##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q   (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended October 31, 2004 o
    
    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
(State or other jurisdiction of
incorporation or organization)
    
    76-0210849
(I.R.S. Employer
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 þ     No o Indicate by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes o    No þ Indicate the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date: 8,909,826 shares of Common Stock, $0.01 par value, were
outstanding as of December 13, 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
    
    
    15Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    15Item 6.
    
    Exhibits
    
    
    15Signatures
    
    
    17Certification of Billy F. Mitcham, Jr., CEOCertification of Christopher C. Siffert, ControllerCertification of Billy F. Mitcham, Jr., CEOCertification of Christopher C. Siffert, Controller
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements 
 MITCHAM INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data) January 31,
    
    October 31,2004
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,834
    
    
    $
    12,929Accounts receivable, net of allowance for
doubtful accounts of $847 and $532
    
    
    5,635
    
    
    
    5,433Current portion of notes receivable, net of
allowance for doubtful
notes of $28 and $492
    
    
    811
    
    
    
    308Prepaid expenses and other current assets
    
    
    700
    
    
    
    676Current assets of discontinued operations
    
    
    898
    
    
    
    389Total current assets
    
    
    14,878
    
    
    
    19,735Seismic equipment lease pool, property and equipment
    
    
    84,624
    
    
    
    77,063Accumulated depreciation of seismic equipment lease
pool, property and equipment
    
    
    (59,265
    )
    
    
    (58,341
    )Long-term assets of discontinued operations
    
    
    491
    
    
    
    286Other assets
    
    
    2
    
    
    
    8Total assets
    
    $
    40,730
    
    
    $
    38,751LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,532
    
    
    $
    1,471Current maturities  long-term debt
    
    
    2,203
    
    
    
    2,263Equipment notes payable
    
    
    1,296
    
    
    
    Deferred revenue
    
    
    345
    
    
    
    291Income taxes payable
    
    
    
    
    
    
    272Wages payable
    
    
    495
    
    
    
    543Accrued expenses and other current liabilities
    
    
    1,245
    
    
    
    428Current liabilities of discontinued operations
    
    
    399
    
    
    
    23Total current liabilities
    
    
    7,515
    
    
    
    5,291Long-term debt, net of current maturities
    
    
    2,418
    
    
    
    714Total liabilities
    
    
    9,933
    
    
    
    6,005Commitments 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 9,824,826 shares
issued, respectively
    
    
    97
    
    
    
    98Additional paid-in capital
    
    
    61,913
    
    
    
    62,615Treasury stock, at cost (915,000 shares)
    
    
    (4,686
    )
    
    
    (4,686
    )Deferred compensation
    
    
    (83
    )
    
    
    (124
    )Accumulated deficit
    
    
    (28,411
    )
    
    
    (27,709
    )Accumulated other comprehensive income
    
    
    1,967
    
    
    
    2,552Total shareholders equity
    
    
    30,797
    
    
    
    32,746Total liabilities and shareholders equity
    
    $
    40,730
    
    
    $
    38,751
 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
    
    Nine Months EndedOctober 31,
    
    October 31,2003
    
    2004
    
    2003
    
    2004Revenues:Equipment leasing
    
    $
    3,970
    
    
    $
    3,948
    
    
    $
    10,574
    
    
    $
    12,727Equipment sales
    
    
    3,305
    
    
    
    790
    
    
    
    6,497
    
    
    
    6,610Total revenues
    
    
    7,275
    
    
    
    4,738
    
    
    
    17,071
    
    
    
    19,337Costs and expenses:Direct costs  seismic leasing
    
    
    896
    
    
    
    450
    
    
    
    1,756
    
    
    
    1,350Cost of equipment sales
    
    
    1,555
    
    
    
    557
    
    
    
    3,300
    
    
    
    3,371General and administrative
    
    
    1,287
    
    
    
    1,471
    
    
    
    3,818
    
    
    
    5,419Provision for doubtful accounts
    
    
    25
    
    
    
    122
    
    
    
    25
    
    
    
    122Depreciation and amortization
    
    
    3,336
    
    
    
    2,700
    
    
    
    10,767
    
    
    
    8,113Total costs and expenses
    
    
    7,099
    
    
    
    5,300
    
    
    
    19,666
    
    
    
    18,375Operating income (loss)
    
    
    176
    
    
    
    (562
    )
    
    
    (2,595
    )
    
    
    962Other income (expense)  net
    
    
    (71
    )
    
    
    3
    
    
    
    (91
    )
    
    
    (76
    )Income (loss) from continuing operations before
income taxes
    
    
    105
    
    
    
    (559
    )
    
