##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q   (Mark One)(X)
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 31, 2004 (  )
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 000-25142   MITCHAM INDUSTRIES, INC.  Texas
    
    76-0210849(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 8141 SH 75 South
P.O. Box 1175
Huntsville, Texas 77342
(Address of principal executive offices) (936) 291-2277
(Registrants telephone number, including area code)   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No (  ) Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes (  ) No (X) Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date: 8,857,994 shares of Common
Stock, $0.01 par value, were outstanding as of September 10, 2004.




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MITCHAM INDUSTRIES, INC. INDEX
 PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 4. Controls and Procedures
    
    
    14PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    16Item 6. Exhibits and Reports on Form 8-K
    
    
    16Signatures
    
    
    17Separation Agreement, Consulting Agreement and ReleaseCertification of CEO pursuant to Rule 13a-14a/15d-14aCertification of Corp. Controller - Rule 13a-14a/15d-14aCertification of CEO under Section 906Certification of Corporate Controller under Section 906
  2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements
 MITCHAM INDUSTRIES, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands except share data)
 January 31,
    
    July 31,2004
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,834
    
    
    $
    11,609Accounts receivable, net of allowance for
doubtful accounts of $847 and $822
    
    
    5,635
    
    
    
    5,743Current portion of notes receivable, net of
allowance for doubtful
notes of $28 and $53
    
    
    811
    
    
    
    307Prepaid expenses and other current assets
    
    
    700
    
    
    
    452Current assets of discontinued operations
    
    
    898
    
    
    
    336Total current assets
    
    
    14,878
    
    
    
    18,447Seismic equipment lease pool, property and equipment
    
    
    84,624
    
    
    
    77,287Accumulated depreciation of seismic equipment lease
pool, property and equipment
    
    
    (59,265
    )
    
    
    (57,086
    )Long-term assets of discontinued operations
    
    
    491
    
    
    
    353Other assets
    
    
    2
    
    
    
    7Total assets
    
    $
    40,730
    
    
    $
    39,008LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,532
    
    
    $
    1,573Current maturities  long-term debt
    
    
    2,203
    
    
    
    2,246Equipment notes payable
    
    
    1,296
    
    
    
    Deferred revenue
    
    
    345
    
    
    
    369Wages payable
    
    
    495
    
    
    
    575Accrued expenses and other current liabilities
    
    
    1,245
    
    
    
    402Current liabilities of discontinued operations
    
    
    399
    
    
    
    15Total current liabilities
    
    
    7,515
    
    
    
    5,180Long-term debt, net of current maturities
    
    
    2,418
    
    
    
    1,280Total liabilities
    
    
    9,933
    
    
    
    6,460Commitments and contingenciesShareholders equity:Preferred stock, $1.00 par value; 1,000,000
shares authorized; none issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 20,000,000 shares
authorized; 9,714,994 and 9,707,994 shares
issued, respectively
    
    
    97
    
    
    
    97Additional paid-in capital
    
    
    61,913
    
    
    
    62,298Treasury stock, at cost (915,000 shares)
    
    
    (4,686
    )
    
    
    (4,686
    )Deferred compensation
    
    
    (83
    )
    
    
    (51
    )Accumulated deficit
    
    
    (28,411
    )
    
    
    (26,886
    )Accumulated other comprehensive income
    
    
    1,967
    
    
    
    1,776Total shareholders equity
    
    
    30,797
    
    
    
    32,548Total liabilities and shareholders equity
    
    $
    40,730
    
    
    $
    39,008
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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MITCHAM INDUSTRIES, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands except share and per share data)
 (Unaudited)
 Three Months Ended
    
    Six Months EndedJuly 31,
    
    July 31,2003
    
    2004
    
    2003
    
    2004Revenues:Equipment leasing
    
    $
    2,638
    
    
    $
    3,378
    
    
    $
    6,604
    
    
    $
    8,779Equipment sales
    
    
    1,291
    
    
    
    3,015
    
    
    
    3,193
    
    
    
    5,820Total revenues
    
    
    3,929
    
    
    
    6,393
    
    
    
    9,797
    
    
    
    14,599Costs and expenses:Direct costs  seismic leasing
    
    
    512
    
    
    
    211
    
    
    
    861
    
    
    
    900Cost of equipment sales
    
    
    557
    
    
    
    1,263
    
    
    
    1,746
    
    
    
    2,814General and administrative
    
    
    1,248
    
    
    
    2,111
    
    
    
    2,530
    
    
    
    3,948Depreciation
    
    
    3,830
    
    
    
    2,706
    
    
    
    7,431
    
    
    
    5,413Total costs and expenses
    
    
    6,147
    
    
    
    6,291
    
    
    
    12,568
    
    
    
    13,075Operating income (loss)
    
    
    (2,218
    )
    
    
    102
    
    
    
    (2,771
    )
    
    
    1,524Other income (expense)  net
    
    
    (46
    )
    
    
    (27
    )
    
    
    (20
    )
    
    
    (79
    )Income (loss) from continuing operations before income taxes
    
    
    (2,264
    )
    
    
    75
    
    
    
    (2,791
    )
    
    
    1,445Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) from continuing operations
    
    
    (2,264
    )
    
    
    75
    
    
    
    (2,791
    )
    
    
    1,445Income (loss) from discontinued operations, net of income
taxes of $0
    
    
    (1,879
    )
    
    
    80
    
    
    
    (2,792
    )
    
    
    80Net income (loss)
    
