Form 10-K

-----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, PMOJHMg56BPkXN+pBq3rSv/QKdwcE99s2Gb0/kQ0kHKMZmjKUZhVygsjBeGcK8w0 FsMc1E1YS8XQcezOlY1Zug== 0001193125-04-208792.txt : 20041207 0001193125-04-208792.hdr.sgml : 20041207 20041207164919 ACCESSION NUMBER: 0001193125-04-208792 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041207 DATE AS OF CHANGE: 20041207 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: 041188846 BUSINESS ADDRESS: STREET 1: 7007 PINEMONT DR. CITY: HOUSTON STATE: TX ZIP: 77040 BUSINESS PHONE: 7139864444 MAIL ADDRESS: STREET 1: 7007 PINEMONT DR. CITY: HOUSTON STATE: TX ZIP: 77040 10-K 1 d10k.htm FORM 10-K Form 10-K

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, 2004

¨	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 5,590,710 shares of the Registrant’s Common Stock outstanding as of the close of business on December 1, 2004. As of March 31, 2004, the aggregate market value of the Registrant’s Common Stock held by non-affiliates was approximately $42 million (based upon the closing price of $17.32 on March 31, 2004, as reported by the NASDAQ Stock Market, Inc.)

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the Registrant’s 2005 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

PART I

Item 1. Business

Company Overview

OYO Geospace was organized in 1994. 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 for seismic data acquisition on land.

Our high definition reservoir characterization products are designed and configured for customized monitoring applications for producing oil and gas fields. Utilizing these systems, producers can better identify and enhance the recovery of oil and gas deposits over the life of the reservoir. 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. 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.

We 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 large-scale 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.

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. Due to the system’s successful performance through December 31, 2003, we earned an additional $3.6 million performance bonus, which we recognized as revenue in fiscal year 2004. Our product warranty obligation extends to 2006 for certain components of the system.

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 Industry

We entered into the commercial graphics business 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 the Former Primary Film Supplier described above).

Shortly thereafter, the Former Primary Film Supplier 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 $1.2 million charge in our third quarter of fiscal year 2002 due to the ultimate uncertainty of realization of value on certain assets, particularly certain prepaid purchase benefits and other 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 we are utilizing such property to manufacture dry thermal film.

On December 10, 2002, we received a notice of claim, in connection with the Former Primary Film Supplier’s bankruptcy, for alleged preferential payments made by the Former Primary Film Supplier to us in the

period before the bankruptcy proceeding in the approximate amount of $259,000. On July 7, 2004, an amended claim was filed against us and the amount of the alleged preferential payments made by the Former Primary Film Supplier was increased to approximately $895,000. 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 the Former Primary Film Supplier. We are unable at this time to predict the outcome and effects of this situation. We had, nevertheless, made a provision for the initial claim made by the Former Primary Film Supplier and we believe that such provision is adequate at this time, although we are unable to make such predictions with any certainty.

Acquisitions

Graphtec’s Thermal Printhead Production Assets

On September 30, 2004, we acquired the thermal printhead production assets of Graphtec Corporation, a company with headquarters in Yokohama, Japan (“Graphtec”) for approximately $1.8 million which was paid in cash on October 1, 2004. Prior to that date, Graphtec was the only supplier of wide format thermal printheads that we use to manufacture our wide format thermal imaging equipment. We expect to manufacture printheads in Japan during the first fiscal quarter of 2005 using the assets we acquired from Graphtec and then relocate the assets to Houston, Texas. We are unable to determine at this time the associated cost of relocating the assets. If printhead sales exceed certain established levels we may owe a royalty to Graphtec annually. We are unable to determine at this date the amount of those royalties and if those royalties will be payable.

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 in 1990 with Geophyspribor Ufa Production Association (“Geophyspribor”), Bank Vostock and Chori Co., Ltd (“Chori”). Since this transaction, the financial results of OYO-GEO Impulse have been consolidated with those of OYO Geospace. At that time, Geophyspribor and Chori 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. This debt and a related equity investment had been written-off in 1994 due to prior concerns regarding realization of those assets and, therefore, such debt and investment had no carrying value in our financial statements. In connection with this acquisition in fiscal year 2002, 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.

On September 12, 2003, we purchased for $164,000 an additional 12% ownership interest in OYO-GEO Impulse from Geophyspribor, thereby increasing our ownership interest to 97%. Chori 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 geophone sensors for the Russian seismic marketplace. At September 30, 2004, OYO-GEO Impulse operated in a 120,000 square foot facility in Ufa and employed approximately 374 people. Our seismic equipment manufacturing subsidiary in Houston is managing the expansion of OYO-GEO Impulse’s operations to produce and sell international-standard sensors and additional seismic-related products.

Products and Product Development

Seismic Products

wire, geophone and hydrophone string connectors, seismic telemetry cable, marine seismic cable retrieval 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 streamer retrieval devices (“SRDs”). Occasionally, streamers are severed and become disconnected from the vessel as a result of inclement weather, vessel traffic or human or technological error. Our SRDs, which are attached to the streamers, contain air bags that are designed to inflate automatically at a given depth, bringing the severed streamer to the surface. These SRDs save the seismic contractor significant time and money compared to the alternative of losing and replacing the streamer. We also produce seismic streamer steering devises, or “birds”, which are finlike devices that attach to the streamer and help maintain it 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 allows it to be configured as a borehole seismic system or as a subsurface system for both land and 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 recent 3-D seismic product developments include an omni-directional geophone for use in reservoir monitoring; a compact marine three-component or four-component gimbaled sensor and 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.

We face certain risks associated with our foreign operations. For a discussion of these risks, refer to Item 7, under the heading “Forward Looking Statements and Risks” under the subheading “Our Foreign Subsidiaries and Foreign Marketing Efforts Face Additional Risks and Difficulties” contained in this Report on Form 10-K.

Commercial Graphics Products

We have adapted our thermal imaging technology, which we originally developed for the seismic industry, for commercial applications in 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). 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, entities in China manufacture 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.

As mentioned above, 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 are not aware of any competing companies that manufacture a product functionally similar to our patented seismic streamer retrieval device. Our primary competitor in the manufacture of our streamer depth positioning device (“Birds”) is Input/Output.

Our primary competitors for our deepwater reservoir characterization systems may be some traditional seismic equipment manufacturers such as Western/Geco (Schlumberger), Input/Output, Sercel, and some newly formed alliances involving these companies.

Our primary competitors for downhole high definition seismic data acquisition systems are Avalon and CGG.

We believe that the primary competitors in our commercial graphics and plotter business segments are Ricoh, Xante, Gerber Scientific, iSys Group, Cypress Tech. and Atlantek, as well as manufacturers of alternative technologies such as inkjet printing. Also, as we advance the resolution capabilities of direct thermal technology, we expose ourselves to additional competition in the more traditional wet-film imagesetting marketplace. A key competitive factor in this market is producing equipment that is technologically advanced yet cost effective.

Suppliers

On September 30, 2004, we acquired the thermal printhead production assets of Graphtec for $1.8 million which was paid in cash on October 1, 2004. Prior to that date, Graphtec was the only supplier of wide format thermal printheads that we use to manufacture our wide format thermal imaging equipment. We now manufacture printheads internally using assets acquired from Graphtec.

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. As a result of the bankruptcy filing, we began to produce dry thermal film internally using the intellectual property purchased from the Former Primary Film Supplier. We also purchase a substantial quantity of film from our Other Film Supplier.

In fiscal year 2004 we did not and currently do not experience any difficulties in obtaining raw materials from our suppliers for the production of seismic products or thermal imaging equipment products.

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. We manufacture seismic equipment to the specifications of our customers. For example, we can armor cables for applications such as deep water uses. We assemble geophone strings and seismic telemetry cables based on a number of customer choices such as length, gauge, tolerance and color of molded parts. With regard 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 in the case of seismic equipment, environmental extremes of product specifications and inspect the products for quality assurance. We normally manufacture and ship our products based on customer orders and, therefore, typically do not maintain significant inventories of finished goods.

Markets and Customers

Our principal seismic customers are contractors 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. For our deepwater reservoir characterization products, our customers are generally large international oil and gas companies which operate long-term offshore oil and gas producing properties. 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. For a further discussion of key customers see Note 17 to the Consolidated Financial Statements contained in this Report on Form 10-K.

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 and thermal imaging technologies. We have incurred research and development expenses of $4.8 million, $5.2 million and $5.3 million during the fiscal years ended September 30, 2004, 2003 and 2002, respectively. 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, 2004 we employed approximately 748 people on a full-time basis, of which approximately 329 were employed in the United States and approximately 374 in Russia. 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 segment and 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, 2004, our operations included the following locations:


Location	Owned/Leased	Approximate Square Footage	Use
Houston, Texas	Owned	208,000	See Note 1 below
Stafford, Texas	Owned	20,000	See Note 2 below
Houston, Texas	Owned	77,000	See Note 3 below
Ufa, Bashkortostan, Russia	Owned	120,000	Manufacturing
Ufa, Bashkortostan, Russia	Owned	41,000	See Note 4 below
Calgary, Alberta, Canada	Owned	21,000	Sales and service
Luton, Bedfordshire, England	Owned	8,000	Sales and service
Beijing, China	Leased	1,000	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 promissory note, secured by a mortgage on the property. The Pinemont Facility consolidated into one location all manufacturing, engineering, selling, marketing and administrative activities for both the seismic and commercial graphics industry of the Company in the United States. The Pinemont Facility also serves as the Company headquarters. Such consolidation was 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 served as our headquarters and for certain research and development operations through November 2003, at which time our headquarters and these operations were relocated to the Pinemont Facility. We are seeking to sell this property.

(3)

This property contained a manufacturing operation and certain support functions. We completed the relocation of these operations to the Pinemont Facility in February 2004. As a result of contemplated expansion plans, we are currently considering utilizing this facility for certain manufacturing operations that can no longer be accommodated in the space available at the Pinemont Facility.

(4)	This property served as a location for manufacturing operations until October 2002, at which time such operations were relocated to a new building in Ufa. We are seeking to sell this property.

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.

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 29, 2004, there were approximately 48 holders of record of our common stock, and the closing price per share on such date was $16.24 as quoted by The NASDAQ Stock Market, Inc.

The following table presents the range of high and low bid quotations for our common stock during the two fiscal years ended September 30, 2004 and September 30, 2003, as reported by The NASDAQ Stock Market, Inc.


	Low		High
*Year Ended September 30, 2004:*
Fourth Quarter	$	14.67	$	18.99
Third Quarter		16.66		19.15
Second Quarter		16.06		17.88
First Quarter		11.72		16.09

*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

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 our 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.

We did not sell any securities within the past three years that were not registered under the Securities Act of 1933.

The following equity plan information is provided as of September 30, 2004:

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	686,660	$12.97	55,709

Equity Compensation Plans Not Approved by Security Holders	17,100	13.45	17,400

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. When reviewing the table below, please also note the acquisitions and accounting pronouncements described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Report on Form 10-K.


	Year Ended September 30,
	2004			2003			2002			2001			2000
	(in thousands, except share and per share amounts)
Statement of Operations Data:
Sales	$	63,538		$	50,854		$	65,049		$	63,618		$	53,474
Cost of sales		40,787			38,337			46,484			42,957			39,042

Gross profit		22,751			12,517			18,565			20,661			14,432
Operating expenses:
Selling, general and administrative		12,086			11,273			11,538			12,528			10,090
Research and development		4,794			5,226			5,347			6,277			6,146
Impairment of assets		—			—			1,246			—			—

Total operating expenses		16,880			16,499			18,131			18,805			16,236

Income (loss) from operations		5,871			(3,982	)		434			1,856			(1,804	)
Other income (expense), net		61			69			(770	)		(226	)		41

Income (loss) before income taxes, minority interest and extraordinary gain		5,932			(3,913	)		(336	)		1,630			(1,763	)
Income tax expense (benefit)		(47	)		(1,399	)		(857	)		292			(572	)

Income (loss) before minority interest, and extraordinary gain		5,979			(2,514	)		521			1,338			(1,191	)
Minority interest		(26	)		(19	)		(88	)		—			—

Income (loss) before extraordinary gain		5,953			(2,533	)		433			1,338			(1,191	)
Extraordinary gain, net of tax of $85		—			—			686			—			—

Net income (loss)	$	5,953		$	(2,533	)	$	1,119		$	1,338		$	(1,191	)

Basic earnings (loss) per share:
Income (loss) before extraordinary gain	$	1.07		$	(0.46	)	$	0.08		$	0.24		$	(0.22	)
Extraordinary gain		—			—			0.12			—			—

Net income (loss) per share	$	1.07		$	(0.46	)	$	0.20		$	0.24		$	(0.22	)

Diluted earnings (loss) per share:
Income (loss) before extraordinary gain	$	1.05		$	(0.46	)	$	0.08		$	0.24		$	(0.22	)
Extraordinary gain		—			—			0.12			—			—

Net income (loss) per share	$	1.05		$	(0.46	)	$	0.20		$	0.24		$	(0.22	)

Weighted average shares outstanding—Basic		5,573,611			5,550,216			5,535,979			5,489,251			5,431,901
Weighted average share outstanding—Diluted		5,684,853			5,550,216			5,547,774			5,598,597			5,431,901

Other Financial Data:
Depreciation, amortization and stock-based compensation	$	4,966		$	4,724		$	4,852		$	4,444		$	4,014
Capital expenditures		2,506			6,045			4,729			4,909			6,004

	As of September 30,
	2004			2003			2002			2001			2000
	(in thousands)
Balance Sheet Data:
Working capital	$	32,789		$	24,937		$	28,130		$	27,891		$	28,505
Total assets		77,794			71,435			68,126			73,000			65,108
Short-term debt		1,029			5,889			714			1,033			198
Long-term debt		5,805			6,232			3,544			3,772			3,984
Stockholders’ equity		59,200			52,471			54,129			52,791			50,709

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 on this Report on Form 10-K.

Industry 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

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.

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. Due to the system’s successful performance through December 31, 2003, we earned an additional $3.6 million performance bonus, which we recognized as revenue in fiscal year 2004. Our product warranty obligation extends to 2006 for certain components of the system.

Commercial Graphics

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. 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. Certain summary financial data for our business segments which was previously presented in prior periods has now been reclassified to conform to the current year presentation.

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


	Years Ended
	September 30, 2004			September 30, 2003			September 30, 2002
Seismic
Net sales	$	50,651		$	37,619		$	51,800
Operating income		10,860			780			6,395

Commercial Graphics
Net sales		12,991			13,333			13,490
Operating income		1,118			1,130			477

Corporate
Operating loss		(6,107	)		(5,892	)		(6,296	)

Eliminations
Net sales		(104	)		(98	)		(241	)
Operating loss		—			—			(142	)

Consolidated Totals
Net sales		63,538			50,854			65,049
Operating income (loss)		5,871			(3,982	)		434

Overview

As discussed under Item 2, “Properties”, in this Part I, in September 2003, we purchased the Pinemont Facility, a 208,000 square foot facility housing our headquarters and all U.S. manufacturing, engineering, selling, marketing, and administrative activities. The purchase price for the Pinemont Facility was $3.8 million, of which $3.0 million was financed by a 7-year promissory note and secured by a mortgage on the property. During fiscal year 2004, we incurred $1.4 million of capitalized costs to remodel the Pinemont Facility and incurred charges of $0.5 million to relocate our operations into the Pinemont Facility. We sold one of our former U.S. facilities in December 2003, and allowed a lease to expire on December 31, 2003 on another facility. We are seeking to sell a facility in Stafford, Texas having a carrying value of $1.1 million. We expect to sell this property during fiscal year 2005 and use those proceeds to pay the debt related to this facility. We own another vacant facility located in Houston, Texas having a net book value of $4.7 million. As a result of our contemplated expansion plans, we are currently considering utilizing this vacant facility for certain manufacturing operations that can no longer be accommodated in the space available at the Pinemont Facility. We expect the end result of this move and restructuring to be the elimination of substantial manufacturing and operating expenses in future periods, which we expect will offset the one-time costs of the move and justify the capital expenditures made with respect to the Pinemont Facility.

Fiscal Year 2004 Compared to Fiscal Year 2003

Consolidated net sales for the year ended September 30, 2004 increased $12.7 million, or 24.9%, from fiscal year 2003. The increase in net sales resulted from our deep water reservoir characterization and borehole reservoir products showing strong increases in sales, both from pre-existing sales contracts and from new customers, as a result of the continued growth and acceptance of these new products. In addition, the increased worldwide demand for our traditional seismic exploration products increased as a result of higher oil and gas commodity prices.

Consolidated gross profits for the year ended September 30, 2004 increased by $10.2 million, or 81.8%, from fiscal year 2003. The higher gross profits in fiscal year 2004 are the result of increased seismic product sales, primarily from our deep water reservoir characterization and borehole reservoir imaging products. The fiscal year 2004 gross profits include a $3.6 million performance bonus payment we received for the continued successful performance of a deepwater reservoir characterization system sold to a customer in fiscal year 2002.

Consolidated operating expenses for the year ended September 30, 2004 increased $0.4 million, or 2.3%, from fiscal year 2003. Such increase is the result of higher incentive compensation expenses in the amount of $0.5 million and facility relocation expenses of $0.5 million. These cost increases were partially offset by a decrease in operating expenses associated with our facilities consolidation and reorganization.

The United States statutory rate applicable to us for the period reported was 34.0%. The effective tax rate for the year ended September 30, 2004 was (0.8)% compared to an effective tax rate of 35.8% in fiscal year 2003. We realized several significant tax benefits in fiscal year 2004, including (i) tax credits and a special tax deduction allowed to U.S. export manufacturers totaling $0.9 million, (ii) the reversal of an $0.8 million deferred tax valuation allowance due to the realization of deferred tax assets, and (iii) a $0.4 million benefit resulting from the taxing rates in certain foreign taxing jurisdictions being lower than the U.S. statutory tax rate. Recently announced changes in U.S. tax legislation are expected to result in the phasing out of the special deduction allowed to U.S. export manufacturers. Consequently, we expect our effective tax rate to increase in fiscal year 2005.

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 fiscal year 2002 containing a $15.8 million sale of a reservoir characterization and monitoring system compared to $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, which was partially offset by increased sales of our new offshore cable products and certain land-based seismic 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 were primarily the result of the 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.

Consolidated operating expenses for the year ended September 30, 2003 decreased $1.6 million, or 9.0%, from fiscal year 2002. The fiscal year 2002 consolidated operating expenses included 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 2.5%, from fiscal year 2002, primarily due to the lower level of sales and actions taken to reduce operating costs in response to then existing market conditions.

Our United States statutory tax rate for fiscal year 2003 was 34.0%. Our effective tax rate for the year ended September 30, 2003 was 35.8% compared to an effective tax rate of a benefit of 255.1% 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 in fiscal year 2003 were available for possible use in future periods. These additional benefits were related to foreign tax credits. Based upon the then current seismic industry environment and our projections of future taxable income, we 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 had net deferred tax assets of $3.1 million at September 30, 2003.

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 2004 Compared to Fiscal Year 2003.

Net Sales

Sales of our seismic products for fiscal year 2004 increased $13.0 million, or 34.6%, from fiscal year 2003. The increase in sales principally resulted from a $7.8 million increase in sales of our deepwater reservoir characterization and borehole reservoir imaging systems, including a $3.6 million performance bonus payment resulting from the continued successful performance of a deepwater reservoir characterization system sold in fiscal year 2002. Our traditional seismic product sales increased by $3.7 million primarily as a result of increased sales by our Canadian and Russian subsidiaries. Other products having industrial applications generated increased revenues of $1.5 million during fiscal year 2004.

Operating Income

Operating income for fiscal year 2004 increased $10.1 million from fiscal year 2003. The increase is primarily attributable to the increase in sales and gross profits of our deepwater reservoir characterization systems, including the $3.6 million performance bonus payment referred to above.

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 $5.6 million, or 87.8%, 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.

Commercial Graphics

Fiscal Year 2004 Compared to Fiscal Year 2003.

Net Sales

Sales of our commercial graphics products for fiscal year 2004 decreased $0.3 million, or 2.6%, from fiscal year 2003. The decrease in sales primarily resulted from a decline in equipment sales, partially offset by increased sales of dry thermal film. Competing imaging technologies are the primary reason for the reduction of equipment sales. The addition of new dry thermal film accounts, previously serviced by competitors, was a significant factor for the increase in dry thermal film sales.

Operating Income

Our operating income for fiscal year 2004 decreased $12,000, or 1.1%, from fiscal year 2003. This reduction in operating income primarily resulted from a decline in sales, partially offset by a decline in operating costs due to our facilities consolidation and reorganization.

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 increased sales of dry thermal film.

Operating Income

Our operating income for fiscal year 2003 increased $0.7 million, or 136.9%, from fiscal year 2002. Fiscal year 2002 included a $1.2 million asset impairment charge relating to the bankruptcy of the 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 decrease in operating income primarily resulted from 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, and increased research and development expenses associated with a newly introduced 1200 dpi thermal imaging device.

Acquisitions

Graphtec’s Thermal Printhead Production Assets

On September 30, 2004, we acquired the thermal printhead production assets of Graphtec for approximately $1.8 million which was paid in cash on October 1, 2004. Prior to that date, Graphtec was the only supplier of wide format thermal printheads that we use to manufacture our wide format thermal imaging equipment. We expect to manufacture printheads in Japan during the first fiscal quarter of 2005 using the assets we acquired from Graphtec and then relocate the assets to Houston, Texas. We are unable to determine at this time the associated cost of relocating the assets. If printhead sales exceed certain established levels we may owe a royalty to Graphtec annually. We are unable to determine at this date the amount of those royalties and if those royalties will be payable.

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 in 1990 with Geophyspribor, Bank Vostock and Chori. Since this transaction, the financial results of OYO-GEO Impulse have been consolidated with those of OYO Geospace. At that time, Geophyspribor and Chori continued as minority shareholders of OYO-GEO Impulse.

On September 12, 2003, we purchased for $164,000 an additional 12% ownership interest in OYO-GEO Impulse from Geophyspribor thereby increasing our ownership interest to 97%. Chori 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 geophone sensors for the Russian seismic marketplace. At September 30, 2004, OYO-GEO Impulse operated in a 120,000 square foot facility in Ufa and employed approximately 374 people. Our seismic equipment manufacturing operation in Houston is managing the expansion of OYO-GEO Impulse’s operations to produce and sell international-standard sensors and additional seismic-related products.

Liquidity and Capital Resources

At September 30, 2004, we had $3.1 million in cash and cash equivalents. For the fiscal year ended September 30, 2004, we generated approximately $8.4 million of cash from operating activities. The cash generated by operating activities was derived from a combination of our net income of $6.0 million and $5.0 million of non-cash depreciation and amortization charges. This cash flow was offset by a $1.0 million non-cash deferred tax benefit. Other operating cash flows included increases in accrued expenses in the amount of $1.9 million primarily reflecting fiscal year 2004 accrued incentive compensation expenses. Income taxes payable increased by $0.6 million, reflecting current taxes owed on the profits of our foreign subsidiaries. Such sources of cash were offset by a $2.7 million increase in accounts and notes receivable resulting from increased sales, and a $2.5 million increase in inventories also as a result of increased sales.

For the year ended September 30, 2004, we used approximately $1.3 million of cash in investing activities. We received $1.2 million of cash proceeds from the sale of a surplus building and a vacant parcel of land. The sale of these surplus properties is an integral part of our plan to consolidate facilities and reduce operating costs. We used $2.5 million of cash for capital expenditures of which approximately $1.4 million represented improvements to our new Pinemont Facility. We estimate that our capital expenditures in fiscal year 2005 will range from $5.0 to $6.0 million, which we expect to fund through operating cash flows and borrowings under our new credit facility as needed.

For the year ended September 30, 2004, we used approximately $4.9 million of cash from financing activities, primarily for the repayment of borrowings under our prior credit facility.

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 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. We decreased our accounts payable by $1.2 million as a result of a 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 prior credit facility and $3.0 million of borrowings to purchase the Pinemont Facility.

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 $6.0 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 a $6.7 million increase 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 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 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 prior credit facility, and $0.2 million for the repayment of long-term debt.

On November 22, 2004 several of our subsidiaries entered into a new credit agreement (the “New Credit Agreement”) with a bank. Under the New Credit Agreement, our borrower subsidiaries can borrow up to $15.0 million principally secured by their accounts and notes receivable and inventories. The New Credit Agreement expires on November 21, 2007. Borrowings under the New Credit Agreement are subject to borrowing base restrictions based on levels of eligible accounts receivable, notes receivable and inventories. The New Credit Agreement limits the incurrence of additional indebtedness, requires the maintenance of certain financial amounts, restricts our and the borrower subsidiaries’ ability to pay dividends and contains other covenants customary in agreements of this type. At December 6, 2004 there were borrowings of $1.9 million under the New Credit Agreement, and additional borrowings of $13.1 million available. The interest rate for borrowings under the New Credit Agreement is, at our option, a discounted prime rate or a LIBOR based rate.

