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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 April 30, 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: 8,799,994 shares of Common
Stock, $0.01 par value, were outstanding as of June 11, 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
    
    
    8Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    12Item 4. Controls and Procedures
    
    
    12PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    16Item 6. Exhibits and Reports on Form 8-K
    
    
    16Signatures
    
    
    18Certification of CEO Pursuant to Section 302Cert.of Corporate Controller Pursuant to Sec.302Certification of CEO Pursuant to Section 906Cert.of Corporate Controller Pursuant to Sec.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,
    
    April 30,2004
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,834
    
    
    $
    10,115Accounts receivable, net of allowance for doubtful accounts of $847
    
    
    5,635
    
    
    
    6,704Current portion of notes receivable, net of allowance for doubtful
notes of $28
    
    
    811
    
    
    
    256Prepaid expenses and other current assets
    
    
    700
    
    
    
    618Current assets of discontinued operations
    
    
    898
    
    
    
    325Total current assets
    
    
    14,878
    
    
    
    18,018Seismic equipment lease pool, property and equipment
    
    
    84,624
    
    
    
    79,188Accumulated depreciation of seismic equipment lease pool, property and
equipment
    
    
    (59,265
    )
    
    
    (57,524
    )Long-term assets of discontinued operations
    
    
    491
    
    
    
    421Other assets
    
    
    2
    
    
    
    9Total assets
    
    $
    40,730
    
    
    $
    40,112LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,532
    
    
    $
    1,676Current maturities  long-term debt
    
    
    2,203
    
    
    
    2,228Equipment notes payable
    
    
    1,296
    
    
    
    931Deferred revenue
    
    
    345
    
    
    
    583Wages payable
    
    
    495
    
    
    
    548Accrued expenses and other current liabilities
    
    
    1,245
    
    
    
    494Current liabilities of discontinued operations
    
    
    399
    
    
    
    170Total current liabilities
    
    
    7,515
    
    
    
    6,630Long-term debt, net of current maturities
    
    
    2,418
    
    
    
    1,851Total liabilities
    
    
    9,933
    
    
    
    8,481Commitments 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 shares issued
    
    
    97
    
    
    
    97Additional paid-in capital
    
    
    61,913
    
    
    
    61,913Treasury stock, at cost (915,000 shares)
    
    
    (4,686
    )
    
    
    (4,686
    )Deferred compensation
    
    
    (83
    )
    
    
    (75
    )Accumulated deficit
    
    
    (28,411
    )
    
    
    (27,041
    )Accumulated other comprehensive income
    
    
    1,967
    
    
    
    1,423Total shareholders equity
    
    
    30,797
    
    
    
    31,631Total liabilities and shareholders equity
    
    $
    40,730
    
    
    $
    40,112
 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 EndedApril 30,2003
    
    2004Revenues:Equipment leasing
    
    $
    3,966
    
    
    $
    5,401Equipment sales
    
    
    1,902
    
    
    
    2,805Total revenues
    
    
    5,868
    
    
    
    8,206Costs and expenses:Direct costs  seismic leasing
    
    
    348
    
    
    
    689Cost of equipment sales
    
    
    1,188
    
    
    
    1,551General and administrative
    
    
    1,283
    
    
    
    1,837Depreciation and amortization
    
    
    3,601
    
    
    
    2,707Total costs and expenses
    
    
    6,420
    
    
    
    6,784Operating income (loss):
    
    
    (552
    )
    
    
    1,422Other income (expense)  net
    
    
    26
    
    
    
    (52
    )Income (loss) from continuing operations
    
    
    (526
    )
    
    
    1,370Loss from discontinued operations, net of income taxes of $0
    
    
    (914
    )
    
    
    Net income (loss)
    
    $
    (1,440
    )
    
    $
    1,370Income (loss) per common share from continuing operations:Basic
    
    $
    (0.06
    )
    
    $
    0.16Diluted
    
    $
    (0.06
    )
    
    $
    0.15Loss per common share from discontinued operations:Basic and diluted
    
    $
    (0.10
    )
    
    $
    Net income (loss) per common share:Basic
    
    $
    (0.16
    )
    
    $
    0.16Diluted
    
    $
    (0.16
    )
    
    $
    0.15Shares used in computing income (loss) per common share:Basic
    
    
    8,743,000
    
    
    
    8,800,000Dilutive effect of common stock equivalents
    
    
    
    
    
    
    381,000Diluted
    
    
    8,743,000
    
    
    
    9,181,000
 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)
 Three Months EndedApril 30,2003
    
    2004Cash flows from operating activities:Income (loss) from continuing operations
    