    
    (2,686
    )
    
    
    886Provision for income taxes
    
    
    
    
    
    
    264
    
    
    
    
    
    
    
    264Net income (loss) from continuing operations
    
    
    105
    
    
    
    (823
    )
    
    
    (2,686
    )
    
    
    622Income (loss) from discontinued operations, net of
income taxes of $0
    
    
    
    
    
    
    
    
    
    
    (2,792
    )
    
    
    80Net income (loss)
    
    $
    105
    
    
    $
    (823
    )
    
    $
    (5,478
    )
    
    $
    702Income (loss) per common share from continuing
operationsBasic
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    (0.31
    )
    
    $
    0.07Diluted
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    (0.31
    )
    
    $
    0.07Income (loss) per common share from discontinued
operationsBasic and diluted
    
    $
    
    
    
    $
    
    
    
    $
    (0.32
    )
    
    $
    0.01Net income (loss) per common share  basic and diluted
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    (0.63
    )
    
    $
    0.08Shares used in computing income (loss) per common
share:Basic
    
    
    8,795,000
    
    
    
    8,880,000
    
    
    
    8,763,000
    
    
    
    8,824,000Dilutive effect of common stock equivalents
    
    
    78,000
    
    
    
    
    
    
    
    
    
    
    
    411,000Diluted
    
    
    8,873,000
    
    
    
    8,880,000
    
    
    
    8,763,000
    
    
    
    9,235,000
 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) Nine Months EndedOctober 31,2003
    
    2004Cash flows from operating activities:Net income (loss) from continuing operations
    
    $
    (2,686
    )
    
    $
    622Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    10,767
    
    
    
    8,113Provision for doubtful accounts, net of charge offs
    
    
    73
    
    
    
    148Net book value of seismic equipment sold
    
    
    3,077
    
    
    
    1,770Changes in:Trade accounts receivable
    
    
    (5,291
    )
    
    
    358Accounts payable, accrued expenses and other
current liabilities
    
    
    429
    
    
    
    (612
    )Other, net
    
    
    132
    
    
    
    (27
    )Net cash provided by operating activities
    
    
    6,501
    
    
    
    10,372Cash flows from investing activities:Purchases of seismic equipment held for lease
    
    
    (2,747
    )
    
    
    (1,687
    )Purchases of property and equipment
    
    
    (114
    )
    
    
    (284
    )Net cash used in investing activities
    
    
    (2,861
    )
    
    
    (1,971
    )Cash flows from financing activities:Proceeds from issuance of common stock upon exercise of options
    
    
    
    
    
    
    703Payments on borrowings
    
    
    (1,564
    )
    
    
    (2,940
    )Net cash used in financing activities
    
    
    (1,564
    )
    
    
    (2,237
    )Net increase in cash and cash equivalents-continuing operations
    
    
    2,076
    
    
    
    6,164Net decrease in cash and cash equivalents-discontinued operations
    
    
    (2,679
    )
    
    
    (69
    )Cash and cash equivalents, beginning of period
    
    
    5,137
    
    
    
    6,834Cash and cash equivalents, end of period
    
    $
    4,534
    
    
    $
    12,929
 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 October 31, 2004; the results of operations for the three and
nine months ended October 31, 2004 and 2003; and the cash flows for the nine months ended
October 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 classified as discontinued
operations and all prior period statements have been reclassified accordingly. See Note 8.
All intercompany transactions and balances have been eliminated in consolidation. 3.Earnings Per Share For the three and nine months ended October 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
    
    Nine Months EndedOctober 31,
    
    October 31,2003
    
    2004
    
    2003
    
    2004Stock options
    
    
    78,000
    
    
    
    
    
    
    
    
    
    
    
    411,000Total dilutive securities
    
    
    78,000
    
    
    
    
    
    
    
    
    
    
    
    411,000
 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 changes
in foreign currency to U.S. dollar exchange rates, which is recorded as follows: Three Months Ended
    
    Nine Months EndedOctober 31,
    
    October 31,2003
    
    2004
    
    2003
    
    2004Net income (loss)
    
    $
    105
    
    
    $
    (823
    )
    
    $
    (5,478
    )
    
    $
    702Change in foreign
currency translation
adjustment
    
    
    1,320
    
    
    
    776
    
    
    
    3,528
    
    
    
    585Comprehensive income
(loss)
    
    $
    1,425
    
    
    $
    (47
    )
    
    $
    (1,950
    )
    
    $
    1,287
 5.Supplemental Statements of Cash Flows Information Supplemental disclosures of cash flow information for the nine months ended October 31, 2003
and 2004 are as follows: Nine Months Ended October 31,2003
    