    $
    (4,143
    )
    
    $
    155
    
    
    $
    (5,583
    )
    
    $
    1,525Income (loss) per common share from continuing operationsBasic
    
    $
    (0.26
    )
    
    $
    0.01
    
    
    $
    (0.32
    )
    
    $
    0.16Diluted
    
    $
    (0.26
    )
    
    $
    0.01
    
    
    $
    (0.32
    )
    
    $
    0.16Income (loss) per common share from discontinued operationsBasic and diluted
    
    $
    (0.21
    )
    
    $
    0.01
    
    
    $
    (0.32
    )
    
    $
    0.01Net income (loss) per common share  basic and diluted
    
    $
    (0.47
    )
    
    $
    0.02
    
    
    $
    (0.64
    )
    
    $
    0.17Shares used in computing income (loss) per common share:Basic
    
    
    8,751,000
    
    
    
    8,791,000
    
    
    
    8,747,000
    
    
    
    8,795,000Dilutive effect of common stock equivalents
    
    
    
    
    
    
    369,000
    
    
    
    
    
    
    
    372,000Diluted
    
    
    8,751,000
    
    
    
    9,160,000
    
    
    
    8,747,000
    
    
    
    9,167,000
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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MITCHAM INDUSTRIES, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months EndedJuly 31,2003
    
    2004Cash flows from operating activities:Income (loss) from continuing operations
    
    $
    (2,791
    )
    
    $
    1,445Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    7,431
    
    
    
    5,413Provision for doubtful accounts, net of charge offs
    
    
    48
    
    
    
    Net book value of seismic equipment sold
    
    
    764
    
    
    
    1,474Changes in:Trade accounts receivable
    
    
    (812
    )
    
    
    212Accounts payable, accrued expenses and other
current liabilities
    
    
    28
    
    
    
    (698
    )Other, net
    
    
    367
    
    
    
    660Net cash provided by operating activities
    
    
    5,035
    
    
    
    8,506Cash flows from investing activities:Purchases of seismic equipment held for lease
    
    
    (1,410
    )
    
    
    (1,118
    )Purchases of property and equipment
    
    
    (66
    )
    
    
    (131
    )Net cash used in investing activities
    
    
    (1,476
    )
    
    
    (1,249
    )Cash flows from financing activities:Payments on borrowings
    
    
    (1,035
    )
    
    
    (2,391
    )Net cash used in financing activities
    
    
    (1,035
    )
    
    
    (2,391
    )Net increase in cash and cash equivalents-continuing operations
    
    
    2,524
    
    
    
    4,866Net decrease in cash and cash equivalents-discontinued
operations
    
    
    (1,825
    )
    
    
    (91
    )Cash and cash equivalents, beginning of period
    
    
    5,137
    
    
    
    6,834Cash and cash equivalents, end of period
    
    $
    5,836
    
    
    $
    11,609
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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MITCHAM INDUSTRIES, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation The condensed consolidated financial statements of Mitcham Industries,
Inc. (the Company) have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations of the
Securities and Exchange Commission, although the Company believes that
the disclosures are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be
read in conjunction with the financial statements and the notes thereto
included in the Companys latest Annual Report on Form 10-K for the year
ended January 31, 2004. In the opinion of the Company, all adjustments,
consisting only of normal recurring adjustments, necessary to present
fairly the financial position as of July 31, 2004; the results of
operations for the three and six months ended July 31, 2004 and 2003; and
the cash flows for the six months ended July 31, 2004 and 2003, have been
included. The foregoing interim results are not necessarily indicative of
the results of the operations to be expected for the full fiscal year
ending January 31, 2005. 2. Organization Mitcham Industries, Inc., a Texas corporation, was incorporated in 1987.
The Company and its wholly-owned Canadian subsidiary provide full-service
equipment leasing, sales and service to the seismic industry worldwide,
primarily in North and South America. The Company, through its
wholly-owned Australian subsidiary, Seismic Asia Pacific Pty Ltd.
(SAP), provides seismic, oceanographic and hydrographic leasing and
sales worldwide, primarily in Asia and Australia. Through its
wholly-owned U.S. subsidiary, Drilling Services, Inc. (DSI), the
Company provided seismic survey program design, quality control, permit
acquisition, geographical surveying and shot hole drilling, all commonly
referred to as front-end services. In August 2003, the Company sold
the operating assets of DSI. The operating results and assets and
liabilities of DSI are discontinued operations and all prior period
statements have been restated accordingly. See Note 8. All intercompany
transactions and balances have been eliminated in consolidation. 3. Earnings Per Share For the three and six months ended July 31, 2003 and 2004, the following
table sets forth the number of shares that may be issued pursuant to
options currently outstanding, which number was used in the per share
calculations. Three Months Ended
    
    Six Months EndedJuly 31,
    
    July 31,2003
    
    2004
    
    2003
    
    2004Stock options
    
    
    
    
    
    
    369,000
    
    
    
    
    
    
    
    372,000Total dilutive securities
    
    
    
    
    
    
    369,000
    
    
    
    
    
    
    
    372,000
 6




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4. Comprehensive Income SFAS 130 Reporting Comprehensive Income establishes standards for the
reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. Comprehensive income
generally represents all changes in shareholders equity (deficit) during
the period except those resulting from investments by, or distributions
to, shareholders. The Company has comprehensive income related to the
change in its foreign currency translations account as follows: Three Months Ended
    
