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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form l0-K/A (Amendment No. 2) (Mark One)þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended January 31, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File No. 000-25142 Mitcham Industries, Inc. (Exact name of registrant as specified in its charter)
 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(Address of principal executive offices)
    
    77342(Zip Code)
 Registrants telephone number, including area code:
936-291-2277 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value
(Title of class) Indicate by check mark whether the registrant (1) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. 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 Aggregate market value of the voting stock held by non-affiliates of the registrant:
$28,115,679 as of July 31, 2004. As of April 17, 2005, there were outstanding 8,979,732 shares of the registrants common
stock, par value $.01, which is the only class of common or voting stock of the registrant. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT
    
    Part of 10-KProxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act
    
    PART IIIof 1934 with respect to the 2005 annual meeting of shareholders




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MITCHAM INDUSTRIES, INC.
AMENDMENT NO. 2 TO ANNUAL REPORT ON FORM 10-K/A 

EXPLANATORY NOTE This
Amendment No. 2 to the Annual Report on Form 10-K/A
(Amendment No. 2) amends and
restates in its entirety Mitcham Industries Annual Report on Form 10-K for the year ended January
31, 2005, filed on May 2, 2005 and as amended on May 17, 2005 (collectively, the Prior Form
10-K). Amendment No. 2 is being filed solely to re-file the certifications, which were
previously filed with the conforming signatures inadvertently omitted. Amendment No. 2 has no
impact on our previously reported audited financial statements and notes thereto as of January 31,
2005. Furthermore, this Amendment No. 2 does not reflect events occurring after the filing date of
the Prior Form 10-K and does not modify or update the disclosures in that form in any way other
than as explained above. TABLE OF CONTENTS  
 PART IItem 1. Business
    
    
    2Item 2. Properties
    
    
    10Item 3. Legal Proceedings
    
    
    11Item 4. Submission of Matters to a Vote of Security Holders
    
    
    11PART IIItem 5. Market for the Registrants Common Equity and Related Stockholder Matters
    
    
    11Item 6. Selected Financial Data
    
    
    12Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 8. Financial Statements and Supplementary Data
    
    
    18Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    18Item 9A. Controls and Procedures
    
    
    18PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    19Item 11. Executive Compensation
    
    
    19Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    19Item 13. Certain Relationships and Related Transactions
    
    
    19Item 14. Principal Accountant Fees and Services
    
    
    19PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    19Signatures
    
    
    22Certification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  1




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PART I 
 Item 1.Business Mitcham Industries, Inc. (the Company), a Texas corporation, was incorporated in 1987.
Since our organization, we have primarily been engaged in the leasing and sales of seismic
equipment to the seismic industry worldwide. The Company consists of the operations of Mitcham
Industries, Inc. and our two wholly owned subsidiaries, Mitcham Canada Ltd. and Seismic Asia
Pacific Pty Ltd. (SAP). We lease and sell geophysical and other equipment used primarily by seismic data acquisition
contractors to perform seismic data acquisition surveys on land and in transition zones (marsh and
shallow water areas). We conduct our operations on a worldwide basis and are the worlds largest
independent lessor of seismic equipment. 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. Over the last several years, advances in seismic technology have
increased drilling success rates, thereby reducing the overall costs
of finding oil and gas. These advances have made it more economical for exploration and production companies to procure more seismic data,
resulting in greater demand for our equipment. We own a variety of technologically advanced equipment acquired from the leading seismic
manufacturers. Our lease pool includes many types of equipment used in seismic data acquisition,
including all electronic components of land and transition zone seismic data acquisition systems,
geophones and cables, earth vibrators, peripheral equipment, survey and other equipment. A
substantial amount of our equipment lease pool is provided by two manufacturers, the Sercel
subsidiaries of Compagnie Generale de Geophysique (collectively, Sercel) and Input/Output, Inc.
(I/O). We believe that the majority of the advanced seismic data acquisition systems in use
worldwide are either Sercel or I/O systems. At January 31, 2005, approximately 43% of our
equipment lease pool, on a cost basis, consisted of seismic recording channels, with the remainder
consisting of geophones and other peripheral equipment. We lease our equipment on a short-term basis, generally for three to nine months, to seismic
contractors who need additional capacity to complete a seismic survey. Certain of our short-term
leases contain a purchase option. Short-term leasing enables our customers to achieve operating
and capital investment efficiencies. A typical seismic crew uses a wide variety of equipment to
perform seismic data acquisition surveys. Our customers may lease a small amount of equipment to
expand an existing crews capabilities or a complete seismic data acquisition system to equip an
entire crew. Demand for short-term seismic equipment leases is affected by many factors,
including: (i) the highly variable size and technological demands of individual seismic surveys,
(ii) seasonal weather patterns and sporadic demand for seismic surveys in certain regions and
(iii) costs of seismic equipment. We believe these factors allow seismic contractors to use
short-term seismic equipment leasing as a cost-effective alternative to purchasing additional
equipment. Our equipment lease rates vary according to an items expected useful life, utilization
and initial cost. We also sell a broad range of used seismic equipment on a worldwide basis and SAP sells
equipment, consumables, systems integration, engineering hardware and software maintenance support
services to the seismic, hydrographic, oceanographic, environmental and defense industries
throughout Southeast Asia and Australia. We have supply and exclusive lease referral agreements with several leading seismic
equipment manufacturers, including Sercel and Pelton Company, Inc., an Input/Output company,
(Pelton), which we believe provide us with certain competitive advantages. Under these
agreements, we are the exclusive worldwide short-term leasing representative for certain
products. Business Strategy Our business strategy is to meet the needs of users of seismic equipment through our
equipment leasing. To accomplish this, we have identified the following major objectives:  
    Provide a technologically advanced seismic equipment lease pool.We intend to
maintain the size and diversity of our equipment lease pool, including most recently,
the addition of marine equipment. We believe that the availability of a large and diverse
seismic equipment lease pool encourages seismic data acquisition contractors to lease,
rather than purchase, such equipment, due to the capital and operating efficiencies
provided by short-term leases. 2