    2004Interest paid, continuing operations
    
    $
    281
    
    
    $
    156Seismic equipment acquired in exchange
for cancellation of accounts receivable
    
    
    
    
    
    $
    685
 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
    
    Nine Months EndedOctober 31,
    
    October 31,2003
    
    2004
    
    2003
    
    2004Pro forma impact of fair value method (FAS 148)Reported income (loss) from continuing operations
    
    $
    105
    
    
    $
    (823
    )
    
    $
    (2,686
    )
    
    $
    622Less: fair value impact of employee stock compensation
    
    
    (85
    )
    
    
    (110
    )
    
    
    (255
    )
    
    
    (248
    )Pro forma income (loss) from continuing operations
    
    $
    20
    
    
    $
    (933
    )
    
    $
    (2,941
    )
    
    $
    374Reported net income (loss)
    
    $
    105
    
    
    $
    (823
    )
    
    $
    (5,478
    )
    
    $
    702Less: fair value impact of employee stock compensation
    
    
    (85
    )
    
    
    (110
    )
    
    
    (255
    )
    
    
    (248
    )Pro forma net income (loss)
    
    $
    20
    
    
    $
    (933
    )
    
    $
    (5,733
    )
    
    $
    454Income (loss) per common shareContinuing operations income (loss) per share:Basic
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    (0.31
    )
    
    $
    0.07Diluted
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    (0.31
    )
    
    $
    0.07Pro forma continuing operations income (loss) per share:Basic
    
    $
    
    
    
    $
    (0.11
    )
    
    $
    (0.34
    )
    
    $
    0.04Diluted
    
    $
    
    
    
    $
    (0.11
    )
    
    $
    (0.34
    )
    
    $
    0.04Reported net income (loss) per share:Basic
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    (0.63
    )
    
    $
    0.08Diluted
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    (0.63
    )
    
    $
    0.08Pro forma net income (loss) per share:Basic
    
    $
    
    
    
    $
    (0.11
    )
    
    $
    (0.65
    )
    
    $
    0.05Diluted
    
    $
    
    
    
    $
    (0.11
    )
    
    $
    (0.65
    )
    
    $
    0.05Weighted 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 reclassified accordingly. A summary of
DSIs revenues and pretax income (loss) is reflected as follows. Three Months Ended 
October 31,
    
    Nine Months Ended 
October 31,2003
    
    2004
    
    2003
    
    2004Revenues
    
    $
    22
    
    
    $
    
    
    
    $
    4,524
    
    
    $
    Pretax income (loss)
    
    $
    
    
    
    $
    
    
    
    $
    (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,
    
    October 31,2004
    
    2004Accounts and notes receivable of discontinued operations
    
    $
    815
    
    
    $
    277Other current assets of discontinued operations
    
    $
    83
    
    
    $
    112Non-current notes receivable and PP&E of discontinued
operations
    
    $
    491
    
    
    $
    286Accounts payable and accrued liabilities of
discontinued operations
    
    $
    399
    
    
    $
    23
 
 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 October 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 October 31, 2004 and 2003 For the quarter ended October 31, 2004, we recorded a net loss from continuing operations in the
approximate amount of $0.8 million, compared to net income from continuing operations for the
comparable quarter of 2003 of $0.1 million. 9




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During the quarter ended October 31, 2004, our results of operations were affected by several
significant factors. Our revenues decreased approximately $2.5 million, reflecting a significant
decrease in sales and a slight decrease in leasing revenues from the corresponding quarter in the
prior fiscal year. Sales of equipment decreased by $2.5 million, compared to the prior year,
primarily as a result of a large sale recorded in the prior years third 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 October 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. Revenues For the quarter ended October 31, 2004, consolidated revenues decreased by $2.5 million, or 35%, to
a total of $4.7 million, as compared to $7.3 million for the corresponding quarter in 2003. The
decrease in revenues was principally due to a large sale recorded in the prior years third
quarter. For the quarter ended October 31, 2004, leasing revenues decreased slightly to $3.9
million compared to $4.0 million in the prior year. Additionally, our leasing revenues
significantly increased in our Australian operations but were offset by decreases from our Canadian
and U.S. operations. A weakened U.S. dollar and its impact on foreign currency exchange rates had
the effect of increasing consolidated revenues in the quarter ended October 31, 2004 by $0.1
million over the comparable quarter in 2003. Equipment sales for the quarter ended October 31, 2004 were $0.8 million as compared to $3.3
million for the comparable quarter in 2003. Cost of equipment sales for the quarters ended October
31, 2004 and 2003 were $0.6 million and $1.6 million, respectively. Gross margins on equipment
sales were 29% and 53% for the quarters ended October 31, 2004 and 2003, respectively. Gross
margins on equipment sales may 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 October 31, 2004, depreciation expense was $2.7 million, which was $0.6
million, or 19%, lower than the depreciation expense in the comparable quarter in 2003. The
decrease in depreciation expense from the quarter ended October 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 October 31, 2004,
a weakened U.S. dollar and its impact on foreign currency exchange 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 October 31, 2004 were $0.5 million, which was approximately $0.4
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 October 31, 2004 totaled approximately
$1.5 million, or $0.2 million greater than 2003 expenses of $1.3 million. The increase in general
and administrative expenses was primarily due to an increase in investor relations, insurance,
customer relations and compensation expenses. For the quarter ended October 31, 2004, we recorded estimated income tax expense in the amount of
$0.3 million, compared to no income tax expense in the comparable quarter of the prior year. The
estimated tax expense is entirely attributable to the operations of SAP, after taking into account
all net operating loss carryforwards available to us. 10