    Six Months EndedJuly 31,
    
    July 31,2003
    
    2004
    
    2003
    
    2004Net income (loss)
    
    $
    (4,143
    )
    
    $
    155
    
    
    $
    (5,583
    )
    
    $
    1,525Change in foreign
currency translation
adjustment
    
    
    444
    
    
    
    354
    
    
    
    2,208
    
    
    
    (191
    )Comprehensive income
(loss)
    
    $
    (3,699
    )
    
    $
    509
    
    
    $
    (3,375
    )
    
    $
    1,334
 5. Supplemental Statements of Cash Flows Information Supplemental disclosures of cash flow information for the six months
ended July 31, 2003 and 2004 are as follows: Six Months Ended July 31,2003
    
    2004Interest paid, continuing operations
    
    $
    111,000
    
    
    $
    113,000Seismic equipment acquired in exchange
for cancellation of accounts receivable
    
    $
    28,000
    
    
    $
    671,000
 6. Reclassifications Certain 2003 amounts have been reclassified to conform to the 2004
presentation. Such reclassifications had no effect on net income or
loss. 7




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7. Stock Options The Company accounts for its stock-based compensation plans under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees. The pro forma information below is based on
provisions of Statement of Financial Accounting Standard (FAS) No. 123,
Accounting for Stock-Based Compensation, as amended by FAS 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, issued
in December 2002. Three Months Ended July 31,
    
    Six Months Ended July 31,2003
    
    2004
    
    2003
    
    2004Pro forma impact of fair value method (FAS 148)Reported income (loss) from continuing operations
    
    $
    (2,264
    )
    
    $
    75
    
    
    $
    (2,791
    )
    
    $
    1,445Less: fair value impact of employee stock compensation
    
    
    (85
    )
    
    
    (66
    )
    
    
    (170
    )
    
    
    (138
    )Pro forma income (loss) from continuing operations
    
    $
    (2,349
    )
    
    $
    9
    
    
    $
    (2,961
    )
    
    $
    1,307Reported net income (loss)
    
    $
    (4,143
    )
    
    $
    155
    
    
    $
    (5,583
    )
    
    $
    1,525Less: fair value impact of employee stock compensation
    
    
    (85
    )
    
    
    (66
    )
    
    
    (170
    )
    
    
    (138
    )Pro forma net income (loss)
    
    $
    (4,228
    )
    
    $
    89
    
    
    $
    (5,753
    )
    
    $
    1,387Income (loss) per common shareContinuing operations income (loss) per share:Basic
    
    $
    (0.26
    )
    
    $
    0.01
    
    
    $
    (0.32
    )
    
    $
    0.16Diluted
    
    $
    (0.26
    )
    
    $
    0.01
    
    
    $
    (0.32
    )
    
    $
    0.16Pro forma continuing operations income (loss) per share:Basic
    
    $
    (0.27
    )
    
    $
    
    
    
    $
    (0.34
    )
    
    $
    0.15Diluted
    
    $
    (0.27
    )
    
    $
    
    
    
    $
    (0.34
    )
    
    $
    0.14Reported net income (loss) per share:Basic
    
    $
    (0.47
    )
    
    $
    0.02
    
    
    $
    (0.64
    )
    
    $
    0.17Diluted
    
    $
    (0.47
    )
    
    $
    0.02
    
    
    $
    (0.64
    )
    
    $
    0.17Pro forma net income (loss) per share:Basic
    
    $
    (0.48
    )
    
    $
    0.01
    
    
    $
    (0.66
    )
    
    $
    0.16Diluted
    
    $
    (0.48
    )
    
    $
    0.01
    
    
    $
    (0.66
    )
    
    $
    0.15Weighted average Black-Scholes fair value assumptionsRisk free interest rate
    
    
    5
    %
    
    
    3-5
    %
    
    
    5
    %
    
    
    3-5
    %Expected life
    
    3-8 yrs.
    
    3-8 yrs.
    
    3-8 yrs.
    
    3-8 yrs.Expected volatility
    
    
    65
    %
    
    
    68
    %
    
    
    65
    %
    
    
    68
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 8. Discontinued Operations On August 1, 2003, the Company sold the operating assets of DSI, which
comprised all of the operating assets of the Companys front-end services
segment. The Companys decision to sell DSI resulted from the
over-capacity in that market segment. Proceeds from the sale were
$250,000 cash and an $800,000 note receivable due over three years.
Additionally, the buyer assumed $143,000 of capitalized lease
obligations. Effective with the October 31, 2003 financial statements,
the operating results of DSI are presented as discontinued operations and
all prior period statements have been restated accordingly. A summary of
DSIs revenues and pretax income (loss) is reflected as follows. Three Months Ended
    
    Six Months EndedJuly 31,
    
    July 31,2003
    
    2004
    
    2003
    
    2004Revenues
    
    $
    2,432
    
    
    $
    
    
    
    $
    4,502
    
    
    $
    Pretax income (loss)
    
    $
    (1,879
    )
    
    $
    80
    
    
    $
    (2,792
    )
    
    $
    80
 8




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8. Discontinued Operations(continued) A summary of DSIs assets and liabilities is reflected as follows: January 31,
    