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
    Continue to expand international operations.Historically, North and South
America have been our core operating areas, with a limited amount of international leasing
activities, but as domestic drilling activity has decreased, our revenues from
international sources have increased. We believe there are significant opportunities to
continue to expand our international leasing activities.
    Maintain alliances with major seismic equipment manufacturers.Our
relationships with leading seismic equipment manufacturers allow us to expand our
equipment lease pool on favorable terms. We believe such relationships improve our access
to customers and provide a competitive advantage.
    Pursue additional business development opportunities.We regularly evaluate
opportunities to expand our business activities within the oil service industry,
particularly in the seismic sector. Recent Developments On
October 20, 2004, we issued a press release to announce that we
had entered into a nonbinding
letter of intent with Seamap International Holdings Pte Ltd
(Seamap) regarding the potential acquisition of
its 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. We
announced on December 10, 2004 that SAP had been chosen by the Australian Department of Defence as the preferred tenderer
to upgrade the Royal Australian Navys hydrographic survey
system. SAP is currently engaged in 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. Seismic Technology and the Industry Seismic surveys are a principal source of information used by oil and gas companies to
identify geological conditions that are favorable for the accumulation of oil and gas and to
evaluate the potential for successful drilling, development and production of oil and gas. Seismic
technology has been used by the oil and gas industry since the 1920s and has advanced
significantly with improvements in computing and electronic technologies. Beginning in the early
1990s, the oil and gas industry has significantly expanded its use of 3-D seismic data, which
provides a more comprehensive subsurface image and is believed to have contributed to improved
drilling success rates, particularly in mature oil and gas basins such as those in North America.
Additionally, 2-D seismic data continues to be used in many areas where 3-D data acquisition is
cost prohibitive or logistical access is limited. . Oil and gas exploration companies utilize seismic data generated from the use of digital
seismic systems and peripheral equipment in determining optimal locations for drilling oil and gas
wells, in the development of oil and gas reserves and in reservoir management for the production
of oil and gas. A complete digital seismic data acquisition system generally consists of (i) a
central electronics unit that records and stores digital data (CEU), (ii) seismic recording
channel boxes that contain from one to eight seismic channels (channel boxes), (iii) geophones,
or seismic sensors, (iv) energy sources including dynamite, airguns or earth vibrators that create
the necessary acoustic wave to be recorded, (v) cables that transmit digital seismic data from the
channel boxes to the CEU, (vi) geographic survey equipment, (vii) drilling equipment for shot
holes and (viii) other peripheral, or accessory, equipment. In seismic data acquisition, an acoustic wave is generated at or below the earths surface
through the discharge of compressed air, the detonation of small explosive charges or the use of
vibrators. As the acoustic wave travels through the earth, it is reflected by the underlying rock
layers and the reflected energy is captured by the geophones, which are 3