    $
    (526
    )
    
    $
    1,370Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    3,601
    
    
    
    2,707Net book value of seismic equipment sold
    
    
    455
    
    
    
    940Changes in:Trade accounts receivable
    
    
    (1,888
    )
    
    
    (27
    )Accounts payable, accrued expenses and other
current liabilities
    
    
    216
    
    
    
    (336
    )Other, net
    
    
    (17
    )
    
    
    44Net cash provided by operating activities
    
    
    1,841
    
    
    
    4,698Cash flows from investing activities:Purchases of seismic equipment held for lease
    
    
    (415
    )
    
    
    (404
    )Purchases of property and equipment
    
    
    (57
    )
    
    
    (33
    )Net cash used in investing activities
    
    
    (472
    )
    
    
    (437
    )Cash flows from financing activities:Payments on borrowings
    
    
    (515
    )
    
    
    (907
    )Net cash used in financing activities
    
    
    (515
    )
    
    
    (907
    )Net increase in cash and cash equivalents-continuing operations
    
    
    854
    
    
    
    3,354Net decrease in cash and cash equivalents-discontinued
operations
    
    
    (751
    )
    
    
    (73
    )Cash, beginning of period
    
    
    5,137
    
    
    
    6,834Cash, end of period
    
    $
    5,240
    
    
    $
    10,115
 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 PresentationThe 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, 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
April 30, 2004; the results of operations for the three months ended
April 30, 2004 and 2003; and cash flows for the three months ended April
30, 2004 and 2003, have been included. The foregoing interim results are
not necessarily indicative of the results of the operations for the full
fiscal year ending January 31, 2005.2.
    
    OrganizationMitcham 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. 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 7. 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. All intercompany transactions and
balances have been eliminated in consolidation.3.
    
    Earnings Per ShareFor the three months ended April 30, 2003 and 2004, the following
potential common stock was used in the per share calculations. Three Months Ended April 30,2003
    
    2004Stock options
    
    
    
    
    
    
    381,000Warrants
    
    
    
    
    
    
    Total dilutive securities
    
    
    
    
    
    
    381,000
  4.
    
    Comprehensive IncomeSFAS 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 stockholders equity (deficit) during
the period except those resulting from investments by, or distributions
to, stockholders. The Company has comprehensive income related to the
change in its foreign currency translations account as follows: 6




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Three Months Ended April 30,2003
    
    2004Net income (loss)
    
    $
    (1,440
    )
    
    $
    1,370Change in foreign currency translation
adjustment
    
    
    1,764
    
    
    
    (544
    )Comprehensive income
    
    $
    324
    
    
    $
    826
  5.
    
    ReclassificationsCertain 2003 amounts have been reclassified to conform to the 2004
presentation. Such reclassifications had no effect on net income or
loss.6.
    
    Stock OptionsThe 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 EndedApril 30,2003
    
    2004Pro forma impact of fair value method (FAS 148)Reported income (loss) from continuing operations
    
    $
    (526
    )
    
    $
    1,370Less: fair value impact of employee stock
compensation
    
    
    (122
    )
    
    
    (83
    )Pro forma income (loss) from continuing operations
    
    $
    (648
    )
    
    $
    1,287Reported net income (loss)
    
    $
    (1,440
    )
    
    $
    1,370Less: fair value impact of employee stock
compensation
    
    
    (122
    )
    
    
    (83
    )Pro forma net income (loss)
    
    $
    (1,562
    )
    
    $
    1,287Income (loss) per common shareContinuing operations income (loss) per share:Basic
    
    $
    (0.06
    )
    
    $
    0.16Diluted
    
    $
    (0.06
    )
    
    $
    0.15Pro forma continuing operations income (loss) per
share:Basic
    
    $
    (0.07
    )
    
    $
    0.15Diluted
    
    $
    (0.07
    )
    
    $
    0.14Reported net income (loss) per share:Basic
    
    $
    (0.16
    )
    
    $
    0.16Diluted
    
    $
    (0.16
    )
    
    $
    0.15Pro forma net income (loss) per share:Basic
    
    $
    (0.18
    )
    
    $
    0.15Diluted
    
    $
    (0.18
    )
    
    $
    0.14Weighted average Black-Scholes fair value
assumptionsRisk free interest rate
    
    
    5.0
    %
    
    
    3-5
    %Expected life
    
    3-8 yrs.
    
    3-8 yrs.Expected volatility
    
    
    65
    %
    
    
    65
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
 7




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7.
    
