acts. The Company's Chief Financial Officer has on-going responsibility to audit compliance with such policies and controls and to discuss such matters with, and to report exceptions to, the Audit Committee of the Board of Directors and the Company's legal counsel and/or independent auditors. . Compliance. No officer, employee or other person acting on behalf of the Company will engage in any activity that circumvents the Company's accounting policies or systems of internal controls or its disclosure controls and procedures. -5- . Illegal Payments. No officer, employee or other person acting on behalf of the Company will in any way offer, promise, make or cause to be offered or made, illegal payments, illegal contributions (or other contributions prohibited hereby) or other illegal disbursements or gifts. . Internal Accounting Controls. Accounting practices are to be conducted in full compliance with the accounting, record keeping and internal control requirements of the FCPA, the Sarbanes-Oxley Act and related rules and regulations. . Cash Disbursements. Company policy prohibits cash disbursements except for nominal disbursements drawn from established and properly recorded petty cash accounts. Upon receipt of appropriate documentation and authorization, all checks will be drawn only to the ultimate payee. No checks will be drawn to cash or bearer. A procedure exists for granting exceptions to this policy, but the excepted transaction or transactions must be approved in advance by the Company's Chief Financial Officer or designee thereof. . Consulting Services and Review Procedures. The experience of American companies operating abroad is that problems relating to the FCPA, particularly its antibribery provisions, are most likely to occur in the use of foreign representatives, consultants, agents or other intermediaries. For this reason, the Company has adopted mandatory procedures that must be followed before a representative, consultant or agent can be retained. For purposes of these procedures, a representative, consultant or agent is any person or company who renders business, professional or technical advice or assists in facilitating relationships between the Company and any other person or otherwise acts as an intermediary compensated by the Company in any manner, directly or indirectly. A representative, consultant or agent cannot be retained without the prior approval of the Company's Chief Executive Officer or the designee thereof, unless the services being rendered will be performed solely in the United States or Canada. Before this approval will be granted, the form of a written contract between the Company and the representative, consultant or agent must be submitted and it must be confirmed that the representative, consultant or agent is not a government official, party official or candidate for office and is technically able to perform the services for which the representative, consultant or agent is contracting to perform. . Reporting and Review Procedure. Any officer, employee or other agent of the Company who thinks (i) a transaction may be illegal, (ii) that a deficiency exists or a circumvention is occurring as to the Company's disclosure controls and procedures or internal controls or (iii) that an event has occurred that may need specific attention as to the necessity for disclosure, must report this possibility to his supervisor, who in turn should consult with the Company's Chief Executive Officer or Chief Financial Officer. If either officer, after conferring with legal -6- counsel, or if the reporting person, believes it is necessary, then such person may request a review by notifying the Audit Committee of the Board of Directors of the Company. When a review is requested, the Audit Committee will inform management and those involved in any pending transaction that the transaction cannot proceed until the issue has been resolved. Under the direction of the Chief Financial Officer or another designee of the Audit Committee, with the assistance of legal counsel, a review will be commenced and completed as promptly as is reasonably possible, and a report will be given to the Audit Committee, which shall then take appropriate action to resolve the issue. All appropriate persons, including the reporting individual, will be informed as to how the issue is resolved. If the review procedure results in a favorable decision as to a pending transaction, then such transaction may proceed. 3. ANTITRUST Federal and state antitrust laws are designed to preserve and foster fair and honest competition within the free enterprise system. To accomplish this goal, the language of antitrust laws is deliberately broad, prohibiting such activities as "unfair methods of competition" and agreements "in restraint of trade." Such language gives enforcement agencies the right to examine many different business activities to judge their effect on competition. Areas of concern include costs, prices, discounts, terms or conditions of sale, distribution, production, sales areas, customers, potential customers and suppliers. Policy--Company policy requires full compliance with all antitrust laws. No employee, under any circumstance, has the authority (actual, apparent or otherwise) to authorize a violation of law. Further, Company policy requires all persons acting on OYO Geospace's behalf to avoid even the appearance of conduct or activities contrary to antitrust laws. Anyone who violates the law, or knowingly permits a subordinate to do so, is subject to Company disciplinary action, including demotion or dismissal. Criminal penalties and civil remedies for antitrust violations are severe for both the Company and the individual. They include the following: Criminal Penalties . imprisonment of individuals for up to three years for each count of a criminal conviction which the court may determine, to be served concurrently or consecutively . fines against the Company for each count of conviction in an amount that can be millions of dollars -7- . fine against individuals in substantial amounts for a conviction of a single count . under certain circumstances, corporate or organizational probation for all criminal antitrust violations (and other corporate felonies), for one to five years, including a fine, restitution or community service, that the organization will not commit any further federal, state or local crimes during the period of probation, plus other recommended conditions, such as mandatory publicity of the conviction or compliance with a compliance and protection program. One of the circumstances requiring mandatory corporate probation is the nonexistence of a compliance and detection program. Civil Remedies . payment of triple damages, plus reasonable attorney's fees and litigation costs awarded for each separate claim in a civil action, to firms or individuals injured by the violation . injunctions or consent decrees prohibiting certain activities. Consent decrees can seriously limit a firm's future freedom to engage in business activity and can be applied across a broader scope than was involved in the original violation. The points discussed herein do not include every instance in which these federal laws or state antitrust laws may apply. If you have questions or are uncertain about how the law may apply to a specific activity, contact your supervisor, the Chief Executive Officer or the Chief Financial Officer. We want you to ask questions and seek advice. Areas of Potential Exposure--Two areas where antitrust violations can occur are in relations with competitors and in relations with customers and suppliers. . Relations with Competitors. Probably the greatest danger for violations of the antitrust laws rests in contacts with competitors. The laws make illegal any agreement or understanding, expressed or implied, written or oral, which restricts competition or interferes with the ability of the free market system to function properly, basically any agreement that restrains trade. In the eyes of the law, good intentions, customer benefits and consumer benefits do not justify or excuse antitrust violations. Communications between representatives of competitors should be avoided unless they concern a true customer-supplier relationship, other legitimate business ventures or legal and proper trade association activities. A formal agreement with a competitor does not have to exist in order to prove a conspiracy to violate antitrust laws. A general discussion followed by common action can be enough to show implied agreement. In an investigation, every written or oral communication is subject to scrutiny. In fact, courts have sometimes referred to -8- "knowing winks" and "willing nods," pointing out tacit agreements in restraint of trade. Accordingly, you must not engage in any communications with competitors that could result, or even appear to result, in . price-fixing . bid-rigging (including "complimentary bidding") . allocation of customers, markets or territories . boycotts . production limits to restrain trade. The antitrust laws recognize your need to be aware of market conditions, and, subject to the restrictions described below, you may generally discuss these with customers and others, provided they are not competitors. . Relations with Customers and Suppliers. Generally speaking, we have an unrestricted right to choose our customers and suppliers. But, there are antitrust pitfalls in this