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situated at intervals along paths from the point of acoustical impulse. The resulting signals
are then transmitted to the channel boxes, which convert the signals from analog to digital data
and transmit this data via cable to the CEU. The CEU stores the seismic data on magnetic tape or
disk for processing. The digital data is then input into a specialized seismic processing system
that uses sophisticated computer software programs to enhance the recorded signal and produce an
image of the subsurface strata. By interpreting seismic data, oil and gas exploration companies
create detailed maps of exploration prospects and oil and gas reservoirs. In the past, 2-D seismic survey was the standard data acquisition technique used to map
geologic formations over a broad area. 2-D seismic data can be visualized as a single vertical
plane of subsurface information. Data gathered from a 3-D seismic survey is best visualized as a
cube of information that can be sliced into numerous planes, providing different views of a
geologic structure with much higher resolution than is available with traditional 2-D seismic
survey techniques. 3-D seismic surveys generally require a larger amount of equipment than 2-D
surveys. By using a greater number of channels and flexible configuration, 3-D seismic data
provides more extensive and detailed information regarding the subsurface geology than does 2-D
data. As a result, 3-D data allows the geophysicists interpreting the data to more closely select
the optimal location of a prospective drill site or oil and gas reservoir. In the exploration and development process, oil and gas companies establish requirements for
seismic data acquisition programs based on their technical objectives. Because of the expense
associated with drilling oil and gas wells, decisions regarding whether or where to drill are
critical to the overall process. Since 3-D seismic data increase drilling success rates and reduce
costs, we believe that 3-D seismic surveys are now predominant. As a result of the increasing
requirements for this higher resolution data, which in turn requires additional channels to
collect and transmit the data, seismic data acquisition systems have been expanding in size during
the past several years. Industry advances include the use of high resolution 3-D, three-component geophones
(3D-3C), which enhance the 3-D image, and time lapse (4-D) seismic, where surveys are
periodically reacquired to allow the monitoring of producing oil and gas fields for optimal
production and reserve recovery. These and other technical advances have contributed to increased
drilling success rates and reduced oil and gas finding costs. With the expanded use of seismic technology, particularly 3-D seismic, the size of data
acquisition surveys has increased substantially in the past several years. Demand for higher
resolution data, larger surveys and more rapid completion of such surveys is requiring seismic
contractors to use data acquisition systems with a greater number of seismic recording channels.
Additionally, in many areas, such as North America, the size of seismic surveys varies
significantly, requiring frequent changes in the configuration of equipment and crews used for
seismic surveys. As a result of these advances, seismic survey channel count has increased from
smaller 2-D surveys, which typically averaged 120 channels, to larger 3-D surveys which today
average approximately 3,000 channels and often use 5,000 or more channels. We believe that many
seismic contractors will continue to meet changes in equipment needs by leasing incremental
equipment to expand crew size as necessary, thereby reducing the substantial capital expenditures
required to purchase such equipment. Business and Operations Seismic Equipment Leasing.We own a comprehensive lease pool of seismic equipment for
short-term lease to our customers, which primarily include seismic contractors. We lease such
equipment multiple times until the end of its useful life or its sale. Our equipment leasing
services generally include the lease of the various components of seismic data acquisition systems
and related equipment to meet a customers job specifications. Such specifications frequently vary
as to the number of required recording channels, geophones, energy sources (e.g., earth vibrators)
and other equipment. Our customers generally lease seismic equipment to supplement their owned
inventory of recording channels and related equipment. Our equipment lease pool includes a total of approximately 36,600 seismic recording channels
(each channel being capable of electronically converting seismic data from analog to digital
format and transmitting the digital data), geophones and cables, earth vibrators, peripheral
equipment and geographic survey and other equipment. All of our lease pool equipment is
manufactured by leading seismic equipment manufacturers and is widely used in the seismic
industry. Our equipment leases generally have terms of three to nine months and are typically renewable
on a month-to-month basis. We provide maintenance of our leased equipment during the lease term
for malfunctions due to failure of 4




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material and parts and will provide replacement equipment, as necessary. In addition, we
provide field technical support services when requested by our customers. Our equipment lease rates vary according to an items expected useful life, utilization and
initial cost. The lessee must also obtain and maintain insurance for the replacement value of the
equipment and a specified minimum amount of general liability and casualty insurance on the leased
equipment during the term of the lease. Before equipment is delivered, the lessee must certify
that we have been named an additional insured and loss payee on its policies. The lessee is
responsible for all maintenance and repairs of leased equipment other than those arising from
normal wear and tear. All taxes (other than U.S. federal income taxes) and assessments are the
contractual obligation of the lessee. Seismic equipment leasing is susceptible to weather patterns in certain geographic regions.
In Canada, a significant percentage of the seismic survey activity occurs in the winter season,
from November through March. During the months in which the weather is warmer, certain areas are
not accessible to trucks, earth vibrators and other heavy equipment because of the unstable
terrain. In the United States and in international markets other than Canada, most of the seismic
survey work is not usually affected by weather. As a result of Canadian weather conditions, we
attempt to manage our equipment lease pool to meet seasonal demands. Equipment leased in Canada
during the winter months is typically moved to other markets during periods of slack Canadian
demand. While it is our general practice to lease our seismic equipment on a monthly basis, to
respond to very competitive market conditions in the Canadian market in the winter months, we have
in recent years leased certain equipment on a day rate usage basis rather than on a flat monthly
fee basis. Seismic Equipment Sales.We buy equipment for resale in response to specific customer orders.
We also sell used equipment from our lease pool. On occasion, we will also hold equipment of third
parties and sell such equipment on consignment. Other Equipment Sales.SAP, headquartered in Brisbane, Australia, sells equipment,
consumables, systems integration, engineering hardware and software maintenance support services
to the seismic, hydrographic, oceanographic, environmental and defense industries throughout
Southeast Asia and Australia. SAP is a manufacturers representative for an array of equipment
lines. SAP also supplies and services hydrographic and radio and satellite positioning equipment
for government and private entities. Key Supplier Agreements The Sercel Lease Agreement Effective April 9, 2003, we renewed our then-existing exclusive leasing arrangement with
Sercel, a major manufacturer of 3-D seismic data acquisition equipment, by entering into a new
Equipment Lease Agreement (the Sercel Agreement). Under this agreement, we are Sercels exclusive third-party worldwide short-term (for leases
of a duration of less than one year) leasing representative for land-based seismic equipment and
its non-exclusive leasing representative with respect to certain marine seismic equipment. While
there are no restrictions on Sercels ability to undertake short-term or long-term leasing of
either land-based or marine seismic equipment, Sercel will provide us with information regarding
any potential leases or sales opportunities that Sercel does not undertake. The Sercel Agreement expires on December 31, 2006, but is subject to termination by
Sercel before that date on (a) Sercels reasonable belief that we have violated or intend to
violate the Foreign Corrupt Practices Act of 1977, as amended, (b) our refusal or inability to
certify that we are in compliance with laws applicable to its activities, or (c) our insolvency,
voluntary or involuntary bankruptcy, assignment for the benefit of creditors or discontinuance as
a going concern. Other Agreements We have an exclusive lease referral agreement (the Pelton Agreement) with Pelton, a leading
manufacturer and supplier of vibrator control electronics, which was acquired by I/O in January
2001. The terms of the Pelton Agreement are similar to those of the Sercel Agreement, except that
(a) Pelton may not engage in short-term leasing (leases for periods of less than a year) of the
equipment covered, and (b) the Pelton Agreement may be terminated by 5