    Discontinued OperationsOn 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 loss is reflected as follows. Three Months Ended April 30,2003
    
    2004Revenues
    
    $
    2,071
    
    
    $
    Pretax loss
    
    $
    (914
    )
    
    $
    
  A summary of DSIs assets and liabilities is reflected as follows: January 31,
    
    April 30,2004
    
    2004Accounts and notes receivable of discontinued operations
    
    $
    815
    
    
    $
    272Other current assets of discontinued operations
    
    $
    83
    
    
    $
    53Non-current notes receivable and PP&E of discontinued
operations
    
    $
    491
    
    
    $
    421Accounts payable and accrued liabilities of
discontinued operations
    
    $
    399
    
    
    $
    170
 
 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. An
accurate and reliable census of active crews does not exist, therefore, 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. Our analysis of the available information is that land-based data
acquisition activity is increasing. 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 April 30, 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. 8




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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 During the quarter ended April 30, 2004, our results of operations were
affected by several significant factors. Our revenues increased $2.3 million,
reflecting significant increases in both leasing and sales from the
corresponding quarter in the prior fiscal year. Revenues from short-term
leasing increased $1.8 million in the U.S. operations primarily because of our
recently expanded marine seismic business, coupled with the addition of several
significant new customers, as compared to the comparable period of the prior
year. Sales of equipment in the United States increased by $1.1 million
primarily due to three large sales transactions recorded in the quarter
totaling approximately $1.8 million. 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
April 30, 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 is a variable
expense that fluctuates 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
remained fairly level from the corresponding quarter in the 2003, except that
we incurred or accrued about $0.3 million on the special investigation
discussed at Item 4. Revenues For the quarter ended April 30, 2004, consolidated revenues increased by $2.3
million, or 40% to a total of $8.2 million, as compared to $5.9 million for the
corresponding quarter in 2003, driven by increases in both leasing and
sales activity during the year. In the quarter ended April 30, 2004, leasing
revenues increased $1.4 million, primarily as a result of an increase in our
North American revenues and our expanding marine seismic business. Foreign
currency translation rates had the effect of increasing consolidated revenues
in the quarter ended April 30, 2004 by $0.4 million over the comparable quarter
in 2003. Seismic equipment sales for the quarter ended April 30, 2004 were $2.8 million
as compared to $1.9 million for the comparable quarter in 2003. Cost of
equipment sales for the quarters ended April 30, 2004 and 2003 were $1.6
million and $1.2 million, respectively. Gross margins on equipment sales were
45% and 38% for the quarters ended April 30, 2004 and 2003, respectively. Gross
margins on equipment sales will vary significantly between periods due to the
mix of sales revenue between new seismic equipment versus sales of depreciated
seismic equipment being sold from our lease pool. Costs and Expenses For the quarter ended April 30, 2004, depreciation expense was $2.7 million,
which is $0.9 million, or 25%, lower than the depreciation expense in the
comparable quarter in 2003. During the quarter ended April 30, 2003, we
recorded depreciation expense in the amount of $3.6 million. For the quarter
ended April 30, 2004, foreign currency translation rates had the effect of
increasing depreciation expense by $0.2 million as compared to the amount in
the comparable quarter in 2003. The decrease of depreciation expense from the quarter ended April 30, 2003 to
2004 is largely because certain equipment reached the end of its depreciable
life during each of those years, coupled with the sales of assets with
remaining depreciable life. 9




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Direct costs for the quarter ended April 30, 2004 were $0.7 million, which was
approximately $0.3 million greater than direct costs for the comparable quarter
in 2003. General and administrative expenses for the quarter ended April 30, 2004
totaled approximately $1.8 million, or $0.6 million greater than 2003
expenses of $1.3 million. During the quarter ended April 30, 2004, we incurred
or accrued expenses of approximately $0.3 million in non-recurring professional
fees related to the recently completed internal investigation discussed at Item 4. The remaining increase in general
and administrative expenses is primarily due to an increase in insurance,
travel, customer relations and compensation expenses, partially offset by a
decrease in consulting expense. For the quarter ended April 30, 2004, we recorded income from continuing
operations in the amount of $1.4 million, compared to a loss from continuing
operations for the comparable quarter of 2003 of $0.5 million. The loss
from discontinued operations in the quarter ended April 30, 2004 was nil,
compared with a net loss of $0.9 million in the comparable quarter of 2003. Liquidity and Capital Resources As of April 30, 2004, we had net working capital of approximately $11.4 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 quarter ended
April 30, 2004 was $4.7 million, as compared to net cash provided by operating
activities of $1.8 million for the quarter ended April 30, 2003. Net cash used
in financing activities for the quarter ended April 30, 2004 was $0.9 million,
compared to net cash used in financing activities for the comparable quarter in
2003 of $0.5 million. We are committed to purchase $2.25 million of land data acquisition equipment
by December 31, 2004, under the Sercel Agreement. We expect that cash on hand
and cash flows from operations will be sufficient to meet this commitment.
Capital expenditures for the quarter ended April 30, 2004 totaled approximately
$0.4 million as compared to capital expenditures of $0.5 million for the
comparable quarter in 2003. Our 2004 and 2003 quarterly capital expenditures
for the seismic equipment lease pool were made to fulfill specific lease
contracts. At April 30, 2004, we had trade accounts and notes receivable of $1.5 million
that were more than 90 days past due. As of April 30, 2004, our allowance for
doubtful accounts was approximately $0.9 million, which management believes is
sufficient to cover any losses in our receivable balances. 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
and unless 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 $4.1
million at April 30, 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. 10