area. The biggest danger is an allegation that, through an understanding or threat, we have improperly restricted a customer's freedom to establish its own prices or terms of sale. You should avoid all conduct or activities suggesting that to be the case or giving such an appearance. You must also avoid any agreement (or appearance of an agreement) with a supplier that establishes the price or terms of sale at which we sell our products, and you should avoid complaining to a supplier about the prices charged by his other customers with whom we compete. By law, a supplier cannot interfere with a customer's freedom to determine its own resale prices, cash discounts, profit margins and other terms and conditions of sale. Furthermore, a supplier acting in concert with a customer cannot interfere with the business decisions of another customer. Resale price-fixing agreements can be proven by circumstantial evidence, and any criticism of a particular price level can be argued to have been a threat. You should also avoid discussions of one customer's prices with another or with a supplier, since such discussions can be interpreted as an implied demand that a particular price be established. Tie-in sales and reciprocal dealing are other potential danger areas where caution should rule. Tie-in or tying sales or arrangements are those in which a customer must purchase one product or service in order to be able to purchase another or a supplier must sell one product or service in order to sell another. Reciprocal sales can be described as "you buy from me because I buy from you." Any activity that may involve these areas should be reviewed and approved by the Chief Executive -9- Officer or the designee thereof before being discussed with a customer or a supplier. Seeking Advice--The preceding discussion is by no means an exhaustive list of areas where antitrust laws apply. If you have questions about a specific business activity, consult with your supervisor, the Chief Executive Officer or the Chief Financial Officer. Remember, we want you to ask questions. 4. POLITICAL PARTICIPATION Participation in the political process is one of every citizen's most basic rights. Federal and state laws, however, limit the nature and extent of individual and corporate political participation. For example, federal law and the laws of many states prohibit corporate contributions to political candidates or officeholders. It is against Company policy to use Company funds or other Company assets to make political contributions to candidates for political office or to officeholders. This policy applies even in states where the law may permit corporate political contributions. In addition, you must obtain the approval of the Chief Executive Officer or the Chief Financial Officer before allowing any OYO Geospace facilities to be used for political purposes. Federal law and Company policy also state that no one will be reimbursed for personal political contributions. Personal compensation will not be altered in any way under any circumstances to reflect such contributions. While corporate policy does not prohibit political contributions that are legal under the laws of foreign countries where the contribution may be made as well as under the FCPA, such a donation requires the approval of the Chief Executive Officer and the Chief Financial Officer. Personal Political Participation--The Company encourages employees to participate in their national or local political process, as they so desire. They may make personal political contributions or communicate their personal beliefs to elected officials. It is important, however, to distinguish between personal and corporate political activities. As a responsible corporate citizen, OYO Geospace may speak out on issues of importance to the Company. Senior management is responsible for developing the Company's position on relevant legislative and regulatory issues, and the Company's government relations representatives are responsible for communicating these positions to government officials as directed by management. Unless you are specifically requested by the Company to represent it before legislative or other government bodies, be sure you clearly label any personal communication with legislators as your own beliefs. If you are contacted by legislators or regulators regarding the Company's position on public issues, you should refer them to the Chief Executive Officer or the Chief Financial Officer. -10- Media Relations--Employees may be asked by representatives of the news media for information concerning the Company's position on issues or about matters pertaining to the Company's business. Employees should refer these and all other requests from the news media to the Chief Executive Officer or Chief Financial Officer. In addition, employees may not release information to the news media about Company activities or the activities of other employees. The Company has established systems and procedures for responding to news media requests and for obtaining management approval for public statements. If an activity merits or requires public disclosure, its release will be handled by the Chief Executive Officer or Chief Financial Officer. 5. EMPLOYEE LOYALTY OYO Geospace expects its employees to serve the Company with undivided business loyalty. You are expected to put the Company's interests ahead of any other business and commercial interest you may have as an individual. You also should avoid situations in which a conflict of interest could arise. Conflict of Interest--A conflict of interest exists when there is a conflict between an individual's obligation to the Company and personal self-interest. Other potential conflicts arise in situations where a competitive, regulatory or adversary relationship could exist. Employees should not use their position with OYO Geospace, or information acquired in that capacity, in a manner (1) that may create a conflict of interest or the appearance of a conflict of interest between the employee's personal interests and the Company or (2) which directly or indirectly benefits the employee or the employee's immediate family. Generally speaking, employees should not engage in activities that . compete with any of the Company's lines of business . provide service or assistance to a competitor . interfere with the performance of job duties. In addition, you should not use Company assets for your personal gain. The work you do for the Company belongs to the Company. You may not exploit inventions, patents, copyrights or other intellectual property or proprietary information or trade secrets belonging to the Company. This policy is based on the legal principle that requires directors, officers and employees who handle Company money or property, or who transact Company business, to serve the Company with undivided loyalty. These individuals are strictly prohibited from taking what in all fairness belongs to the Company. If a business opportunity should belong to OYO Geospace, taking it for personal gain is considered taking a corporate asset. Specifically, you should not participate in, and no member of your immediate family should participate in, any of the following activities without prior written approval: -11- . selling or brokering products or services for any competing enterprise . accepting a position or arrangement in or with any competing business . using Company copyrights, trade names or other intellectual property or proprietary information without permission . engaging in land or property transactions in which the Company may have an interest . acquiring an equity interest (including stock or stock options), or engaging in any other business or financial arrangement with, a business engaged in purchases from or sales to the Company or in competition with the Company, except, of course, for equity interests in public companies that are not significant ownership positions therein. Trading in publicly traded securities usually is not a conflict of interest. But see "Securities Trading and Disclosure" hereinafter. If you have questions about this policy, contact the Company's Chief Executive Officer or Chief Financial Officer. In addition, employees should obtain the written approval of the Chief Executive Officer or the designee thereof before serving as an officer or director of a business other than OYO Geospace or its subsidiaries (if any) and other charitable, civic and similar organizations whose activities do no conflict with the interests of OYO Geospace and which do not impose excessive time demands. Intellectual Property and Computer Law--OYO Geospace has made a large investment in the development of software, trademarks, service marks, trade names, patents, copyrights, trade secrets and other valuable intellectual property. The continued success of the Company is dependent upon the successful commercial development and exploitation of its intellectual property. Every employee is responsible for insuring that these valuable assets are protected and preserved. Most intellectual property created by an employee will be "work for hire" and OYO Geospace will automatically own all rights in what the employee creates. In some cases, however, an employee may be asked to sign a separate document transferring the employee's rights to the Company. An employee will be required to sign the transfer document when the invention or other work being transferred