Prior to entering into the New Credit Agreement, several of our subsidiaries were a party to a credit agreement (the “Previous Credit Agreement”) with a bank, and could borrow up to $10.0 million principally secured by their accounts receivable and inventories. The Previous Credit Agreement, as amended, was scheduled to expire on February 27, 2005, however this agreement was terminated on November 22, 2004 and replaced by the New Credit Agreement. Borrowings under the Previous Credit Agreement were subject to borrowing base restrictions based on levels of eligible accounts receivable and inventories. The Previous Credit Agreement limited the incurrence of additional indebtedness, required the maintenance of certain financial amounts, restricted our and the borrower subsidiaries’ ability to pay dividends and contained other covenants customary in agreements of that type. As of September 30, 2004, there were borrowings of $0.6 million outstanding under the Previous Credit Agreement, and additional borrowings available under the Previous Credit Agreement of $9.2 million. The borrowing interest rate was, at our option, the bank’s prime rate or a LIBOR based rate.

A summary of future payments owed for contractual obligations and commercial commitments as of September 30, 2004 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	$	6,225	$	420	$	917	$	1,032	$	3,856
Operating leases		12		9		3		—		—

Total contractual obligations		6,237		429		920		1,032		3,856

Commercial Commitments:
Lines of Credit		609		609		—		—		—

Total Contractual Obligations and Commercial Commitments	$	6,846	$	1,038	$	920	$	1,032	$	3,856

We believe that the combination of existing cash reserves, cash flows from operations and borrowing availability under the New Credit Agreement should provide us sufficient capital resources and liquidity to fund our planned operations through fiscal year 2005. However, there can be no assurance 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 current or future effect on our financial statements or the items contained therein that is material to investors.

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 generally range from daily rentals to rental periods of up to six months or longer. Except for certain of our reservoir characterization products, our products are generally sold without any customer acceptance provisions and our standard terms of sale do not allow customers to return products for credit. In circumstances where acceptance provisions are significant, the revenue and related profit are deferred until such time as customer acceptance occurs. 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 or, in absence of historical experience, management estimates. 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

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 a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. We have implemented the disclosure requirements of this standard in our fiscal year 2004 and this disclosure has been included in Note 1 to the Consolidated Financial Statements in this Report on Form 10-K.

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, 2004, 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 our 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 March 2004, the FASB issued an exposure draft, “Share-Based Payments, an Amendment of FASB Statements No. 123 and 95,” which may eliminate the ability to account for share-based compensation transactions using APB No. 25. In October 2004, the FASB delayed the effective date of this proposed pronouncement until June 2005. We will continue to monitor the rules and statements released by the FASB in regard to how we account for stock-based employee compensation and related disclosure.

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 or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires a financial instrument within its scope to be classified as a liability. It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. These effective dates are not applicable to the provisions of paragraphs 9 and 10 of SFAS 150 as they apply to mandatorily redeemable noncontrolling interests, as the FASB has delayed these provisions indefinitely. Our adoption of this statement had no initial impact on our results of operations or financial position.

In December 2003, the SEC issued Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”), which supercedes SAB 101, “Revenue Recognition in Financial Statements”. SAB 104’s primary purpose is to rescind accounting guidance contained within SAB 101 related to multiple element revenue arrangements, which was superceded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material effect on our financial position or our results of operations.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—an amendment of ARB 43, Chapter 4”. This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This statement requires that those items be recognized as current-period charges. In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. We will adopt this statement effective October 1, 2005. We are currently evaluating the effect of the adoption of this statement on our results of operations or financial position.

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 caption “Business”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and in “Management’s Current Outlook”, are, or may be, 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, seismic reservoir monitoring projects and demand for thermal imaging technologies, 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 2005:

•

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 significant decrease in demand for our seismic products during fiscal year 2005.

•

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.

•

While we expect demand for our traditional seismic land and marine products to increase in 2005 due to higher oil and gas commodity prices, sales of equipment into the traditional seismic contracting industry will remain constrained because:

•

in many international markets, the supply of land and marine contract seismic services currently exceeds the international demand for such services;

•

past customer consolidations have resulted in a surplus in the availability of certain seismic equipment;

•

the supply of seismic data stored in libraries is sufficient for many of the oil and gas producing regions around the world;

•

pricing for many of our land based seismic products will continue to be subject to competitive pressures due to industry wide manufacturing over-capacity and the emergence of new suppliers in China and elsewhere; and

•

competition among seismic equipment manufacturers could further intensify as large international seismic contractors expand their internal manufacturing capabilities or form alliances with competitors.

•

In the absence of any new large-scale deepwater reservoir characterization projects, revenues from our reservoir characterization products in fiscal year 2005 are expected to remain near fiscal year 2004 levels.

•

Demand for our products used in the commercial graphics industry is expected to increase marginally in fiscal year 2005.

Our New Products May Not Achieve Market Acceptance.

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

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 seismic products for 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 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. For instance, our results for fiscal year 2003 and results from our traditional seismic products in particular, were adversely affected by the downturn in the industry, particularly as the industry continued to limit exploration activities and to be cautious in spending notwithstanding some recent improvements in, or some relative stabilization of, oil and gas commodity prices during such period.

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, 2004 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 in past years 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 exist. Although industry conditions have improved, some of our customers continue to experience 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. A decline in the 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 daily trading volume during fiscal year 2004 has averaged approximately 6,700 shares. Our small float and daily trading volumes have 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, and

•

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 new 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, two competitors in our seismic business segment currently offer a broader range of instruments and equipment for sale than we do and market this equipment as “packaged” data acquisition systems. We do not currently 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 traditional 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 could materially and adversely impact our sales.

We Cannot Be Certain of Patent Protection of Our Products.

We hold and from time to time we apply for 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 Subsidiaries and Foreign Marketing Efforts Face Additional Risks and Difficulties.

Net sales outside the United States accounted for approximately 61.0% of our net sales during fiscal year 2004 and are again expected to represent a substantial portion of our net sales for fiscal year 2005 and subsequent years. 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 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 United Kingdom subsidiaries are subject to currency fluctuations. Significant foreign currency fluctuations could adversely impact our results of operations. For further discussion on this risk see Item 7A, “Quantitive and Qualitative Disclosures about Market Risk” contained in this Report on Form 10-K.

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 the United States or, 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 foreign markets, for example in Russia, we may not be able to transfer cash balances to the United States to assist with debt servicing or other obligations.

Our subsidiary in Russia currently does not maintain property and casualty insurance coverage for certain plant, equipment and personal property. We are evaluating the cost of obtaining minimum levels of insurance coverage for such assets.

We Rely on Key Suppliers for Significant Product Components.

On September 30, 2004, we purchased the thermal printhead production assets from Graphtec. Prior to that date, Graphtec was the only supplier of wide format thermal printheads use to manufacture our wide format thermal imaging equipment.

We currently manufacture dry thermal film which is used by our customers in the thermal imaging equipment we manufacture using the assets we acquired from Graphtec. We also purchase a large quantity of dry thermal film from our Other Film Supplier. 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 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.

It may be Difficult to Integrate the Assets Purchased from Graphtec and May Result in a Failure to Realize Some of the Anticipated Potential Benefits of the Asset Purchase.

We may not be able to integrate or manage the assets purchased from Graphtec to produce the returns that we have anticipated from the manufacture of thermal printheads. Any difficulty in successfully integrating business operations resulting from the purchase of such assets could lead to a failure to realize the anticipated synergies. Our management also will be required to dedicate substantial time and effort to the integration of these assets and relocation of these assets to Houston, Texas. These efforts could divert management’s focus and resources from other strategic opportunities and operational matters.

We Are Subject to Control by a Principal Stockholder.

OYO Corporation, a Japanese corporation, owns indirectly in the aggregate approximately 51.0% 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 affected. In addition, our success depends to a significant extent upon the abilities and efforts of the members of our senior management.

A General Downturn in the U.S. Economy in Fiscal 2005 May Adversely Affect our Business.

A general downturn in the U.S. economy in future periods could adversely affect our business in ways that we cannot identify. Any economic downturn may adversely affect the demand for oil and gas generally or cause volatility 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 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 with respect to our internal controls over financial reporting effective with our 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 result in higher expenses for publicly traded companies as a result of higher audit and review fees, higher legal fees, higher director fees, and higher internal costs to document, test and potentially remediate internal controls. The Act, together with the financial scandals and difficult economic environment of recent years has also led to substantially increased premiums for director and officer liability insurance. These 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.

With respect to the internal controls requirement flowing from the Act, we will devote substantial efforts and incur significant expenses in fiscal year 2005 in documenting, testing and potentially remediating our internal controls system. We have hired outside experts to help us with respect to these matters. Notwithstanding our substantial efforts, the requirements of the Act as to internal controls are new and significant and, to some extent, quite burdensome, and there exists a risk that we will not be able to meet all the requirements of the Act in such regard by the end of fiscal year 2005, when we are required to report on our internal controls and provide our auditor’s opinion thereon.

We May Not Enjoy the Expected Benefits of Our Move to a New Facility and Other Internal Restructurings.

While we purchased the Pinemont Facility in 2003 to house all our existing U.S. operations and activities 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.

One of our vacant facilities, a 77,000 square foot manufacturing building in northwest Houston, is being considered for re-utilization due to our inability to further expand our manufacturing operations at the Pinemont Facility. This facility has a net book value of $4.7 million and is reflected in the accompanying balance sheet under property, plant and equipment. If we are unable to either utilize this facility or lease it to a third party, we may be required to record an impairment charge in fiscal 2005.

We have another vacant facility, a 20,000 square foot office building located in Stafford, Texas, which is being marketed for sale. We expect to sell this building in fiscal year 2005.

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 as to market risk 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

Until September 30, 2004, we purchased printheads from OYO Corporation, which purchased them from Graphtec, pursuant to terms under which such purchases were denominated in Japanese yen. We routinely attempted 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 was to eliminate variability of cash flows associated with foreign currency exchanges on amounts payable in Japanese yen. Our forward contracts with

banks were 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 did not exceed $0.5 million and such contracts ordinarily were settled within 10 months. Resulting gains and losses are reflected in income and were not material for our fiscal year ended September 30, 2004. As a result of our recent acquisition of Graphtec’s thermal printhead production assets, at September 30, 2004, there were no yen denominated foreign currency forward contracts or 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, 2004 reflected approximately $2.3 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. Under recently passed tax legislation, we may be able to repatriate foreign earnings from Russia and elsewhere at a more attractive tax rate than had been applicable.

Foreign Currency Intercompany Accounts and Notes Receivable

From time to time, we provide access to capital to our foreign subsidiaries through U.S. dollar denominated interest bearing promissory notes. Such funds are generally used by our foreign subsidiaries to purchase capital assets and for general working capital needs. In addition, we sell products to our foreign subsidiaries in U.S. dollars on trade credit terms. Because these U.S. dollar denominated intercompany debts are accounted for in the local currency of our foreign subsidiaries, any appreciation or devaluation of such foreign currencies against the U.S. dollar will result in a gain or loss, respectively, to our consolidated statement of operations. At September 30, 2004, we had outstanding accounts and notes receivable of $1.6 million and $4,000 from our subsidiaries in Russia and Canada, respectively. There were no accounts or notes receivable due from our subsidiary in the United Kingdom.

Floating Interest Rate Risk

Our New Credit Agreement and one of our real estate mortgage agreements contains 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 New Credit Agreement, our borrowing interest rate is a discounted prime lending rate or a LIBOR based rate, whichever we select. Similarly, under our Previous Credit Agreement, our interest rate was either the bank’s prime rate or a LIBOR based rate. Under the real estate mortgage agreement, our borrowing rate is a LIBOR based rate plus 250 basis points with a minimum rate of 4.0%. As of September 30, 2004, we had borrowed $0.6 million under our Previous Credit Agreement at a rate of 4.8% and we had borrowed $2.9 million under our real estate mortgage agreement at a rate of 4.0%. Due to the amount of borrowings outstanding under these facilities, including potential borrowings available under the New Credit Agreement, any increased interest costs associated with movements in market interest rates could be material to our financial condition, results of operation or cash flow. At September 30, 2004 based on our current level of borrowings, a 1.0% increase in interest rates would increase interest expense annually by approximately $35,000.

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

Our independent public accountant has not resigned, declined to stand for reelection or been dismissed in our last two fiscal years, and we have not engaged any other independent public accountants to audit us or any of our subsidiaries during that time.

Item 9A. Controls and Procedures

As of the end of the period covered by this report, our management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could materially affect or that are reasonably likely to materially affect, internal controls over financial reporting, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.

Item 9B. Other Information

None.

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 2005 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

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item is contained in our definitive Proxy Statement to be distributed in connection with our 2005 Annual Meeting of Stockholders under the caption “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference as well as in Item 5, “Market for Registrants Common Equity and Related Stockholder Matters”, contained in Part II hereof.

Item 13. Certain Relationships and Related Transactions

Item 14. Principal Accountant Fees and Services

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 of Form 8-K reporting the Company 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		Business Loan Agreement dated November 22, 2004, made by and between Union Planters Bank, N.A., and Concord Technologies, LP, Geospace Technologies, LP, OYO Instruments, LP, Geospace Engineering Resources International, LP and OYOG Operations, LP.

10.12		Promissory Note dated November 22, 2004, made by Concord Technologies, LP, Geospace Technologies, LP, OYO Instruments, LP, Geospace Engineering Resources International, LP and OYOG Operations, LP for the benefit of Union Planters Bank, NA.

10.13		Guaranty Agreement dated November 22, 2004, made by and between the Company and Union Planters Bank, NA.

10.14		Guaranty Agreement dated November 22, 2004, made by and between OYOG, LLC and Union Planters Bank, NA.

10.15		Guaranty Agreement dated November 22, 2004, made by and between OYOG Limited Partner, LLC and Union Planters Bank, NA.


Exhibit Number		Description of Documents
10.16		Security Agreement dated as of November 22, 2004, between Union Planters Bank, N.A., and Concord Technologies, LP. Each of Geospace Technologies, LP, OYO Instruments, LP, Geospace Engineering Resources International, LP and OYOG Operations, LP has entered into a Security Agreement with Union Planters Bank, N.A. which is substantially identical to the Security Agreement attached as an exhibit to this Form 10-K.

10.17(i)		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(i)		Promissory Note, dated September 10, 2003, made by OYOG Operations, LP payable to Compass Bank.

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

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

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

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

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

14.1(i)		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. 333-36767).

(i)	Incorporated by reference to the registrants Annual Report on Form 10-K for the year ended September 30, 2003 (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 3, 2004

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 3, 2004

/s/ THOMAS T. MCENTIRE Thomas T. McEntire	Chief Financial Officer (Principal Financial and Accounting Officer)	December 3, 2004

/s/ WILLIAM H. MOODY William H. Moody	Director	December 3, 2004

/s/ KATSUHIKO KOBAYASHI Katsuhiko Kobayashi	Director	December 3, 2004

/s/ RYUOZO OKUTO Ryuzo Okuto	Director	December 3, 2004

/s/ MICHAEL J. SHEEN Michael J. Sheen	Director	December 3, 2004

/s/ THOMAS L. DAVIS Thomas L. Davis	Director	December 3, 2004

/s/ CHARLES H. STILL Charles H. Still	Director	December 3, 2004

OYO GEOSPACE CORPORATION AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm		F-2

Consolidated Balance Sheets as of September 30, 2004 and 2003		F-3

Consolidated Statements of Operations for the Years Ended September 30, 2004, 2003 and 2002		F-4

Consolidated Statement of Stockholders’ Equity for the Years Ended September 30, 2004, 2003 and 2002		F-5

Consolidated Statements of Cash Flows for the Years Ended September 30, 2004, 2003 and 2002		F-6

Notes to Consolidated Financial Statements		F-7

Schedule II— Valuation and Qualifying Accounts		F-30

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

of OYO Geospace Corporation:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of OYO Geospace Corporation and its subsidiaries at September 30, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2004, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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

December 3, 2004

F-2

OYO Geospace Corporation and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share amounts)


	AS OF SEPTEMBER 30,
	2004		2003
ASSETS
Current assets:
Cash and cash equivalents	$	3,139	$	671
Trade accounts receivable, net of allowance of $689 and $478		10,849		7,849
Notes receivable, net of allowance of $0		1,978		2,129
Inventories, net		25,406		22,929
Deferred income tax		1,567		1,233
Prepaid expenses and other		2,494		2,739

Total current assets		45,433		37,550

Rental equipment, net		1,916		2,175
Property, plant and equipment, net		21,421		22,379
Patents, net of accumulated amortization of $2,727 and $2,153		3,127		3,861
Goodwill, net of accumulated amortization of $921		1,843		1,843
Deferred income tax		2,700		1,869
Other assets		1,354		1,758

Total assets	$	77,794	$	71,435

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt	$	1,029	$	5,889
Accounts payable:
Trade		4,876		2,418
Related parties		—		383
Accrued expenses and other		5,838		3,758
Deferred revenue		316		138
Income tax payable		585		27

Total current liabilities		12,644		12,613
Long-term debt		5,805		6,232

Total liabilities		18,449		18,845

Minority interest in consolidated subsidiary		145		119

Stockholders’ equity:
Preferred stock, 1,000,000 shares authorized, no shares issued and outstanding		—		—
Common stock, $.01 par value, 20,000,000 shares authorized, 5,588,160 and 5,554,874 shares issued and outstanding		56		56
Additional paid-in capital		31,115		30,636
Retained earnings		27,752		21,799
Accumulated other comprehensive income (loss)		277		(16	)
Unearned compensation-restricted stock awards		—		(4	)

Total stockholders’ equity		59,200		52,471

Total liabilities and stockholders’ equity	$	77,794	$	71,435

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,
	2004			2003			2002
Net sales	$	63,538		$	50,854		$	65,049
Cost of sales		40,787			38,337			46,484

Gross profit		22,751			12,517			18,565

Operating expenses:
Selling, general and administrative expenses		12,086			11,273			11,538
Research and development expenses		4,794			5,226			5,347
Impairment of assets		—			—			1,246

Total operating expenses		16,880			16,499			18,131

Income (loss) from operations		5,871			(3,982	)		434

Other income (expense):
Interest expense		(419	)		(464	)		(666	)
Interest income		268			329			177
Other, net		212			204			(281	)

Total other income (expense), net		61			69			(770	)

Income (loss) before income taxes, minority interest and extraordinary gain		5,932			(3,913	)		(336	)
Income tax benefit		(47	)		(1,399	)		(857	)

Income (loss) before minority interest, and extraordinary gain		5,979			(2,514	)		521
Minority interest		(26	)		(19	)		(88	)

Income (loss) before extraordinary gain		5,953			(2,533	)		433
Extraordinary gain, net of tax of $85		—			—			686

Net income (loss)	$	5,953		$	(2,533	)	$	1,119

Basic earnings (loss) per share:
Income (loss) before extraordinary gain	$	1.07		$	(0.46	)	$	0.08
Extraordinary gain		—			—			0.12

Net income (loss)	$	1.07		$	(0.46	)	$	0.20

Diluted earnings (loss) per share:
Income (loss) before extraordinary gain	$	1.05		$	(0.46	)	$	0.08
Extraordinary gain		—			—			0.12

Net income (loss)	$	1.05		$	(0.46	)	$	0.20

Weighted average shares outstanding:
Basic		5,573,611			5,550,216			5,535,979

Diluted		5,684,853			5,550,216			5,547,774

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, 2004, 2003 and 2002

(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									Total
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
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
Comprehensive income:
Net income	—			—		—			5,953			—			—			5,953
Foreign currency translation Adjustments	—			—		—			—			293			—			293

Total comprehensive income																		6,246
Issuance of common stock pursuant to Director Plan	2,121			—		38			—			—			—			38
Termination of restricted stock grants	(250	)		—		(4	)		—			—			—			(4	)
Issuance of common stock pursuant to exercise of options, net of tax	31,415			—		445			—			—			—			445
Unearned compensation amortization	—			—		—			—			—			4			4

Balance at September 30, 2004	5,588,160		$	56	$	31,115		$	27,752		$	277		$	—		$	59,200

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,
	2004			2003			2002
Cash flows from operating activities:
Net income (loss)	$	5,953		$	(2,533	)	$	1,119
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred income tax benefit		(1,013	)		(1,036	)		(1,381	)
Depreciation		4,223			3,565			3,938
Amortization		739			702			649
Stock-based compensation		4			1			137
Impairment of assets		—			—			1,246
Extraordinary gain, net of tax		—			—			(686	)
Minority interest		26			20			88
(Gain) loss on disposal of property, plant and equipment		(156	)		22			192
Bad debt expense		145			229			146
Effects of changes in operating assets and liabilities:
Trade accounts and notes receivable		(2,691	)		2,377			(626	)
Inventories		(2,525	)		(1,128	)		7,622
Prepaid expenses and other assets		377			(1,478	)		262
Accounts payable		636			(1,246	)		(1,030	)
Accrued expenses and other		1,923			(995	)		(658	)
Deferred revenue		178			(8	)		(4,713	)
Income tax payable		559			(1,094	)		241

Net cash provided by (used in) operating activities		8,378			(2,602	)		6,546

Cash flows from investing activities:
Proceeds from the sale of property, plant and equipment		1,241			33			616
Capital expenditures		(2,506	)		(6,045	)		(4,729	)
Purchase of intangible assets		—			—			(2,267	)
Business acquisitions, net of cash acquired		—			(164	)		913

Net cash used in investing activities		(1,265	)		(6,176	)		(5,467	)

Cash flows from financing activities:
Increase in notes payable to banks		14,163			32,570			29,266
Principal payments on notes payable to banks		(19,449	)		(24,706	)		(29,812	)
Proceeds from exercise of stock options		400			39			77

Net cash provided by (used in) financing activities		(4,886	)		7,903			(469	)

Effect of exchange rate changes on cash		241			8			46

Increase (decrease) in cash and cash equivalents		2,468			(867	)		656
Cash and cash equivalents, beginning of period		671			1,538			882

Cash and cash equivalents, end of period	$	3,139		$	671		$	1,538

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 thermal imaging equipment and dry thermal film products to the commercial graphics industry. As of September 30, 2004, OYO Corporation U.S.A. (“OYO USA”) owned approximately 51.0% 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, long-lived assets, 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. As of September 30, 2004 and 2003, the Company included bank overdrafts of $0.5 million and $0.1 million, respectively in accounts payable.

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 holding such deposits minimizes the credit risk of such deposits. The Company anticipates that the existing cash balance as of September 30, 2004, cash flows from operations and borrowing availability under a new credit facility will provide adequate cash flows and liquidity for fiscal year 2005. Management expects that the liquidity from such amounts and cash flows from operations in fiscal year 2005 will satisfy the capital expenditures, scheduled debt payments, and operational budgets of the Company for the upcoming year.

F-7

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

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 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.

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, 2004 reflected approximately $2.3 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, 2004 the Company had surplus land and building held for sale with a net book value of $1.1 million.

Property, Plant and Equipment and Rental Equipment

Property, plant and equipment and rental equipment are stated at cost. Depreciation expense is calculated using 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.

F-8

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

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. Patent amortization expense was approximately $0.2 million during fiscal years 2004, 2003 and 2002. Intellectual property amortization expense was approximately $0.5 million, $0.4 million, and $0.2 million during fiscal years 2004, 2003 and 2002, respectively. The estimated amortization for the five succeeding years is approximately $0.7 million, $ 0.7 million, $0.5 million, $0.2 million and $0.2 million for the years ended September 30, 2005, 2006, 2007, 2008, and 2009, respectively.

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 years ended September 30, 2004 and 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 $1.0 million of long-term notes receivable. Monthly payments are scheduled to be received by the Company over the next two years.

Revenue Recognition

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 the 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 generally range from daily rentals to rental periods of up to six months or longer. Except for certain reservoir characterization products, the Company’s 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. In circumstances where acceptance provisions are significant, the revenue and related profit are deferred until such time as customer acceptance occurs. Most of the Company’s products do not require installation assistance from the Company or sophisticated instruction.

F-9

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Research and Development Costs

The Company expenses research and development costs as incurred. Research 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, 2003)	$	877
Accruals for warranties issued during the period		484
Accruals related to pre-existing warranties (including changes in estimates)		(476	)
Settlements made (in cash or in kind) during the period		24

Balance at the end of the period (September 30, 2004)	$	909

Stock-Based Compensation

Employee stock plans are accounted for under the intrinsic value method of recognition and measurement principles as discussed in the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The Company utilizes the Black-Scholes option valuation model to value stock options for pro forma presentation of income and per share data as if the fair value based method in Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, had been used to account for stock-based compensation.

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.

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

F-10

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

comprehensive income until the hedged transactions occur and are recognized in earnings. Until September 30, 2004, the Company purchased printheads from OYO Japan whereby such purchases were denominated in Japanese yen. The Company routinely attempted 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 was 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 were 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, 2004, 2003 and 2002. At September 30, 2004, the Company had no yen-denominated foreign currency forward contracts or yen-denominated accounts payable.

Shipping and Handling Costs

Amounts billed to a customer in a sales transaction related to reimbursable shipping and handling costs are included in revenues and the associated costs incurred by the Company for reimbursable shipping and handling costs are reported as an expense in cost of sales.

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

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 the Company’s fiscal year 2004.

F-11

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

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, 2004, the Company had two stock-based employee compensation plans. The Company accounts 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. The 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, 2004			September 30, 2003			September 30, 2002
Net income (loss), as reported	$	5,953		$	(2,533	)	$	1,119
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(466	)		(443	)		(428	)

Pro forma income (loss)	$	5,487		$	(2,976	)	$	691

Earnings (loss) per share:
Basic-as reported	$	1.07		$	(0.46	)	$	0.20
Basic-pro forma	$	0.98		$	(0.54	)	$	0.12

Diluted-as reported	$	1.05		$	(0.46	)	$	0.20
Diluted-pro forma	$	0.97		$	(0.54	)	$	0.12

In March 2004, the FASB issued an exposure draft, “Share-Based Payments, an Amendment of FASB Statements No. 123 and 95”, which may eliminate the ability to account for share-based compensation transactions using APB No. 25. In October 2004, the FASB delayed the effective date of this proposed pronouncement until June 2005. The Company will continue to monitor the rules and statements released by the FASB in regard to how the Company accounts for stock-based employee compensation and related disclosure.