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either party upon 90 days prior written notice. SAP has a number of manufacturers representation agreements for major product lines,
including: acoustic positioning systems, computer and electronic maintenance consumables, data
acquisition and management systems, electrostatic and plotter consumables, geophone, cable and
instrument repairs, geophones, hydrophones, connectors, cables, test equipment, GPS systems -
geodetic and navigational, including Sercel differential GPS, graphic recorders, heave
compensators and attitude sensors, hydrographic data acquisition systems, magnetometers,
oceanographic and hydrographic instrumentation, tide gauges and current meters, radio positioning
equipment, underwater and surface ROVs, land and marine seismic sources, side-scan sonar and
sub-bottom profiling systems, underwater communications and location devices, echo sounders and
transducers. In fiscal years 2002 and 2003, we had a Commercial Representative Agreement (the Sercel
Sales Agreement) with Georex, Inc., a wholly-owned subsidiary of Sercel, under which we were
Sercels designated sales representative in Canada for seismic data acquisition and other field
equipment. The Sercel Sales Agreement was subject to termination by either party on 90 days prior
written notice. On October 28, 2002, we were notified that Sercel was terminating the Sercel Sales
Agreement effective January 26, 2003. Total commissions earned under this agreement in the 2002
and 2003 fiscal years were $1,269,000 and $4,000, respectively. Discontinued Operations On January 28, 2002, we formed a wholly-owned subsidiary, Drilling Services, Inc. (DSI), to
own and operate a fleet of seismic shot hole drills and to provide other services required by
seismic data acquisition contractors. On August 1, 2003, we sold the operating assets of DSI. Our
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. We recorded an asset impairment charge of $700,000 in 2004 related to the sale of those
assets. The impairment charge is included in the loss from discontinued operations. The operating
results and assets and liabilities of DSI are presented as discontinued operations and all prior
period statements have been restated accordingly. We recorded a loss from discontinued operations,
net of applicable taxes, of $2,422,000 in fiscal 2003 and $2,715,000 in fiscal 2004 and income
from discontinued operations in the amount of $80,000 in fiscal 2005. Customers; Sales and Marketing Our lease customers are seismic data acquisition contractors. We typically have a small
number of lease customers, the composition of which changes yearly as leases are negotiated and
concluded and equipment needs vary. As of January 31, 2005, we had lease customers
with 66 active leases of various lengths, but typically for less than a year. Our
seismic equipment sales customers include seismic data acquisition contractors, foreign
governments, universities, engineering firms and research organizations worldwide. For
information regarding the extension of payment terms to customers, see Managements Discussion
and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources. We participate in both domestic and international trade shows and expositions to inform the
industry of our products and services. In addition to advertising in major geophysical trade
journals, direct advertising in the form of a semi-annual listing of equipment offerings is
provided to over 1,000 industry participants. In addition, we advertise our alliances with Sercel
and Pelton in major geophysical trade journals and list our seismic equipment available for sale
and lease on our website, www.mitchamindustries.com. We work with a network of representatives in several international markets, including Europe,
Asia, Russia and other former Soviet Union countries. These agents generate equipment sales and,
to a lesser extent, equipment leasing business for us and are compensated on a commission
basis. We also expend resources in the areas of customer service, product support and the
maintenance of customer relationships. 6




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A summary of the Companys revenues from foreign customers by geographic region is as
follows: Years Ended January 31,2003
    
    
    2004
    
    
    2005Canada
    
    $
    9,481,000
    
    
    $
    9,530,00
    
    
    $
    6,587,000UK / Europe
    
    
    408,000
    
    
    
    808,000
    
    
    
    1,950,000Mexico
    
    
    64,000
    
    
    
    110,000
    
    
    
    31,000South America
    
    
    1,135,000
    
    
    
    1,012,000
    
    
    
    2,931,000Asia
    
    
    625,000
    
    
    
    4,569,000
    
    
    
    7,170,000Other
    
    
    281,000
    
    
    
    513,000
    
    
    