was created by the employee during the time the employee was working for OYO Geospace. Infringement of other parties' intellectual property rights is both expensive and illegal. It is OYO Geospace's policy to avoid unauthorized use of other companies' or people's proprietary intellectual property, including trademarks, service marks, patents, copyrights, and trade secrets. Therefore, employees are instructed as follows: -12- . Employees should not use OYO Geospace trademarks or service marks in any way other than as a capitalized adjective, or fail to accompany trademarks or service marks with the proper designation. . Employees should affix a proper copyright notice to any piece of OYO Geospace's intellectual property, including but not limited to computer software developed by OYO Geospace or its contractor. . Employees responsible for purchasing and/or managing software should be familiar with the terms of software licenses and should take steps to ensure that users of the software are familiar with any contractual limitations on use. . Employees should not knowingly make unauthorized copies of software, use it in a manner, at a location, or on any machine, that is not authorized by the terms of the license agreement. As an example, employees should not bring software from home to use on their personal computers at work. . Unless approved by appropriate management personnel, employees should not engage outside consultants or developers without adequate protection of the intellectual property rights of OYO Geospace. . Employees should respect the intellectual property rights of other companies and persons and not knowingly misappropriate such property. Ethical Standards--All of the Company's activities must be performed based on the highest ethical standards. To assure this goal, employees should avoid any relationship with other businesses that could impair or unduly influence their ability to discharge their duties properly. The appearance of a conflict often can be as damaging as an actual conflict. A good general rule is to avoid any action or association that would be embarrassing to you or the Company if it were disclosed to the public. Gifts and Bribes--Gifts and entertainment represent an area of potential conflict in situations where a competitive, regulatory or adversary relationship could exist. Giving or accepting gifts and entertainment can be construed as an attempt to unduly influence the relationship. It should be noted that many states and foreign countries have so-called "commercial bribery" statutes that prohibit bribes in private business, and some federal criminal statutes can be extended to cover such activities. Generally, you should not make or accept gifts of more than nominal value or entertainment of greater than usual or customary expense. Gifts of money, stock, bonds or similar items are never permissible. Your judgment can help tell you (1) when a gift is improper and should be refused to prevent embarrassment to everyone and (2) when to avoid what may be an unintentional violation of the law. In addition, you should never receive or provide any gifts or entertainment when there is any obligation to "pay back" on the part of the recipient. Employees should report any instance in which they have been offered something they cannot accept under this Code to their supervisor as soon as possible. -13- Business entertainment is an ambiguous area. Picking up the check (or letting someone else pay the tab) for a business lunch or dinner or a trip to a sporting event or other event is usually permissible. However, a clear business purpose should be involved. Employees will be reimbursed for reasonable travel and entertainment expenses incurred for the benefit of the Company which are ordinary and necessary, legally incurred and properly authorized, reported and approved. Gratuities and Government Employees--Federal and state laws restrict the ability to give gratuities to government employees, including politicians. These laws specifically prohibit giving a gratuity to a government employee in connection with a business transaction. Procurement and contracting officers, inspectors, auditors and even local officials who issue permits or grant zoning variances are examples of government employees frequently dealt with, but any government employee can be included in this prohibition. The laws could be violated if anything of value is given to a government employee even if there is no intent to influence an official action or decision. While it is possible that there may be some "tolerance" under certain federal bribery laws for the giving of small "good will" type items, to avoid gray areas the Company's policy prohibits all such activities. A limited exception to the prohibition permits certain entertainment of public officials in connection with lobbying efforts and closely related public affairs work. However, applicable laws and rules restrict even this exception and, under certain conditions, impose even more stringent controls, such as requirements to register as lobbyists and to report expenditures. Therefore, no employee should entertain a public official or otherwise engage in lobbying efforts without authorization from OYO Geospace's Chief Executive Officer or Chief Financial Officer. 6. SECURITIES TRADING AND DISCLOSURE Insider Information--Publicly traded companies generally are required, subject to certain narrow exceptions, to provide full and fair public disclosure on a timely basis of any activities or events which would materially affect the value of their securities. In the normal course of business, some OYO Geospace employees may have access to information about such activities or events (including information as to both activities undertaken by OYO Geospace itself and activities undertaken by others) before it becomes public knowledge. Until it is released to the public, this knowledge is considered "inside" information and must be kept confidential. In general, federal securities laws may be viewed as designed to protect the public by preventing anyone with access to inside information from exploiting this knowledge. If you are aware of any material information relating to the Company that has not been made available to the public for at least two full business days, you must not trade directly or indirectly in the Company's securities or disclose ("tip") such information to another person who is likely to trade in the Company's securities. Serious criminal and civil penalties attach to "insider" trading and "tipping". You should assume that information is "material" if an investor might consider the information to be important in deciding whether to buy, sell or hold securities of the Company. -14- A good question to ask is "will the information when disclosed be likely to affect the price for the Company's securities?" Information may be important for this purpose even if it would not alone determine an investor's decision. Some (but not all) of the matters which may be material are earnings forecasts and undisclosed past financial results, possible acquisition or disposition of a business or formation of a joint venture or other strategic relationship, acquisition or loss of a significant supplier or customer or contract therewith, dividend actions, important product developments, significant financing developments, major personnel changes, major litigation developments, changes in the Company's capital structure (debt or equity) and the status of any labor negotiations. We emphasize that this list is merely illustrative. When there is any doubt, please consult with the Chief Executive Officer or Chief Financial Officer; we recommend a conservative attitude in these regards. You may not act on this information or release it to anyone else, including relatives, friends, co-workers or stockbrokers, until the information has been disclosed publicly and the public has had time to react to it. Similarly, if you are aware of nonpublic information concerning a possible significant transaction between the Company and another public company, you must not disclose that information to persons outside of the Company and you must not trade directly or indirectly in securities of the other company until such information has been publicly disclosed or until the possibility of such a transaction has been permanently terminated. Penalties for violations are severe and include . criminal fines and imprisonment . judgment in favor of a damaged investor ordering the violator to pay over any profits made from trading on the information and possible payment of damages . in certain cases, judgment in favor of the Company ordering the violator to pay over any profits made from the transaction, and possible payment of damages . court injunction . administrative sanction . civil penalties of up to three times the amount of profit gained or loss avoided. OYO Geospace may even have allegations made, and civil penalties sought, against it under certain circumstances in connection with violations by its employees. While the nature of their duties means that some employees have greater knowledge or access than others to material Company information, the rules apply to anyone who has direct or indirect access to material nonpublic information. This includes everyone from officers and directors of the Company to clerical staff and secretaries who may type confidential memoranda or technical