    July 31,2004
    
    2004Accounts and notes receivable of discontinued operations
    
    $
    815
    
    
    $
    273Other current assets of discontinued operations
    
    $
    83
    
    
    $
    63Non-current notes receivable and PP&E of discontinued
operations
    
    $
    491
    
    
    $
    353Accounts payable and accrued liabilities of
discontinued operations
    
    $
    399
    
    
    $
    15
 
 Item 2.Managements Discussion and Analysis of Financial Condition and
Results of Operations Overview Our revenues are directly related to the level of worldwide oil and gas
exploration activities and the profitability and cash flows of oil and gas
companies and seismic contractors, which in turn are affected by expectations
regarding the supply and demand for oil and natural gas, energy prices and
finding and development costs. Seismic data acquisition activity levels are
measured in terms of the number of active recording crews, known as the crew
count, and the number of recording channels deployed by those crews. Because
an accurate and reliable census of active crews does not exist, it is not
possible to make definitive statements regarding the absolute levels of seismic
data acquisition activity. Furthermore, a significant number of seismic data
acquisition contractors are either private or state-owned enterprises and
information about their activities is not available in the public domain. Due
to our unique position as the largest independent lessor of seismic equipment,
we are privy to information about future projects from many data acquisition
contractors. Based on our analysis of various indicators, including recent bid
activity, equipment movement and public announcement of companies adding crew
capacity, it appears that the worst of the downturn may be behind us and that
the seismic exploration market is in an uptrend. We believe that this increase
is being driven by historically high world oil and North American natural gas
prices, combined with the maturation of the worlds hydrocarbon producing
basins. The future direction and magnitude of changes in seismic data
acquisition activity levels will continue to be dependent upon oil and natural
gas prices. We lease and sell seismic data acquisition equipment primarily to seismic data
acquisition companies conducting land and transition zone seismic surveys
worldwide. We provide short-term leasing of seismic equipment to meet a
customers requirements and offer technical support during the lease term. The
majority of all active leases at July 31, 2004 were for a term of less than one
year. Seismic equipment held for lease is carried at cost, net of accumulated
depreciation. SAP sells equipment, consumables, systems integration,
engineering hardware and software maintenance support services to the seismic,
hydrographic, oceanographic, environmental and defense industries throughout
South East Asia and Australia. Seismic equipment leasing is susceptible to weather patterns in certain
geographic regions. Our lease revenue is seasonal, especially in Canada, where
a significant percentage of seismic survey activity occurs in the winter
months, from November through March. During the months in which the weather is
warmer, certain areas are not accessible to trucks, earth vibrators and other
equipment because of the unstable terrain. This seasonal leasing activity by
our Canadian customers has historically resulted in increased lease revenues in
our first and fourth fiscal quarters. Results of Operations For the three months ended July 31, 2004 and 2003 During the quarter ended July 31, 2004, our results of operations were affected
by several significant factors. Our revenues increased approximately $2.5
million, reflecting significant increases in both leasing and sales from the
corresponding quarter in the prior fiscal year. Revenues from short-term
leasing increased $0.7 million over the prior year primarily due to a
settlement reached with one of our marine customers related to rentals of
marine equipment during the prior two fiscal quarters that had not been
recorded due to collectibility issues. Sales of 9




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equipment increased by $1.7 million, compared to the prior year, primarily due
to several large sales transactions recorded in the quarter. Our fixed and variable costs are important factors affecting our results of
operations. Due to the size and age of our seismic equipment lease pool,
depreciation expense, which amounted to $2.7 million for the quarter ended July
31, 2004, is our single largest expense item. This expense will vary between
periods based on acquisitions of new equipment and sales of equipment with
remaining depreciable life. Direct costs of seismic leasing are variable
expenses that fluctuate with our equipment leasing revenues. The main
components of this cost are freight, sublease expenses and repairs and
maintenance, to the extent that repairs performed are normal wear and tear and
not billable to the lease customer. Our general and administrative expenses
increased significantly from the corresponding quarter in 2003, with the
increase consisting primarily of severance-related expenses related to the
resignation of our former chief financial officer during the quarter. Revenues For the quarter ended July 31, 2004, consolidated revenues increased by $2.5
million, or 63% to a total of $6.4 million, as compared to $3.9 million for the
corresponding quarter in 2003. The increase in revenues was principally due to
improvements in both leasing and sales activity during the quarter. For the
quarter ended July 31, 2004, leasing revenues increased $0.7 million, of which
approximately $0.6 million was related to rentals of marine equipment during
the prior two quarters that had not been recorded due to collectibility issues.
During the quarter, we agreed to accept certain marine seismic equipment owned
by the customer as payment for the invoices billed but not paid. The equipment
was appraised by a third-party and such values were used as the basis for the
settlement of these outstanding receivables. Additionally, our leasing
revenues significantly increased in our Australian operations but were largely
offset by decreases from our Canadian operations. Foreign currency translation
rates had the effect of increasing consolidated revenues in the quarter ended
July 31, 2004 by $0.1 million over the comparable quarter in 2003. Seismic equipment sales for the quarter ended July 31, 2004 were $3.0 million
as compared to $1.3 million for the comparable quarter in 2003. Cost of
equipment sales for the quarters ended July 31, 2004 and 2003 were $1.3 million
and $0.6 million, respectively. Gross margins on equipment sales were 58% and
57% for the quarters ended July 31, 2004 and 2003, respectively. Gross margins
on equipment sales will vary significantly between periods due to the mix of
sales revenue between new seismic and oceanographic equipment as compared to
sales of depreciated seismic equipment sold from our lease pool. Costs and Expenses For the quarter ended July 31, 2004, depreciation expense was $2.7 million,
which is $1.1 million, or 29%, lower than the depreciation expense in the
comparable quarter in 2003. The decrease in depreciation expense from the
quarter ended July 31, 2003 to 2004 was primarily due to certain equipment
reaching the end of its depreciable life during each of those years, coupled
with the sales of assets with remaining depreciable life. For the quarter
ended July 31, 2004, foreign currency translation rates had the effect of
increasing depreciation expense by $0.1 million as compared to the amount in
the comparable quarter in 2003. Direct costs for the quarter ended July 31, 2004 were $0.2 million, which was
approximately $0.3 million less than direct costs for the comparable quarter in
2003 primarily due to a decrease in repair expenses. General and administrative expenses for the quarter ended July 31, 2004 totaled
approximately $2.1 million, or $0.9 million greater than 2003 expenses of $1.2
million. During the quarter ended July 31, 2004, we incurred one-time
severance-related charges of approximately $0.7 million related to the
resignation of our former chief financial officer. Of this amount, $0.4
million was a non-cash stock-based compensation expense based on the estimated
fair value of the option grant on the date of grant using the Black-Scholes
option pricing model. The remaining increase in general and administrative
expenses was primarily due to an increase in travel, customer relations,
investor relations and professional fees, partially offset by a decrease in
insurance expense. For the quarter ended July 31, 2004, we recorded income from continuing
operations in the approximate amount of $0.1 million, compared to a loss from
continuing operations for the comparable quarter of 2003 of $2.3 million. 10