    458,000Totals
    
    $
    11,994,000
    
    
    $
    16,542,000
    
    
    $
    19,127,000
 One customer represented approximately 13% of fiscal 2003 total revenues and two customers
represented approximately 11% and 10% of fiscal 2004 total revenues, respectively. One customer
represented approximately 10% of fiscal 2005 total revenues. No other customer exceeded 10% of
revenues for fiscal 2003, 2004 and 2005. Competition Our major competitors are the major seismic equipment manufacturers, who sell equipment on
financed terms. We face lesser competition from several companies that engage in seismic equipment
leasing, but competition has historically been fragmented and our competitors have not had as
extensive a seismic equipment lease pool as we do. We compete for seismic equipment leases on the
basis of (i) price and delivery, (ii) variety and availability of both peripheral seismic
equipment and complete data acquisition systems and (iii) length of lease term. Our lease pool
service and repair is also a major competitive advantage. We compete in the used equipment sales market with a broad base of seismic equipment owners,
including seismic data acquisition contractors, which use and eventually dispose of seismic
equipment, many of which have substantially greater financial resources than us. We believe there
is one competitor in the used seismic equipment sales business that generates comparable revenues
from such sales, as well as numerous, smaller competitors who, in the aggregate, generate
significant revenue from such sales. Suppliers We have several suppliers of seismic equipment for our lease pool. We acquire the majority of
our seismic lease pool equipment from equipment manufacturers, Sercel and I/O. Other suppliers of
peripheral seismic equipment include OYO Geospace Corporation (geophones, cables and seismic
cameras), Steward Cable (cables) and Seismic Source Company (shooting systems). From time to time,
we purchase new and used peripheral seismic equipment from various other manufacturers. Management
believes that its current relationships with its suppliers are satisfactory. Employees As of January 31, 2005, we employed 68 people, none of whom is covered by a collective
bargaining agreement. We consider our employee relations to be satisfactory. Web Site Access to Our Periodic SEC Reports Our internet address is http://www.mitchamindustries.com. We file Quarterly Reports on Form
10-Q and Annual Reports on Form 10-K, as well as Current Reports on Form 8-K with the U.S.
Securities and Exchange Commission (SEC). Materials we file with the SEC may be read and copied
at the SECs Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information

on the operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. The SEC also maintains an internet website at http://www.sec.gov that contains
reports, proxy and information statements, and other information regarding our company that we
file electronically with the SEC. We may from time to time provide important disclosures to
investors by posting them in the investor relations section of our web site, as allowed by SEC
rules. 7




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Forward-Looking Statements and Risk Factors Certain information contained in this Annual Report on Form 10-K (including statements
contained in Part I, Item 1. Business, Part I, Item 3. Legal Proceedings Part II, Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations and Part
II, Item 9A. Controls and Procedures), 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 2lE of the Securities Exchange Act of 1934 (the Exchange Act). This information
includes, without limitation, statements concerning:  o
    our future financial position and results of operations;o
    planned capital expenditures;o
    our business strategy and other plans for future operations;o
    the future mix of revenues and business;o
    our commitments and contingent liabilities;o
    future demand for our services; ando
    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 Annual Report on Form 10-K. Demand for Land-Based
Seismic Data Is 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. The levels of such spending are
influenced by:  o
    oil and gas prices and industry perceptions of future price levels;o
    the cost of exploring for, producing and delivering oil and gas;o
    the availability of current geophysical data;o
    the discovery rate of new oil and gas reserves; ando
    local and international political and economic conditions. The cyclical nature of the oil and gas industry has a significant effect on our revenues and
profitability. Historically, prices of oil and gas, as well as the level of exploration and
developmental activity, have fluctuated substantially. This has, in the past, and may, in the
future, adversely affect our business. We are unable to predict future oil and gas prices or the
level of oil and gas industry activity. A prolonged low level of activity in the oil and gas
industry will likely depress development activity, adversely affecting the demand for our products
and services and our financial condition and results of operations. Loss of Significant
Customers Will 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, 2003, 2004 and 2005, the single largest customer accounted for approximately 13%, 11%
and 10%, respectively, of our consolidated revenues. 8




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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 January 31, 2005, we had approximately $8.2 million of customer accounts and notes
receivable of which $1.6 million was over 90 days past due. At January 31, 2005, we had an
allowance of $1.0 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. International Economic and Political Instability Could Adversely 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 73% of our revenues in the
fiscal year ended January 31, 2005. Since the majority of our lease and sales contracts with our
customers are denominated in U.S., Australian and Canadian dollars, there is some 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. Statement of operations 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. Our Operations and
Financial Condition Would Be Materially Adversely Affected if We Are
Unable to
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. We Depend on Key Personnel Our success is dependent on, among other things, the services of certain key personnel,
including specifically Billy F. Mitcham, Jr., our 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 9