personnel who may work on new projects. -15- Insider Trading Guidelines--The following guidelines are intended to help you comply with the rules regarding inside information. . Regardless of the motive or purpose involved, Company personnel should not discuss internal information about the Company (i) with anyone outside the Company, except as required in the performance of regular Company duties and (ii) with anyone inside the Company except on a "needs to know" basis. . Do not disclose sensitive or nonpublic information to anyone outside the Company regardless of your view as to its materiality. The Company has standard procedures for the release of information where appropriate, necessary or required. No disclosure should be made without following these procedures. Communications on behalf of the Company with the media, securities analysts and other investors must be made only by specifically designated representatives of the Company. Unless you have been expressly authorized to make such communications, if you receive any inquiry relating to the Company from the media, a securities analyst or an investor, you should decline commenting and refer the inquiry to the Company's Chief Executive Officer or Chief Financial Officer. . You should not buy or sell OYO Geospace securities (or options therefor), or direct someone else to buy or sell them for you, when you have knowledge of material inside information which has not been made public. After it has been made public, you cannot act on the information until the public has had time to react to it. . You should not trade in another company's stock, options or other securities if you believe that their value will be affected by OYO Geospace's plans, activities or business or a transaction with OYO Geospace. Insider Trading Blackout Period--To ensure compliance with this Code of Conduct and applicable federal and state securities laws, the Company requires that all directors, officers and employees who receive monthly financial information as to the Company refrain from conducting transactions involving the purchase or sale of the Company's securities during the following periods (the "Blackout Period"): Blackout Period: The period in any fiscal quarter commencing twenty days prior to the last day of any fiscal quarter and ending at the close of business on the third business day following the date of public disclosure of the financial results for such fiscal quarter or year. (These periods will usually include March 11 through April 30, June 10 through July 31, September 10 through November 15, and December 11 through January 31.) The safest period for trading in the Company's securities, assuming the absence of possession of material, non-public information, is generally the first ten or so business days following the end of a Blackout Period. The Blackout Periods are particularly sensitive periods of time for transactions in the Company's stock from the perspective of compliance with -16- applicable securities laws, and while they are not mandatory for all employees, all employees are directed to use caution during such periods in connection with any transaction in Company securities. The purpose behind the Blackout Periods is to help establish a diligent effort to avoid any improper transactions. All officers, directors and employees who receive monthly consolidated financial information must comply with the Blackout Period restrictions. Each person is individually responsible at all times for compliance with the prohibitions against insider trading. Trading in the Company's securities outside a Blackout Period should not be considered a "safe harbor," and all directors, officers and employees should use good judgment at all times. From time to time, the Company may also recommend that directors, officers, selected employees and others suspend trading because of developments known to the Company and not yet disclosed to the public. In such an event, selected persons are advised not to engage in any transaction involving the purchase or sale of the Company's securities during this period and should not disclose to others the fact of such suspension of trading. Pre-Clearance of Trades--The Company has determined that all officers and directors, and certain other employees of the Company (who receive monthly consolidated financial information or who have been specifically instructed) should refrain from trading in the Company's securities, even outside of the Blackout Periods, without first complying with the Company's "pre-clearance" process. Each such person should contact the Company's Chief Financial Officer prior to initiating any purchase or sale of the Company's securities. The Company may also find it necessary, from time to time, to require compliance with the pre-clearance process by certain employees, consultants and contractors other than and in addition to the foregoing persons. Applicability Policy--With regard to insider trading, this Code applies to all transactions in the Company's securities, including common stock and any other securities the Company may issue from time to time, such as preferred stock, options, warrants and convertible debentures, as well as to derivative securities relating to the Company's stock, whether or not issued by the Company, such as publicly-traded options. As discussed above, it also applies to such securities of any other company. The Code as to insider trading applies to all officers of the Company, all members of the Company's Board of Directors and all employees of, consultants to, and other persons associated with the Company and its subsidiaries who receive or have access to material non-public information (as defined above) regarding the Company. This Code as to insider trading applies not only to the above group of people but also to members of their immediate families, members of their households, entities controlled by them and any person who receives material, non-public information from any insider. If you have any questions about what information is considered inside information or material information or whether the rules apply to you, consult your supervisor, the Chief Executive Officer or the Chief Financial Officer. Violation of the Company's insider trading -17- policies by employees will also result in disciplinary action, which could include termination of employment with the Company. Communicating With Securities Analysts and Investors--Securities laws generally focus on ensuring that investors are given full and fair disclosure about the public companies in which they invest. Although these laws impose an affirmative duty on public companies to make disclosures to the market under certain circumstances, disclosures to analysts and investors are completely voluntary and these groups generally owe no fiduciary duty to companies to keep disclosures confidential absent a confidentiality agreement. Notwithstanding the noncompulsory nature of such communications, OYO Geospace spokespersons must be cognizant of the special problems that may create liability for the company when it chooses to open its channels of communication to analysts and investors. The Securities and Exchange Commission has adopted rules governing "Selective Disclosure and Insider Trading" which became effective October 23, 2000. These rules are referred to as Regulation FD (Fair Disclosure). The regulation provides that when an issuer of public securities, or person acting on its behalf, discloses material nonpublic information to securities market professionals and/or holders of the issuer's securities, it must make simultaneous public disclosure of that information. This policy documents how OYO Geospace will respond to questions and other communications to/from securities analysts and investors (including potential investors). Designated Spokesperson--Public communications should be both consistent and concise. Before being publicized, the company's written communications generally receive considerable scrutiny from its Board of Directors, legal counsel and auditors. Great care is taken to determine the appropriate language needed to convey the event or events being communicated, as well as to be silent on any confidential matters not yet appropriate for public disclosure. Generally, public communications may be followed-up by inquiries from interested analysts, investors or other third parties. To ensure consistent communications to all interested parties outside the company, we have limited the number of "story tellers" within the OYO Geospace organization. The company has designated only its Chief Executive Officer and Chief Financial Officer to respond to such inquiries. Material Nonpublic Information--OYO Geospace spokespersons may not disclose material nonpublic information to analysts and investors without simultaneously disclosing that information publicly. Any dissemination of such information must be in a manner sufficient to ensure its availability to the investing public to promote market efficiency through equal access to information. Because disclosures to one or a group of analysts or investors are viewed as improperly favoring one group of investors, these "selective" disclosures do not satisfy the broad dissemination standard required for disclosing material information and may result in liability to our company. -18- Material nonpublic information can take many forms. Information that will often