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

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” This statement establishes standards for how an issuer classifies

F-12

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

and measures certain financial instruments with characteristics of both liabilities and equity. It requires a financial instrument within its scope to be classified as a liability. It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. These effective dates are not applicable to the provisions of paragraphs 9 and 10 of SFAS 150 as they apply to mandatorily redeemable noncontrolling interests, as the FASB has delayed these provisions indefinitely. The adoption of this statement had no initial impact on the Company’s results of operations or financial position.

In December 2003, the SEC issued Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”), which supercedes SAB 101, “Revenue Recognition in Financial Statements”. SAB 104’s primary purpose is to rescind accounting guidance contained within SAB 101 related to multiple element revenue arrangements, which was superceded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material effect on the Company’s financial position or the Company’s results of operations.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—an amendment of ARB 43, Chapter 4”. This statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This statement requires that those items be recognized as current-period charges. In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company will adopt this statement, effective October 1, 2005. The Company is currently evaluating the effect of the adoption of this statement on the Company’s results of operations or financial position.

2. Acquisitions:

Effective November 8, 2001, the Company increased its equity ownership from 44% to 85% in OYO-GEO Impulse International, LLC (“OYO-GEO Impulse”), a Russian joint venture formed in 1990 with Geophyspribor Ufa Production Association (“Geophyspribor”), Bank Vostock and Chori Co., Ltd. (“Chori”). Since this transaction, the financial results of OYO-GEO Impulse have been consolidated with those of OYO Geospace. At that time, Geophyspribor and Chori Co., Ltd. continued as minority shareholders 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. This debt and a related equity investment had been written-off in 1994 due to prior concerns regarding realization of those assets and, therefore, such debt and investment had no carrying value in the Company’s financial statements. In connection with this acquisition, in fiscal year 2002, the Company 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.

On September 12, 2003, the Company purchased for $164,000 an additional 12% ownership interest in OYO-GEO Impulse from Geophyspribor, thereby increasing its ownership interest to 97%. Chori 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 geophone sensors for the Russian seismic marketplace. At September 30, 2004, OYO-GEO Impulse operated in a 120,000 square foot facility in Ufa and employed approximately 374 people. The Company’s seismic equipment manufacturing subsidiary in Houston is managing the expansion of OYO-GEO Impulse’s operations to produce and sell international-standard sensors and additional seismic related products.

F-13

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The allocation of the purchase price of the fiscal year 2002 acquisition of OYO-GEO Impulse, including related direct costs, and a reconciliation of the purchase price to the cash used for the acquisition is as follows (in thousands):


Fair values of assets and liabilities:
Net current assets, excluding cash acquired	$	1,134
Net current liabilities		(1,186	)
Minority interest		(175	)
Negative goodwill		(686	)

Cash provided by business acquisition	$	(913	)

On September 30, 2004, the Company acquired the thermal printhead production assets of Graphtec Corporation located in Yokohama, Japan, (“Graphtec”) for approximately $1.8 million which was paid in cash on October 1, 2004. Prior to that date, Graphtec was the only supplier of wide format thermal printheads that the Company used to manufacture its wide format thermal imaging equipment. If printhead sales exceed certain established levels the Company may owe a royalty to Graphtec annually. The Company is unable to determine at this date the amount of those royalties and if those royalties will be payable.

The consolidated results of operations of the Company include the results of OYO-GEO Impulse from the date of acquisition. The revenues and net income of OYO-GEO Impulse prior to the acquisition date was not material to the Company’s consolidated results of operations and, therefore, no proforma consolidated results of operations as if the acquisition had occurred at the beginning of the year has been presented.

3. Inventories:

Inventories consisted of the following (in thousands):


	AS OF SEPTEMBER 30,
	2004			2003
Finished goods	$	5,471		$	4,900
Work in progress		3,940			3,241
Raw materials		17,627			15,841
Obsolescence reserve		(1,632	)		(1,053	)

	$	25,406		$	22,929

Inventory obsolescence expense was approximately $0.7 million, $0.2 million and $1.0 million during fiscal years 2004, 2003 and 2002, respectively.

4. Notes Receivable:

At September 30, 2004 and 2003, the Company had outstanding notes receivable from customers in the amount of $2.9 million (including $1.0 million classified as long-term) and $3.4 million (including $1.3 million classified as long-term), respectively. The notes receivable outstanding at September 30, 2004 bear interest at rates up to 10.0% and are collectible in monthly installments through September 2006. At September 30, 2004 and 2003, there was no allowance for doubtful accounts deemed necessary for the Company’s notes receivable. The Company’s annual maturities of notes receivable will be approximately $2.0 million, $0.9 million and $0.1 million in fiscal years ended September 30, 2005, 2006, and 2007, respectively.

F-14

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

5. Rental Equipment:

Rental equipment consisted of the following (in thousands):


	AS OF SEPTEMBER 30,
	2004			2003
Rental equipment, primarily geophones and related products	$	10,073		$	8,198
Less accumulated depreciation		(8,157	)		(6,023	)

	$	1,916		$	2,175

Rental equipment depreciation expense was $2.1 million, $0.8 million and $1.0 million in fiscal years 2004, 2003 and 2002, respectively.

6. Property, Plant and Equipment:

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


	AS OF SEPTEMBER 30,
	2004			2003
Land	$	3,209		$	3,366
Buildings		11,519			12,205
Machinery and equipment		18,849			17,872
Furniture and fixtures		1,352			1,580
Transportation equipment		152			212
Tools and molds		1,665			1,679
Leasehold improvements		4			943
Construction in progress		46			418

		36,796			38,275
Accumulated depreciation		(15,375	)		(15,896	)

	$	21,421		$	22,379

Property, plant and equipment depreciation expense was $2.1 million, $2.8 million and $3.0 million in fiscal years 2004, 2003 and 2002, respectively. The Company had fully depreciated assets of $7.6 million and $7.7 million in use at September 30, 2004 and 2003, respectively. On September 30, 2004, the Company purchased for $1.4 million certain thermal printhead production fixed assets from Graphtec with an estimated useful life of 5 years.

In September 2003, the Company purchased a facility located at 7007 Pinemont Drive in Houston, Texas (the “Pinemont Facility”) having 208,000 square feet, which houses the Company’s headquarters and all U.S. manufacturing, engineering, selling, marketing, and administrative activities. The Pinemont Facility was purchased at a cost of $3.8 million, $3.0 million of which was financed by a 7-year promissory note and secured by a mortgage on the property. The Pinemont Facility consolidated into one location all manufacturing, engineering, selling, marketing and administrative activities for the Company in the United States. The Pinemont Facility also serves as the Company’s headquarters. This consolidation was a critical element in the Company’s strategic restructuring initiative aimed at making its operations more efficient in the face of continuing pricing pressure on the Company’s traditional seismic businesses. At September 30, 2004, the Company was seeking to sell a facility in Stafford, Texas having a carrying value of $1.1 million. The Company

F-15

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

has another vacant facility located in Houston, Texas having a net book value of $4.7 million which the Company expects to use in its operations. If the Company does not use this property, it may need to record an impairment charge if it is unable to lease the property to a third party.

7. Other Assets:

In April 2002, the Company purchased for $2.3 million certain intellectual property rights from the Company’s then primary supplier of dry thermal film (the “Former Primary Film Supplier”). 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. Such purchase included technology then existing and any dry thermal film technology thereafter developed by the Former Primary Film Supplier for use in the Company’s equipment. The Company 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. 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. If the Former Primary Film Supplier could not meet such requirements, the agreement provided the Company with the right to use the technology itself 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, 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 the Former Primary Film Supplier described above).

Shortly thereafter, the Former Primary Film Supplier ceased providing the Company with dry thermal film. As a result, 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 $1.2 million charge in its third quarter of fiscal year 2002 due to the ultimate uncertainty of realization of value on certain assets, particularly certain prepaid purchase benefits and other benefits under the amended supply contract with the Former Primary Film Supplier. The Company does not believe there has been any impairment in the value of the intellectual property it 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.

On December 10, 2002, the Company received a notice of claim, in connection with the Former Primary Film Supplier’s bankruptcy, for alleged preferential payments made by the Former Primary Film Supplier to it in the period before filing of the bankruptcy proceeding in the approximate amount of $259,000. On July 7, 2004, an amended claim was filed against the Company and the amount of the alleged preferential payments made by the Former Primary Film Supplier was increased to approximately $895,000. 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 Former 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 had, nevertheless, made a provision for the initial claim made by the Former Primary Film Supplier and the Company believes that such provision is adequate at this time, although the Company is unable to make such predictions with any certainty.

F-16

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

8. Notes Payable and Long-Term Debt:

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


	AS OF SEPTEMBER 30,
	2004			2003
Mortgage note payable, due in monthly installments of $31 with interest at 7.0% through January 2014, collateralized by certain land and building having a net book value of $4.7 million	$	2,582		$	2,771
Mortgage note payable, due in monthly installments of $9 with interest at 7.6% through July 2013, collateralized by certain land and building having a net book value of $1.1 million		718			773
Mortgage note payable, due in monthly installments of $10 with interest at 4.0% through September 2010, with remaining principal and interest due September 2010, collateralized by certain land and building having a net book value of $5.0 million		2,925			3,040
OYO-GEO Impulse note payable, with interest at 18.0%, due December 2003		—			113
Working capital line of credit		609			5,424

		6,834			12,121
Less current portion		(1,029	)		(5,889	)

	$	5,805		$	6,232

On November 22, 2004, several of the Company’s subsidiaries entered into a new credit agreement (the “New Credit Agreement”) with a bank. Under the New Credit Agreement, the Company’s borrower subsidiaries can borrow up to $15.0 million secured principally by their accounts and notes receivable and inventories. The New Credit Agreement expires on November 21, 2007. Borrowings under the New Credit Agreement are subject to borrowing base restrictions based on levels of eligible accounts receivable, notes receivable and inventories. The New Credit Agreement limits the incurrence of additional indebtedness, requires the maintenance of certain financial amounts, restricts the Company’s and the borrower subsidiaries’ ability to pay dividends and contains other covenants customary in agreements of this type. At December 6, 2004 there were borrowings of $1.9 million under the New Credit Agreement, and additional borrowings available of $13.1 million. The interest rate for borrowing under the New Credit Agreement is, at the Company’s option, a discounted prime rate or a LIBOR based rate.

Prior to entering in to the New Credit Agreement, several of the Company’s subsidiaries were a party to a credit agreement (the “Previous Credit Agreement”) with a bank, and could borrow up to $10.0 million secured principally by the subsidiaries’ accounts receivable and inventories. The Previous Credit Agreement, as amended, was scheduled to expire on February 27, 2005, however this agreement was terminated on November 22, 2004 and replaced by the New Credit Agreement. Borrowings under the Previous Credit Agreement were subject to borrowing base restrictions based on levels of eligible accounts receivable and inventories. The Previous Credit Agreement limited the incurrence of additional indebtedness, required the maintenance of certain financial amounts, restricted the Company’s and the borrower subsidiaries’ ability to pay dividends and contained other covenants customary in agreements of this type. As of September 30, 2004, there were borrowings of $0.6 million outstanding under the Previous Credit Agreement, and additional borrowings available under the Previous Credit Agreement of $9.2 million. The Company’s borrowing interest rate was, at its option, the bank’s prime rate or a LIBOR based rate.

F-17

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The Company anticipates that the existing cash balance as of September 30, 2004, cash flows from operations and borrowing availability under its New Credit Agreement will satisfy the capital expenditures, scheduled debt payments, and operational budgets of the Company for the upcoming fiscal year.

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


YEAR ENDING SEPTEMBER 30,
2005	$	1,029
2006		445
2007		472
2008		500
2009		531
Thereafter		3,857

	$	6,834

9. Accrued Expenses and Other:

Accrued expenses consisted of the following (in thousands):


	AS OF SEPTEMBER 30,
	2004		2003
Employee bonuses	$	1,180	$	17
Product warranty		909		877
Compensated absences		585		544
Legal and professional fees		248		308
Payroll		468		312
Property taxes		749		723
Medical claims		200		225
Other		1,499		752

Accrued expenses and other	$	5,838	$	3,758

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 historical experience and on estimates of aggregate liability for uninsured claims incurred using certain actuarial assumptions followed in the insurance industry.

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 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 2004, 2003 and 2002.

The Company’s stock incentive plans in which employees may participate are discussed in Note 11 in these Consolidated Financial Statements.

F-18

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

11. Stockholders’ Equity:

In September 1997, the board of directors and stockholders approved the 1997 Key Employee Stock Option Plan (the “Employee Plan”), and, following an amendment thereto, 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, 2004, the shares of common stock available for grant under the Employee Plan and Director Plan were 55,400 and 309, 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 there under. 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 17,400 shares available for grant under this plan at September 30, 2004.

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 October 1, 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
Granted	15,450		16.93
Exercised	(31,415	)	12.74
Forfeited	(9,575	)	12.35
Expired	—		—

Outstanding at September 30, 2004	703,760		12.98

The following table summarizes information about stock options outstanding and exercisable at September 30, 2004:


	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	284,160	7.8	$	8.04	117,256	$	8.55
$13.50 to $19.99	394,700	4.8		15.72	379,563		15.66
$20.00 to $27.63	24,900	4.9		25.86	24,150		25.98

	703,760	6.0		12.98	520,969		14.54

As partial compensation for services of its outside directors, the Company issued 2,121 shares, 3,604 shares and 1,890 shares of common stock to directors during fiscal years 2004, 2003 and 2002, respectively.

The amortization of unearned compensation related to stock-based employee compensation included in the consolidated results of operations was $4,000, $1,000 and $0.1 million for each of fiscal years 2004, 2003 and 2002, 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 $0, $4,000 and $5,000 as of September 30, 2004, 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 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

F-20

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

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, 2004, 2003 and 2002 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 4.5%, 4.2% and 3.8%; and expected volatility of 65%, 65% and 54%; with an expected option term of 5 years for 2004, 2003 and 2002, respectively.

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


	YEAR ENDED SEPTEMBER 30,
	2004		2003		2002
Options	$	17.19	$	7.54	$	6.44
Director’s common stock		17.68		6.94		13.73

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,
	2004		2003			2002
Net income (loss):
As reported	$	5,953	$	(2,533	)	$	1,119
Pro forma		5,487		(2,976	)		691
Basic earnings (loss) per common share:
As reported	$	1.07	$	(0.46	)	$	0.20
Pro forma		0.98		(0.54	)		0.12
Diluted earnings (loss) per common share:
As reported	$	1.05	$	(0.46	)	$	0.20
Pro forma		0.97		(0.54	)		0.12

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 Plan and Director Plan.

12. Income Taxes:

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


	YEAR ENDED SEPTEMBER 30,
	2004		2003			2002
United States	$	2,622	$	(4,334	)	$	(1,642	)
Foreign		3,310		421			1,306

	$	5,932	$	(3,913	)	$	(336	)

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,
	2004			2003			2002
Current:
Federal	$	82		$	(345	)	$	(169	)
Foreign		879			(28	)		769
State		5			10			(76	)

		966			(363	)		524

Deferred:
Federal		(890	)		(1,198	)		(1,430	)
Foreign		(123	)		162			49
State		—			—			—

		(1,013	)		(1,036	)		(1,381	)

	$	(47	)	$	(1,399	)	$	(857	)

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,
	2004			2003			2002
Provision for U.S. federal income tax at statutory rate	$	2,017		$	(1,330	)	$	(114	)
Effect of foreign income taxes		(369	)		(10	)		(10	)
Tax benefit from export sales and other items		(907	)		(11	)		(410	)
State income taxes, net of federal income tax benefit		3			7			2
Nondeductible expenses		33			28			104
Resolution of prior years’ tax matters		(24	)		(83	)		(429	)
Change in valuation allowance		(800	)		—			—

	$	(47	)	$	(1,399	)	$	(857	)

		(0.8	)%		(35.8	)%		(255.1	)%

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,
	2004			2003
Deferred income tax assets:
Allowance for doubtful accounts	$	168		$	132
Inventories		826			617
Capitalized research and development costs		2,735			1,426
Intangible assets		145			—
AMT carryforward		291			272
NOL carryforwards, tax credits and deferrals		688			2,255
Accrued product warranty		309			298
Accrued compensated absences		199			185
Insurance and other reserves		65			—

		5,426			5,185
Deferred income tax liabilities:
Property, plant and equipment and other		(1,159	)		(1,283	)

Net deferred income tax asset before valuation allowance		4,267			3,902
Valuation allowance		—			(800	)

Net deferred income tax asset	$	4,267		$	3,102

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


	AS OF SEPTEMBER 30,
	2004		2003
Current deferred income tax asset	$	1,567	$	1,233
Noncurrent deferred income tax asset		2,700		1,869

	$	4,267	$	3,102

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 foreign tax credits that were available for potential use in future periods. Based upon the industry environment at that time, and considering the Company’s projections of future taxable income, the Company recorded a valuation allowance of approximately $0.8 million against the foreign tax credits.

In fiscal year 2004, the Company (i) realized a $3.6 million award received as a result of the successful performance of a reservoir characterization system it sold in fiscal year 2002, and (ii) increased its projections of future domestic and foreign source taxable income due to improving market conditions. As a result, the Company reversed the $0.8 million valuation allowance established in fiscal year 2003.

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, if any.

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 these foreign operations would cause the excess to become taxable. At September 30, 2004 and 2003, the temporary difference related to undistributed earnings for which no deferred taxes have been provided was approximately $4.8 million and $2.8 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, 2004, the Company had $0.5 million in foreign tax credit carryforwards available to offset future federal income taxes payable. Such tax credits can be carried forward for up to nine years and begin to expire in fiscal year 2012. The Company has general business credits of $46,000 which begin to expire in fiscal year 2013. 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.

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,
	2004		2003			2002
Income (loss) before extraordinary item	$	5,953	$	(2,533	)	$	433
Extraordinary gain, net of tax of $85		—		—			686

Net earnings (loss) available to common stockholders	$	5,953	$	(2,533	)	$	1,119

Weighted average common shares and common share equivalents:
Common shares		5,573,611		5,550,216			5,535,979
Common share equivalents		111,242		—			11,795

Total weighted average common shares and common share equivalents		5,684,853		5,550,216			5,547,774

Basic earnings (loss) per share:
Income (loss) before extraordinary gain	$	1.07	$	(0.46	)	$	0.08
Extraordinary gain		—		—			0.12

Net income (loss)	$	1.07	$	(0.46	)	$	0.20

Diluted earnings (loss) per share:
Income (loss) before extraordinary gain	$	1.05	$	(0.46	)	$	0.08
Extraordinary gain		—		—			0.12

Net income (loss)	$	1.05	$	(0.46	)	$	0.20

F-24

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Options totaling 19,260, 729,300 and 474,800 shares of common stock in fiscal years 2004, 2003 and 2002 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 $0.5 million, $0.3 million and $0.1 million during fiscal years 2004, 2003 and 2002, respectively. Purchases of inventory and equipment from OYO Japan were approximately $0.8 million, $1.8 million and $0.6 million during fiscal years 2004, 2003 and 2002, respectively.

15. Commitments and Contingencies:

Operating Leases

The Company leases certain office equipment under noncancelable operating leases. In addition, through December 31, 2003 the Company leased certain manufacturing facilities. The approximate future minimum rental commitments under noncancelable operating leases are as follows (in thousands):


YEAR ENDING SEPTEMBER 30,
2005	$	9
2006		3
2007		—

	$	12

Rent expense was approximately $0.2 million, $0.6 million, and $0.7 million for fiscal years 2004, 2003 and 2002, 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. Legal expenses related to such matters are expensed as incurred. 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.

16. Supplemental Cash Flow Information:

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


	YEAR ENDED SEPTEMBER 30,
	2004		2003		2002
Cash paid (refund received) for:
Interest	$	215	$	116	$	585
Income taxes		309		199		(153	)
Noncash investing and financing activities:
Purchase of Graphtec assets and inventory		1,818		—		—
Common stock issued pursuant to Employee and Director Plan		38		25		25

F-25

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

17. Segment and Geographic Information:

The Company reports two business segments: Seismic and Commercial Graphics. Certain summary financial data for the Company’s business segments which was previously presented in prior periods has now been reclassified to conform to the current year presentation. The Commercial Graphics business segment primarily sells products into the commercial graphics industry; however, it also has some minor sales into the seismic industry.

The Company’s 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 and hydrophone string connectors, seismic telemetry cable, 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,
	2004			2003			2002
Net sales:
Seismic	$	50,651		$	37,619		$	51,800
Commercial Graphics		12,991			13,333			13,490
Eliminations		(104	)		(98	)		(241	)

Total		63,538			50,854			65,049

Income (loss) from operations:
Seismic		10,861			780			6,395
Commercial Graphics		1,117			1,130			477
Corporate		(6,107	)		(5,892	)		(6,296	)
Eliminations		—			—			(142	)

Total		5,871			(3,982	)		434

Total assets:
Seismic		49,667			47,391
Commercial Graphics		15,979			14,256
Corporate		12,148			9,788

Total	$	77,794		$	71,435

“Corporate” consists primarily of overhead expenses and unallocated assets. Unallocated corporate assets primarily consist of the Company’s building, office equipment, deferred tax assets and other general assets.

F-26

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The Company has operations in the United States, Canada, Russia and the United Kingdom. Summaries of net sales by geographic area for fiscal years 2004, 2003 and 2002 are as follows (in thousands):


	YEAR ENDED SEPTEMBER 30,
	2004		2003		2002
Asia (excluding Japan and Middle East)	$	8,903	$	9,778	$	7,386
Canada		8,356		6,503		9,058
Europe		19,404		11,501		16,094
Japan		689		618		436
Middle East		581		1,255		918
United States		24,754		20,221		30,137
Other		851		978		1,020

	$	63,538	$	50,854	$	65,049

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.

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


	YEAR ENDED SEPTEMBER 30,
	2004			2003			2002
United States	$	51,473		$	41,335		$	61,238
Canada		7,295			5,608			4,492
Russia		6,214			4,836			4,061
United Kingdom		3,149			3,105			6,526
Eliminations		(4,593	)		(4,030	)		(11,268	)

	$	63,538		$	50,854		$	65,049

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


	AS OF SEPTEMBER 30,
	2004		2003
United States	$	22,386	$	25,646
Canada		3,155		3,800
Russia		2,144		2,053
United Kingdom		521		517
China		15		—
Japan		1,440		—

	$	29,661	$	32,016

The Company had no customers comprising more than 10% of sales for the fiscal year 2004 or 2003. The Company had one customer comprising 24.5% of annual sales for the fiscal year 2002.

During the fiscal year ended September 30, 2002, the Company 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, the Company recognized $15.8 million of revenues in its fiscal year ended

F-27

OYO Geospace Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

September 30, 2002 and $2.5 million of revenues in its fiscal year ended September 30, 2003. Due to the system’s continued successful performance through December 31, 2003, the Company earned a $3.6 million performance bonus payment, which was recognized as revenue in fiscal year 2004. The Company has agreed to extend its standard product warranty for certain components of the system until 2006.

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 the Former Primary Film Supplier).

Shortly thereafter, the Former Primary Film Supplier ceased providing the Company with dry thermal film. As a result, the Company is currently purchasing a large quantity of dry thermal film from an alternative film supplier (the “Other Film Supplier”), and it 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 $1.2 million charge in its third quarter of fiscal year 2002 due to the ultimate uncertainty of realization of value on certain assets, particularly certain prepaid purchase benefits and other benefits under the amended supply contract with the Former Primary Film Supplier. The Company does not believe there has been any impairment in the value of the intellectual property it acquired from the Former Primary Film Supplier because of its ability to utilize the intellectual property to have thermal film manufactured either internally or elsewhere.

On December 10, 2002, the Company received a notice of claim, in connection with the Former Primary Film Supplier’s bankruptcy, for alleged preferential payments made by the Former Primary Film Supplier to it in the period before filing of the bankruptcy proceeding in the approximate amount of $259,000. On July 7, 2004, an amended claim was filed against the Company and the amount of the alleged preferential payments made by the Former Primary Film Supplier was increased to approximately $895,000. 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 Former Primary Film Supplier and it 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 its relationship with the 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 a provision for the initial claim made by the Former Primary Film Supplier and it believes that such provision is adequate at this time, although it is unable to make such predictions with any certainty.

F-28

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 2004 and 2003 (in thousands, except per share amounts).