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upgrade or replace our existing lease pool with newer-technology equipment demanded by our
customers. Weather Conditions Cause Seasonal Fluctuations in Our Operating 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 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. We Face Competition in Our Seismic Equipment Leasing Activities We have several competitors engaged in seismic equipment leasing and sales, including seismic
equipment manufacturers and data acquisition contractors 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. Our Stock Price is Subject to Volatility 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. We Rely on a Small Number of Suppliers and Disruption in Vendor Supplies Could
Adversely Affect Our Results of Operations We purchase the majority of our seismic equipment for our lease pool from a small number of
suppliers. We believe we have satisfactory relationships with our suppliers. However, should
those relationships deteriorate, we may have difficulty in obtaining new technology demanded by
our customers and maintaining the existing equipment in accordance with manufacturers
specifications. In addition, we may, from time to time, experience supply or quality control
problems with suppliers, and these problems could significantly affect our ability to meet our
lease commitments. Reliance on certain suppliers, as well as industry supply conditions,
generally involve several risks, including the possibility of a shortage or a lack of
availability of key products and increases in product costs and reduced control over delivery
schedules; any of these could adversely affect our future results of operations. 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. 
 Item 2.Properties We own our corporate office and warehouse facilities in Huntsville, Texas. Our headquarters
facility consists of 25,000 square feet of office and warehouse space on approximately six acres.
We also lease approximately 31,000 square feet of office and warehouse space at our facility in
Calgary, Canada. SAP leases approximately 4,400 square 10




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##### Table of Contents



feet of office and warehouse space in Brisbane, Australia. Our facilities are adequately
utilized for our current operations. 
 Item 3.Legal Proceedings No material lawsuits existed or were pending as of the fiscal year ended January 31, 2005. 
 Item 4.Submission of Matters to a Vote of Security
Holders None 
 PART II 
 Item 5.Market for the Registrants Common Equity and Related Stockholder
Matters Market Information for Common Stock Our common stock is traded on the Nasdaq National Market under the symbol MIND. The
following table sets forth, for the periods indicated, the high and low sales prices as
reported on the Nasdaq National Market. High
    
    
    LowFiscal Year Ended January 31, 2004:First Quarter
    
    $
    1.47
    
    
    $
    0.87Second Quarter
    
    
    2.22
    
    
    
    1.15Third Quarter
    
    
    2.50
    
    
    
    1.65Fourth Quarter
    
    
    4.18
    
    
    
    1.90Fiscal Year Ended January 31, 2005:First Quarter
    
    $
    5.35
    
    
    $
    3.10Second Quarter
    
    
    5.25
    
    
    
    3.42Third Quarter
    
    
    7.68
    
    
    
    4.20Fourth Quarter
    
    
    8.94
    
    
    
    5.40
 As
of April 30, 2005, there were approximately 4,000 holders of the common stock. Dividend policy We have not paid any cash dividends on the common stock since our inception, and our Board
of Directors does not contemplate the payment of cash dividends in the foreseeable
future. It is the present policy of the Board of Directors to retain earnings, if any,
for use in developing and expanding our business. In the future, our payment of dividends
will also depend on our financial condition, results of operations and such other
factors as our Board of Directors may consider. 11




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##### Table of Contents



Securities Authorized for Issuance Under Equity Compensation Plans The following table sets forth certain information with respect to our equity compensation
plans as of January 31, 2005: EQUITY COMPENSATION PLAN INFORMATION Number of Securities
    
    
    Weighted-Average
    
    
    Number of Securitiesto be Issued Upon
    
    
    Exercise Price of
    
    
    Remaining AvailableExercise of
    
    
    Outstanding
    
    
    for Future IssuanceOutstanding Options,
    
    
    Options, Warrants
    
    
    Under EquityPlan Category
    
    Warrants and Rights
    
    
    and Rights
    
    
    Compensation Plans (1)Equity compensation plans approved
by our stockholders (2)
    
    
    1,383,282
    
    
    $
    4.19
    
    
    
    319,530Equity compensation plans not
approved by our stockholders
    
    
    0
    
    
    
    0
    
    
    
    0
   (1)
    
    Excludes securities to be issued upon the exercise of outstanding options, warrants
and rights.(2)
    
    Includes options granted under the 1994 Stock Option Plan, 1994 Non-Employee Director Stock
Option Plan, 1998 Amended and Restated Stock Awards Plan and 2000 Stock Option Plan, each of which is further described
in footnote 16 to our audited financial statements. Purchases of Equity
Securities By the Issuer and Affiliated Purchasers The Company has not purchased any of its securities during the last fiscal quarter. 
 Item 6. Selected Financial Data The selected consolidated financial information contained below is derived from our
Consolidated Financial Statements and should be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of Operations and our audited consolidated
financial statements. Years Ended January 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005(Amounts in thousands, except per share amounts)Net sales and other revenues
    
    $
    20,597
    
    
    $
    27,183
    
    
    $
    14,139
    
    
    $
    22,406
    
    
    $
    26,368Income (loss) from continuing operations
    
    
    (2,946
    )
    
    
    (8,457
    )
    
    
    (7,677
    )
    
    
    (3,574
    )
    
    
    2,049Income (loss) from continuing operations per common
share  basic
    
    
    (0.32
    )
    
    
    (0.95
    )
    
    
    (0.88
    )
    
    
    (0.41
    )
    
    
    0.23Income (loss) from continuing operations per common
share  diluted
    
    
    (0.32
    )
    
    
    (0.95
    )
    
    
    (0.88
    )
    
    
    (0.41
    )
    
    
    0.22Cash dividends declared per common share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance Sheet Data:Cash and marketable securities
    
    
    11,402
    
    
    
    8,244
    
    
    
    5,137
    
    
    
    6,834
    
    
    
    13,138Seismic equipment lease pool, property and
equipment, cost basis
    
    
    91,435
    
    
    
    90,381
    
    
    
    84,552
    
    
    