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Income from discontinued operations for the quarter ended July 31, 2004 was
$0.1 million, compared with a loss of $1.9 million for the comparable
quarter of 2003. For the six months ended July 31, 2004 and 2003 Revenues For the six months ended July 31, 2004, consolidated revenues increased by $4.8
million, or 49% to a total of $14.6 million, as compared to $9.8 million for
the corresponding period of the prior year. The increase in revenues was
principally due to improvements in both leasing and sales activity during the
period. For the six months ended July 31, 2004, leasing revenues increased
$2.2 million, of which approximately $0.6 million is related to rentals of
marine equipment during the prior two quarters that had not been recorded due
to collectibility issues. We agreed to accept certain marine seismic equipment
owned by the customer as payment for the invoices billed but not paid. The
equipment was appraised by a third-party and such values were used as the basis
for the settlement of these outstanding receivables. Additionally, our leasing
revenues significantly increased in our Australian and US operations but were
partly offset by a decrease from our Canadian operations. Foreign currency
translation rates had the effect of increasing consolidated revenues in the six
months ended July 31, 2004 by $0.4 million over the comparable period in 2003. Seismic equipment sales for the six months ended July 31, 2004 were $5.8
million as compared to $3.2 million for the comparable period in 2003. Cost of
equipment sales for the six months ended July 31, 2004 and 2003 were $2.8
million and $1.7 million, respectively. Gross margins on equipment sales were
52% and 45% for the six months ended July 31, 2004 and 2003, respectively.
Gross margins on equipment sales will vary significantly between periods due to
the mix of sales revenue between new seismic and oceanographic equipment as
compared to sales of depreciated seismic equipment sold from our lease pool. Costs and Expenses For the six months ended July 31, 2004, depreciation expense was $5.4 million,
which was $2.0 million, or 27%, lower than the depreciation expense in the
comparable six-month period in 2003. The decrease in depreciation expense for
the six months ended July 31, 2004 from the comparable six-month period ended
July 31, 2003 was principally due to certain equipment reaching the end of its
depreciable life during each of those years, coupled with the sales of assets
with remaining depreciable life. For the six months ended July 31, 2004,
foreign currency translation rates had the effect of increasing depreciation
expense by $0.2 million over the amount in the reported comparable period in
2003. Direct costs for the six months ended July 31, 2004 were $0.9 million, which
was relatively unchanged from the comparable period in 2003. General and administrative expenses for the six months ended July 31, 2004
totaled approximately $3.9 million, or $1.4 million greater than 2003 expenses
of $2.5 million. During the six months ended July 31, 2004, we incurred
one-time severance-related charges of approximately $0.7 million related to the
resignation of our former chief financial officer. Of this amount, $0.4
million was recorded as a non-cash stock-based compensation expense.
Additionally, during the six months ended July 31, 2004 we incurred
approximately $0.3 million in non-recurring professional fees related to the
internal investigation conducted by the Company. The remaining increase in
general and administrative expenses was primarily due to an increase in travel,
customer relations, investor relations, insurance, compensation expenses and
professional fees. For the six months ended July 31, 2004, we recorded income from continuing
operations in the amount of $1.4 million, compared to a loss from continuing
operations for the comparable six-month period of 2003 of $2.8 million. Income
from discontinued operations for the six months ended July 31, 2004 was $0.1
million, compared with a loss of $2.8 million for the comparable six-month
period of 2003. Liquidity and Capital Resources As of July 31, 2004, we had net working capital of approximately $13.3 million
as compared to net working capital of $7.4 million at January 31, 2004.
Historically, our principal liquidity requirements and uses of cash have been
for 11