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For the nine months ended October 31, 2004 and 2003 Revenues For the nine months ended October 31, 2004, we recorded income from continuing operations in the
amount of $0.6 million, compared to a loss from continuing operations for the comparable nine-month
period of 2003 of $2.7 million. Income from discontinued operations for the nine months ended
October 31, 2004 was $0.1 million, compared with a loss of $2.8 million for the comparable
nine-month period of 2003. For the nine months ended October 31, 2004, consolidated revenues increased by $2.3 million, or
13%, to a total of $19.3 million, as compared to $17.1 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 nine months ended October 31, 2004, leasing revenues increased
$2.2 million, of which approximately $0.7 million was related to rentals of marine equipment during
prior fiscal quarters that had not been recorded due to collectibility issues. We agreed to accept
certain marine seismic equipment owned by the customer and valued at approximately $0.6 million as
partial payment for the invoices billed but not paid in addition to a cash payment by the customer
of $50,000. 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 U.S. operations but were partly offset by a decrease
from our Canadian operations. A weakened U.S. dollar and its impact on foreign currency exchange
rates had the effect of increasing consolidated revenues in the nine months ended October 31, 2004
by $0.5 million over the comparable period in 2003. Equipment sales for the nine months ended October 31, 2004 were $6.6 million as compared to $6.5
million for the comparable period in 2003. Cost of equipment sales for the nine months ended
October 31, 2004 and 2003 were $3.4 million and $3.3 million, respectively. Gross margins on
equipment sales were 49% and 49% for the nine months ended October 31, 2004 and 2003, respectively.
Gross margins on equipment sales may 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 nine months ended October 31, 2004, depreciation expense was $8.1 million, which was $2.7
million, or 25%, lower than the depreciation expense in the comparable nine-month period in 2003.
The decrease in depreciation expense for the nine months ended October 31, 2004 from the comparable
nine-month period ended October 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 nine months ended October 31, 2004, a weakened U.S. dollar and its
impact on foreign currency exchange rates had the effect of increasing depreciation expense by $0.3
million over the amount in the reported comparable period in 2003. Direct costs for the nine months ended October 31, 2004 were $1.4 million, which was approximately
$0.4 million lower than the direct cost expense for the comparable period in 2003. The decrease
in direct costs is primarily a result of lower equipment repair expenses. General and administrative expenses for the nine months ended October 31, 2004 totaled
approximately $5.4 million, or $1.6 million greater than 2003 expenses of $3.8 million. During the
nine months ended October 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
nine months ended October 31, 2004 we incurred approximately $0.3 million in non-recurring
professional fees related to the internal investigation of the
Companys internal controls that was
conducted by the Company earlier in the year. 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 nine months ended October 31, 2004, we recorded estimated income tax expense in the amount
of $0.3 million, compared to no income tax expense in the comparable period of the prior year. The
estimated tax expense is entirely attributable to the operations of SAP, after taking into account
all net operating loss carryforwards available to us. 11