    84,624
    
    
    
    74,792Total assets
    
    
    72,561
    
    
    
    58,795
    
    
    
    44,340
    
    
    
    40,730
    
    
    
    41,395Long-term debt
    
    
    5,444
    
    
    
    4,079
    
    
    
    4,622
    
    
    
    2,418
    
    
    
    Total liabilities
    
    
    18,573
    
    
    
    16,192
    
    
    
    10,682
    
    
    
    9,933
    
    
    
    7,518Total shareholders equity
    
    
    53,988
    
    
    
    42,603
    
    
    
    33,658
    
    
    
    30,797
    
    
    
    33,877
 12




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##### Table of Contents



Item 7.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 believe that we are privy to information about
future projects from many data acquisition contractors. As a result, we believe that the seismic
exploration market is improving. 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 January 31, 2005 were
for a term of less than one year. Seismic equipment held for lease is carried at cost,
net of accumulated depreciation. In addition to leasing seismic data acquisition equipment, SAP
sells equipment, consumables, systems integration, engineering hardware and software maintenance
support services to the seismic, hydrographic, oceanographic, environmental and defense industries
throughout Southeast 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. For the years ended January 31, 2003, 2004 and 2005, revenues from foreign customers totaled
$12.0 million, $16.5 million and $19.1 million, representing 85%, 74% and 73% of consolidated
revenues in those fiscal years, respectively. The majority of our transactions with foreign
customers are denominated in United States, Australian and Canadian dollars. Results of Operations For the fiscal year ended January 31, 2005, we recorded net income from continuing operations
in the approximate amount of $2.0 million, compared to a net loss from continuing operations of
approximately $3.6 million and $7.7 million for the fiscal years ended January 31, 2004 and 2003,
respectively. Income from discontinued operations for the fiscal year ended January 31, 2005 was
$0.1 million compared to a net loss of $2.7 million and $2.4 million for the fiscal years ended
January 31, 2004 and 2003, respectively. During fiscal 2005, our results of operations were affected by several significant factors.
Our revenues increased $4.0 million, reflecting a significant increase in leasing and a
moderate increase in sales from the prior fiscal year. The increase in revenues was attributable
to several factors. Our increase in leasing revenues was largely attributable to the significant
increase in leasing activities recorded by SAP and our U.S. operations. Also contributing to our
increase in fiscal 2005 revenues was a general increase in demand for short-term rentals in the
United States from some of our seismic contractor customers. We believe that this increased demand
resulted from the decision by a major contractor to cease land-based operations in North America,
which benefited our customers due to the reduced level of competition. Our fixed and variable costs are an important factor affecting our results of operations. Due
to the size and age of our seismic equipment lease pool, depreciation expense, which
amounted to $10.6 million for the year ended January 31, 2005, was our single largest expense
item. This expense will vary between periods based on 13




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acquisitions of new equipment and sales of equipment with remaining depreciable life. Direct
cost 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. Revenues For fiscal 2005, our consolidated revenues increased $4.0 million, or 18%, to $26.4 million
from fiscal 2004, representing increases in both leasing and sales activity for the year. During
fiscal 2005, leasing revenues increased $3.3 million, of which approximately $0.4 million was
related to rentals of marine equipment during the prior fiscal year that had not been recognized
due to collectibility issues. In July 2004, 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 as of that date. 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 during the year
ended January 31, 2005 by $0.8 million over the prior year. For fiscal 2004, consolidated revenues increased $8.3 million, or 58%, to $22.4 million from
fiscal 2003, driven by increases in both leasing and sales activity during the year. Consolidated
revenues for fiscal 2003 decreased approximately $13.0 million, or 48%, from fiscal 2002 due
mainly to the loss of three significant customers that ceased operations in fiscal 2002. During fiscal 2004, leasing revenues increased $5.4 million, primarily as a result of an
increase in our North American revenues, our expanding marine seismic business, our
first large rental contract in the Southeast Asia market, and the inclusion of the operations of
SAP, which we acquired in December 2002. SAPs revenues for fiscal 2004 were approximately $3.3
million as compared to approximately $0.6 million in fiscal 2003. Foreign currency translation
rates had the effect of increasing fiscal 2004 revenues by $1.0 million from fiscal 2003 levels. Seismic equipment sales for fiscal 2005 were $9.3 million as compared to $8.6 million and
$5.8 million for fiscal 2004 and 2003, respectively. Cost of sales for the fiscal years ended
January 31, 2005, 2004 and 2003 was $4.6 million, $4.7 million and $4.6 million, respectively.
Gross margins on equipment sales were 50%, 45% and 22% for fiscal years 2005, 2004 and 2003,
respectively. Additionally, during fiscal 2005 we conducted a company-wide physical inventory of
our lease pool assets. As a result, we recorded a charge in the approximate amount of $50,000
related to missing equipment that had remaining net book value. This charge was recorded as a
component of cost of goods sold for the year. 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 Depreciation expense for fiscal 2005 amounted to $10.6 million, which was $3.1 million, or
23%, lower than fiscal 2004. For fiscal 2004, depreciation expense was $13.7 million, which was
$1.0 million, or 7%, lower than fiscal 2003 depreciation expense. During fiscal 2003, we recorded
depreciation expense in the amount of $14.7 million. Foreign currency translation rates had the
effect of increasing fiscal 2005 depreciation expense by approximately $0.4 million. For fiscal
2004, foreign currency translation rates had the effect of increasing depreciation expense by $1.1
million from the fiscal 2003 amount. The decrease in depreciation expense for the past three fiscal years was 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. We recorded direct costs related to seismic leasing for fiscal 2005 in the amount of $1.6
million, which was approximately $0.7 million lower than fiscal 2004. The decrease was primarily
due to a decrease in sublease expenses and repair costs during fiscal 2005. Direct costs for
fiscal 2004 were $2.3 million, which was approximately $1.0 million greater than fiscal 2003
direct costs. The increase was largely attributable to an increase in sublease expenses of
$645,000. For fiscal 2003, direct costs totaled $1.4 million, representing a decrease of $0.9
million from the fiscal 2002 amount of $2.2 million. This decrease was attributable to the
significant decrease in leasing activity during the 14