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capital expenditures and working capital. Our principal sources of cash have
been cash flows from operations and proceeds from sales of lease pool
equipment. Net cash provided by operating activities for the six months ended
July 31, 2004 was $8.5 million, as compared to net cash provided by operating
activities of $5.0 million for the six months ended July 31, 2003. Net cash
used in financing activities for the six months ended July 31, 2004 was $2.4
million, compared to net cash used in financing activities for the comparable
period in 2003 of $1.0 million. We are committed to purchase $2.25 million of land data acquisition equipment
by December 31, 2004, under an agreement with Sercel. We expect that cash on
hand and cash flows from operations will be sufficient to meet this commitment.
Capital expenditures for the six months ended July 31, 2004 totaled
approximately $1.2 million as compared to capital expenditures of $1.5 million
for the comparable period in 2003. Our 2004 and 2003 capital expenditures for
the seismic equipment lease pool were made to fulfill specific lease contracts. At July 31, 2004, we had trade accounts and notes receivable of $2.1 million
that were more than 90 days past due. As of July 31, 2004, our allowance for
doubtful accounts was approximately $0.9 million, which management believes is
sufficient to cover any losses in our receivable balances. During the six
months ended July 31, 2004, the Company acquired seismic equipment in exchange
for cancellation of certain accounts receivable due from two customers in the
approximate amount of $0.7 million. In certain instances when customers have been unable to repay their open
accounts receivable balances, we have agreed to a structured repayment program
using an interest-bearing promissory note. In these cases, we provide a reserve
for doubtful accounts against the balance. Due to the uncertainty of
collection, we do not recognize the interest earned until the entire principal
balance has been collected. In most cases where we have a chronic collection
problem with a particular customer, future business is done on a prepayment
basis or if additional credit is extended, revenues are not recognized until
collected. Although the extension of repayment terms on open accounts
receivables temporarily reduces our cash flow from operations, we believe that
this practice is necessary in light of seismic industry conditions and that it
has not adversely affected our ability to conduct routine business. Additionally, we occasionally offer extended payment terms on equipment sales
transactions. These terms are generally less than one year in duration. Until
there is a question as to whether an account is collectible, the sales revenue
and cost of goods sold is recognized at the transfer of title of the equipment. In February 2002, we obtained an $8.5 million term loan with First Victoria
National Bank, the remaining principal balance of which was approximately $3.5
million at July 31, 2004. The loan is payable in forty-eight equal
installments of approximately $197,000 and bears interest at the rate of prime
plus 1/2%. The loan is secured by lease pool equipment and all proceeds from
lease pool equipment leases and sales. We paid for our $3.5 million in capital expenditures during the fiscal year
ended January 31, 2004, using $1.8 million in cash and entering into separate
short-term note agreements with three seismic equipment manufacturers related
to the purchase of equipment for our lease pool. The aggregate amount financed
by the manufacturers was $1.7 million, all of which has been repaid as of July
31, 2004. The notes called for monthly payments aggregating approximately
$121,000 and bore interest ranging from 0% to 8%. All three notes had 12-month
repayment terms and matured during fiscal 2005. On March 30, 2004, we obtained a $4 million revolving loan agreement and credit
line with First Victoria National Bank. The line allows us to borrow funds to
purchase equipment and is secured by the equipment purchased and any leases on
that equipment. Interest is payable monthly at prime plus 1/2%. Principal is
due on each note 25% after six months, 25% after nine months and the remaining
50% after a year from the date of each note. The last date that advances can
be made is June 30, 2005. We have not yet borrowed any funds available under
this line. Although we have sufficient cash to meet known commitments and no
current plans to draw down any amount, this credit line gives us the financial
flexibility to acquire equipment for resale and for lease, as needed, on short
notice to take advantage of strategic opportunities regardless of our cash
position at the time. At the present time, we believe that cash on hand and cash provided by future
operations will be sufficient to fund our anticipated capital and liquidity
needs over the next 12 months. However, should demand warrant, we may pursue
additional borrowings to fund capital expenditures and acquisitions. 12




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Critical Accounting Policies The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions in determining the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the period. Significant estimates made
by us in the accompanying consolidated financial statements relate to reserves
for uncollectible accounts receivable and useful lives of our lease pool assets
and their valuation. Critical accounting policies are those that are most important to the portrayal
of a companys financial position and results of operations and require
managements subjective judgment. Below is a brief discussion of our critical
accounting policies. Revenue Recognition Leases We recognize lease revenue ratably over the term of the lease until there is a
question as to whether it is collectible. Commission income is recognized once
it has been paid to us. We do not enter into leases with imbedded maintenance
obligations. Under our standard lease contract, the lessee is responsible for
maintenance and repairs to the equipment, excluding fair wear and tear. We
provide technical advice to our customers as part of our customer service
practices. Equipment Sales We recognize revenue and cost of goods sold from the equipment sales upon
transfer of title. We occasionally offer extended payment terms on equipment
sales transactions. These terms are generally less than one year in duration. Allowance for Doubtful Accounts We make provisions to the allowance for doubtful accounts periodically, as
conditions warrant, based on whether we believe such receivables are
collectible. In certain instances when customers have been unable to repay
their open accounts receivable balances, we have agreed to a structured
repayment program using an interest-bearing promissory note. In these cases, we
provide a reserve for doubtful accounts against the balance and do not
recognize interest earned until the entire principal balance has been
collected. Long-Lived Assets We carry property and equipment at cost, net of accumulated depreciation, and
compute depreciation on the straight-line method over the estimated useful
lives of the property and equipment, which range from three to seven years.
Buildings are depreciated over 40 years, property improvements are amortized
over 10 years and leasehold improvements are amortized over the life of the
leases. We review our long-lived assets for impairment at each reporting date.
If our assessment of the carrying amount of such assets exceeds the fair market
value in accordance with the applicable accounting regulations, we record an
impairment charge. During fiscal 2004, we recorded a non-cash impairment
charge of $0.7 million related to the sale of DSIs operating assets. Income Taxes We account for our taxes under the liability method, whereby we recognize, on a
current and long-term basis, deferred tax assets and liabilities which
represent differences between the financial and income tax reporting bases of
our assets and liabilities. A valuation allowance is established when
uncertainty exists as to the ultimate realization of net deferred tax assets.
As of January 31, 2003 and 2004, we have recorded a net deferred tax asset of
$9.4 million and $11.6 million, respectively. As we believe it is not assured
that these net deferred tax assets will be realized, we have provided valuation
allowances of $9.4 million and $11.6 million at January 31, 2003 and 2004,
respectively. We periodically reevaluate these estimates and assumptions as circumstances
change. Such factors may significantly impact our results of operations from
period to period. 13