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Liquidity and Capital Resources As of October 31, 2004, we had net working capital of approximately $14.4 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 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 nine months ended October 31,
2004 was $10.4 million, as compared to net cash provided by operating activities of $6.5 million
for the nine months ended October 31, 2003. Net cash used in financing activities for the nine
months ended October 31, 2004 was $2.2 million, compared to net cash used in financing activities
for the comparable period in 2003 of $1.6 million. We are committed to purchase $2.25 million of land data acquisition equipment by December 31, 2004,
under an agreement with Sercel. During the nine months ended October 31, 2004, we issued purchase
orders to Sercel for new equipment purchases totaling approximately $3.6 million, with expected
delivery of the equipment in our fiscal fourth quarter. We expect that cash on hand and cash flows
from operations will be sufficient to meet this commitment. Capital expenditures for the nine
months ended October 31, 2004 totaled approximately $2.0 million as compared to capital
expenditures of $2.9 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 October 31, 2004, we had trade accounts and notes receivable of $1.9 million that were more than
90 days past due. As of October 31, 2004, our allowance for doubtful accounts was approximately
$1.0 million, which management believes is sufficient to cover any losses in our receivable
balances. During the nine months ended October 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. During the nine months ended October 31, 2004,
we issued a note receivable in the approximate amount of $0.3 million related to open accounts
receivable balances for one customer. The note bears interest at the rate of 10% per annum and
provides for eight monthly payments of approximately $42,000. 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 inception of
the transaction. In February 2002, we obtained an $8.5 million term loan with First Victoria National Bank, the
remaining principal balance of which was approximately $3.0 million at October 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 October
31, 2004. The notes provided 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 12




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advances can be made is June 30, 2005. We have not 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. On October 20, 2004, we issued a press release to announce that we entered into a nonbinding letter
of intent with Seamap International Holdings Pte Ltd regarding a potential acquisition of Seamap
International Holdings three subsidiaries. The letter of intent provides for a period during
which we will conduct a due diligence review of Seamap and negotiate a definitive purchase
agreement. We anticipate that the aggregate purchase price for Seamap will be $5.5 million in cash
and notes and an earn out component based on performance of up to an additional $2 million. 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. Subsequent Event It was announced on December 10, 2004, that our wholly-owned subsidiary, Seismic Asia Pacific Pty
Ltd. (SAP), has been chosen by the Australian Department of Defence as the preferred tenderer to
upgrade the Royal Australian Navys hydrographic survey system. SAP has been invited to enter into
formal contract negotiations to finalize contract details. If those negotiations with SAP are
unsuccessful, the Australian Department of Defence has retained the right to negotiate with other
tenderers. Subject to the successful completion of contract negotiations, the contract is expected
to have a value to SAP of more than AU $40 million. While the project is scheduled to begin in
late 2005 with completion anticipated in 2006, we cannot assure you that the contract will be
executed or that the transaction will be completed. 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 at the inception of the
transaction unless there is a question as to its collectibility. We occasionally offer extended
payment terms on equipment sales transactions. These terms are generally less than one year in
duration. 13




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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. 
 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 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. During the three months ended October 31, 2004, we have made no change in our internal
controls over financial reporting that has materially affected, or is 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 14




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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 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 4.Submission of Matters to a Vote of Security Holders  (a)
    
    The Company held its Annual Meeting of Shareholders on September 1, 2004. Shareholders
of record at the close of business on July 9, 2004 were entitled to vote.  (b)
    
    Shareholders elected each of the five directors nominated for the board of directors: Name of Nominee
    
    For
    
    Against
    
    WithheldBilly F. Mitcham, Jr.
    
    
    8,001,704
    
    
    
    3,500
    
    
    
    579,610R. Dean Lewis
    
    
    7,907,846
    
    
    
    97,358
    
    
    
    579,610John F. Schwalbe
    
    
    7,905,846
    
    
    
    99,358
    
    
    
    579,610Robert P. Capps
    
    
    7,991,604
    
    
    
    13,600
    
    
    
    579,610Peter H. Blum
    
    
    7,916,346
    
    
    
    88,858
    
    
    
    579,610
  (c)
    
    The Shareholders ratified approval of the Companys Amended and Restated 1998 Stock
Awards Plan: For
    
    Against
    
    Abstaining2,487,533
    
    
    
    1,052,050
    
    
    
    37,880
  (d)
    
    The Shareholders ratified the appointment of Hein & Associates LLP as the Companys
independent auditors: For
    
    Against
    
    Abstaining8,546,585
    
    
    
    17,171
    
    
    
    21,058
 
 Item 6.Exhibits The following documents are filed as exhibits to this Report: 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 amended
 15




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32.1  Certification of Billy F. Mitcham, Jr., Chief Executive Officer, under Section 906 of
the Sarbanes-Oxley Act of 2002, U.S.C. 1350 32.2  Certification of Christopher C. Siffert, Corporate Controller, under Section 906 of
the Sarbanes-Oxley Act of 2002, U.S.C. 1350 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: December 14, 2004
    /s/ Christopher C. SiffertChristopher C. SiffertVice President & Corporate
Controller

(Authorized Officer and Principal Accounting Officer) 17




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INDEX TO EXHIBITS ExhibitNo.
    
    Description31.1
    
    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