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We paid for our $3.5 million in capital expenditures during the fiscal year
ended January 31, 2004 in part by three 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, of which $0.9 million remains unpaid as of April 30, 2004. The
notes call for monthly payments aggregating approximately $121,000 and bear
interest ranging from 0% to 8%. All three notes have 12-month repayment terms
and mature 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 at any time as necessary 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. 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. 11




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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 carried out an evaluation, under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, of 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 quarter ending April 30, 2004, management became aware of a possible
issue related to certain accounts receivable accounts 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. 12




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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 any 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, and in one instance, a probable credit toward the future
purchase of equipment. 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 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 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 conduct a 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. 13




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
    
    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, we have retained a CFO consultant, Gary
Brooks, who, together with our Controller, are 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 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 below and elsewhere within this Quarterly Report on
Form 10-Q. Demand for Land-Based Seismic Data Not Assured Demand for our services depends on the level of spending by oil and gas
companies for exploration, production and development activities, as well as on
the number of crews conducting land and transition zone seismic data
acquisition worldwide, and especially in North America. Loss
of Significant Customers Could Adversely Affect Us We typically lease and sell significant amounts of seismic equipment to a
relatively small number of customers, the composition of which changes from
year to year as leases are initiated and concluded and as customers equipment
needs vary. Therefore, at any one time, a large portion of our revenues may be
derived from a limited number of customers. In the fiscal years ended January
31, 2002, 2003 and 2004, the single largest customer accounted for
approximately 22%, 13% and 11%, respectively, of our consolidated revenues.
Because our customer base is relatively small, the loss of one or more
customers for any reason could adversely affect our results of operations. Significant Defaults of Past-Due Customer Accounts Would Adversely Affect Our
Results of Operations On April 30, 2004, we had approximately $8.0 million of customer accounts and
notes receivable of which $1.5 million was over 90 days past due. At April 30,
2004, we had an allowance of $0.9 million to cover losses in our receivable
balances. Significant payment defaults by our customers in excess of the
allowance would have a material adverse effect on our financial position and
results of operations. 14