be considered material includes: . Earnings information (reports or projections, both favorable and unfavorable) . Pending mergers, acquisitions, tender offers, joint ventures or changes in assets . New products, contracts or discoveries, or developments regarding customers or suppliers . Changes in control or in management . Change in auditors . Events regarding the company's securities (defaults, calls for redemption, repurchase plans, stock splits, changes in dividends, public or private sales of additional securities) Private Communications with Analysts and Investors-Reports and Models--Communications with analysts sometimes take the form of reviewing or correcting statements contained in reports and reviewing models of the company's historical and estimated future earnings. Assisting with the drafting, reviewing, revising or disseminating such reports or projections may cause a company to inadvertently assume a duty to correct information published by an analyst if it is or becomes incorrect, and a company may be held liable for statements made in the reports if that information is materially false and misleading and can be legally attributed to the company. It is preferable for the OYO Geospace spokesperson to avoid any comment on such documents. However, at his/her discretion, an OYO Geospace spokesperson may comment on such reports or projections only with regard to historical facts and general industry data that has been widely disseminated. Any comments on future financial or business activities, whether positive or negative, must be avoided. Earnings Projections--Analysts and investors will often ask for commentary regarding the accuracy of future earnings projections (either their own internal projections or those of a consensus). The SEC has taken the position that giving any guidance on earnings should be avoided because it is likely to be material. Explicit statements indicating that an estimate is "ballpark", "too high" or "too low" must be avoided. Even implicit guidance, such as suggestions to "rethink" an earnings estimate should be avoided. This policy prohibits any OYO Geospace spokesperson from commenting on the accuracy of future earnings projections. Any inquiries from analysts and investors should be answered with "It is our company's policy not to comment on earnings estimates unless we choose to do so publicly in a broadly disseminated fashion". -19- Rumors--Often the company's spokesperson will be asked to comment on rumors. While a company is not ordinarily required to comment on rumors if it did nothing to contribute to them, a company can be held liable for rumors even without leaking information if its actions in responding to rumors are misleading. For example, if a company denies rumors that are false and then takes a "no comment" position on rumors that are true, its actions may be criticized and challenged. For this reason, the OYO Geospace spokesperson should always respond to market rumors with "It is our company's policy not to comment on market rumors". Planned Communications--If OYO Geospace intends to open its doors to analysts' inquiries through a conference call or by other means, it should anticipate questions that will be asked and formulate written preplanned responses. Having a "script" to follow eases the possibility of inadvertently disclosing material information. The OYO Geospace spokesperson should make every attempt to identify the types of questions that the company will, and will not, entertain and be prepared to answer in a consistent way those questions it will entertain. Public Disclosures-Cautionary Language--Except for certain documents filed with the SEC (particularly as "Management's Discussion and Analysis" requirements focus on known trends and uncertainties), OYO Geospace is generally not required to make forward-looking disclosures. To the extent that OYO Geospace makes any forward-looking disclosures, it should use cautionary language to put the analyst or investor on notice that the statement potentially lacks reliability. The spokesperson should avoid using vague, blanket or boilerplate language because such statements merely warn the reader that the investment has risks and ordinarily will be inadequate to prevent misinformation. To suffice, the cautionary statements must be substantive and specifically tailored to the risks involved. All OYO Geospace forward-looking disclosures should be accompanied by appropriate language sufficient to give us the safe-harbor protections afforded by securities laws. Full and Fair Disclosure--If OYO Geospace decides that it must make certain disclosures, it must follow the concept of full and fair disclosure. Half-truths should be avoided and all relevant information related to the disclosure should be revealed so that the statement is not misleading. The four "golden maxims of disclosure" are: tell the truth, tell the whole truth, tell it plainly, and tell what it means. Full and fair disclosure can only be achieved if our spokespersons monitor and track disclosures that have been previously made in both formal SEC filings and informally to analysts and others so that they will continuously appreciate the "total mix" of information available to investors. Intention to Update--To minimize the risk that OYO Geospace will be found liable for failing to update prior statements, any forward-looking disclosures should include language disclaiming an intention to update so that the investment community is put on notice that it should not rely on the continued accuracy of the statement. While we do not intend to update forward-looking information, we will monitor the circumstances so that we can reconsider that intention if we feel it advisable. -20- 7. HUMAN RESOURCES OYO Geospace recognizes that its greatest strength lies in the talent and the ability of its employees. These goals have been established to guide the Company's activities in employee relations; it is the Company's on-going policy . to provide equal opportunity for employment and advancement on the basis of ability and aptitude without regard to race, color, creed, age, sex, sexual orientation, disabilities or national origin . to protect the health and safety of employees in their work environment . to compensate employees fairly, according to their performance and to provide benefits within the framework of prevailing practices. OYO Geospace's policy prohibits racial, ethnic, religious or sexual harassment of employees or applicants. Racial, ethnic and religious harassment includes such conduct as slurs, jokes or intimidation. Sexual harassment includes unwelcome sexual advances or other verbal or physical conduct of a sexual nature when . submission to such conduct is made, either explicitly or implicitly, a term or condition of an individual's employment . submission to or rejection of such conduct by an individual is used as the basis for employment decisions affecting such individual . such conduct has the purpose or effect of unreasonably interfering with an individual's work performance or creating an intimidating, hostile or offensive working environment. Any questions about this policy, any complaint by an employee or applicant who is subjected to harassment, or any information concerning potential harassment, whether sexual or on the basis of race, religion or national origin, should be directed to the Chief Executive Officer or the designee thereof. All reports can be made without fear of reprisal, and appropriate confidentiality will be maintained. Each report will be immediately investigated. If a violation of Company policy is found, corrective action will be taken and the offending employee will be subject to disciplinary action, which may include dismissal. 8. SUBSTANCE ABUSE OYO Geospace is alarmed at the growing trend of substance abuse and the harmful effects it has on individuals and our society. The Company does not condone nor will it tolerate illegal drug use or abuse of alcohol or other legally controlled substances by its employees. -21- To protect the health and welfare of its employees, customers, neighbors and others with whom it has relationships, OYO Geospace has adopted the following practices and procedures. . The possession, use, sale, manufacture, distribution, dispensation or purchase of unauthorized or illegal drugs or substances, or the abuse or misuse of legal drugs or alcohol on Company premises, while on Company business or during working hours, is prohibited. . Any employee under the influence of drugs or alcohol while on Company premises, while on Company business or during working hours is subject to disciplinary action, including termination. . Unlawful actions which discredit the Company involving illegal drugs, controlled substances or alcohol during non-working hours are grounds for disciplinary action, including termination. . A medical screen for drugs may be included as a condition of employment in any physical examination provided by the Company, including pre-employment, executive and work-related physical examinations. Further, employees performing jobs involving safety and health concerns may be notified by management that periodic or mandatory random testing for drug use will be conducted. Confirmed positive test results are grounds for disciplinary action, including termination, or for denial of employment. . The Company may require appropriate medical screens as a condition of