	2004
	Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Net sales	$	15,915		$	13,945		$	16,320		$	17,358
Gross profit		4,466			4,548			5,594			8,143
Income from operations		222			801			1,352			3,496
Other income (expense), net		104			(111	)		71			(3	)
Net income		510			1,084			1,191			3,168

Basic earnings per share	$	0.09		$	0.19		$	0.21		$	0.57

Diluted earnings per share	$	0.09		$	0.19		$	0.21		$	0.56


	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		57			88			(72	)		(4	)
Net income (loss)		(494	)		(759	)		38			(1,318	)

Basic earnings (loss) per share	$	(0.09	)	$	(0.14	)	$	0.01		$	(0.24	)

Diluted earnings (loss) per share	$	(0.09	)	$	(0.14	)	$	0.01		$	(0.24	)

F-29

Schedule II

OYO Geospace Corporation and Subsidiaries

Valuation and Qualifying Accounts

(In Thousands)


	Balance at Beginning of Period		Charged to Costs And Expenses		Charged to Other Assets		(Deductions) And Additions			Balance at End of Period
Year ended September 30, 2004
Allowance for doubtful accounts on accounts and notes receivable	$	478	$	145	$	—	$	66		$	689

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


	Balance at Beginning of Period		Charged to Costs And Expenses		Charged to Other Assets		(Deductions)			Balance at End Of Period
Year ended September 30, 2004
Inventory obsolescence reserve	$	1,053	$	663	$	—	$	(84	)	$	1,632

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

F-30

EX-10.11 2 dex1011.htm BUSINESS LOAN AGREEMENT DATED NOVEMBER 22, 2004 Business Loan Agreement dated November 22, 2004

Exhibit 10.11

LOAN AGREEMENT

THIS LOAN AGREEMENT, dated as of November 22, 2004 (this “Agreement”), 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 (“Geospace”), OYO INSTRUMENTS, LP, a Texas limited partnership (“Instruments”), and OYOG OPERATIONS, LP, a Texas limited partnership (“Operations”, and together with Concord, Engineering, Geospace and Instruments, the “Borrowers”), jointly and severally, and UNION PLANTERS BANK, N.A., a national banking association (“Lender”).

R E C I T A L S :

Borrowers have requested that Lender extend credit to Borrowers in the form of a revolving line of credit in the amount of $15,000,000.00 under which Borrowers may request (i) advances and (ii) letters of credit. Lender is willing to make such extensions of credit to Borrowers upon the terms and conditions hereinafter set forth.

NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows:

ARTICLE I.

Definitions

Section 1.1. Definitions. As used in this Agreement, the following terms have the following meanings:

“Advance” means an advance of funds by Lender to Borrowers pursuant to Article II.

“Advance Request Form” means a certificate, in substantially the form of Exhibit “K” hereto, properly completed and signed by an Authorized Representative requesting an Advance.

“Affiliate” means, with respect to any Person, any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, including, (a) any Person which beneficially owns or holds ten percent (10%) or more of any class of voting stock of such Person or ten percent (10%) or more of the equity interest in such Person, (b) any Person of which such Person beneficially owns or holds ten percent (10%) or more of any class of voting

shares or in which such Person beneficially owns or holds ten percent (10%) or more of the equity interests in such Person, and (c) any officer or director of such Person.

“Applicable Margin” means, for the Levels described below, the percentage amounts set forth below.


	Level I	Level II	Level III
LIBOR Margin	2.00%	1.75%	1.50%
Prime Rate Margin	-0.50%	-0.75%	-1.00%

Level I applies when the Debt Service Coverage Ratio is less than 1.25 to 1.00.

Level II applies when the Debt Service Coverage Ratio is greater than or equal to 1.25 to 1.00 but less than 1.75 to 1.00.

Level III applies when the Debt Service Coverage Ratio is greater than or equal to 1.75 to 1.00.

The applicable Level shall be adjusted, to the extent applicable, effective and applicable sixty (60) days after the end of each quarter (or, in the case of any change reflected by the audited financial statements delivered pursuant to Section 7.1(a), one hundred twenty (120) days after the end of any fiscal year) based on the Debt Service Coverage Ratio tested for the period ending on the last day of such quarter or such fiscal year, as applicable; provided that if Borrowers fail to deliver the financial statements required by Section 7.1(a) or (b), as applicable, or the related No Default Certificate required by Section 7.1(c) by the sixtieth (60th) day after the end of any quarter (or, if applicable, the one hundred twentieth (120^th) day after the end of any fiscal year) Level I shall apply until such financial statements and No Default Certificate are delivered.

“Applicable Rate” means (a) during the period that an Advance is a Prime Rate Advance, the sum of the Prime Rate and the Prime Rate Margin from time to time in effect, and (b) during the period that an Advance is a LIBOR Advance, the sum of the LIBOR Rate and the LIBOR Margin from time to time in effect.

“Authorized Representative” means any officer or employee of Borrowers who has been designated in writing by Borrowers to Lender to be an Authorized Representative.

“Autopay Agreement” means that portion of the treasury management services agreements between Operations (and/or other Borrowers) and Lender,

which provides for the daily application of funds in the Deposit Account to the payment of the Advances and which may provide for the making of an Advance by writing a check on the Deposit Account.

“Borrowing Base” means, at any particular time, an amount equal to the sum of (a) eighty percent (80%) of Eligible Accounts, plus (b) fifty percent (50%) of Eligible Inventory, plus (c) eighty percent (80%) of Eligible Notes; provided, however, that the Eligible Inventory component of the Borrowing Base shall at no time be greater than fifty percent (50%) of the total Borrowing Base.

“Borrowing Base Certificate” means a certificate in the form of Exhibit “L” hereto, fully completed and executed by Borrowers.

“Business Day” means any day on which commercial banks are not authorized or required to close in Houston, Texas.

“Capital Lease Obligations” means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property, which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP.

“Closing Date” means the date on which this Agreement has been executed and delivered by the parties hereto and the conditions set forth in Section 5.1 have been satisfied.

“Collateral” has the meaning specified in Section 4.1.

“Commitment” means the obligation of Lender to make Advances and issue Letters of Credit hereunder in an aggregate principal amount at any time outstanding up to but not exceeding $15,000,000.00.

“Concord” has the meaning given to such term in the first paragraph of this Agreement.

“Continue”, “Continuation” and “Continued” shall refer to continuation pursuant to Section 3.7 of an Advance as an Advance of the same Type from one Interest Period to the next Interest Period.

“Contribution Agreement” means the Contribution Agreement executed by Guarantors in substantially the form of Exhibit “J” hereto, as the same may be amended, supplemented, or modified.

“Convert”, “Conversion” and “Converted” shall refer to a conversion pursuant to Section 3.7 or 3.8 of one Type of Advance into another Type of Advance.

“Current Assets” means, at any particular time, all amounts which, in conformity with GAAP, would be included as current assets on a consolidated balance sheet of Parent and its Subsidiaries.

“Current Liabilities” means, at any particular time, all amounts which, in conformity with GAAP, would be included as current liabilities on a consolidated balance sheet of Parent and its Subsidiaries.

“Current Maturities of Long Term Debt” means for Parent and its Subsidiaries, on a consolidated basis, the principal amount due and payable during the next succeeding twelve month period on Debt of Parent and its Subsidiaries for borrowed money which has a final maturity more than twelve months from the date of calculation.

“Current Ratio” means the ratio of Current Assets to Current Liabilities.

“Debt” means for any Person, without duplication, (a) all indebtedness, whether or not represented by bonds, debentures, notes, securities, or other evidences of indebtedness, for the repayment of money borrowed, (b) all indebtedness representing deferred payment of the purchase price of property or assets (other than trade payables), (c) all Capital Lease Obligations, (d) all indebtedness under guaranties, endorsements, assumptions, or other contingent obligations, in respect of, or to purchase or otherwise acquire, indebtedness of others, (e) all indebtedness secured by a Lien existing on property owned, subject to such Lien, whether or not the indebtedness secured thereby shall have been assumed by the owner thereof, and (f) any obligation to redeem or repurchase any of such Person’s capital stock, warrants, or stock equivalents.

“Debt Service Coverage Ratio” means for Parent and its Subsidiaries, on a consolidated basis, as of any date (a) EBITDA for the period ended as of such date, divided by the sum of (b) Current Maturities of Long Term Debt as of such date, plus Interest Expense for the period ended as of such date. The Debt Service Coverage Ratio shall be calculated and tested as of the last day of each fiscal quarter of Parent on a cumulative basis for the four quarters ended as of such date.

“Default Rate” means a per annum rate of interest equal to the lesser of (a) the sum of the Prime Rate then in effect from day to day plus two percent (2.0%), but not less than seven percent (7.0%) per annum, or (b) the Maximum Rate.

“Deposit Account” means the depository account of Operations designated in the treasury management services agreement between Operations (and/or any other Borrower) and Lender as the account into which the proceeds of the Lockbox are to be deposited.

“Dollar,” “Dollars” and “$” means currency of the United States of America which is at the time of payment legal tender for the payment of public and private debts in the United States of America.

“Domestic Receivables” means accounts receivable of any Borrower which are owed by a Person that is a citizen of or organized under the laws of the United States of America or any State thereof and are not owed by a Foreign Person.

“EBITDA” means for Parent and its Subsidiaries, on a consolidated basis for any period, the sum of (a) Net Income for such period, plus (b) without duplication and to the extent deducted in determining such Net Income (i) depreciation and amortization for such period, plus (ii) Interest Expense for such period, plus (iii) Income Tax Expense for such period, plus (iv) non-cash charges for such period.

“Eligible Accounts” means the aggregate of all accounts receivable of Borrowers that satisfy the following conditions: (a) are due and payable within thirty (30) days; (b) have been outstanding less than one hundred twenty (120) days past the original date of invoice; (c) have arisen in the ordinary course of business from services performed by any Borrower to or for the account debtor or from the sale, lease or rental by any Borrower of goods in which one or more Borrowers had sole ownership where such goods have been shipped or delivered to the account debtor; (d) represent complete bona fide transactions which require no further act under any circumstances on the part of any Borrower to make such accounts receivable payable by the account debtor; (e) the goods the sale of which gave rise to such accounts receivable were shipped or delivered to the account debtor on an absolute sale basis and not on consignment, a sale or return basis, a guaranteed sale basis, a bill and hold basis, or on the basis of any similar understanding; (f) the goods the sale, lease or rental of which gave rise to such accounts receivable were not, at the time of sale thereof, subject to any Lien, except the security interest in favor of Lender created by the Loan Documents; (g) are not subject to any provisions prohibiting assignment or requiring notice of or consent to such assignment; (h) are subject to a perfected, first priority security interest in favor of Lender and are not subject to any other Lien; (i) are not subject to setoff, counterclaim, defense, allowance, dispute, or adjustment other than normal discounts for prompt payment, and the goods of sale, lease or rental which gave rise to such accounts receivable have not been returned, rejected, repossessed, lost, or damaged; (j) the account debtor is not insolvent or the subject of any bankruptcy or insolvency proceeding and has not made an assignment for the benefit of creditors, suspended normal business operations,

dissolved, liquidated, terminated its existence, ceased to pay its debts as they become due, or suffered a receiver or trustee to be appointed for any of its assets or affairs; (k) are not evidenced by chattel paper or any instrument of any kind; (l) are Domestic Receivables or are Foreign Receivables and Lender has not delivered to any Borrower notice that either (i) such Foreign Receivables do not constitute Eligible Accounts or (ii) the accounts receivable of the Foreign Person who is the account debtor with respect to such Foreign Receivables do not constitute Eligible Accounts; (m) for accounts receivable which are owed by the United States of America or any department, agency, or instrumentality thereof, the Federal Assignment of Claims Act shall have been complied with; and (n) are not owed by an Affiliate of any Borrower other than OYO Japan. No account receivable owed by an account debtor to any Borrower shall be included as an Eligible Account if more than twenty percent (20%) of the balances then outstanding on accounts receivable owed by such account debtor and its affiliates to Borrowers have remained unpaid for more than one hundred nineteen (119) days from the dates of their original invoices. The amount of any Eligible Accounts owed by an account debtor to Borrowers shall be reduced by the amount of all “contra accounts” and other obligations owed by any Borrower to such account debtor. In the event that at any time the accounts receivable from any account debtor and its affiliates to Borrowers exceed twenty percent (20%) of the accounts receivable of Borrowers, the accounts receivable from such account debtor and its affiliates shall not constitute Eligible Accounts to the extent to which such accounts receivable exceed twenty percent (20%) of the accounts receivable of Borrowers; provided, however, that with respect to Persons which have been specifically approved by Lender, the twenty percent (20%) limitation contained in this sentence shall be a fifty percent (50%) limitation.

“Eligible Inventory” means, at any time, all inventory of raw materials, and finished goods then owned by (and in the possession or under the control of) any Borrower, located in the State of Texas, and held for sale or disposition in the ordinary course of any Borrower’s business, in which Lender has a perfected, first priority security interest, valued at the lower of actual cost or fair market value. Eligible Inventory shall not include (a) inventory consisting of work-in-process, (b) inventory that has been shipped or delivered to a customer on consignment, a sale or return basis, or on the basis of any similar understanding (c) inventory with respect to which a claim exists disputing any Borrower’s title to or right to possession of such inventory, (d) inventory that is not in good condition or does not comply with any applicable laws, rules, or regulations or the standards imposed by any governmental authority with respect to its manufacture, use, or sale, and (e) inventory that Lender, in its reasonable sole discretion, has determined to be unmarketable.

“Eligible Notes” means promissory notes executed by any Person to evidence such Person’s obligation to pay Borrower for the sale, lease or rental of goods or the provision of services by Borrower to such Person, (a) with respect to

which there is no payment of principal or interest which has been outstanding more than ninety (90) days past the due date thereof and (b) which have been endorsed to Lender (in a manner satisfactory to Lender) and delivered to Lender.

“Engineering” has the meaning given to such term in the first paragraph of this Agreement.

“Environmental Laws” means any and all federal, state and local laws, regulations, and judicially enforceable requirements pertaining to occupational health and safety, or the environment, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. § 9601 et seq., the Resource Conservation and Recovery Act of 1976, 42 U.S.C. § 6901 et seq., the Occupational Safety and Health Act, 29 U.S.C. § 651 et seq., the Clean Water Act, 33 U.S.C. § 1251 et seq., the Toxic Substances Control Act, 15 U.S.C. § 2601 et seq., and all similar laws, regulations, and judicially enforceable requirements of any governmental authority or agency having jurisdiction over any Borrower, any Guarantor or any Subsidiary or any of their respective properties or assets, as such laws, regulations, and judicially enforceable requirements may be amended or supplemented.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations published thereunder.

“Event of Default” has the meaning specified in Section 10.1.

“Field Audits” means audits, verifications and inspections of the accounts receivable and inventory of Borrowers conducted by an independent third Person selected by Lender.

“Foreign Person” any Person organized under the laws of a jurisdiction located outside of the United States of America.

“Foreign Receivables” means accounts receivable of any Borrower which are owed by a Foreign Person.

“GAAP” means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants or in statements of the Financial Accounting Standards Board or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a “consistent basis” when the accounting principles observed in a current period are comparable in all material respects to those accounting principles applied in a preceding period.

“Geospace” has the meaning given to such term in the first paragraph of this Agreement.

“General Partner” means OYOG, LLC, a Delaware limited liability company, and its successors and assigns.

“Guarantors” means General Partner, Limited Partner and Parent.

“Guaranty-General Partner” means the Guaranty Agreement executed by General Partner in favor of Lender in substantially the form of Exhibit “G” hereto, as the same may be amended, supplemented or modified.

“Guaranty-Limited Partner” means the Guaranty Agreement executed by Limited Partner in favor of Lender in substantially the form of Exhibit “H” hereto, as the same may be amended, supplemented or modified.

“Guaranty-Parent” means the Guaranty Agreement executed by Parent in favor of Lender in substantially the form of Exhibit “I” hereto, as the same may be amended, supplemented or modified.

“Guaranty Agreements” means the Guaranty-General Partner, the Guaranty-Limited Partner and the Guaranty-Parent.

“Hazardous Substance” means any substance, product, waste, pollutant, material, chemical, contaminant, constituent, or other material which is or becomes listed or regulated as a hazardous or toxic material under any Environmental Law, including, without limitation, asbestos, petroleum, and polychlorinated biphenyls.

“Income Tax Expense” means for Parent and its Subsidiaries, on a consolidated basis for any period, all income taxes during such period, as determined in accordance with GAAP.

“Instruments” has the meaning given to such term in the first paragraph of this Agreement.

“Interest Expense” means for Parent and its Subsidiaries, on a consolidated basis, for any period, the sum of all interest expense paid or required by its terms to be paid during such period, as determined in accordance with GAAP.

“Interest Period” means with respect to any LIBOR Advance, each period commencing on the date such Advance is made or the date such Advance is Converted from an Advance of another Type or, in the case of each subsequent, successive Interest Period applicable to a LIBOR Advance, each period

commencing on the last day of the immediately preceding Interest Period with respect to such LIBOR Advance, and in each case ending on the numerically corresponding day of the first, second or third month thereafter, as Borrowers may select as provided in Sections 2.5 or 3.7; provided, however, that (a) each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day, (b) any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month in which it would have ended if there were a numerically corresponding day in such calendar month, (c) no Interest Period for any LIBOR Advance may extend beyond the Termination Date (and any proposed LIBOR Advance with an Interest Period which would extend beyond the Termination Date shall be a Prime Rate Advance maturing on the Termination Date), (d) no more than five (5) Interest Periods for the Advances shall be in effect at the same time and (e) no Interest Period shall have a duration of less than thirty (30) days, and, if the Interest Period for any LIBOR Advance would otherwise be a shorter period, such Advance shall be a Prime Rate Advance.

“Letter of Credit” means any letter of credit issued by Lender for the account of Borrowers pursuant to Article II.

“Letter of Credit Liabilities” means, at any time, the aggregate face amounts of all outstanding Letters of Credit.

“LIBOR Advances” means Advances the interest rate on which are determined on the basis of the rates referred to in the definition of “LIBOR Rate”.

“LIBOR Rate” means, for any LIBOR Advance, for any Interest Period therefor, the rate per annum offered for Dollar deposits in an amount comparable to the principal amount of such LIBOR Advance for a period of time equal to such Interest Period as of 11:00 A.M. City of London, England time two (2) London Business Days prior to the first date of such Interest Period as published in the Wall Street Journal (or any successor publication if the Wall Street Journal is no longer published) in the “Money Rates” Section (or such successor section). If a range of such rate is published “LIBOR Rate” shall mean the highest rate in such published range. If such rate is not available in the Wall Street Journal, then such offered rate shall be otherwise independently determined by Lender from an alternate, substantially similar independent source available to Lender and recognized in the banking industry.

“Lien” means any lien, mortgage, security interest, tax lien, financing statement, pledge, charge, hypothecation, assignment, preference, priority, or other encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or title retention agreement), whether arising by contract, operation of law, or otherwise.

“Limited Partner” means OYOG Limited Partner, LLC, a Nevada limited liability company, and its successors and assigns.

“Loan Documents” means this Agreement and all promissory notes, security agreements, deeds of trust, assignments, letters of credit, guaranties, and other instruments, documents, and agreements executed and delivered pursuant to or in connection with this Agreement, as such instruments, documents, and agreements may be amended, modified, renewed, extended, or supplemented.

“Lockbox” means P.O. Box 3049, Houston Texas 77253-3049.

“London Business Day” means any day other than a Saturday, Sunday or a day on which banking institutions are generally authorized or obligated by laws or executive order to close in the City of London, England.

“Material Adverse Effect” means a material adverse effect on (a) the business, operations, property or condition (financial or otherwise) of Parent and its Subsidiaries, taken as a whole, (b) the ability of Borrowers to pay the Obligations or the ability of any Borrower or any Guarantor to perform its respective obligations under this Agreement or any of the other Loan Documents, or (c) the validity or enforceability of this Agreement or any of the other Loan Documents, or the rights or remedies of Lender hereunder or thereunder.

“Maximum Rate” means the maximum rate of nonusurious interest permitted from day to day by applicable law, including Chapter 303 of the Texas Finance Code (the “Code”) (and as the same may be incorporated by reference in other Texas statutes). To the extent that Chapter 303 of the Code is relevant to Lender for the purposes of determining the Maximum Rate, Lender elects to determine such applicable legal rate pursuant to the “weekly ceiling,” from time to time in effect, as referred to and defined in Chapter 303 of the Code; subject, however, to the limitations on such applicable ceiling referred to and defined in the Code, and further subject to any right Lender may have subsequently, under applicable law, to change the method of determining the Maximum Rate.

“Net Income” means, for Parent and its Subsidiaries for any period, the consolidated net income (or loss) of Parent and its Subsidiaries for such period, calculated in accordance with GAAP applied consistently.

“No Default Certificate” means a certificate in the form of Exhibit “M” hereto, fully completed and executed by Borrowers and Parent.

“Note” means the promissory note executed by Borrowers payable to the order of Lender, in substantially the form of Exhibit “A” hereto, and all extensions, renewals, and modifications thereof and all substitutions therefor.

“Obligations” means collectively (a) all obligations, indebtedness, and liabilities of Borrowers to Lender now existing or hereafter arising under this Agreement and the other Loan Documents (including, without limitation, all of Borrowers’ contingent reimbursement obligations in respect of Letters of Credit), and all interest accruing thereon and all attorneys’ fees and other expenses incurred in the enforcement or collection thereof, and (b) the Rate Management Transaction Obligations.

“Operations” has the meaning given to such term in the first paragraph of this Agreement.

“Organizational Documents” means, for any Person, (a) the articles of incorporation and bylaws of such Person if such Person is a corporation, (b) the articles of organization and regulations of such Person if such Person is a limited liability company, (c) the limited partnership agreement of such Person if such Person is a limited partnership, or (d) the documents under which such Person was created and is governed if such Person is not a corporation, limited liability company or limited partnership.

“Parent” means OYO Geospace Corporation, a Delaware corporation, and its successors and assigns.

“Partners” means General Partner and Limited Partner.

“Person” means any individual, corporation, limited liability company, business trust, association, company, partnership, joint venture, governmental authority, or other entity.

“Prime Rate” means, at any time, the rate of interest per annum then most recently published in The Wall Street Journal (or any successor publication if The Wall Street Journal is no longer published) in the “Money Rates” section (or such successor section) as the “Prime Rate.” If a range of prime interest rates per annum is so published, “Prime Rate” shall mean the highest rate per annum in such published range. If the definition of “Prime Rate” is no longer published in The Wall Street Journal (or any successor publication), “Prime Rate” shall mean, at any time, the rate of interest per annum then most recently established by Lender as its prime rate.

“Prime Rate Advances” means Advances that bear interest at rates based upon the Prime Rate.

“Rate Management Transaction” means any transaction (including an agreement with respect thereto) now existing or hereafter entered into between any 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 any Borrower to Lender arising under or in connection with any Rate Management Transaction.

“Ratio of Total Liabilities to Tangible Net Worth” means, as of any date, (a) (i) Total Liabilities minus (ii) Subordinated Debt divided by (b) (i) Tangible Net Worth plus (ii) Subordinated Debt.

“Regulation D” means Regulation D of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented.

“Regulatory Change” means, with respect to Lender, any change after the date of this Agreement in United States federal or state laws or regulations (including Regulation D or the adoption or making after such date of any interpretations, directives, or requests applying to a class of banks including Lender) of or under any United States federal or state laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof.

“Reserve Requirement” means the aggregate maximum reserve percentages (including any marginal, special, supplemental or emergency reserves, and expressed as a decimal) established by the Federal Reserve Board or any other United States banking authority to which Lender is subject for “Eurocurrency Liabilities” (as defined in Regulation D of the Board of Governors of the Federal Reserve System). Such reserve percentages shall include, without limitation, those imposed under Regulation D of the Board of Governors of the Federal Reserve System.

“Security Agreement-Concord” means the Security Agreement executed by Concord in favor of Lender in substantially the form of Exhibit “B” hereto, as the same may be amended, supplemented or modified.

“Security Agreement-Engineering” means the Security Agreement executed by Engineering in favor of Lender in substantially the form of Exhibit “C” hereto, as the same may be amended, supplemented or modified.

“Security Agreement-Geospace” means the Security Agreement executed by Geospace in favor of Lender in substantially the form of Exhibit “D” hereto, as the same may be amended, supplemented or modified.

“Security Agreement-Instruments” means the Security Agreement executed by Instruments in favor of Lender in substantially the form of Exhibit “E” hereto, as the same may be amended, supplemented or modified.

“Security Agreement-Operations” means the Security Agreement executed by Operations in favor of Lender in substantially the form of Exhibit “F” hereto, as the same may be amended, supplemented or modified.

“Security Agreements” means the Security Agreement-Concord, the Security Agreement-Engineering, the Security Agreement-Geospace, the Security Agreement-Instruments and the Security Agreement-Operations.

“Subordinated Debt” means Debt of Parent or any of its Subsidiaries to any Person, the payment of which has been subordinated to the payment of the Obligations in a manner satisfactory to Lender and by a document satisfactory to Lender.

“Subsidiary” means any Person of which or in which Parent and its other Subsidiaries own or control, directly or indirectly, fifty percent (50%) or more of (a) the combined voting power of all classes having general voting power under ordinary circumstances to elect a majority of the directors or equivalent body of such Person, if it is a corporation, (b) the capital interest or profits interest of such Person, if it is a partnership, limited liability company, joint venture or similar entity, or (c) the beneficial interest of such Person, if it is a trust, association or other unincorporated association or organization.

“SWBT” means Southwest Bank of Texas N.A., a national banking association, and its successors and assigns.