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Item 3. Quantitative and Qualitative Disclosures About Market Risk We operate internationally, giving rise to exposure to market risks from
changes in foreign exchange rates to the extent that transactions are not
denominated in U.S. dollars. We typically denominate the majority of our lease
and sales contracts in U.S., Canadian and Australian dollars to mitigate the
exposure to fluctuations in foreign currencies. Since the majority of our
lease and sales contracts with our customers are denominated in U.S., Canadian
and Australian dollars, there is little risk of economic (as opposed to
accounting) loss from fluctuations in foreign currencies. 
 Item 4. Controls and Procedures As required by SEC Rule 13a-15(b), we evaluated, under the supervision and with
the participation of our management, including our principal executive officer
and principal financial officer, the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period covered by this
report. Our principal executive officer and principal financial officer have
concluded that, with the exceptions noted below, our current disclosure
controls and procedures are effective to timely alert them to material
information regarding the Company that is required to be included in our
periodic reports filed with the SEC, and that our internal controls are
effective to provide reasonable assurance that our financial statements are
fairly presented in conformity with generally accepted accounting principles.
This Item 4 contains the information regarding the evaluation of the Companys
disclosure controls and procedures that is referred to in paragraph 4(b) of the
certifications of the CEO and Controller attached as Exhibits 31.1 and 31.2 to
this report, and should be read in conjunction with those certifications for a
thorough understanding and presentation of that information. During the quarter ending April 30, 2004, management became aware of a possible
issue related to certain accounts receivable of our Canadian subsidiary,
Mitcham Canada, that were recognized in the fourth quarter of the fiscal year
ended January 31, 2004. In April 2004, an employee reported to the Audit
Committee some concern regarding the integrity of those receivables. Our Audit
Committee immediately began an investigation, engaging independent legal
counsel and independent forensic accountants. As a result of the investigation,
and based on comments made to us by our independent auditor, material
weaknesses in internal controls over financial reporting at Mitcham Canada
discussed below were identified and fully disclosed to our Audit Committee and
independent auditor. In addition, as a result of the independent investigation, we became aware of
an isolated incident in which certain of our employees overrode the system of
internal controls in connection with the preparation of an invoice. The
incident, which did not indicate a weakness in our system of internal controls
over financial reporting, had no effect on our financial statements, and was
fully disclosed to the Audit Committee and our independent auditors. We have identified the following weaknesses in internal controls over financial
reporting: Implementation of a winter season billing practice change for leasing customers
of Mitcham Canada that began in November 2003.Mitcham Canada equipment lease
customers were resistant to the acceptance of the recent changes in billing
policy for certain leased equipment. As a result, several customers disputed
their billings during the fourth quarter and receivables balance at January 31,
2004. These billing and collection issues were resolved in the first quarter of
fiscal 2005, when Mitcham Canada provided certain customers with credits of
disputed receivables. All resolutions have been appropriately accounted for. By way of explanation, the current market of seismic data acquisition
contractors in Canada is limited, consisting of perhaps between 12-16
contractors. Each of these contractors financial condition is sensitive to
changes in demand for seismic services and to the timeliness in which they are
paid for their services, which in turn affect the timing of when Mitcham Canada
is paid for its equipment leasing. To compete effectively in the market,
Mitcham Canada must respond to these market conditions. The lack of required formal high-level management reporting for Mitcham Canada,
along with regular on-site reviews of accounting policies and practices.We
have historically relied on non-standardized verbal updates from our
subsidiaries on high-level management issues, which can affect both the
timeliness and accuracy of accounting for certain transactions. Formal
high-level management reporting and regular on-site reviews of accounting
policies 14




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and practices would have sooner identified the issues discussed in the
preceding paragraph, and with more specificity. Prior to the investigation but
before the publication of our financial results for the fiscal year ended
January 31, 2004, disputed amounts were reflected in our general, but not our
specific, reserves for doubtful accounts. The lack of automated equipment inventory management systems at Mitcham Canada.
While our headquarters in Huntsville, Texas employs an inventory tracking and
management system that is fully integrated with its accounting system, Mitcham
Canada is not on the same fully integrated system. Instead, management relies
on manual reconciliations of equipment from spreadsheets to the accounting
system, which require accounting staff resources to track the movement of
equipment to and from the customer, as well as between Huntsville, Texas and
Calgary, Canada. This tracking process uses a number of databases, thus
creating inefficiencies in identifying and deploying equipment that is
available for rent, as well as additional required reconciliation procedures
between the databases and the general ledger. We are in the process of implementing the following changes or additions to our
internal controls and procedures, on a post-fiscal-year end basis:  
    
    We now require a monthly formal high-level executive summary for
Mitcham Canada and SAP as part of their regular monthly financial
reporting packages.  
    