continued employment if suspicion exists that an employee's work performance or safety is impaired by the use of drugs or alcohol. . The Company may inspect or search employees' possessions on Company premises to assure a drug-free work environment. . Refusal to cooperate with these procedures, including appropriate medical screens, may result in disciplinary action, including termination. . Employees who suffer from a substance abuse problem are urged to seek assistance by contacting OYO Geospace's Human Resources Department. Records associated with substance abuse counseling or the Employee Assistance Program and the results of drug and alcohol tests will be kept confidential, except to the extent disclosure is required by law. The law and our policy require any employee working on a federal contract who is convicted of violating a criminal drug law while on Company premises to promptly report the conviction to OYO Geospace's Human Resources Department. Any employee so convicted may be required to participate in a substance abuse rehabilitation program. -22- 9. HEALTH, SAFETY AND ENVIRONMENT Regulations--Numerous environmental regulations designed to protect human health and the environment affect nearly every aspect of OYO Geospace's business. Failure to comply with the regulations can result in the imposition of civil penalties against OYO Geospace and its employees. The penalties that may be imposed under the various regulations are up to thousands of dollars per day per violation. Criminal sanctions may also be imposed upon individuals, with resultant penalties including possible imprisonment. The environmental statutes also prohibit OYO Geospace from reimbursing any employee for fines imposed against the employee by the government for violations of environmental laws. Policy--OYO Geospace is committed to protecting and maintaining the quality of the environment and to promoting the health and safety of its employees, its customers and the communities where it operates. Employees are expected to support OYO Geospace's commitment by: . operating in full compliance with all environmental, health and safety laws and regulations . consistently implementing all work practices taught in Company-sponsored education and training programs to prevent personal injury or property loss . actively encouraging care and regard for the environment among fellow employees . immediately reporting any environmental, health or safety problems to supervisors . identifying opportunities to improve environmental, health and safety programs . being prepared to implement emergency preparedness plans, if necessary. Finally, possession or use of firearms or other weapons on Company premises is absolutely prohibited and termination will likely follow for any violation of this prohibition. Reports of any actual or potential environmental, health or safety problems, or any questions about employees' responsibilities or Company policies in these areas, should be immediately directed to your supervisor, the Chief Executive Officer or the Chief Financial Officer. 10. INTERNATIONAL TRADE RESTRICTIONS AND BOYCOTTS The ability of American companies and their foreign affiliates to trade in the world market is occasionally restricted by regulations issued by the United States government. For example, American companies are prohibited from participating in economic boycotts directed against friendly countries and trade with certain countries is restricted or prohibited. -23- Detailed and complex regulations have been adopted that prohibit the taking of any action that may support a boycott. The regulations prohibit the Company or any of its employees from refusing to do business with anyone based upon race, religion, sex or national origin and from providing information concerning these matters about its employees to customers or potential customers. The regulations require that requests to participate in a boycott be promptly reported to the U.S. government. Requests to participate in a boycott can be found in almost any business document, including contracts, requests to bid, letters of credit, purchase orders and questionnaires which seek information about potential suppliers. You should thoroughly review all documents for boycott language, being particularly alert for words like "boycott," "blacklist" and provisions that prohibit the importation of goods from certain countries or that require that goods be shipped on vessels or aircraft that are able to enter the ports of particular countries. If any document contains language that you believe may be boycott-related, immediately contact the Chief Executive Officer or the Chief Financial Officer before completing the transaction. Trade between American companies and certain countries, including in particular Cuba, Iraq, North Korea and Libya, is prohibited. Further, additional restrictions and regulations apply to certain trade activities with certain other countries. The prohibitions may also apply to foreign affiliates of American companies. You should consult with the Chief Executive Officer or the Chief Financial Officer before any business relationships are established with any of the named countries, and trade with other countries, if any doubt exists, also should be cleared with the Chief Executive Officer or the Chief Financial Officer. Compliance with boycott requests, failure to promptly report the receipt of boycott requests and trading with the named countries (or with certain other countries to which further regulations apply) can subject the Company to severe penalties. 11. CONFIDENTIALITY OF CORPORATE INFORMATION One of OYO Geospace's most valuable assets is its body of business information, ideas and data. The widespread use of computer terminals and computer systems has caused this information to be accessible by many employees. Failure to adequately protect this corporate information can lead to the loss of highly confidential data that may place OYO Geospace at a disadvantage in the marketplace or breach the Company's contractual obligations. As an employee, you are responsible and accountable for the integrity and protection of business information and must take steps to protect information that has been entrusted to you. Care must be taken to safeguard the confidentiality of internal information. For example, you must not make inappropriate modifications to information or destroy, disfigure or disclose information. Documents containing sensitive data should not be left lying on desks and must be properly secured at the end of the business day. Visitors should not be left unattended in offices containing internal Company documents. In addition, particular attention must be paid to the security of the data stored on the computer system - you must maintain the secrecy of your password and lock the equipment when not in use. If you observe individuals that you do not recognize using terminals in your area, immediately report this to your supervisor. -24- 12. RECORDS RETENTION/DESTRUCTION OYO Geospace's corporate records are important assets. Corporate records include essentially everything you produce as an employee. This may be something as obvious as a memorandum, a contract or a product or market study or something not as obvious, such as a desk calendar, an appointment book or an expense record. OYO Geospace is required by law to maintain certain types of corporate records, usually for a specified period of time. Failure to retain such documents for such minimum periods could subject the Company to penalties and fines, cause the loss of rights, obstruct justice, place the Company in contempt of court or place the Company at a serious disadvantage in litigation. Accordingly, OYO Geospace has established controls to assure retention for required periods and timely destruction of retrievable records, such as hard copies and records on computers, electronic systems, microfiche and microfilm. Even if a document is retained for the minimum period, legal liability or other adverse effects could still result if a document is destroyed before its scheduled destruction date. You are expected to fully comply with the records retention/destruction schedule for the department in which you work, as it may be implemented from time to time. If you believe that documents should be saved beyond the applicable retention period, consult your supervisor who, in turn, should contact the Chief Executive Officer or the Chief Financial Officer. 13. COMMUNITY INVOLVEMENT OYO Geospace strives to be a responsible corporate citizen in the communities and areas in which it operates. In this effort, the Company provides support to various educational, cultural and civic endeavors. Such support may involve gifts of time or money. Monetary contributions are made in specified main categories, including education, health and welfare, culture and art and civic causes. Funds are allocated on the basis of financial need, degree to which programs affect employees or their families, effectiveness of the program being considered and the extent of benefits to the public. In addition, OYO Geospace supports charitable gifts through payroll deductions for employee gifts and may, from time-to-time, offer matching employer donations. The Company also encourages employees to become active citizens in their communities. You should use your good judgment to assure that your participation doesn't conflict with your responsibilities to the Company. 