“Tangible Net Worth” means, at any particular time, all amounts which, in conformity with GAAP, would be included as stockholders’ equity on a consolidated balance sheet of Parent and its Subsidiaries; provided, however, there shall be excluded therefrom (a) any amount at which shares of capital stock of Parent appear as an asset on Parent’s or any Subsidiary’s balance sheet, (b) goodwill, including any amounts, however designated, that represent the excess of the purchase price paid for assets or stock over the value assigned thereto, (c) patents, trademarks, trade names, and copyrights, (d) deferred expenses,

(e) loans and advances to any stockholder, director, officer, or employee of Parent or any Subsidiary or any Affiliate, and (f) all other assets which are properly classified as intangible assets.

“Termination Date” means 11:00 a.m., Houston, Texas time on November 22, 2007, or such earlier date on which the Commitment terminates as provided in this Agreement.

“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 Parent and its Subsidiaries.

“Type” means the type of Advance (i.e. Prime Rate Advance or LIBOR Advance).

“Unmatured Event of Default” means the occurrence of an event or the existence of a condition which, with the giving of notice or the passage of time would constitute an Event of Default.

Section 1.2. Other Definitional Provisions. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. The words “hereof”, “herein”, and “hereunder” and words of similar import referring to this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all Article and Section references pertain to this Agreement. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. Terms used herein that are defined in the Uniform Commercial Code as adopted by the State of Texas, unless otherwise defined herein, shall have the meanings specified in the Uniform Commercial Code as adopted by the State of Texas.

ARTICLE II.

Advances and Letters of Credit

Section 2.1. Advances. Subject to the terms and conditions of this Agreement, Lender agrees to make one or more Advances to Borrowers from time to time from the date hereof to and including the Termination Date in an aggregate principal amount at any time outstanding up to but not exceeding the Commitment; provided that the aggregate amount of all Advances at any time outstanding shall not exceed the lesser of (a) the Commitment minus the outstanding Letter of Credit Liabilities or (b) the Borrowing Base minus the outstanding Letter of Credit Liabilities. Lender shall have no obligation to make any Advance if an Event of Default or an Unmatured Event of Default has occurred and is continuing. Subject to the foregoing limitations, and the other terms and provisions of this Agreement, Borrowers may borrow, repay, and reborrow hereunder.

Section 2.2. The Note. The obligation of Borrowers to repay the Advances shall be evidenced by the Note executed by Borrowers, payable to the order of Lender, in the principal amount of the Commitment.

Section 2.3. Repayment of Principal and Interest; Extension. (a) Accrued and unpaid interest on the Advances (and, therefore, Note) shall be due and payable as follows:

(i) in the case of each Advance which is a Prime Rate Advance, on the first day of each month, commencing December 1, 2004;

(ii) in the case of each Advance which is a LIBOR Advance, on the last day of each Interest Period therefor;

(iii) upon the payment or prepayment (mandatory or optional) of any Advance or the Conversion of any Advance (but only on the principal amount so paid, prepaid, or Converted); and

(iv) on the Termination Date.

(b) The principal of the Advances shall be due and payable on the Termination Date.

(c) Prior to the Termination Date, Lender will review such matters as it may deem appropriate in its sole discretion and may, in its sole and absolute discretion, determine whether to extend the Termination Date.

Section 2.4. Interest. The unpaid principal amount of the Advances shall bear interest prior to maturity at a varying rate per annum equal from day to day to the lesser of (a) the Maximum Rate or (b) the Applicable Rate in effect from day to day, and each change in the rate of interest charged on the Advances shall become effective, without notice to any Borrower, on the effective date of each change in the Applicable Rate or the Maximum Rate, as the case may be; provided, however, if at any time the rate of interest specified in clause (b) preceding shall exceed the Maximum Rate, thereby causing the interest on the Advances to be limited to the Maximum Rate, then any subsequent reduction in the Applicable Rate shall not reduce the rate of interest on the Advances below the Maximum Rate until the aggregate amount of interest actually accrued on the Advances equals the amount of interest which would have accrued on the Advances if the interest rate specified in clause (b) preceding had at all times been in effect. If an Event of Default has occurred and is continuing, all principal of the Advances shall bear interest at the Default Rate.

Section 2.5. Requests for Advances. (a) As long as the provisions of the Autopay Agreement related to automatic advances are in effect, Advances which are Prime Rate Advances may be made as provided in the Autopay Agreement, and Borrowers shall not be required to request an Advance directly from Lender by means of an Advance Request Form.

(b) The provisions of this paragraph shall apply to all requests for Advances which are to be LIBOR Advances. The provisions of this paragraph shall also apply to Advances which are to be Prime Rate Advances if Borrowers so choose, or if the provisions of the Autopay Agreement related to automatic advances are not in effect, or if the Available Amount (as defined in the Autopay Agreement) is, or has been declared to be, equal to zero. Borrowers shall request each Advance by delivering to Lender an Advance Request Form (i) stating the amount of the Advance, (ii) stating the date on which Borrowers desire that the Advance be funded (provided that without any date specified, an Advance that is to be a Prime Rate Advance shall be funded on the next Business Day and an Advance that is to be a LIBOR Advance shall be funded on the succeeding third Business Day following such Advance Request Form), (iii) stating the Type of the Advance, and (iv) if such Advance is a LIBOR Advance, designating the Interest Period thereof. Such documents shall be delivered to Lender at least (i) one (1) Business Day before the date on which Borrowers desire that the Advance be funded in the case of each Advance which is to be a Prime Rate Advance and (ii) at least three (3) Business Days before the date on which Borrowers desire that the Advance be funded in the case of each Advance which is to be a LIBOR Advance; provided that no Advance which is a LIBOR Advance may be in an amount which is less that $500,000.00. Borrowers at any time may redesignate the amounts of, and Convert and Continue the Advances, but only to be effective from and after the end of the Interest Period therefor if an Advance is to be Continued as, or Converted from, a LIBOR Advance, and subject to the terms and provisions of this Agreement, including Sections 3.7, 3.8 and 3.9 hereof. Prior to making any Advance, Lender may require that Borrowers deliver a Borrowing Base Certificate dated a recent date acceptable to Lender evidencing that the amount of the outstanding Advances plus the requested Advance plus the Letter of Credit Liabilities is less than the lesser of (i) the Commitment or (ii) the Borrowing Base.

Section 2.6. Use of Proceeds. The proceeds of Advances shall be used to refinance existing indebtedness, for working capital purposes and for general corporate purposes.

Section 2.7. Mandatory Prepayment. If at any time the outstanding principal amount of the Advances plus the Letter of Credit Liabilities exceeds the Borrowing Base, Borrowers shall immediately prepay the outstanding Advances by the amount of the excess plus accrued and unpaid interest on the amount so prepaid or, if no (or insufficient) Advances are outstanding, Borrowers shall immediately pledge to Lender cash or cash equivalent investments in an amount equal to the excess as security for the Letter of Credit Liabilities.

Section 2.8. Letters of Credit. Subject to the terms and conditions of this Agreement, Lender agrees to issue one or more Letters of Credit for the account of Borrowers from time to time from the date hereof to and including the Termination Date;

provided, however, that the outstanding Letter of Credit Liabilities shall not at any time exceed the lesser of (a) the Commitment minus the outstanding Advances, or (c) the Borrowing Base minus the outstanding Advances. Each Letter of Credit shall have an expiration date which shall not be more than one year after the Termination Date. Each Letter of Credit shall be payable in United States dollars, shall support a transaction that is entered into in the ordinary course of any Borrower’s business, and shall otherwise be satisfactory in form and substance to Lender. No Letter of Credit shall require any payment by Lender to the beneficiary thereunder pursuant to a drawing prior to the end of the Business Day next following presentment of a draft and any related documents to Lender. Notwithstanding any provision of this Agreement to the contrary, in the event that any Borrower should request that Lender issue, and Lender should issue, a letter of credit, the face amount of which is fully secured by cash or cash equivalent securities acceptable to Lender, such letter of credit shall not constitute a Letter of Credit under this Agreement.

Section 2.9. Procedure for Issuing Letters of Credit; Fully Cash Secured Letters of Credit. Each Letter of Credit shall be issued upon receipt by Lender of written notice from an Authorized Representative requesting the issuance of such Letter of Credit, which notice shall be received by Lender at least three (3) Business Days prior to the requested date of issuance of such Letter of Credit. Such notice shall be accompanied by Lender’s standard application for issuance of Letters of Credit (commercial or standby) as then in effect and such other documents and instruments as Lender may require. Such notice and application (both front and back sides) may be sent by fax, provided that Borrowers hold Lender harmless with respect to actions taken by Lender based upon notices and applications sent by fax. Each request for a Letter of Credit shall constitute a representation by Borrowers to Lender as to each of the matters set forth in the Borrowing Base Certificate, including representations that (a) the sum of (i) the outstanding Advances plus (ii) the Letter of Credit Liabilities plus (iii) the face amount of the requested Letter of Credit does not exceed the lesser of the Borrowing Base or the Commitment, and (b) no Event of Default exists. Prior to Issuing any Letter of Credit, Lender may request a Borrowing Base Certificate from Borrowers dated of a recent date acceptable to Lender evidencing that the statements contained in the preceding sentence are correct.

Section 2.10. Payments Constitute Advances. Each payment by Lender pursuant to a drawing under a Letter of Credit shall constitute and be deemed an Advance by Lender to Borrowers under the Note and this Agreement as of the day and time such payment is made by Lender and in the amount of such payment.

Section 2.11. Letter of Credit Fees. Borrowers shall pay to Lender a letter of credit fee payable on the date each Letter of Credit is issued in an amount equal to the greater of (a) one percent (1.0%) per annum of the stated amount of such Letter of Credit for the period during which such Letter of Credit will remain outstanding, based on a 360 day year and the actual number of days to elapse, and (b) $250.00. In addition, Borrowers shall pay to Lender (a) at the time of issuance of any Letter of Credit, all out-of-pocket

costs incurred by Lender in connection with the issuance of such Letter of Credit (b) upon the payment of any Letter of Credit, all applicable payment fees, and (c) upon the amendment (including the extension) of any Letter of Credit, all applicable amendment fees.

Section 2.12. Obligations Absolute. The obligations of Borrowers under this Agreement and the other Loan Documents, including without limitation the obligation of Borrowers to reimburse Lender for payment of drawings under any Letter of Credit, shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and the other Loan Documents under all circumstances, including (a) any lack of validity or enforceability of any Letter of Credit or any other Loan Document, (b) the existence of any claim, set-off, counterclaim, defense or other rights which any Borrower, any Obligated Party or any other Person may have at any time against any beneficiary of any Letter of Credit, Lender, or any other Person, whether in connection with this Agreement or any other Loan Document or any unrelated transaction, (c) if any statement, draft or other document presented under any Letter of Credit proves to be forged, fraudulent, invalid or insufficient in any respect or any statement therein is untrue or inaccurate in any respect whatsoever, (d) payment by Lender under any Letter of Credit against presentation of a draft or other document which does not comply with the terms of such Letter of Credit in a manner which is not material (but which in any event complies with the requirements of Section 5.108(a) of the Texas Uniform Commercial Code), (e) any amendment or waiver of, or any consent to departure from, any Loan Document or (f) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing.

Section 2.13. Limitation of Liability. Borrowers assume all risks of the acts or omissions of any beneficiary of any Letter of Credit with respect to its use of such Letter of Credit. Neither Lender or any of its officers, employees or directors shall have any responsibility or liability to any Borrower or any other Person for (a) the failure of any draft to bear any reference or adequate reference to any Letter of Credit, or the failure of any documents to accompany any draft at negotiation (provided such documents are otherwise timely presented), or the failure of any Person to surrender or to take up any Letter of Credit or to send documents apart from drafts as required by the terms of any Letter of Credit (provided such documents are otherwise timely presented), or the failure of any Person to note the amount of any instrument on any Letter of Credit, each of which requirements, if contained in any Letter of Credit itself, it is agreed may be waived by Lender, (b) errors, omissions, interruptions or delays in transmission or delivery of any messages, (c) the validity, sufficiency or genuineness of any draft or other document, or any endorsement thereon, even if any such draft, document or endorsement should in fact prove to be in any and all respects invalid, insufficient, fraudulent or forged or any statement therein is untrue or inaccurate in any respect or (d) payment by Lender to the beneficiary of any Letter of Credit against presentation of any draft or other document that does not comply with the terms of the Letter of Credit in a respect which is not material (but which in any event complies with the requirement of Section 5.108(a) of the Texas Uniform Commercial Code). Lender may accept documents that appear on their face to

be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. Notwithstanding the foregoing, Lender shall be liable to Borrowers to the extent of any direct, but not consequential, damages suffered by Borrowers which Borrowers prove in a final nonappealable judgment were caused by (i) Lender’s willful misconduct or negligence in determining whether documents presented under any Letter of Credit complied with the terms thereof or (ii) Lender’s willful failure to pay under any Letter of Credit after presentation to it of documents strictly complying with the terms and conditions of such Letter of Credit.

Section 2.14. Cash Deposit Prior to Termination Date. If Letters of Credit are to be outstanding after the Termination Date, not later than five (5) Business Days prior to the Termination Date, Borrowers will deposit with Lender cash, or pledge to Lender (in an manner satisfactory to Lender) cash equivalent investments or other collateral acceptable to Lender, or a combination thereof, in an amount equal to the sum of the face amounts of the Letters of Credit which will remain outstanding after the Termination Date.

Section 2.15. Provisions Regarding Electronic Issuance of Letters of Credit. Lender may adopt procedures pursuant to which Borrowers may request the issuance of Letters of Credit by electronic means and Lender may issue Letters of Credit based on such electronic requests. Such procedures may include the entering by Borrowers into the Letter of Credit Applications electronically. All the procedures, actions and documents referred to in the two preceding sentences are referred to as “Electronic Applications”. Subject in all respects to the provisions of Sections 2.12 and 2.13 hereof, Borrowers hold Lender harmless with respect to actions taken by Lender based upon Electronic Applications. Subject in all respects to the provisions of Sections 2.12 and 2.13 hereof (which provisions shall control and be given effect over any conflicting or inconsistent provisions contained in any Letter of Credit Application), Borrowers further agree to be bound by all the terms and provisions contained in the Letter of Credit Applications, including, without limitation, the terms and provisions of the Letter of Credit Applications contained on the reverse side of the paper copies thereof, including the release and indemnification provisions contained therein.

ARTICLE III.

Payments

Section 3.1. Method of Payment. All payments of principal, interest, and other amounts to be made by Borrowers under this Agreement, the Note or any other Loan Documents shall be made to Lender at its designated office, without setoff, deduction, or counterclaim in immediately available funds. Whenever any payment under this Agreement, the Note or any other Loan Document shall be stated to be due on a day that is not a Business Day, such payment may be made on the next Business Day, and interest shall continue to accrue during such extension.

Section 3.2. Voluntary Prepayment. Borrowers may prepay the Note in whole at any time or from time to time in part without premium or penalty but with accrued interest to the date of prepayment on the amount so prepaid.

Section 3.3. Computation of Interest. Interest on the indebtedness evidenced by the Note shall be computed on the basis of a year of 365 or 366 days, as the case may be, and the actual number of days elapsed (including the first day but excluding the last day).

Section 3.4. Additional Costs in Respect of Letters of Credit. If as a result of any Regulatory Change there shall be imposed, modified, or deemed applicable any tax, reserve, special deposit, or similar requirement against or with respect to or measured by reference to Letters of Credit issued or to be issued hereunder or Lender’s commitment to issue Letters of Credit hereunder, and the result shall be to increase the cost to Lender of issuing or maintaining any Letter of Credit or its commitment to issue Letters of Credit hereunder or reduce any amount receivable by Lender hereunder in respect of any Letter of Credit (which increase in cost, or reduction in amount receivable, shall be the result of Lender’s reasonable allocation of the aggregate of such increases or reductions resulting from such event), then, upon demand by Lender, Borrowers agree to pay to Lender from time to time as specified by Lender, such additional amounts as shall be sufficient to compensate Lender for such increased costs or reductions in amount. A statement in reasonable detail as to such increased costs or reductions in amount incurred by Lender, submitted by Lender to Borrowers, shall be conclusive as to the amount thereof, provided that the determination thereof is made on a reasonable basis.

Section 3.5. Joint and Several Obligations. The obligations of Borrowers under this Agreement shall be joint and several in all respects.

Section 3.6. Subrogation and Contribution. (a) If any Borrower makes a payment in respect of the Obligations, it shall be subrogated to the rights of Lender (or any other payee) against the other Borrowers, as appropriate, with respect to such payment and shall have the rights of contribution set forth below against the other Borrowers; provided that such Borrower shall not enforce its rights to any payment by way of subrogation or by exercising its rights of contribution until all the Obligations shall have been paid in full and Lender has no Commitment to make Advances or issue Letters of Credit hereunder. If any Borrower makes a payment in respect of the Obligations so that the amount of its then current Net Payments is less than the amount of its then current Contribution Obligation, any Borrower making such proportionately smaller payment shall, when permitted by the preceding sentence, pay to the other Borrowers an amount such that the Net Payments made by the Borrowers in respect of the Obligations shall be shared among the Borrowers pro rata in proportion to their respective Contribution Percentage. If any Borrower receives any payment by way of subrogation or contribution so that the amount of its then current Net Payments is greater than the amount of its then current Contribution Obligation, the Borrower receiving such proportionately greater payment shall, when permitted by the second preceding sentence, pay to the other Borrowers an

amount such that the Net Payments received by the Borrowers shall be shared among the Borrowers pro rata in proportion to their respective Contribution Percentage. If any Borrower makes a payment in respect of the Obligations so that the amount of its then current Net Payments is greater than the amount of its then current Contribution Obligation, any Borrower making such proportionately larger payment shall, when permitted by the third preceding sentence, receive from the other Borrowers an amount such that the Net Payments made by the Borrowers in respect of the Obligations shall be shared amount the Borrowers pro rata in proportion to their respective Contribution Percentage, unless otherwise agreed to by the Borrowers.

(b) As used in this Section 3.6, the term “Contribution Obligation” shall mean an amount equal, at any time and from time to time and for each respective Borrower, to the product of (i) such Borrower’s Contribution Percentage, times (ii) the sum of all payments made previous to or at the time of calculation by all Borrowers in respect of the Obligations (less the amount of any such payments previously returned to any Borrower by operation of law or otherwise, but not including payments received by any Borrower by way of its rights of subrogation and contribution hereunder). Notwithstanding anything to the contrary contained in this Section or in this Agreement, no liability or obligation of any Borrower that shall accrue pursuant to this Agreement shall be paid nor shall it be deemed owed pursuant to this Agreement until all of the Obligations shall be paid in full and Lender shall have no Commitment to make Advances or issue Letter of Credit hereunder.

(c) As used in this Section 3.6, the term “Net Payments” shall mean an amount equal, at any time and from time to time and for each respective Borrower, to the difference of (i) the sum of all payments made previous to or at the time of calculation by such Borrower in respect of the Obligations and in respect of its obligations contained in this Agreement, less (ii) the sum of all such payments previously returned to such Borrower by operation of law or otherwise and including payments received by such Borrower by way of its rights of subrogation and contribution hereunder.

(d) As used in this Section 3.6, the term “Contribution Percentage” shall mean, for any applicable date as of which such percentage is being determined an amount equal to the quotient of (i) the Net Worth of such Borrower as of such date, divided by (ii) the sum of the Net Worth of all the Borrowers as of such date.

(e) As used herein, the term “Net Worth” shall mean for any Borrower, calculated on and as of any applicable date on which such amount is being determined, the difference between (i) the sum of all such Borrower’s property (other than its equity interest in another Borrower, at a fair valuation as of such date, minus (ii) the sum of all such Borrower’s debts, at a fair valuation as of such date excluding the Obligations.

Section 3.7. Conversions and Continuations. Borrowers shall have the right from time to time to Convert any Advance from one Type of Advance into another Type of Advance or to Continue any LIBOR Advance as a LIBOR Advance by giving Lender

written notice at least one (1) Business Day before Conversion into a Prime Rate Advance and at least three (3) Business Days before Conversion into or Continuation of a LIBOR Advance, specifying (a) the Conversion or Continuation date, and (b) in the case of Conversions, the Type of Advance to be Converted into; provided that (w) no more than five (5) Interest Periods may be in effect for the LIBOR Advances at any time, (x) no LIBOR Advance may be in an amount which is less than $500,000.00, (y) a LIBOR Advance may only be Converted on the last day of the Interest Period therefor, and (z) except for Conversions to Prime Rate Advances, Lender shall have no obligation to make any Conversions while an Event of Default has occurred and is continuing. All notices under this Section shall be irrevocable and shall be given not later than 11:00 A.M. Houston, Texas time on the day which is not less than the number of Business Days specified above for such notice. If Borrowers shall fail to give Lender the notice specified above for Continuation or Conversion of any LIBOR Advance prior to the end of the Interest Period with respect thereto, such LIBOR Advance shall automatically be Converted into a Prime Rate Advance on the last day of such Interest Period.

Section 3.8. Illegality, Impossibility, Regulatory Change and Compensation. In the event that (a) it becomes unlawful for Lender to honor its obligation to make LIBOR Advances hereunder or to maintain LIBOR Advances hereunder, (b) Lender determines that (i) quotations of interest rates for the relevant deposits referred to in the definition of “LIBOR Rate” are not being provided in the relative amounts or for the relative maturities for determining the interest rates borne by the LIBOR Advances as provided in this Agreement or (ii) such quotations do not accurately reflect Lender’s costs in connection therewith, or (c) a Regulatory Change (including the imposition of a Reserve Requirement) occurs which changes Lender’s basis of taxation with respect to LIBOR Advances or imposes reserve, capital or other requirements with respect thereto, then Lender shall notify Borrowers of any such event. Following such notice, upon written notice to Borrowers showing the computation of such amounts in reasonable detail, Borrowers shall promptly pay to Lender such amounts as Lender may determine (which determination shall be conclusive provided such determination is made on a reasonable basis) to be necessary to compensate Lender for any increased costs incurred by Lender after such notice or decreases in amounts receivable by Lender after such notice which Lender determines are attributable to any event described in clauses (a), (b) or (c) above. For so long as such event or circumstance shall continue in effect, the obligation of Lender to make or Continue LIBOR Advances or to Convert Prime Rate Advances to LIBOR Advances shall terminate, and (i) all future Advances shall be Prime Rate Advances and (ii) all outstanding Advances which are LIBOR Advances shall be Converted to Prime Rate Advances on the last day of the current Interest Period therefor.

Section 3.9. Compensation for Prepayment or Failure to Borrow. Upon (a) any prepayment or Conversion of any LIBOR Advance on a day other than the last day of an Interest Period therefor or (b) the failure by Borrowers to borrow as provided in an Advance Request Form delivered to Lender, Convert or prepay a LIBOR Advance on any date required hereby, Borrowers shall pay to Lender a fee in an amount reasonably determined by Lender equal to funding losses actually incurred by Lender as a result of

such event, but not more than one percent (1.00%) of the principal amount of the Advance times a fraction, the numerator of which is the number of days remaining in the Interest Period and the denominator of which is 365.

ARTICLE IV.

Collateral

Section 4.1. Collateral. To secure full and complete payment and performance of the Obligations, Borrowers shall execute and deliver or cause to be executed and delivered the documents described below covering the property and collateral described therein and in this Section 4.1 (which, together with any other property and collateral which may now or hereafter secure the Obligations or any part thereof, is sometimes herein called the “Collateral”):

(a) Each Borrower shall grant to Lender a first priority security interest in all of its accounts, accounts receivable, general intangibles (but excluding patents, trademarks, trade names and other intellectual property), inventory, chattel paper, documents, instruments, deposit accounts and all investment property, cash and financial assets arising therefrom, whether now owned or hereafter acquired, and all products and proceeds thereof, pursuant to the Security Agreement executed by such Borrower.

(b) Borrower shall execute and cause to be executed such further documents and instruments as Lender, in its sole discretion, deems necessary or desirable to evidence and perfect its liens and security interests in the Collateral. Borrower authorizes, directs and permits Lender to file Uniform Commercial Code financing statements with respect to the Collateral in such jurisdictions as Lender may desire.

Section 4.2. Setoff. Upon the occurrence of an Event of Default, Lender shall have the right to set off and apply against the Obligations in such a manner as Lender may determine, at any time and without notice to any Borrower, any and all deposits (general, time or demand, provisional or final) or other sums at any time credited by or owing from Lender to any Borrower whether or not the Obligations are then due. The rights and remedies of Lender hereunder are in addition to other rights and remedies (including, without limitation, to the rights of setoff) which Lender may have.

Section 4.3. Guaranty Agreements. Guarantors shall unconditionally and irrevocably guarantee payment and performance of the Obligations by execution and delivery of the Guaranty Agreements, respectively.

ARTICLE V.

Conditions Precedent

Section 5.1. Initial Extension of Credit. The obligation of Lender to make the initial Advance or issue the initial Letter of Credit is subject to the condition precedent that prior thereto Lender shall have received all of the documents set forth below in form and substance satisfactory to Lender.

(a) Certificate - Each Borrower. For each Borrower, a certificate of an officer of such Borrower acceptable to Lender certifying (i) resolutions of the General Partner which authorize the execution, delivery and performance by such Borrower of this Agreement and the other Loan Documents to which such Borrower is or is to be a party, and (ii) the names of the officers of such Borrower authorized to sign this Agreement and each of the other Loan Documents to which such Borrower is or is to be a party together with specimen signatures of such Persons.

(b) Organizational Documents - Each Borrower. The Limited Partnership Agreement of each Borrower and the Certificate of Limited Partnership of each Borrower certified by an officer of such Borrower acceptable to Lender.