    We have established quarterly (for Mitcham Canada) and semi-annual
(for SAP) on-site reviews of accounting policies and practices with
internal accounting personnel and local management of Mitcham Canada
and SAP, and formalized monthly telephonic reviews of the management
report.  
    
    We are evaluating how best to implement an integrated software
system to effectively track and account for lease equipment at Mitcham
Canada and SAP, and the timetable in which this can reasonably be
accomplished.  
    
    Until we can implement an integrated software system, we will
require more frequent reconciliations of the manual systems to the
general ledger accounts, and more levels of review of those
reconciliations.  
    
    We will engage our independent auditor to observe our physical
inventory of the Canadian lease pool during the coming summer months,
which is the Canadian low season.  
    
    We will as soon as practicable hire an internal auditor who will
report directly to the Audit Committee.  
    
    We are interviewing consultants to begin the Section 404 internal
controls documentation work so that there is adequate time for us to
comply with those requirements for the fiscal year ended January 31,
2006. In addition, our Chief Financial Officer, who was also a director and our Chief
Operating Officer, has resigned. We have therefore initiated a formal search
for a new CFO and COO. In the interim, our Controller is fulfilling the CFO
duties. Management views the short-term and long-term remediation of our internal
control deficiencies as a top-priority item. We will continue to evaluate the
effectiveness of our internal controls and procedures to take action as
appropriate. Other than implementing the improvements discussed above, there
have been no changes in our internal controls over financial reporting during
our most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting. Forward-Looking Statements and Risk Factors Certain information contained in this Quarterly Report on Form 10-Q (including
statements contained in Part I, Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations, Part I, Item 4. Controls
and Procedures and in Part II, Item 1. Legal Proceedings), as well as other
written and oral statements made or incorporated by reference from time to time
by us and our representatives in other reports, filings with the United States
Securities and Exchange Commission (the SEC), press releases, conferences,
or otherwise, may be deemed to be forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934 (the Exchange Act). This information
includes, without limitation, statements concerning our future financial
position and results of operations; planned capital expenditures; business
strategy and other plans for future operations; the future mix of revenues and
business; commitments and contingent liabilities; and future demand for our
services and predicted improvement in energy industry and seismic service
industry conditions. Although we believe that the expectations reflected in
such forward-looking statements are reasonable, we can give no assurance 15




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that
such expectations will prove to have been correct. When used in this report,
the words anticipate, believe, estimate, expect, may, and
similar expressions, as they relate to the Company and our management, identify
forward-looking statements. The actual results of future events described in
such forward-looking statements could differ materially from the results
described in the forward-looking statements due to the risks and uncertainties
set forth in our Annual Report on Form 10-K for the year ended January 31, 2004
and elsewhere within this Quarterly Report on Form 10-Q. 
 PART II. OTHER INFORMATION 
 Item 1.Legal Proceedings From time to time, the Company is a party to legal proceedings arising in the
ordinary course of business. The Company is not currently a party to any
litigation that it believes could have a material adverse effect on the results
of operations or financial condition of the Company. 
 Item 6.Exhibits and Reports on Form 8-K  (a)
    
    ExhibitsThe following documents are filed as exhibits to this Report:10.1  Separation Agreement, Consulting Agreement and Release, dated June
24, 2004 between P. Blake Dupuis and Mitcham Industries, Inc.*31.1  Certification of Billy F. Mitcham, Jr., Chief Executive Officer,
pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
Act, as amended31.2  Certification of Christopher C. Siffert, Corporate Controller,
pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
Act, as amended32.1  Certification of Billy F. Mitcham, Jr., Chief Executive Officer,
under Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. 135032.2  Certification of Christopher C. Siffert, Corporate Controller,
under Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. 1350*
    
    Management contract or compensatory plan or arrangement(b)
    
    Reports on Form 8-KCurrent Report on Form 8-K dated May 14, 2004 announcing the completion of
the Companys internal investigation.Current Report on Form 8-K dated June 2, 2004 related to the Companys
earnings for the fiscal year ended January 31, 2004.Current Report on Form 8-K dated June 14, 2004 related to the Companys
earnings for the first quarter ended April 30, 2004.Current Report on Form 8-K dated July 28, 2004 related to the Companys
distribution to shareholders of its 2004 Annual Report, the CEOs
accompanying letter of which contained certain forward-looking information
regarding industry trends, capital expenditures and profitability. 16




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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. MITCHAM INDUSTRIES, INC.Date: September 13, 2004
    
    /s/ Christopher C. Siffert
Christopher C. Siffert
Vice President & Corporate Controller
(Authorized Officer and Principal Accounting Officer)
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Exhibit Index  10.1  Separation Agreement, Consulting Agreement and Release, dated June
24, 2004 between P. Blake Dupuis and Mitcham Industries, Inc.*31.1  Certification of Billy F. Mitcham, Jr., Chief Executive Officer,
pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
Act, as amended31.2  Certification of Christopher C. Siffert, Corporate Controller,
pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
Act, as amended32.1  Certification of Billy F. Mitcham, Jr., Chief Executive Officer,
under Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. 135032.2  Certification of Christopher C. Siffert, Corporate Controller,
under Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. 1350*
    
    Management contract or compensatory plan or arrangement