14. GOVERNMENT AND THIRD PARTY INVESTIGATIONS Occasionally, OYO Geospace may be subject to information requests, inspections or investigations by governmental entities. It is Company's policy to cooperate fully with all legal and reasonable governmental requests associated with information requests, inspections or investigations unless the Chief Executive Officer, together with legal counsel, determines that -25- OYO Geospace has a legally defensible basis for not complying and that the Company should not comply. Therefore, employees are instructed as follows: . Employees should notify the Chief Executive Officer immediately about any government (or private) information request, inspection, investigation, search warrant or subpoena of OYO Geospace or its personnel or customers. . Employees should also notify the Chief Executive Officer before any information is given to any government entity. If circumstances prevent advance notification, notification should be given as soon as possible after information is given to the government entity. . Employees should notify the Chief Executive Officer immediately about any information request, inspection or investigation by any stock exchange or self-regulatory organization that is directed to OYO Geospace or its personnel before any information is given to the entity. 15. THE FOLLOW-THROUGH As described throughout this document, the Company has put certain review mechanisms into place with respect to specific matters in the Code and specific officers have been designated in connection therewith for certain responsibilities. In addition, there are three broad actions we can take to assure that our written commitment to legal and ethical business conduct pays off in practice. The first action is to provide a mechanism that will help us handle difficult judgment decisions--those "gray areas" where it is often hard to pinpoint right from wrong. None of us should be uncomfortable in handling a question of ethics. When such situations arise, we must seek counsel. The OYO Geospace system is very simple: ask the person to whom you report. That person can in turn "take it up the line" as may be necessary. All managers are to maintain an "open door" policy with regard to questions of ethics and law. They are to make themselves easily available to any and all employees who have such questions. Employees in turn are reminded that the time to bring up a question of legal or moral standard or ethical behavior is before the fact, rather than after the fact. You must never hesitate to talk to your supervisors about a question of proper business conduct, no matter how small or insignificant it may seem to be. The second action consists of several programs or procedures that will make attention to this Code and detection of variances an integral part of managing our business. These steps are as follows: . The Audit Committee of the Company's Board of Directors serves as the final authority with regard to our Code and is responsible for specifying procedures to implement this follow-through program. This committee consists of designated -26- members of the Board of Directors who may in turn designate members of management for certain purposes. . At least once a year managers will review this Code with their subordinates to insure that the Code is fully understood. . Managers will investigate any suspicion that unethical or illegal activities are taking place and call upon the Chief Executive Officer or Chief Financial Officer for assistance. . All corporate officers, general managers, supervisors and other key personnel will sign a letter every year, a copy of which will be retained by the Company (and available for review by the Audit Committee), affirming a knowledge and understanding of OYO Geospace's Code and stating that within the past year - they have reviewed this Code with their subordinates - they have investigated all cases of suspicious conduct - they have reported significant violations of this Code to the Audit Committee. . The Chief Executive Officer, the Chief Financial Officer and the Company's independent public accountants will report immediately to the Audit Committee any violations or suspected violations of this Code which come to their attention as a result of the procedures contemplated hereby and of carrying out normal audits of the Company's accounts. Appropriate action will follow. . Waivers of this Code as to any officer or director of the Company may be made only by the Audit Committee and will ordinarily require prompt public disclosure. The third action is to advise you that the Audit Committee is hereby establishing procedures for (i) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal controls and auditing matters and violations of law or of this General Code of Business Conduct and (ii) the confidential, anonymous submission by employees of the Company of concerns regarding any such matters. Any such submissions should be made by means of a memorandum delivered in a sealed envelope, addressed to "Chairman, Audit Committee", at the Company's main address, which envelope should be marked externally "Personal and Confidential". In such memorandum you may report Code and/or law violations or your concerns in that regard. You may remain anonymous if you so wish. This procedure should not, of course, be used for personal vendetta, but is an open means for your use. The cooperation of every employee is required in assuring that instances of violations of law or of this Code, including accounting, internal control or auditing breaches or lapses, are called to the attention of those in the Company who should be informed. Employees and agents should report conduct by others in the organization that is at odds with this Code and/or law and cooperate with investigations. They may do so without fear of retribution. No -27- OYO Geospace employee will suffer any adverse action or career disadvantage for questioning in good faith an OYO Geospace practice. The Audit Committee will treat all such submissions in as confidential a manner as is possible in carrying out any investigation as to the matters brought to its attention. If we are to hold ourselves to these high standards, each of us must understand that the Company's best interests are our best interests and that we are expected to exercise honorable intentions and good judgment as well as moral courage in matters of investigation and reporting covered in this policy. Like our Code of Business Conduct itself, the system we have devised for follow-through will be subject to change and revision as we gain experience with it. The Company has no intention of overcomplicating our business lives with unnecessary procedures. But at the same time, OYO Geospace wants it clearly understood that adherence to law and this Code carries the highest priority. -28- OYO GEOSPACE CORPORATION GENERAL CODE OF BUSINESS CONDUCT FORM OF AGREEMENT In consideration of my employment by OYO Geospace Corporation or one of its subsidiary corporations or partnerships (hereinafter "OYO Geospace" or the "Company"), I understand that my conduct as an employee is expected to comply at all times with the highest ethical business standards. I have read the Company's General Code of Business Conduct (the "Code") and, if applicable to me, the Supplemental Code of Ethics for CEO and Senior Financial Officers (the "Supplemental Code"), and I agree to abide by the terms of the policies set forth therein. In addition, I hereby specifically agree that . I am familiar with and understand the statements set forth in the Code and, if applicable to me, the Supplemental Code. . I will abide by the Company's policies in the Code and, if applicable to me, the Supplemental Code. My obligations to abide by these policies may not be changed or modified, released, discharged, abandoned or terminated, in whole or in part, except by an instrument in writing signed by a duly authorized senior officer of the Company. I further understand that my obligation to abide by these policies is an ongoing one, and I agree to promptly disclose to the Company's Chief Executive Officer or Chief Financial Officer any exceptions to or potential conflicts with this Agreement that may arise subsequent to signing this Agreement. I acknowledge that neither this Agreement nor the Code nor the Supplemental Code, if applicable to me, is meant to vary or supersede the regular terms and conditions of my employment by OYO Geospace or to constitute an employment contract. In consideration of my continued employment by OYO Geospace, I understand my continuing responsibility to comply at all times with the Code and, if applicable to me, the Supplemental Code. At this time, I am in compliance with the Code of Business Conduct and I am not currently aware of any violation of it by employees under my supervision, if applicable. I will continue to comply and will report any non-compliance that comes to my attention. I understand that this certification supplement does not supersede any prior certifications that I have signed. Signature:_______________________________________________ Name:____________________________________________________ (Print Legibly) Employee Title:__________________________________________ Employee Business Phone:_________________________________ Date:____________________________________________________ -29- EMPLOYEES: RETAIN A COPY OF THIS DOCUMENT FOR YOUR RECORDS. A COPY OF THIS CERTIFICATION WILL BE MAINTAINED IN YOUR PERMANENT EMPLOYEE FILE. INFORMATION REQUIRED BY THE COMPANY'S CODE OR THE SUPPLEMENTAL CODE. List below any existing or potential conflicts of interest and any directorships, officerships, or other positions held in commercial firms or organizations that are not substantially or wholly owned by OYO Geospace Corporation or one of its subsidiaries. You should list those positions even if you serve at the request of or with the permission of the Company, but you need not list positions held in charitable or community organizations or on residential cooperative boards whose activities do not conflict with the interest of your employer and which do not impose excessive demands on your time. Also, use the space below to identify any questions or comments you may have. ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ PLEASE RETURN TO YOUR HUMAN RESOURCES DEPARTMENT. -30- SUPPLEMENTAL CODE OF ETHICS FOR CEO AND SENIOR FINANCIAL OFFICERS The Company has a General Code of Business Conduct applicable to all directors and employees of the Company. The CEO and all senior financial officers, including the CFO and principal accounting officer, are bound by the provisions set forth therein relating to ethical conduct, conflicts of interest and compliance with law. In addition to the General Code of Business Conduct, the CEO and senior financial officers are subject to the following additional specific policies and procedures: 1. The CEO and all senior financial officers are responsible for full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the Company with the Securities and Exchange Commission or in its press releases as to financial matters. Accordingly, it is the responsibility of the CEO and each senior financial officer promptly to bring to the attention of the Audit Committee of the Board of Directors any material information of which he or she may become aware that affects the disclosures made by the Company in its public filings and such press releases and otherwise to assist management personnel involved in the disclosure process and the Audit Committee in fulfilling their responsibilities. 2. The CEO and each senior financial officer shall promptly bring to the attention of the Audit Committee any information he or she may have concerning (a) significant deficiencies in the design or operation of internal control over financial reporting that could adversely affect the Company's ability to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's financial reporting, disclosures or internal controls. 3. The CEO and each senior financial officer shall promptly bring to the attention of the Audit Committee any information he or she may have concerning any violation of the Company's General Code of Business Conduct or of these additional policies and procedures, including any actual or apparent conflicts of interest between personal and professional relationships, involving any management member or other employee who has a significant role in the Company's financial reporting, disclosures or internal controls. 4. The CEO and each senior financial officer shall promptly bring to the attention of the Audit Committee any information he or she may have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to the Company and the operation of its business, by the Company or any agent thereof. 5. The Board of Directors or the Audit Committee, each with the advice of legal counsel, shall determine, or designate appropriate persons to determine, appropriate actions to be taken in the event of violations of the General Code of Business Conduct or of these additional policies and procedures by the CEO or any of the Company's senior financial officers. Such actions shall be reasonably designed to prevent and deter wrongdoing and to promote accountability for adherence to the General Code of Business Conduct and to these additional procedures, and shall include written notice to the individual involved (i) that the Board or Audit -31- Committee has determined that there has been a violation, (ii) of censure by the Board or Audit Committee, (iii) of demotion or re-assignment of the individual involved, (iv) of suspension with or without pay or benefits, (v) of termination of the individual's employment or (vi) some combination of the foregoing, all as shall be determined by the Board or Audit Committee to be appropriate in a particular situation. In determining what action is appropriate in a particular situation, the Board of Directors or Audit Committee or any designee thereof shall take into account all relevant information, including the nature and severity of the violation, whether a violation was a single occurrence or one of repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individual in question had been advised prior to the violation as to the proper course of action and whether or not the individual in question had committed other violations in the past. 6. Any changes to, or waivers (including an implicit waiver arising by reason of failure to take action with respect to a departure from these additional procedures within a reasonable period of time) as to, these additional procedures will, under requirements under the Sarbanes-Oxley Act and rules and regulations promulgated thereunder, be disclosed by the Company on a Form 8-K filed with the SEC or on the Company's website within five business days of the event. -32- EX-21.1 12 dex211.txt SUBSIDIARIES EXHIBIT 21.1 Subsidiaries of OYO Geospace Corporation OYO Geospace International, Inc., a Barbados corporation OYOG, LLC, a Delaware limited liability company OYOG Limited Partner, LLC, a Nevada limited liability company OYOG Operations, LP, a Texas limited partnership Geospace Technologies, LP, a Texas limited partnership Geospace Technologies Corporation, a Delaware corporation OYO Geo Space Canada, Inc., an Alberta corporation OYO Instruments LP, a Texas limited partnership OYO Instruments Europe Limited, a United Kingdom company Geospace Engineering Resources International, LP, a Texas limited partnership Geospace Engineering Resources EAME Limited, a United Kingdom company Concord Technologies, LP, a Texas limited partnership OYO Geospace J.V., LP, a Texas limited partnership OYO-GEO Impulse International, LLC, a Russian limited liability company EX-23.1 13 dex231.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of OYO Geospace Corporation: We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-80003) of OYO Geospace Corporation of our report dated November 24, 2003 relating to the financial statements, which appear in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated November 24, 2003 relating to the financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Houston, Texas December 3, 2003 EX-31.1 14 dex311.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER (SECTION 302) EXHIBIT 31.1 CERTIFICATIONS I, Gary D. Owens, certify that: 1. I have reviewed this annual report on Form 10-K of OYO Geospace Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. December 2, 2003 /s/ Gary D. Owens ------------------------ Name: Gary D. Owens Title: Chief Executive Officer EX-31.2 15 dex312.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER (SECTION 302) EXHIBIT 31.2 CERTIFICATIONS I, Thomas T. McEntire, certify that: 1. I have reviewed this annual report on Form 10-K of OYO Geospace Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3 Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. December 2, 2003 /s/ Thomas T. McEntire ------------------------ Name: Thomas T. McEntire Title: Chief Financial Officer EX-32.1 16 dex321.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER (SECTION 906) EXHIBIT 32.1 INFORMATIONAL ADDENDUM TO REPORT ON FORM 10-K PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 NOT FILED PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934 The undersigned Chief Executive Officer of OYO Geospace Corporation do hereby certify as follows: Solely for the purpose of meeting the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and solely to the extent this certification may be applicable to this Report on Form 10-K, the undersigned hereby certify that this Report on Form 10-K fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in this Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of OYO Geospace Corporation. /s/ Gary D. Owens ------------------------ Name: Gary D. Owens Title: Chief Executive Officer December 2, 2003 EX-32.2 17 dex322.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER (SECTION 906) EXHIBIT 32.2 INFORMATIONAL ADDENDUM TO REPORT ON FORM 10-K PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 NOT FILED PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934 The undersigned Chief Financial Officer of OYO Geospace Corporation do hereby certify as follows: Solely for the purpose of meeting the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and solely to the extent this certification may be applicable to this Report on Form 10-K, the undersigned hereby certify that this Report on Form 10-K fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in this Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of OYO Geospace Corporation. /s/ Thomas T. McEntire ------------------------- Name: Thomas T. McEntire Title: Chief Financial Officer December 2, 2003 -----END PRIVACY-ENHANCED MESSAGE-----