(c) Governmental Certificates - Each Borrower. A certificate issued by the appropriate government official of the state of organization of each Borrower as to the existence of such Borrower.

(d) Certificate - Parent. A certificate of the Secretary or another officer of Parent acceptable to Lender certifying (i) resolutions of the board of directors of Parent which authorize the execution, delivery and performance by Parent of the Guaranty-Parent and the other Loan Documents to which Parent is or is to be a party, and (ii) the names of the officers of Parent authorized to sign the Guaranty-Parent and each of the other Loan Documents to which Parent is or is to be a party together with specimen signatures of such officers.

(e) Organizational Documents - Parent. The articles of incorporation and the bylaws of Parent certified by the Secretary or another officer of Parent acceptable to Lender.

(f) Governmental Certificates - Parent. Certificates issued by the appropriate government officials of (i) the state of incorporation of Parent as to the existence and good standing of Parent and (ii) the state of Texas as to the existence and good standing of Parent as a foreign corporation in such states.

(g) Certificate - Each Partner. A certificate of a Manager or another officer of each Partner acceptable to Lender certifying (i) resolutions of the Members of such Partner which authorize the execution, delivery and performance by such Partner of the Guaranty Agreement to which such Partner is a party and the other Loan Documents to which such Partner is or is to be a party, and (ii) the names of the Managers or other officers of such Partner authorized to sign the Guaranty Agreement to which such Partner is a party and the other Loan Documents to which such Partner is or is to be a party together with specimen signatures of such Persons.

(h) Organizational Documents - Each Partner. The articles of organization and the regulations of each Partner certified by a Manager or another officer of such Partner acceptable to Lender.

(i) Governmental Certificates - Each Partner. Certificates issued by the appropriate government officials of (i) the state of Delaware as to the existence and good standing of General Partner and (ii) the state of Nevada as to the existence and good standing of Limited Partner.

(j) Note. The Note executed by Borrowers.

(k) Security Agreements. The Security Agreements executed by Borrowers, respectively.

(l) Financing Statements. Uniform Commercial Code financing statements showing each Borrower as debtor.

(m) Guaranty Agreements. The Guaranty Agreements executed by Guarantors, respectively.

(n) Contribution Agreement. The Contribution Agreement executed by Borrowers and Guarantors.

(o) Treasury Management Services Agreements. Lender’s treasury management services agreements, including the Autopay Agreement, executed by Operations.

(p) Insurance Policies. Copies of all insurance policies or certificates therefor required by Section 7.5, together with loss payable endorsements in favor of Lender with respect to all insurance policies covering Collateral.

(q) UCC Search. A Uniform Commercial Code search showing all financing statements and other documents or instruments on file against Borrowers in the office of the Secretary of State of Texas.

(r) Attorneys’ Fees and Expenses. Evidence that the costs and expenses (including reasonable attorneys’ fees) referred to in Section 11.1, to the extent incurred, have been paid in full by Borrowers.

(s) Additional Documentation. Such additional approvals, opinions or documents as Lender may reasonably request.

Section 5.2. All Extensions of Credit. The obligation of Lender to make any Advance or issue any Letter of Credit (including the initial Advance and the initial Letter of Credit) is subject to receipt by Lender of the items required by Section 2.5 or 2.9, as applicable, and such additional documents as Lender may reasonably request.

ARTICLE VI.

Representations and Warranties

To induce Lender to enter into this Agreement, each Borrower represents and warrants to Lender that:

Section 6.1. Existence. (a) Each Borrower (i) is duly formed and validly existing under the laws of the State of Texas, (ii) has all requisite power and authority to own its assets and carry on its business as now being or as proposed to be conducted and (iii) is qualified to do business in all jurisdictions where such qualification is required by law and where failure to so qualify might reasonably be expected to have a Material Adverse Effect. Each Borrower has the power and authority to execute, deliver and perform its obligations under this Agreement and the other Loan Documents to which it is or may become a party.

(b) Each Subsidiary (i) is duly organized or formed, validly existing and (if applicable to its type of organization) in good standing under the laws of its jurisdiction of organization, (ii) has all requisite power and authority to own its assets and carry on its business as now being or as proposed to be conducted and (iii) is qualified to do business in all jurisdictions where such qualification is required by law and where failure to so qualify might reasonably be expected to have a Material Adverse Effect.

Section 6.2. Financial Statements. Borrowers have delivered to Lender audited consolidated financial statements of Parent and its Subsidiaries as at and for the fiscal year ended September 30, 2003, and unaudited consolidated financial statements of Parent and its Subsidiaries for the nine (9) month period ended June 30, 2004. Such financial statements are true and correct, have been prepared in accordance with GAAP,

and fairly and accurately present, on a consolidated basis, the consolidated financial condition of Parent and its Subsidiaries as of the respective dates indicated therein and the consolidated results of operations for the respective periods indicated therein. Neither Parent nor any of its Subsidiaries has any material contingent liabilities, liabilities for taxes, material forward or long-term commitments, or unrealized or anticipated losses from any unfavorable commitments not reflected in such financial statements. There has been no Material Adverse Effect since the effective date of the most recent financial statements referred to in this Section.

Section 6.3. Requisite Action; No Breach. The execution, delivery, and performance by each Borrower of this Agreement and the other Loan Documents to which such Borrower is or may become a party have been duly authorized by all requisite action on the part of such Borrower and General Partner and do not and will not violate or conflict with the Organizational Documents of such Borrower or General Partner or any law, rule or regulation or any order, writ, injunction, or decree of any court, governmental authority, or arbitrator, and do not and will not conflict with, result in a breach of, or constitute a default under, or result in the imposition of any Lien (except as provided in this Agreement) upon any of the revenues or assets of such Borrower or any Subsidiary pursuant to the provisions of any indenture, mortgage, deed of trust, security agreement, franchise, permit, license, or other instrument or agreement by which such Borrower or any Subsidiary or any of their respective properties is bound.

Section 6.4. Operation of Business. Each Borrower, each Guarantor and each Subsidiary possess all material licenses, permits, franchises, patents, copyrights, trademarks, and trade names, or rights thereto, to conduct their respective businesses substantially as now conducted and as presently proposed to be conducted.

Section 6.5. Litigation and Judgments. There is no action, suit, investigation, or proceeding before or by any court, governmental authority, or arbitrator pending, or to the knowledge of any Borrower, threatened against or affecting any Borrower, any Guarantor or any Subsidiary, that would, if adversely determined, have a Material Adverse Effect. There are no outstanding judgments against any Borrower, any Guarantor or any Subsidiary.

Section 6.6. Rights in Properties; Liens. Each Borrower, each Guarantor and each Subsidiary have good and indefeasible title to or valid leasehold interests in their respective properties and assets, real and personal, including the properties, assets and leasehold interests reflected in the financial statements described in Section 6.2, and none of the properties, assets or leasehold interests of any Borrower, any Guarantor or any Subsidiary is subject to any Lien, except as permitted by this Agreement.

Section 6.7. Enforceability. This Agreement constitutes, and the other Loan Documents to which each Borrower is party, when delivered, shall constitute the legal, valid, and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms, except as enforceability thereof may be limited by (i) bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditor’s rights and (ii) by general principles of equity.

Section 6.8. Approvals. No authorization, approval, or consent of, and no filing or registration with, any court, governmental authority, or third party is or will be necessary for the execution, delivery, or performance by any Borrower of this Agreement and the other Loan Documents to which any Borrower is or may become a party or the validity or enforceability thereof.

Section 6.9. Debt. Neither any Borrower, any Guarantor nor any Subsidiary has any Debt except Debt to Lender and other Debt permitted pursuant to Section 8.1.

Section 6.10. Use of Proceeds; Margin Securities. Neither any Borrower, any Guarantor nor any Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T, U, or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any extension of credit under this Agreement will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock.

Section 6.11. ERISA. Each Borrower, each Guarantor and each Subsidiary have complied with all applicable minimum funding requirements of Section 302 of ERISA and all applicable and material requirements of Title IV of ERISA, and there are no existing conditions that would give rise to liability thereunder. No Reportable Event (as defined in Section 4043 of ERISA) has occurred in connection with any employee benefit plan that could reasonably be expected to result in the termination thereof by the Pension Benefit Guaranty Corporation or the appointment by the appropriate United States District Court of a trustee to administer such plan.

Section 6.12. Taxes. Each Borrower, each Guarantor and each Subsidiary have filed all tax returns (federal, state, and local) required to be filed, including all income, franchise, employment, property, and sales taxes, and have paid all of their liabilities for taxes, assessments, governmental charges, and other levies that are due and payable, and no Borrower knows of any pending investigation of any Borrower, any Guarantor or any Subsidiary by any taxing authority or of any pending but unassessed tax liability of any Borrower, any Guarantor or any Subsidiary.

Section 6.13. Disclosure. There is no fact known to any Borrower which has a Material Adverse Effect, or which might in the future have a Material Adverse Effect that has not been disclosed in writing to Lender.

Section 6.14. Subsidiaries. Neither any Borrower nor any Guarantor has any Subsidiaries except as shown on the OYO Geospace Corporation Entity Structure Effective September 30, 2004 (the “Corporate Chart”) delivered by Borrowers to Lender. Each Borrower and each Guarantor owns the percentage of ownership interests in its Subsidiaries shown on the Corporate Chart.

Section 6.15. Compliance with Laws. Neither any Borrower, any Guarantor nor any Subsidiary is in violation in any material respect of any law, rule, regulation, order, or decree of any court, governmental authority, or arbitrator. All inventory of Borrowers has been and will hereafter be produced in compliance with all applicable laws, rules, regulations, and governmental standards, including, without limitation, the minimum wage and overtime provisions of the Fair Labor Standards Act, as amended (29 U.S.C. §§ 201-219), and the regulations promulgated thereunder.

Section 6.16. Compliance with Agreements. Neither any Borrower, any Guarantor nor any Subsidiary is in violation in any material respect of any material document, agreement, contract or instrument to which it is a party or by which it or its properties are bound.

Section 6.17. Environmental Matters. Each Borrower, each Guarantor and each Subsidiary, and their respective properties are in compliance with all applicable Environmental Laws and neither any Borrower, any Guarantor nor any Subsidiary is subject to any liability or obligation for remedial action thereunder. There is no pending or, to the knowledge of Borrowers, threatened investigation or inquiry by any governmental authority of any Borrower, any Guarantor or any Subsidiary, or any of their respective properties pertaining to any Hazardous Substance. Except in the ordinary course of business and in material compliance with all Environmental Laws, there are no Hazardous Substances located on or under any of the properties of any Borrower, any Guarantor or any Subsidiary. Except in the ordinary course of business and in material compliance with all Environmental Laws, neither any Borrower, any Guarantor nor any Subsidiary has caused or permitted any Hazardous Substance to be disposed of on or under or released from any of its properties. Each Borrower, each Guarantor and each Subsidiary have obtained all material permits, licenses, and authorizations which are required under and by all Environmental Laws.

Section 6.18. Solvency. Each Borrower and its Subsidiaries, on an individual and a consolidated basis, is not insolvent, each Borrower’s and its Subsidiaries’ assets, on an individual and a consolidated basis, exceed its liabilities, and no Borrower will be rendered insolvent by the execution and performance of this Agreement and the Loan Documents. Each Guarantor and its Subsidiaries, on an individual and a consolidated basis, is not insolvent, each Guarantor’s and its Subsidiaries’ assets, on an individual and a consolidated basis, exceed its liabilities, and no Guarantor will be rendered insolvent by the execution and performance of this Agreement and the Loan Documents.

Section 6.19. Investment Company Act. Neither any Borrower, any Guarantor nor any Subsidiary is an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

Section 6.20. Partners. General Partner owns one percent (1%) of each Borrower and Limited Partner owns ninety-nine percent (99%) of each Borrower.

ARTICLE VII.

Affirmative Covenants

Borrowers covenant and agree that, as long as the Obligations or any part thereof are outstanding or Lender has any Commitment hereunder, Borrowers will perform and observe the covenants set forth below, unless Lender shall otherwise consent in writing.

Section 7.1. Reporting Requirements. Borrowers will deliver to Lender:

(a) Annual Financial Statements - Parent. As soon as available, and in any event within one hundred twenty (120) days after the end of each fiscal year of Parent, beginning with the fiscal year ending September 30, 2004, a copy of the annual audited consolidated financial statements of Parent and its Subsidiaries for such fiscal year on SEC Form 10-K containing, on a consolidated basis, balance sheets, statements of income, statements of stockholders’ equity and statements of cash flows as at the end of such fiscal year and for the 12-month period then ended, in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail, prepared in accordance with GAAP, and audited and certified without qualification by independent certified public accountants of recognized standing acceptable to Lender.

(b) Quarterly Financial Statements - Parent. As soon as available, and in any event within sixty (60) days after the end of each of the first three quarters of each fiscal year of Parent, a copy of the consolidated financial statements of Parent and its Subsidiaries as of the end of such fiscal quarter and for the portion of the fiscal year then ended, on SEC Form 10-Q, containing, on a consolidated basis, balance sheets, statements of income and cash flows in each case setting forth in comparative form the figures for the corresponding period of the preceding fiscal year, all in reasonable detail, prepared in accordance with GAAP and reviewed by independent certified public accountants acceptable to Lender.

(c) No Default Certificate. Together with the financial statements delivered pursuant to Section 7.1(a) and (b), a No Default Certificate as of the last day of the fiscal quarter or year covered by such financial statements, in each case executed by an officer of Parent acceptable to Lender and containing detailed calculations of the covenants contained in Article IX.

(d) Borrowing Base Certificate. As soon as available, and in any event within sixty (60) days after the end of each fiscal quarter of each fiscal year of Borrowers, a Borrowing Base Certificate as of the last day of such fiscal quarter certified by an officer of each Borrower acceptable to Lender.

(e) Quarterly Accounts Receivable Reports. As soon as available, and in any event within sixty (60) days after the end of each fiscal quarter of each fiscal year of Borrowers, aged accounts receivable reports for Borrowers as of the last day of such fiscal quarter certified by an officer of each Borrower acceptable to Lender.

(f) Inventory Report. As soon as available, and in any event within sixty (60) days after the end of each fiscal quarter of each fiscal year of Borrowers, an inventory report as of the end of such fiscal quarter certified by an officer of each Borrower acceptable to Lender.

(g) Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits and proceedings before any court or governmental department, commission, board, agency or instrumentality, domestic or foreign, affecting any Borrower, any Guarantor or any Subsidiary which if concluded adversely to such Person might reasonably be expected to have a Material Adverse Effect.

(h) Judgments. Within five (5) days of the rendering thereof, notice of any judgment against any Borrower, any Guarantor or any Subsidiary in an amount which is more than $25,000.00.

(i) Notice of Default. As soon as possible and in any event within five (5) days after the occurrence of each Event of Default and Unmatured Event of Default, a written notice setting forth the details of such Event of Default or Unmatured Event of Default and the action which Borrowers have taken and propose to take with respect thereto.

(j) Notice of Material Adverse Effect. As soon as possible, an in any event within five (5) days after any Borrower becomes aware thereof, notice of the occurrence of any event or the existence of any condition which might reasonably be expected to have a Material Adverse Effect.

(k) Proxy Statements, Etc. As soon as available, one copy of each financial statement, report, notice or proxy statement sent by Parent or any Subsidiary to its stockholders generally and one copy of each regular, periodic or special report, registration statement, or prospectus filed by Parent or any Subsidiary within any securities exchange or the Securities and Exchange Commission or any successor agency.

(l) General Information. Promptly, such other information concerning any Borrower, any Guarantor or any Subsidiary as Lender may from time to time reasonably request.

Section 7.2. Maintenance of Existence; Conduct of Business. Each Borrower will preserve and maintain, and will cause each Guarantor and each Subsidiary to preserve and maintain, its corporate existence and all of its leases, privileges, licenses, permits, franchises, qualifications and rights that are necessary or desirable in the ordinary conduct of its business.

Section 7.3. Maintenance of Properties. Each Borrower will maintain, and will cause each Guarantor and each Subsidiary to maintain, its assets and properties in good condition and repair, normal wear and tear excepted.

Section 7.4. Taxes and Claims. Each Borrower will pay or discharge, and will cause each Guarantor and each Subsidiary to pay or discharge, at or before maturity or before becoming delinquent (a) all taxes, levies, assessments, and governmental charges imposed on it or its income or profits or any of its property, and (b) all lawful claims for labor, material, and supplies, which, if unpaid, might become a Lien upon any of its property; provided, however, that neither any Borrower, any Guarantor or any Subsidiary shall be required to pay or discharge any tax, levy, assessment, or governmental charge, which is being contested in good faith by appropriate proceedings diligently pursued, and for which adequate reserves have been established to the extent required by GAAP.

Section 7.5. Insurance. Each Borrower will maintain, and will cause each Guarantor and each Subsidiary to 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. Each insurance policy covering Collateral shall name Lender as lender loss payee and provide that such policy will not be cancelled without thirty (30) days prior written notice to Lender.

Section 7.6. Inspection; Field Audits. (a) At any reasonable time and from time to time and upon reasonable prior notice from Lender, each Borrower will permit, and will cause each Guarantor and each Subsidiary to permit, representatives of Lender:

(a) to examine and make copies of the books and records of, and visit and inspect the properties or assets of Borrowers, Guarantors and any Subsidiary and to discuss the business, operations, and financial condition of any such Persons with their respective officers and employees and with their independent certified public accountants, and

(b) to conduct Field Audits; provided that (i) Lender intends to conduct (A) a Field Audit prior to December 31, 2004, and (B) a Field Audit during each calendar year commencing with the calendar year beginning January 1, 2005, and (ii) Borrowers shall pay the cost of each Field Audit up to an amount equal to $3,500.00 per Field Audit.

Section 7.7. Keeping Books and Records. Each Borrower will maintain, and will cause each Guarantor and each Subsidiary to maintain, proper books of record and account in which full, true, and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities.

Section 7.8. Compliance with Laws. Each Borrower will comply, and will cause each Guarantor and each Subsidiary to comply, in all material respects with all applicable laws, rules, regulations, and orders of any court, governmental authority, or arbitrator.

Section 7.9. Compliance with Agreements. Each Borrower will comply, and will cause each Guarantor and each Subsidiary to comply, in all material respects with all material agreements, contracts, and instruments binding on it or affecting its properties or business.

Section 7.10. Further Assurances. Each Borrower will execute and deliver, and will cause each Guarantor and each Subsidiary to execute and deliver, such further instruments as may be reasonably requested by Lender to carry out the provisions and purposes of this Agreement and the other Loan Documents and to preserve and perfect the Liens of Lender in the Collateral.

Section 7.11. ERISA. Each Borrower will comply, and will cause each Guarantor and each Subsidiary to comply, with the minimum funding requirements of Section 302 of ERISA, and all other material requirements of Title IV of ERISA, if applicable, so as not to give rise to any liability thereunder.

Section 7.12. Continuity of Operations. Each Borrower will continue to conduct, and will cause each Guarantor to continue to conduct, its primary businesses as substantially conducted as of the Closing Date and to continue its operations in such businesses.

Section 7.13. Lockbox. (a) Each Borrower will cause the proceeds from the accounts receivable of such Borrower to be remitted by check to the Lockbox or by wire transfer to the Deposit Account. All collected funds with respect to acceptable checks received in the Lockbox shall be deposited into the Deposit Account and applied by Lender to the Obligations as provided in the treasury management services agreements between Lender and Operations (and/or any other Borrower).

(b) Each Borrower hereby pledges and assigns to Lender, and grants to Lender a security interest in, the Deposit Account and in all cash, instruments, securities

and funds on deposit therein, all interest and cash or other property received in connection therewith or in exchange therefor, and all proceeds of all of the above, now or hereafter existing, as additional collateral security for the Obligations.

ARTICLE VIII.

Negative Covenants

Section 8.1. Debt. No Borrower will incur, create, assume or permit to exist, nor will it permit any Guarantor or any Subsidiary to incur, create, assume, or permit to exist, any Debt, except (a) Debt to Lender, (b) Debt of Borrowers, Guarantors and their Subsidiaries in an aggregate principal amount which does not exceed $3,000,000.00 outstanding at any time, (c) Debt described in Schedule 8.1(c), (d) Subordinated Debt, (e) accounts payable in the ordinary course of business, and (f) Debt arising from the endorsement of instruments for collection in the ordinary course of business.

Section 8.2. Limitation on Liens. No Borrower will incur, create, assume or permit to exist, nor will it permit any Guarantor or any Subsidiary to incur, create, assume or permit to exist, any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except (a) Liens in favor of Lender, (b) purchase money Liens securing Debt permitted by Section 8.1(b), which Liens cover only the assets financed with the Debt permitted by Section 8.1(b), but not the Collateral or the machinery, equipment, furniture or fixtures of any Borrower, any Guarantor or any Subsidiary, (c) Liens on real property securing Debt permitted by Section 8.1(c), which Liens cover only the real property financed with the Debt permitted by Section 8.1(c), (d) encumbrances consisting of minor easements, zoning restrictions, or other restrictions on the use of real property that do not (individually or in the aggregate) materially affect the value of the assets encumbered thereby or materially impair the ability of any Borrower, any Guarantor or any Subsidiary to use such assets in its business, and none of which is violated in any material aspect by existing or proposed structures or land use, (e) Liens for taxes, assessments, or other governmental charges which are not delinquent or which are being contested in good faith, and for which adequate reserves have been established, and (f) Liens of mechanics, materialmen, warehousemen, carriers or other similar statutory Liens securing obligations that are not yet due and are incurred in the ordinary course of business.

Section 8.3. Negative Pledge on Equipment. No Borrower will incur, create, assume or permit to exist, nor will it permit any Guarantor or any Subsidiary to, incur, create, assume or permit to exist, any Lien upon any of the machinery and equipment of any Borrower, any Guarantor or any Subsidiary, or any portion thereof, whether now owned or hereafter acquired.

Section 8.4. Mergers, Acquisitions, Dissolutions and Disposition of Assets. No Borrower will, nor will it permit any Guarantor or any Subsidiary to, (a) become a party to a merger, consolidation, joint venture or other business combination (“Merger”) or purchase or otherwise acquire all or a substantial part of the assets of any Person (other than a Borrower or a Guarantor) or any shares or other evidence of beneficial ownership of any Person (other than a Borrower or a Guarantor) (“Acquisition”), unless (i) such Borrower, such Guarantor or such Subsidiary is the surviving Person to such Merger or Acquisition, (ii) no Event of Default or Unmatured Event of Default exists immediately prior to such Merger or Acquisition, and (iii) no Event of Default or Unmatured Event of Default would arise as a result of such Merger or Acquisition, (b) dissolve or liquidate, (c) sell, lease, assign, transfer or otherwise dispose of substantially all of its assets, except dispositions of inventory in the ordinary course of business, (d) amend its Organizational Documents, (e) create any new Subsidiary, or (f) enter into any agreement to do any of the foregoing; provided, however, notwithstanding the foregoing provisions of this Section 8.4 or any other provision of any Loan Document, Parent and its Subsidiaries may, on a consolidated basis, acquire or purchase a business or its assets involving cash and/or equity consideration totaling not more than $10,000,000.00 in any period of twelve (12) consecutive months.

Section 8.5. Restricted Payments. No Borrower will, nor will it permit Parent or any other Guarantor to, declare or pay any dividends or distributions (excluding distributions solely of capital stock or partnership interests) or make any other payment (in cash, property, or obligations) on account of its capital stock or partnership interests, as applicable, or redeem, purchase, retire, or otherwise acquire any of its capital stock, or set apart any money for a sinking or other analogous fund for any dividend or other distribution on its capital stock or for any redemption, purchase, retirement, or other acquisition of any of its capital stock (excluding any net or cashless exercise of stock opinions). No Borrower will, nor will it permit any Guarantor other than Parent to, grant or issue any capital stock or any warrant, right, or option pertaining to its capital stock, or issue any security convertible into capital stock.

Section 8.6. Loans and Advances. No Borrower will make, nor will it permit any Guarantor or any Subsidiary to make, any advance, loan or extension of credit to any Person, including any other Borrower, Guarantor or Subsidiary or any employee, officer or director of any Borrower, any Guarantors or any Subsidiary; provided, however, that (a) any Borrower may make loans and advances to any other Borrower or Guarantor, (b) Parent and Borrowers may make loans and advances to their Subsidiaries in amounts which do not exceed $3,000,000.00 in the aggregate at any time, and (c) Parent and its Subsidiaries may make loans and advances to their employees, officers and directors in amounts which do not exceed $150,000.00 in the aggregate at any time.

Section 8.7. Investments. Other than investments permitted by Section 8.4, no Borrower will make, nor will it permit any Guarantor or any Subsidiary to make, any capital contribution to or investment in any Person in an aggregate amount which exceeds $2,000,000.00 during any fiscal year. No Borrower will purchase, or permit any Guarantor or any Subsidiary to purchase, any stock, bonds, notes, debentures, or other securities of any Person, except (a) readily marketable direct obligations of the United States of America, (b) fully insured certificates of deposit with maturities of one year or less from the date of acquisition of Lender or any commercial bank operating in the United States having capital and surplus in excess of $100,000,000.00, (c) commercial paper of a domestic issuer if at the time of purchase such paper is rated in one of the two highest rating categories of Standard and Poor’s Corporation (“S&P”) or Moody Investors Service (“Moody”), (d) investments in securities with maturity of one (1) year or less from the date of acquisition issued or fully guaranteed by the United States or any state, commonwealth or territory of the United States, or any political subdivision thereof, and rated at least “A” by S&P or Moody, (e) any money market or similar fund investing solely in the foregoing investments, and (f) investments made through Lender or its affiliates and approved by Lender.