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International
Economic and Political Instability Could Adversely Affect Our Results of
Operations Our results of operations are dependent upon the current political and economic
climate of several international countries in which our customers either
operate or are located. International sources (including Canada) accounted for
approximately 74% of our revenues in the fiscal year ended January 31, 2004.
Since the majority of our lease and sales contracts with our customers are
denominated in U.S., Australian and Canadian dollars, there is little risk of
economic (as opposed to accounting) loss from fluctuations in foreign
currencies. However, our internationally sourced revenues are still subject to
the risk of currency exchange controls (in which payment could not be made in
U.S. dollars), taxation policies, and expropriation, as well as to political
turmoil, civil disturbances, armed hostilities, and other hazards. Foreign Currency Exchange Rates Have Increasingly Materially Affected Our
Results of Operations For accounting purposes, balance sheet accounts of the Canadian and Australian
subsidiaries are translated at the current exchange rate as of the end of the
accounting period. Income statement items are translated at average currency
exchange rates. The resulting translation adjustment is recorded as a separate
component of comprehensive income within shareholders equity. This translation
adjustment has become material because of the significant
amount of equipment assigned to our Canadian operations and the significant
fluctuations in the Canadian dollar exchange rate over the last few years. We Must Continually Obtain Additional Lease Contracts Our seismic equipment leases typically have a term of three to nine months and
provide gross revenues that recover only a portion of our capital investment.
Our ability to generate lease revenues and profits is dependent on obtaining
additional lease contracts after the termination of an original lease. However,
lessees are under no obligation to, and frequently do not, continue to lease
seismic equipment after the expiration of a lease. Although we have been
successful in obtaining additional lease contracts with other lessees after the
termination of the original leases, there can be no assurance that we will
continue to do so. Our failure to obtain additional leases or extensions beyond
the initial lease term would have a material adverse effect on our operations
and financial condition. Dependence on Key Personnel Our success is dependent on, among other things, the services of certain key
personnel, including specifically Billy F. Mitcham, Jr., our Chairman of the
Board, President and Chief Executive Officer. Mr. Mitchams employment
agreement is automatically renewed on a year-to-year basis until terminated by
either party giving 30 days notice prior to the end of the current term
(subject to earlier termination on certain stated events). The agreement
prohibits Mr. Mitcham from engaging in any business activities that are
competitive with our business and from diverting any of our customers to a
competitor for two years after the termination of his employment. The loss of
the services of Mr. Mitcham could have a material adverse effect on us. Our Seismic Lease Pool is Subject to Technological Obsolescence We have a substantial capital investment in seismic data acquisition equipment.
The development by manufacturers of seismic equipment of newer technology
systems or component parts that have significant competitive advantages over
seismic systems and component parts now in use could have an adverse effect on
our ability to profitably lease and sell our existing seismic equipment.
Significant improvements in technology may also require us to recognize an
asset impairment charge to our lease pool investment, and to correspondingly
invest significant sums to upgrade or replace our existing lease pool with
newer-technology equipment demanded by our customers. Weather Conditions Cause Seasonal Results The first and fourth quarters of our fiscal year have historically accounted
for a greater portion of our revenues than do our second and third quarters.
This seasonality in revenues is primarily due to the increased seismic survey
activity in Canada from November through March. This seasonal pattern may cause
our results of operations to vary 15




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significantly from quarter to quarter.
Accordingly, period-to-period comparisons are not necessarily meaningful and
should not be relied on as indicative of future results. Competition We have several competitors engaged in seismic equipment leasing and sales,
including seismic equipment manufacturers, data acquisition contractors and oil
and gas exploration companies that use seismic equipment, many of which have
substantially greater financial resources than us. There are also several
smaller competitors that, in the aggregate, generate significant revenue from
the sale of seismic survey equipment. Pressures from existing or new
competitors could adversely affect our business operations. We are also aware
of several companies that engage in seismic equipment leasing. We believe that
our competitors, in general, have neither as extensive a seismic equipment
lease pool as we do, or similar exclusive lease referral agreements with
suppliers. Competition exists to a lesser extent from seismic data acquisition
contractors that may lease equipment that is temporarily idle. Volatile Stock Prices and No Payment of Dividends Due to recent energy industry conditions, energy and energy service company
stock prices, including our stock price, have been extremely volatile. Such
stock price volatility could adversely affect our business operations by, among
other things, impeding our ability to attract and retain qualified personnel
and to obtain additional financing if such
financing is ever needed. We have historically not paid dividends on our common
stock and do not anticipate paying dividends in the foreseeable future. Possible Adverse Effect of Anti-Takeover Provisions; Potential Issuance of
Preferred Stock Certain provisions of our Articles of Incorporation and the Texas Business
Corporation Act may tend to delay, defer or prevent a potential unsolicited
offer or takeover attempt that is not approved by our Board of Directors but
that our shareholders might consider to be in their best interest, including an
attempt that might result in shareholders receiving a premium over the market
price for their shares. Because our Board of Directors is authorized to issue
preferred stock with such preferences and rights as it determines, it may
afford the holders of any series of preferred stock preferences, rights or
voting powers superior to those of the holders of common stock. Although we
have no shares of preferred stock outstanding and no present intention to issue
any shares of our preferred stock, there can be no assurance that we will not
do so in the future. Limitation on Directors Liability Our Articles of Incorporation provide, as permitted by governing Texas law,
that a director of the Company shall not be personally liable to the Company or
its shareholders for monetary damages for breach of fiduciary duty as a
director, with certain exceptions. These provisions may discourage shareholders
from bringing suit against a director for breach of fiduciary duty and may
reduce the likelihood of derivative litigation brought by shareholders on
behalf of the Company against a director. 
 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: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 amended 16




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31.2  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(b)
    
    Reports on Form 8-KDuring the quarter ended April 30, 2004, we filed a Current Report on Form
8-K announcing the delay in releasing the Companys earnings for the
fourth quarter and fiscal year ended January 31, 2004. 17




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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: June 11, 2004
    /s/ Christopher C. SiffertChristopher C. SiffertVice President & Corporate Controller
(Authorized Officer and Principal
Accounting Officer) 18




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Exhibit Index  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