Section 8.8. Compliance with Environmental Laws. No Borrower will, nor will it permit any Guarantor or any Subsidiary to, (a) use (or permit any tenant to use) any of their respective properties or assets for the handling, processing, storage, transportation, or disposal of any Hazardous Substance, except in the ordinary course of business and in compliance with all Environmental Laws, or (b) otherwise conduct any activity or use any of their respective properties or assets in any manner that is likely to violate any Environmental Law.

Section 8.9. Accounting. No Borrower will make, nor will it permit any Guarantor or any Subsidiary to make, any change in accounting treatment or reporting practices, except as allowed or required by GAAP.

Section 8.10. Subordinated Debt. No Borrower will pay, nor will it permit any Guarantor or any Subsidiary to pay, any Subordinated Debt except pursuant to the agreement pursuant to which the payment of such Subordinated Debt is subordinated to the payment of the Obligations.

Section 8.11. Change of Business. No Borrower will enter into, no will it permit any Guarantor or any Subsidiary to enter into, any type of business which is materially different from the business in which such Borrower, such Guarantor or such Subsidiary is presently engaged.

ARTICLE IX.

Financial Covenants

Borrowers covenant and agree that, as long as the Obligations or any part thereof are outstanding or Lender has any Commitment hereunder, Borrowers will observe and perform, and will cause Parent and its Subsidiaries to observe and perform, the financial covenants set forth below, unless Lender shall otherwise consent in writing.

Section 9.1. Tangible Net Worth. Parent will at all times maintain Tangible Net Worth in an amount not less than $48,000,000.00. Tangible Net Worth shall be calculated and tested quarterly as of the last day of each fiscal quarter of Parent.

Section 9.2. Current Ratio. Parent will at all times maintain a Current Ratio of not less than 1.50 to 1.00. The Current Ratio shall be calculated and tested quarterly as of the last day of each fiscal quarter of Parent.

Section 9.3. Ratio of Total Liabilities to Tangible Net Worth. Parent will at all times maintain a Ratio of Total Liabilities to Tangible Net Worth of not greater than .60 to 1.00. The Ratio of Total Liabilities to Tangible Net Worth shall be calculated and tested quarterly as of the last day of each fiscal quarter of Parent.

ARTICLE X.

Default

Section 10.1. Events of Default. Each of the following shall be deemed an “Event of Default”:

(a) Any Borrower shall fail to pay the Obligations or any part thereof when due and such failure shall continue for a period of five (5) days.

(b) Any representation or warranty made or deemed made by any Borrower or any Guarantor (or any of their respective officers) in any Loan Document or in any certificate, report, notice, or financial statement furnished at any time in connection with this Agreement shall be false, misleading, or erroneous in any material respect when made or deemed to have been made.

(c) Any Borrower or any Guarantor shall fail to perform, observe, or comply with any covenant, agreement, or term contained in this Agreement or any other Loan Document and such failure shall continue for a period of twenty (20) days.

(d) Any Borrower, any Guarantor or any Subsidiary shall commence a voluntary proceeding seeking liquidation, reorganization, or other relief with

respect to itself or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official of it or a substantial part of its property or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it or shall make a general assignment for the benefit of creditors or shall generally fail to pay its debts as they become due or shall take any corporate action to authorize any of the foregoing.

(e) An involuntary proceeding shall be commenced against any Borrower, any Guarantor or any Subsidiary seeking liquidation, reorganization, or other relief with respect to it or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official for it or a substantial part of its property, and such involuntary proceeding shall remain undismissed and unstayed for a period of sixty (60) days.

(f) Any Borrower, any Guarantor or any Subsidiary shall fail to discharge within a period of thirty (30) days after the commencement thereof any attachment, sequestration, or similar proceeding or proceedings involving an aggregate amount in excess of $25,000.00 against any of its assets or properties.

(g) Any Borrower, any Guarantor or any Subsidiary shall fail to satisfy and discharge promptly any final judgement or judgements against it for the payment of money in an aggregate amount in excess of $25,000.00.

(h) Any Borrower, any Guarantor or any Subsidiary shall fail to pay when due any principal of or interest on any Debt (other than the Obligations), or the maturity of any such Debt shall have been accelerated, or any such Debt shall have been required to be prepaid prior to the stated maturity thereof, or any event shall have occurred that permits (or, with the giving of notice or lapse of time or both, would permit) any holder or holders of such Debt or any Person acting on behalf of such holder or holders to accelerate the maturity thereof or require any such prepayment.

(i) This Agreement or any other Loan Document shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by any Borrower, any Guarantor, any Subsidiary, or any Borrower or any Guarantor shall deny that it has any further liability or obligation under any of the Loan Documents, or any Lien or security interest created by the Loan Documents shall for any reason cease to be a valid, first priority perfected security interest in and Lien upon any of the Collateral purported to be covered thereby.

(j) The occurrence or existence of any default, Event of Default or other similar condition or event (however described) with respect to any Rate Management Transaction.

Section 10.2. Remedies Upon Default. If any Event of Default shall occur, Lender may do any one or more of the following: (a) declare the outstanding principal of and accrued and unpaid interest on the Note and the Obligations or any part thereof to be immediately due and payable, and the same shall thereupon become immediately due and payable, without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by Borrowers, (b) terminate the Commitment without notice to any Borrower, (c) foreclose or otherwise enforce any Lien granted to Lender to secure payment and performance of the Obligations, and (d) exercise any and all rights and remedies afforded by the laws of the State of Texas or any other jurisdiction by any of the Loan Documents, by equity or otherwise; provided, however, that upon the occurrence of an Event of Default under Section 10.1(d) or Section 10.1(e), the Commitment shall automatically terminate, and the outstanding principal of and accrued and unpaid interest on the Note and the other Obligations shall become immediately due and payable without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by Borrowers.

Section 10.3. Cash Collateral. If any Event of Default shall occur, Borrowers shall, if requested by Lender, immediately deposit with and pledge to Lender, cash or cash equivalent investments in an amount equal to the outstanding Letter of Credit Liabilities as security for the Obligations. Such cash or cash equivalent investment shall bear interest while held by Lender and shall be released on the date on which (a) all Letters of Credit which were outstanding at the time of such Event of Default have expired by their own terms (and have not been extended by Lender) without being drawn, and (b) all the Advances representing drawings on Letters of Credit which were outstanding at the time of such Event of Default have been paid in full.

Section 10.4. Performance by Lender. If Borrowers shall fail to perform any covenant, duty, or agreement contained in any of the Loan Documents, Lender may perform or attempt to perform such covenant, duty, or agreement on behalf of Borrowers. In such event, Borrowers shall, at the request of Lender, promptly pay any amount expended by Lender in such performance or attempted performance to Lender, together with interest thereon at the Default Rate from the date of such expenditure until paid. Notwithstanding the foregoing, it is expressly agreed that Lender shall not have any liability or responsibility for the performance of any obligation of Borrowers under this Agreement or any other Loan Document.

ARTICLE XI.

Miscellaneous

Section 11.1. Expenses of Lender. Borrowers hereby agree to pay Lender on demand (a) all reasonable costs and expenses incurred by Lender in connection with the preparation, negotiation, and execution of this Agreement and the other Loan Documents and any and all amendments, modifications, renewals, extensions, and supplements thereof and thereto, including, without limitation, the fees and expenses of Lender’s legal counsel, (b) all reasonable costs and expenses incurred by Lender in connection with the enforcement of this Agreement or any other Loan Document, including, without limitation, the fees and expenses of Lender’s legal counsel, and (c) all other reasonable costs and expenses incurred by Lender in connection with this Agreement or any other Loan Document, including, without limitation, all costs, expenses, taxes (other than income taxes and franchise taxes), assessments, filing fees, and other charges levied by any governmental authority or otherwise payable in respect of this Agreement or any other Loan Document or in obtaining any insurance policy, audit or appraisal in respect of the Collateral.

SECTION 11.2. INDEMNIFICATION. BORROWERS HEREBY INDEMNIFY LENDER AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS, AND AGENTS FROM, AND HOLDS EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS’ FEES) (COLLECTIVELY, “CLAIMS”) TO WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (A) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION, OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS, (B) ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, (C) ANY BREACH BY ANY BORROWER OF ANY REPRESENTATION, WARRANTY, COVENANT, OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS, (D) THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL, OR CLEANUP OF ANY HAZARDOUS SUBSTANCE LOCATED ON, WITHIN, OR MIGRATING FROM ANY OF THE PROPERTIES OR ASSETS OF ANY BORROWER OR ANY SUBSIDIARY, (E) ANY ACT OR OMISSION OF LENDER BASED UPON ANY FAX OR ELECTRONIC TRANSMISSION, OR (F) ANY MATTER RELATED TO ANY LETTER OF CREDIT, OTHER THAN A NON-CONFORMING LETTER OF CREDIT DRAWING PAID AS A RESULT OF LENDER’S ORDINARY NEGLIGENCE, INCLUDING, WITH RESPECT TO ALL OF THE ABOVE, ANY CLAIM WHICH ARISES AS A RESULT OF THE NEGLIGENCE OF LENDER; PROVIDED, HOWEVER, THAT BORROWERS’ INDEMNIFICATION OBLIGATIONS UNDER THIS SECTION 11.2 SHALL NOT APPLY TO THE EXTENT THAT THE CLAIMS ARISE AS A RESULT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF LENDER.

Section 11.3. Limitation of Liability. Neither Lender nor any affiliate, officer, director, employee, attorney, or agent of Lender shall have any liability with respect to, and each Borrower hereby waives, releases, and agrees not to sue any of them upon, any claim for any special, indirect, incidental, or consequential damages suffered or incurred by any Borrower in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Each Borrower hereby waives, releases, and agrees not to sue Lender or any of Lender’s affiliates, officers, directors, employees, attorneys, or agents for punitive damages in respect of any claim in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents.

Section 11.4. No Waiver; Cumulative Remedies. No failure on the part of Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided for in this Agreement and the other Loan Documents are cumulative and not exclusive of any rights and remedies provided by law.

Section 11.5. Successors and Assigns. This Agreement is binding upon and shall inure to the benefit of Lender and Borrowers and their respective successors and assigns, except that no Borrower may assign or transfer any of its rights or obligations under this Agreement without prior written consent of Lender.

Section 11.6. Survival. All representations and warranties made in this Agreement or any other Loan Document or in any document, statement, or certificate furnished in connection with this Agreement shall survive the execution and delivery of this Agreement and the other Loan Documents, and no investigation by Lender or any closing shall affect the representations and warranties or the right of Lender to rely upon them. Without prejudice to the survival of any other obligation of Borrowers hereunder, the obligations of Borrowers under Sections 11.1 and 11.2 shall survive repayment of the Note and termination of the Commitment and the Letters of Credit.

Section 11.7. Amendment. The provisions of this Agreement may be amended or waived only by an instrument in writing signed by the parties hereto.

Section 11.8. Maximum Interest Rate. No provision of this Agreement or of any other Loan Document shall require the payment or permit the collection of interest in excess of the maximum permitted by applicable law. If any excess of interest in such respect is hereby provided for, or shall be adjudicated to be so provided, in any Loan Documents or otherwise in connection with this loan transaction, the provisions of this Section shall govern and prevail and neither any Borrower nor the sureties, guarantors, successors, or assigns of any Borrower shall be obligated to pay the excess amount of

such interest or any other excess sum paid for the use, forbearance, or detention of sums loaned pursuant hereto. In the event Lender ever receives, collects, or applies as interest any such sum, such amount which would be in excess of the maximum amount permitted by applicable law shall be applied as a payment and reduction of the principal of the indebtedness evidenced by the Note; and, if the principal of the Note has been paid in full, any remaining excess shall forthwith be paid to Borrowers. In determining whether or not the interest paid or payable exceeds the Maximum Rate, Borrowers and Lender shall, to the extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the indebtedness evidenced by the Note so that interest for the entire term does not exceed the Maximum Rate.

Section 11.9. Notices. All notices and other communications provided for in this Agreement and the other Loan Documents shall be in writing and may be telecopied (faxed), mailed by certified mail return receipt requested, or delivered to the intended recipient at the addresses specified below or at such other address as shall be designated by any party listed below in a notice to the other parties listed below given in accordance with this Section.


If to any Borrower:		7007 Pinemont Drive
		Houston, Texas 77040
		Attention: Tom McEntire
		Telephone No.: 713-986-4444
		Fax No.: 713-986-4445

If to any Guarantor		7007 Pinemont Drive
		Houston, Texas 77040
		Attention: Tom McEntire
		Telephone No.: 713-986-4444
		Fax No.: 713-986-4445

If to Lender:		Union Planters Bank, N.A.
		5005 Woodway Drive
		Houston, Texas 77056
		Attention: Edward K. Bowdon
		Telephone No.: 713-426-7109
		Fax No.: 713-426-7180

Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopy (fax), subject to confirmation of receipt, when personally delivered or, in the case of a mailed notice, three (3) Business Days after being duly deposited in the mail, in each case given or addressed as aforesaid; provided, however, that notices to Lender pursuant to Article II shall not be effective until received by Lender.

Section 11.10. Applicable Law; Venue; Service of Process. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States of America. This Agreement has been entered into in Harris County, Texas and it shall be performable for all purposes in Harris County, Texas. Except as provided in Section 11.20, any action or proceeding against any Borrower under or in connection with any of the Loan Documents may be brought in any state or federal court in Harris County, Texas, and each Borrower hereby irrevocably submits to the nonexclusive jurisdiction of such courts and waives any objection it may now or hereafter have as to the venue of any such action or proceeding brought in any such court or that any such court is an inconvenient forum. Each Borrower agrees that service of process upon it may be made by certified or registered mail, return receipt requested, at its office specified in this Agreement. Except as provided in Section 11.20, nothing herein or in any of the other Loan Documents shall affect the right of Lender to serve process in any other manner permitted by law or shall limit the right of Lender to bring any action or proceeding against any Borrower or with respect to any of its property in courts in other jurisdictions. Except as provided in Section 11.20, any action or proceeding by any Borrower against Lender shall be brought only in a court located in Harris County, Texas.

Section 11.11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

Section 11.12. Severability. Any provision of this Agreement held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal.

Section 11.13. Headings. The headings, captions, and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement.

Section 11.14. Non-Application of Chapter 346 of Texas Finance Code. The provisions of Chapter 346 of the Texas Finance Code are specifically declared by the parties hereto not to be applicable to this Agreement or any of the other Loan Documents or to the transactions contemplated hereby.

Section 11.15. Consent to Participations. Lender shall have the right at any time and from time to time to sell or transfer one or more participation interests in the Note and the indebtedness evidenced thereby to one or more purchasers (“Purchasers”), whether related or unrelated to Lender. Subject in all respects to the provisions of Section 11.16 of this Agreement, Lender may provide to any one or more Purchasers or

potential Purchasers any information, financial statements, data or knowledge Lender may have about any Borrower or about any other matter relating to the Obligations. Borrowers further waive any and all notices of sale of participation interests and notices of repurchases of participation interests. In the event of any such sale by Lender of participation interests to a Purchaser, Lender’s obligations under the Loan Documents shall remain unchanged, Lender shall remain solely responsible to Borrowers for the performance of such obligations, Lender shall remain the owner and holder of the Note for all purposes under the Loan Documents, all amounts payable by Borrowers and Guarantors under this Agreement shall be determined as if Lender had not sold such participation interests, and Borrowers and Guarantors shall continue to deal solely and directly with Lender in connection with Lender’s rights and obligations under the Loan Documents. Lender shall retain the sole right to approve, without the consent of any Purchaser, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any credit extension or Commitments in which such Purchaser has an interest which (i) forgives principal or interest, or reduces the interest rate or fees payable with respect to any such credit extension, (ii) extends the Termination Dates, postpones any date fixed for any regularly-scheduled payment of principal or interest on any credit extension or Commitment in which such Purchaser has an interest, or of any regularly-scheduled payment of fees on any such credit extension or Commitments, (iii) releases any Guarantor of any such credit extension, or (iv) releases all or substantially all of the Collateral. Borrowers agree that each Purchaser shall be deemed to have the right of setoff in respect of its participation interests in amounts owing under the Loan Documents to the same extent as if the amount of its participation interests were owing directly to it as Lender under the Loan Documents. Borrowers further agree that any Purchaser may enforce its interests irrespective of any claims or defenses that any Borrower may have against Lender.

Section 11.16. Confidentiality. Lender agrees to hold any confidential information which it may receive from any Borrower or any Guarantor pursuant to any Loan Document in confidence, except for disclosure (i) to legal counsel, accountants and other professional advisers to Lender, (ii) to regulatory officials, (iii) to any Person as required by law, regulation or legal process, (iv) to any Person in connection with any legal proceeding to which Lender is a party, and (v) as permitted by Section 11.17.

Section 11.17. Dissemination of Information. Each Borrower and each Guarantor authorizes Lender to disclose to any Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a “Transferee”) and any prospective Transferee any and all information in Lender’s possession concerning the creditworthiness of Borrowers and Guarantors; provided that each Transferee and prospective Transferee first agrees in writing to be bound by Section 11.16 of this Agreement.

Section 11.18. Document Imaging. Borrowers understand and agree that (a) Lender’s document retention policy involves the imaging of executed loan documents and the destruction of the paper originals, and (b) Borrowers waive any right that it may have to claim that the imaged copies of the Loan Documents are not originals.

Section 11.19. ENTIRE AGREEMENT. THIS AGREEMENT, THE NOTE, AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN REPRESENT THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND THEREOF AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.


BORROWERS:

CONCORD TECHNOLOGIES, LP

By:	OYOG, LLC,
	its general partner

	By:	/s/ Thomas T. McEntire
		Thomas T. McEntire
		Vice President and
		Chief Financial Officer

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

OYOG OPERATIONS, LP

By:	OYOG, LLC,
	its general partner

	By:	/s/ Thomas T. McEntire
		Thomas T. McEntire
		Vice President and
		Chief Financial Officer


LENDER:

UNION PLANTERS BANK, N.A.

By:		/s/ Edward K. Bowdon
		Edward K. Bowdon
		Senior Vice President

EX-10.12 3 dex1012.htm PROMISSORY NOTE DATED NOVEMBER 22, 2004 Promissory Note dated November 22, 2004

Exhibit 10.12

PROMISSORY NOTE


$15,000,000.00		Houston, Texas		November 22, 2004

FOR VALUE RECEIVED, the undersigned, CONCORD TECHNOLOGIES, LP, a Texas limited partnership, GEOSPACE ENGINEERING RESOURCES INTERNATIONAL, LP, a Texas limited partnership, GEOSPACE TECHNOLOGIES, LP, a Texas limited partnership, OYO INSTRUMENTS, LP, a Texas limited partnership and OYOG OPERATIONS, LP, a Texas limited partnership, jointly and severally (“Maker”), hereby promise to pay to the order of UNION PLANTERS BANK, N.A., a national banking association (“Payee”), at its offices at 5005 Woodway Drive, Houston, Texas 77056, Harris County, Texas, or such other address as may be designated by Payee, in lawful money of the United States of America, the principal sum of FIFTEEN MILLION AND NO/100 DOLLARS ($15,000,000.00). Maker promises to pay interest on the outstanding principal balance of this note (this “Note”) from day to day remaining, at a varying rate per annum which shall from day to day be equal to the lesser of (a) the Maximum Rate as defined in the Loan Agreement (hereinafter defined), or (b) the Applicable Rate as defined in the Loan Agreement. The principal balance hereof and all accrued and unpaid interest thereon shall be due and payable as provided for in the Loan Agreement.

This Note is the Note provided for in the Loan Agreement dated as of November 22, 2004, between Maker and Payee (such Loan Agreement, as it may be amended is referred to herein as the “Loan Agreement”).

This Note evidences Maker’s obligations pursuant to the Loan Agreement to repay to Payee all Advances made by Payee to Maker pursuant to the Loan Agreement. Maker may borrow, repay and reborrow hereunder upon the terms and conditions specified in the Loan Agreement.

This Note is secured as provided in the Loan Agreement. Reference is made to the Loan Agreement for provisions for the payment and prepayment hereof, the acceleration of the maturity hereof, and definitions of terms used and not otherwise defined in this Note.

Notwithstanding anything to the contrary contained herein, no provisions of this Note shall require the payment or permit the collection of interest in excess of the Maximum Rate. If any excess of interest in such respect is herein provided for, or shall be adjudicated to be so provided, in this Note or otherwise in connection with this loan transaction, the provisions of this paragraph shall govern and prevail, and neither Maker nor the sureties, guarantors, successors or assigns of Maker shall be obligated to pay the excess amount of such interest, or any other excess sum paid for the use, forbearance or detention of sums loaned pursuant hereto. If for any reason interest in excess of the Maximum Rate shall be deemed charged, required or permitted by any court of competent jurisdiction, any such excess shall be applied as a payment and reduction of the principal of indebtedness evidenced by this Note; and, if the principal amount hereof has been paid in full, any remaining excess shall forthwith be paid to Maker. In determining whether or not the interest paid or payable exceeds the Maximum Rate, Maker and Payee shall, to the extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize,

prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the indebtedness evidenced by this Note so that the interest for the entire term does not exceed the Maximum Rate.

If default occurs in the payment of principal or interest under this Note and the applicable period for cure provided in the Loan Agreement has expired, or upon the occurrence of any other Event of Default, as such term is defined in the Loan Agreement, the holder hereof may during the continuation of such Event of Default, at its option, (a) declare the entire unpaid principal of and accrued interest on this Note immediately due and payable without notice, demand or presentment, all of which are hereby waived, and upon such declaration, the same shall become and shall be immediately due and payable, (b) foreclose or otherwise enforce all liens or security interests securing payment hereof, or any part hereof, (c) offset against this Note any sum or sums owed by the holder hereof to Maker and (d) take any and all other actions available to Payee under this Note, the Loan Agreement, the other Loan Documents (as such term is defined in the Loan Agreement) 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, Maker agrees to pay all costs, expenses, and fees incurred by the holder, including all reasonable attorneys’ fees.

THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS NOTE IS PERFORMABLE IN HARRIS COUNTY, TEXAS.

Maker and each surety, guarantor, endorser, and other party ever liable for payment of any sums of money payable on this Note jointly and severally waive notice, presentment, demand for payment, protest, notice of protest and non-payment or dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, diligence in collecting, grace, and all other formalities of any kind, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, and any impairment of any collateral securing this Note, all without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to release or substitute part or all of the collateral securing this Note, or to grant any other indulgences or forbearances whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder.


CONCORD TECHNOLOGIES, LP

By:	OYOG, LLC, its general partner

	By:	/s/ Thomas T. McEntire
		Thomas T. McEntire
		Vice President and
		Chief Financial Officer


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

OYOG OPERATIONS, LP

By:		OYOG, LLC, its general partner

	By:	/s/ Thomas T. McEntire
		Thomas T. McEntire
		Vice President and
		Chief Financial Officer

EX-10.13 4 dex1013.htm GUARANTY AGREEMENT DATED NOVEMBER 22, 2004 Guaranty Agreement dated November 22, 2004

Exhibit 10.13

GUARANTY AGREEMENT

WHEREAS, the execution of this Guaranty Agreement is a condition to UNION BANK PLANTERS, N.A., a national banking association (“Lender”) making certain loans to GEOSPACE TECHNOLOGIES, LP, a Texas limited partnership (“Geospace”), OYO INSTRUMENTS, LP, a Texas limited partnership (“Instruments”), GEOSPACE ENGINEERING RESOURCES INTERNATIONAL, LP, a Texas limited partnership (“Engineering”), CONCORD TECHNOLOGIES, LP, a Texas limited partnership (“Concord”), and OYOG OPERATIONS, LP, a Texas limited partnership (“Operations” and together with Geospace, Instruments, Engineering and Concord, collectively hereinafter referred to as the “Borrowers”), pursuant to that certain Loan Agreement dated as of November 22, 2004, between Borrowers and Lender (such Loan Agreement as it may hereafter be amended or modified from time to time, is hereinafter referred to as the “Loan Agreement”);

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:

1. The term “Guaranteed Indebtedness”, as used herein means all of the “Obligations”, as defined in the Loan Agreement. 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. As of the date of this Guaranty Agreement, the Obligations include, but are not limited to the indebtedness evidenced by (a) that certain promissory note in the original principal amount of $15,000,000.00, dated as of November 22, 2004, executed by Borrowers and payable to the order of Lender, and (b) all renewals, extensions, amendments, increases, decreases or other modifications of any of the foregoing and all promissory notes given in renewal, extension, amendment, increase, decrease or other modification thereof.

2. 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 (other than actual payment) which any Borrower may have against Lender or any other party, or which Guarantor may have against any 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.

3. If Guarantor becomes liable for any indebtedness owing by Borrowers 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.

4. In the event of default by any 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 any 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 any 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.

5. If acceleration of the time for payment of any amount payable by any Borrower under the Guaranteed Indebtedness is stayed upon the insolvency, bankruptcy, or reorganization of any 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.

6. 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 any Borrower, or the dissolution, insolvency, or bankruptcy of any 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, 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 any 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 any 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 existence, structure, or ownership of any Borrower; or (n) any other circumstance (other than actual payment) which might otherwise constitute a defense available to, or discharge of, any Borrower or Guarantor.

7. 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 might reasonably be expected to 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 (i) bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditor’s rights and (ii) by general principles of equity.

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 organization or regulations 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 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 Borrowers and Lender entering into the Loan Agreement and Guarantor executing and delivering this Guaranty Agreement is reasonably worth at least as much as the liability and obligation of Guarantor hereunder, and such liability and obligation and the Loan Agreement 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 assets exceed its liabilities, and Guarantor will not be rendered insolvent by the execution and performance of this Agreement and the Loan Documents.

8. Guarantor covenants and agrees that, as long as the Guaranteed Indebtedness or any part thereof is outstanding or Lender has any commitment under the Loan Agreement:

1. Guarantor will comply with all of the covenants contained in the Loan Agreement with which Borrowers agree in the Loan Agreement to cause Guarantor to comply as if Guarantor were a party to the Loan Agreement, and all of such covenants are incorporated herein by reference as if set forth herein in full.

2. Guarantor will furnish promptly to Lender written notice of the occurrence of any default under this Guaranty Agreement or an Event of Default under the Loan Agreement of which Guarantor has knowledge.

3. Guarantor will furnish promptly to Lender such additional information concerning Guarantor as Lender may reasonably request.

9. Upon the occurrence of an Event of Default (as defined in the Loan Agreement) 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 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.

10. Guarantor hereby agrees that the Subordinated Indebtedness (as hereinafter defined) 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 any 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 any Borrower to Guarantor, whether such indebtedness, liabilities, and obligations now exist or are hereafter incurred or arise, or whether the obligations of any 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.

11. 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.

12. 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.

13. Guarantor recognizes that Lender is relying upon this Guaranty Agreement and the undertakings of Guarantor hereunder in making extensions of credit to Borrowers under the Loan Agreement and further recognizes that the execution and delivery of this Guaranty Agreement is a material inducement to Lender in entering into the Loan Agreement. Guarantor hereby acknowledges that there are no conditions to the full effectiveness of this Guaranty Agreement.

14. 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 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 Loan Agreement. 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.

15. Guarantor shall pay on demand all reasonable attorneys’ fees and all other costs and expenses reasonably incurred by Lender in connection with the preparation, administration, enforcement, or collection of this Guaranty Agreement.

16. 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 any Borrower of additional indebtedness, and all other notices and demands with respect to the Guaranteed Indebtedness and this Guaranty Agreement.

17. The Loan Agreement, 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 Loan Agreement and the other Loan Documents (as defined in the Loan Agreement) 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 Loan Agreement.

18. Guarantor hereby represents and warrants to Lender that Guarantor has adequate means to obtain from Borrowers on a continuing basis information concerning the financial condition and assets of Borrowers 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.

19. THIS GUARANTY AGREEMENT REPRESENTS 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 UNWRITTEN 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 November 22, 2004.


GUARANTOR:

OYO GEOSPACE CORPORATION

By:		/s/ Thomas T. McEntire
		Thomas T. McEntire
		Vice President and
		Chief Financial Officer

EX-10.14 5 dex1014.htm GUARANTY AGREEMENT DATED NOVEMBER 22, 2004 Guaranty Agreement dated November 22, 2004

Exhibit 10.14

GUARANTY AGREEMENT

WHEREAS, the execution of this Guaranty Agreement is a condition to UNION PLANTERS BANK, N.A., a national banking association (“Lender”) making certain loans to GEOSPACE TECHNOLOGIES, LP, a Texas limited partnership (“Geospace”), OYO INSTRUMENTS, LP, a Texas limited partnership (“Instruments”), GEOSPACE ENGINEERING RESOURCES INTERNATIONAL, LP, a Texas limited partnership (“Engineering”), CONCORD TECHNOLOGIES, LP, a Texas limited partnership (“Concord”), and OYOG OPERATIONS, LP, a Texas limited partnership (“Operations” and together with Geospace, Instruments, Engineering and Concord, collectively hereinafter referred to as the “Borrowers”), pursuant to that certain Loan Agreement dated as of November 22, 2004, between Borrowers and Lender (such Loan Agreement as it may hereafter be amended or modified from time to time, is hereinafter referred to as the “Loan Agreement”);

NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the undersigned, OYOG, LLC, a Delaware limited liability company (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:

4. In the event of default by any Borrower in payment or performance of the Guaranteed Indebtedness, or any part thereof, when such Guaranteed Indebtedness becomes due, whether by its

6. 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 any Borrower, or the dissolution, insolvency, or bankruptcy of any 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, 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 any 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 existence, structure, or ownership of any Borrower; or (n) any other circumstance (other than actual payment) which might otherwise constitute a defense available to, or discharge of, any Borrower or Guarantor.

7. Guarantor represents and warrants to Lender as follows:

1. Guarantor is a limited liability company duly organized, validly existing and in good standing under the laws of the state of its organization, 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 might reasonably be expected to have a material adverse effect on its business, financial condition, or operations.

2. Guarantor has the 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 (i) bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditor’s rights and (ii) by general principles of equity.

8. Guarantor covenants and agrees that, as long as the Guaranteed Indebtedness or any part thereof is outstanding or Lender has any commitment under the Loan Agreement:

3. Guarantor will furnish promptly to Lender such additional information concerning Guarantor as Lender may reasonably request.

DATED AND EXECUTED as of November 22, 2004.


GUARANTOR:

OYOG, LLC

By:		/s/ Thomas T. McEntire
		Thomas T. McEntire
		Vice President and
		Chief Financial Officer

EX-10.15 6 dex1015.htm GUARANTY AGREEMENT DATED NOVEMBER 22, 2004 Guaranty Agreement dated November 22, 2004

Exhibit 10.15

GUARANTY AGREEMENT

NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the undersigned, OYOG LIMITED PARTNER, LLC, a Nevada limited liability company (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:

4. In the event of default by any Borrower in payment or performance of the Guaranteed Indebtedness, or any part thereof, when such Guaranteed Indebtedness becomes due, whether by its

6. 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 any Borrower, or the dissolution, insolvency, or bankruptcy of any 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, 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 any 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 existence, structure, or ownership of any Borrower; or (n) any other circumstance (other than actual payment) which might otherwise constitute a defense available to, or discharge of, any Borrower or Guarantor.

7. Guarantor represents and warrants to Lender as follows:

8. Guarantor covenants and agrees that, as long as the Guaranteed Indebtedness or any part thereof is outstanding or Lender has any commitment under the Loan Agreement:

3. Guarantor will furnish promptly to Lender such additional information concerning Guarantor as Lender may reasonably request.

DATED AND EXECUTED as of November 22, 2004.


GUARANTOR:

OYOG LIMITED PARTNER, LLC

By:		/s/ Thomas T. McEntire
		Thomas T. McEntire
		Manager

EX-10.16 7 dex1016.htm SECURITY AGREEMENT DATED AS OF NOVEMBER 22, 2004 Security Agreement dated as of November 22, 2004

Exhibit 10.16

SECURITY AGREEMENT

THIS SECURITY AGREEMENT dated as of November 22, 2004 (this “Agreement”), is by and between CONCORD TECHNOLOGIES, LP, a Texas limited partnership (the “Debtor”), and UNION PLANTERS BANK, N.A., a national banking association (“Secured Party”).

R E C I T A L S:

1. Debtor, Geospace Technologies, LP, a Texas limited partnership (“Geospace”), OYO Instruments, LP, a Texas limited partnership (“Instruments”), Geospace Engineering Resources International, LP, a Texas limited partnership (“Engineering”), OYOG Operations, LP, a Texas limited partnership (“Operations”), and Secured Party have entered into that certain Loan Agreement dated as of November 22, 2004 (such Loan Agreement, as the same may be amended or modified from time to time, is referred to herein as the “Loan Agreement”).

2. Secured Party has conditioned its obligations under the Loan Agreement upon, among other things, the execution and delivery of this Agreement by Debtor.

NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. ARTICLE

Security Interest

1.1. Section Security Interest. Debtor hereby grants to Secured Party a security interest in the following property, whether now owned or existing or hereafter arising or acquired and wherever arising or located (such property being hereinafter sometimes called the “Collateral”):

(a) all of its accounts, accounts receivable, contract rights and general intangibles (but excluding patents, trademarks, trade names and other intellectual property), whether now owned or hereafter acquired and all investment property, financial assets, instruments, documents, chattel paper, deposit accounts and funds on deposit with Secured Party arising therefrom and including, without limitation, all lease receivables and all cash, notes, drafts and acceptances arising therefrom, all returned and repossessed goods arising from or relating to any such accounts, or other proceeds of any sale, lease or other disposition of inventory, and all proceeds (including insurance proceeds) and products thereof; and

(b) all of its inventory, whether now owned or hereafter acquired, including, without limitation, all raw materials, goods in process, finished goods and other tangible personal property held for sale or lease or furnished or to be furnished under contracts for service or used or consumed in

Debtor’s trade or business and all additions, accessions, substitutions, attachments and replacements thereto and all contracts with respect thereto and all documents of title evidencing or representing any part thereof and all products and proceeds (including insurance proceeds) thereof.

All terms used in this Agreement that are defined in the Uniform Commercial Code as adopted in the state of Texas shall have the meanings specified in the Uniform Commercial Code as adopted by the State of Texas.

1.2. Section Obligations. The Collateral shall secure the following obligations, indebtedness, and liabilities (all such obligations, indebtedness, and liabilities being hereinafter sometimes called the “Obligations”):

(a) the obligations and indebtedness of Debtor to Secured Party evidenced by that certain promissory note in the original principal amount of $15,000,000.00 dated November 22, 2004, executed, jointly and severally, by Debtor, Geospace, Instruments, Engineering and Operations and payable to the order of Secured Party;

(b) the Obligations as defined in the Loan Agreement;

(c) all costs and expenses, including, without limitation, all attorneys’ fees and legal expenses, incurred by Secured Party to preserve and maintain the Collateral, collect the obligations herein described, and enforce this Agreement; and

(d) all extensions, renewals, and modifications of any of the foregoing and all promissory notes given in renewal, extension or modification of any of the foregoing.

2. ARTICLE

Representations and Warranties

To induce Secured Party to enter into this Agreement and the Loan Agreement, Debtor represents and warrants to Secured Party that:

2.1. Section Title. Except for the security interest granted herein, Debtor owns, and with respect to Collateral acquired after the date hereof Debtor will own, the Collateral free and clear of any lien, security interest, or other encumbrance.

2.2. Section Accounts. Unless Debtor has given Secured Party written notice to the contrary, whenever the security interest granted hereunder attaches to an account, Debtor shall be deemed to have represented and warranted to Secured Party as to each and all of its accounts that (a) each account is genuine and is in all respects what it purports to be, (b) each account represents the legal, valid, and binding obligation of the account debtor evidencing indebtedness unpaid and owed by such account debtor arising out of the performance of labor or services by

Debtor or the sale or lease of goods by Debtor, and (c) the amount of each account represented as owing is the correct amount actually and unconditionally owing except for normal trade discounts and other normal credits (such as allowances for warranty claims) granted in the ordinary course of business.

2.3. Section Financing Statements. No financing statement, security agreement, or other lien instrument covering all or any part of the Collateral is on file in any public office, except as may have been filed in favor of Secured Party.

2.4. Section Jurisdiction of Organization; Legal Name. Debtor is a Texas limited partnership. Debtor’s legal name set forth in its Certificate of Limited Partnership filed with the Texas Secretary of State, as amended to date is: Concord Technologies, LP. Debtor’s organizational ID is 139644-10.

2.5. Section Principal Place of Business. The principal place of business and chief executive office of Debtor, and the office where Debtor keeps its books and records, is located at the address of Debtor listed in the Loan Agreement.

2.6. Section Location of Collateral. All inventory of Debtor is located at 7007 Pinemont Drive, Houston, Texas 77040.

2.7. Section Business Purpose. The Collateral is used, acquired and held exclusively for business purposes and no portion of the Collateral is consumer goods. The Obligations were incurred solely for business purposes and not as a consumer-goods transaction or a consumer transaction.

3. ARTICLE

Covenants

Debtor covenants and agrees with Secured Party that until the Obligations are paid and performed in full:

3.1. Section Maintenance. Debtor shall maintain the Collateral in good operating condition and repair and shall not permit any waste or destruction of the Collateral or any part thereof. Debtor shall not use or permit the Collateral to be used in violation of any law or inconsistently with the terms of any policy of insurance. Debtor shall not use or permit the Collateral to be used in any manner or for any purpose that would impair the value of the Collateral or expose the Collateral to unusual risk.

3.2. Section Encumbrances. Except for Liens (as defined in the Loan Agreement) described in clauses (a), (d), (e) and (f) of Section 8.2 of the Loan Agreement, Debtor shall not create, permit, or suffer to exist, and shall defend the Collateral against any lien, security interest, or other encumbrance on the Collateral except the security interest of Secured Party hereunder, and shall defend Debtor’s rights in the Collateral and Secured Party’s security interest in the Collateral against the claims of all persons and entities.

3.3. Section Disposition of Collateral. Debtor shall not sell, lease, or otherwise dispose of the Collateral or any part thereof without the prior written consent of Secured Party, except Debtor may sell inventory in the ordinary course of business.

3.4. Section Further Assurances. At any time and from time to time, upon the request of Secured Party, and at the sole expense of Debtor, Debtor shall promptly execute and deliver all such further instruments and documents and take such further action as Secured Party reasonably may deem necessary or desirable to preserve and perfect its security interest in the Collateral and carry out the provisions and purposes of this Agreement, including, without limitation, the execution (if necessary or applicable) and filing of such financing statements as Secured Party may require. A carbon, photographic, or other reproduction of this Agreement or of any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement and may be filed as a financing statement.

3.5. Section Risk of Loss; Insurance. Debtor shall be responsible for any loss of or damage to the Collateral. Debtor shall maintain insurance on the Collateral as provided in the Loan Agreement.

3.6. Section Inspection Rights. Upon reasonable prior notice, during Debtor’s normal business hours, Debtor shall permit Secured Party and its representatives to examine or inspect the Collateral wherever located and to examine, inspect, and copy Debtor’s books and records at any reasonable time and as often as Secured Party may desire.

3.7. Section Notification. Debtor shall promptly notify Secured Party of (a) any lien, security interest, encumbrance, or claim made or threatened against the Collateral, and (b) any material change in the Collateral, including, without limitation, any material damage to or loss of the Collateral.

3.8. Section Partnership Changes. Debtor shall give Secured Party at least thirty (30) days prior written notice of any change of its name, identity, or partnership structure in any manner that might make any financing statement filed in connection with this Agreement misleading and shall have taken all action deemed necessary or desirable by Secured Party to cause its security interest in the Collateral to be perfected with the priority required by this Agreement. Debtor shall not change its principal place of business, chief executive office, or the place where it keeps its books and records unless it shall have given Secured Party thirty (30) days prior written notice thereof and shall have taken all action deemed necessary or desirable by Secured Party to cause its security interest in the Collateral to be perfected with the priority required by this Agreement.

3.9. Section Books and Records; Information. Debtor shall from time to time at the request of Secured Party deliver to Secured Party such information regarding the Collateral and Debtor as Secured Party may request, including, without limitation, lists and descriptions of the Collateral and evidence of the identity and existence of the Collateral.

3.10. Section Location of Collateral. Other than pursuant to lease and rental agreements, Debtor shall not move any of its inventory from the location described in Section 2.6 without the prior written consent of Secured Party.

4. ARTICLE

Rights of Secured Party

4.1. Section Power of Attorney. Debtor hereby irrevocably constitutes and appoints Secured Party and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the name of Debtor or in its own name, upon the occurrence of an Event of Default, to take any and all action and to execute any and all documents and instruments which Secured Party at any time and from time to time deems necessary or desirable to accomplish the purposes of this Agreement and, without limiting the generality of the foregoing, Debtor hereby gives Secured Party the power and right on behalf of Debtor and in its own name to do any of the following, without notice to or the consent of Debtor:

(a) to demand, sue for, collect, or receive in the name of Debtor or in its own name, any money or property at any time payable or receivable on account of or in exchange for any of the Collateral and, in connection therewith, endorse checks, notes, drafts, acceptances, money orders, documents of title, or any other instruments for the payment of money under the Collateral or any policy of insurance;

(b) to pay or discharge taxes, liens, security interests, or other encumbrances levied or placed on or threatened against the Collateral;

(d) (i) to direct account debtors and any other parties liable for any payment under any of the Collateral to make payment of any and all monies due and to become due thereunder directly to Secured Party or as Secured Party shall direct; (ii) to receive payment of and receipt for any and all monies, claims, and other amounts due and to become due at any time in respect of or arising out of any Collateral; (iii) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, proxies, stock powers, verifications, and notices in connection with accounts and other documents relating to the Collateral; (iv) to exchange any of the Collateral for other property upon any merger, consolidation, reorganization, recapitalization, or other readjustment of the issuer thereof and, in connection therewith, deposit any of the Collateral with any

committee, depositary, transfer agent, registrar, or other designated agency upon such terms as Secured Party may determine; (v) to insure, and to make, settle, compromise, or adjust claims under any insurance policy covering any of the Collateral; and (vi) to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes, and to do, at Secured Party’s option and Debtor’s expense, at any time, or from time to time, all acts and things which Secured Party deems necessary to protect, preserve, or realize upon the Collateral and Secured Party’s security interest therein.

This power of attorney is a power coupled with an interest and shall be irrevocable. Secured Party shall be under no duty to exercise or withhold the exercise of any of the rights, powers, privileges, and options expressly or implicitly granted to Secured Party in this Agreement, and shall not be liable for any failure to do so or any delay in doing so. Secured Party shall not be liable for any act or omission or for any error of judgment or any mistake of fact or law in its individual capacity or in its capacity as attorney-in-fact except acts or omissions resulting from its gross negligence or willful misconduct. This power of attorney is conferred on Secured Party solely to protect, preserve, and realize upon its security interest in the Collateral. Secured Party shall not be responsible for any decline in the value of the Collateral and shall not be required to take any steps to preserve rights against prior parties or to protect, preserve, or maintain any security interest or lien given to secure the Collateral.

4.2. Section Performance by Secured Party. If Debtor fails to perform or comply with any of its agreements contained herein, Secured Party itself may, at its sole discretion, cause or attempt to cause performance or compliance with such agreement and the reasonable expenses of Secured Party, together with interest thereon at the Default Rate (as defined in the Loan Agreement), shall be payable by Debtor to Secured Party on demand and shall constitute Obligations secured by this Agreement. Notwithstanding the foregoing, it is expressly agreed that Secured Party shall not have any liability or responsibility for the performance of any obligation of Debtor under this Agreement.

4.3. Section Assignment by Secured Party. Subject to applicable provisions of the Loan Agreement, Secured Party may from time to time assign or grant participations in the Obligations and any portion thereof or the Collateral and any portion thereof, and the assignee or Purchaser (as defined in the Loan Agreement) shall be entitled to all of the rights and remedies of Secured Party under this Agreement in relation thereto.

4.4. Section Financing Statements. Debtor expressly authorizes Secured Party to file financing statements showing Debtor as debtor covering all or any portion of the Collateral in such filing locations as selected by Secured Party and authorizes, ratifies and confirms any financing statement filed prior to the date hereof by Secured Party in any jurisdiction showing Debtor as debtor covering all or any portion of the Collateral.

5. ARTICLE

Default

5.1. Section Events of Default. The term “Event of Default” shall mean an Event of Default as defined in the Loan Agreement.

5.2. Section Rights and Remedies. Upon the occurrence of an Event of Default, Secured Party shall have the following rights and remedies:

(a) Secured Party may declare the Obligations or any part thereof immediately due and payable, without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by Debtor; provided, however, that upon the occurrence of an Event of Default under Section 10.1(d) or Section 10.1(e) of the Loan Agreement, the Obligations shall become immediately due and payable without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by Debtor.

(b) In addition to all other rights and remedies granted to Secured Party in this Agreement and in any other instrument or agreement securing, evidencing, or relating to the Obligations or any part thereof, Secured Party shall have all of the rights and remedies of a secured party under the Uniform Commercial Code as adopted by the State of Texas. Without limiting the generality of the foregoing, Secured Party may (i) without demand or notice to Debtor, collect, receive, or take possession of the Collateral or any part thereof and for that purpose Secured Party may enter upon any premises on which the Collateral is located and remove the Collateral therefrom or render it inoperable, and/or (ii) sell, lease, or otherwise dispose of the Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at Secured Party’s offices or elsewhere, for cash, on credit, or for future delivery. Upon the request of Secured Party, Debtor shall assemble the Collateral and make it available to Secured Party at any place designated by Secured Party that is reasonably convenient to Debtor and Secured Party. Debtor agrees that Secured Party shall not be obligated to give more than five (5) Business Days (as defined in the Loan Agreement) written notice of the time and place of any public sale or of the time after which any private sale may take place and that such notice shall constitute reasonable notice of such matters. Debtor shall be liable for all reasonable expenses of retaking, holding, preparing for sale, or the like, and all reasonable attorneys’ fees, legal expenses, and all other costs and expenses incurred by Secured Party in connection with the collection of the Obligations and the enforcement of Secured Party’s rights under this Agreement. Subject to mandatory provisions of applicable law, Secured Party may apply the Collateral against the Obligations in such order and manner as Secured Party may elect in its sole discretion. Debtor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay the Obligations in full. Debtor waives all rights of marshalling in respect of the Collateral.

(c) Secured Party may cause any or all of the Collateral held by it to be transferred into the name of Secured Party or the name or names of Secured Party’s nominee or nominees.

6. ARTICLE

Miscellaneous

6.1. Section No Waiver; Cumulative Remedies. No failure on the part of Secured Party to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided for in this Agreement are cumulative and not exclusive of any rights and remedies provided by law.

6.2. Section Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of Debtor and Secured Party and their respective heirs, successors, and assigns, except that Debtor may not assign any of its rights or obligations under this Agreement without the prior written consent of Secured Party.

6.3. Section Amendment. The provisions of this Agreement may be amended or waived only by an instrument in writing signed by the parties hereto.

6.4. Section Notices. All notices and other communications provided for in this Agreement shall be given as provided in the Loan Agreement.

6.5. Section Applicable Law; Venue; Service of Process. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States of America. This Agreement has been entered into in Harris County, Texas, and it shall be performable for all purposes in Harris County, Texas. The venue of, and provisions regarding service of process in connection with any action or proceeding hereunder shall be determined as provided in the Loan Agreement.

6.6. Section Headings. The headings, captions, and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement.

6.7. Section Survival of Representations and Warranties. All representations and warranties made in this Agreement or in any certificate delivered pursuant hereto shall survive the execution and delivery of this Agreement, and no investigation by Secured Party shall affect the representations and warranties or the right of Secured Party to rely upon them.

6.8. Section Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

6.9. Section Waiver of Bond. In the event Secured Party seeks to take possession of any or all of the Collateral by judicial process, Debtor hereby irrevocably waives any bonds and any surety or security relating thereto that may be required by applicable law as an incident to such possession, and waives any demand for possession prior to the commencement of any such suit or action.

6.10. Section Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

6.11. Section ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (AS DEFINED IN THE LOAN AGREEMENT) REPRESENT THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first written above.


DEBTOR:

CONCORD TECHNOLOGIES, LP

By:		OYOG, LLC,
		its general partner

By:		/s/ Thomas T. McEntire
		Thomas T. McEntire
		Vice President and
		Chief Financial Officer


SECURED PARTY:

UNION PLANTERS BANK, N.A.

By:		/s/ Edward K. Bowdon
		Edward K. Bowdon
		Senior Vice President

EX-21.1 8 dex211.htm SUBSIDIARIES OF THE REGISTRANT Subsidiaries of the Registrant

Exhibit 21.1

Subsidiaries of

OYO Geospace 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

Geospace Technologies Corporation Japanese Branch Office, a Japanese company

OYO Geospace China, a Chinese company

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 9 dex231.htm CONSENT OF INDEPENDENT ACCOUNTANTS 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 Statements on Form S-8 (No. 333-80003 and No. 333-40893) of OYO Geospace Corporation of our report dated December 3, 2004 relating to the financial statements and financial statement schedules, 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 December 3, 2004 relating to the financial statement schedule, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

Houston, Texas

December 7, 2004

EX-31.1 10 dex311.htm CERTIFICATION OF THE COMPANY'S CEO PURSUANT TO SECTION 302 Certification of the Company's CEO pursuant to 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:

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;

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

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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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):

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

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 3, 2004


		/s/ Gary D. Owens
Name:		Gary D. Owens
Title:		Chief Executive Officer

EX-31.2 11 dex312.htm CERTIFICATION OF THE COMPANY'S CFO PURSUANT TO SECTION 302 Certification of the Company's CFO pursuant to 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:

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):

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 3, 2004


		/s/ Thomas T. McEntire
Name:		Thomas T. McEntire
Title:		Chief Financial Officer

EX-32.1 12 dex321.htm CERTIFICATION OF THE COMPANY'S CEO PURSUANT TO SECTION 906 Certification of the Company's CEO pursuant to 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 does 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 certifies 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 3, 2004

EX-32.2 13 dex322.htm CERTIFICATION OF THE COMPANY'S CFO PURSUANT TO SECTION 906 Certification of the Company's CFO pursuant to 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 does hereby certify as follows:


		/s/ Thomas T. McEntire
Name:		Thomas T. McEntire
Title:		Chief Financial Officer
		December 3, 2004

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