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fiscal year. Specifically, the decrease was mainly attributable to decreases in freight,
equipment repairs and sublease expenses of $134,000, $474,000 and $276,000, respectively. Direct
costs typically fluctuate with leasing revenues, as the three main components of direct costs are
freight, equipment repairs and sublease expense. General and administrative expenses for fiscal 2005 totaled $7.0 million, or $1.9 million
greater than fiscal 2004 expenses of $5.1 million. During fiscal 2005, 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 year 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, rent and utilities and professional fees.
General and administrative expenses for fiscal 2004 totaled $5.1 million, or $0.6 million greater
than fiscal 2003 expenses of $4.5 million. This increase was due to the inclusion of the results
of operations of SAP for a full year, which had general and administrative expenses totaling $0.5
million greater than the prior year. For the fiscal year ended January 31, 2003, our general and
administrative expenses totaled $4.5 million, or $0.1 million above those of fiscal 2002, which
was entirely attributable to the inclusion of SAP. During fiscal 2005 and 2004, we recorded a provision for doubtful accounts in the amount of
$155,000 and $25,000, respectively, compared to a non-cash net benefit for doubtful accounts in
the amount of $1.9 million recorded in fiscal 2003. Of this net benefit, approximately $1.7
million represents recoveries of receivables written off in the prior fiscal year. The recovery
was in the form of seismic equipment that we accepted as a settlement of trade receivables owed us
by a former customer, who ceased operations that year. The remaining $0.2 million benefit resulted
from our collecting an outstanding note receivable that had been fully reserved in prior fiscal
years due to the uncertainty of collection. Once the funds were collected, we reduced our
allowance for doubtful accounts and recorded the net benefit. At January 31, 2005 and 2004, we
had past due trade accounts and note receivables in the approximate amount of $1.6 million and
$1.7 million, respectively. As of January 31, 2005 and 2004, our allowance for doubtful accounts
and notes receivable amounted to $1.0 million and $0.9 million, respectively. During fiscal 2004, we recorded a non-cash impairment charge of $0.7 million against assets
held for sale as a result of our decision to sell the operating assets of DSI. No such charge was
recorded in fiscal 2005 or 2003. For fiscal 2005, we recorded estimated income tax expense in the amount of $0.3 million,
compared to no income tax expense in fiscal 2004 and a net tax benefit of approximately $1.6
million in fiscal 2003. Liquidity and Capital Resources As of January 31, 2005, we had net working capital of approximately $13.9 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
year ended January 31, 2005 was $17.0 million, as compared to net cash provided by operating
activities of $9.9 million and $3.4 million for the years ended January 31, 2004 and 2003,
respectively. Net cash used in financing activities for the year ended January 31, 2005 was $4.7
million, compared to net cash used in financing activities for the year ended January 31, 2004 of
$2.1 million and net cash provided by financing activities of $0.1 million for fiscal year 2003. Capital expenditures for the 2005 fiscal year totaled approximately $6.0 million as compared
to capital expenditures of $3.6 million and $4.8 million for fiscal 2004 and 2003, respectively.
Our capital expenditures during the past three fiscal years were made to fulfill specific lease
contracts. During fiscal 2005, we fulfilled our $2.25 million Sercel purchase commitment in its
entirety. At January 31, 2005, we had trade accounts and notes receivable of $1.6 million that were
more than 90 days past due. As of January 31, 2005, our allowance for doubtful accounts was
approximately $1.0 million, which management believes is sufficient to cover any losses in our
trade accounts receivable and notes receivable. During fiscal 2005, we acquired seismic equipment
in exchange for cancellation of certain accounts receivable due from three 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 15




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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 fiscal 2005, 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. Unless there is a question as to
whether an account is collectible, the sales revenue and cost of goods sold is recognized upon
agreement of terms and delivery has occurred. In February 2002, we obtained an $8.5 million term loan with First Victoria National Bank,
the remaining principal balance of which was approximately $0.9 million at January 31, 2005. The
loan is payable in forty-eight equal installments of $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 $3.6 million in capital expenditures during fiscal 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 January 31,
2005. 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 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. During fiscal 2003, we repurchased 7,800 shares of our common stock for an aggregate cost of
$15,000, or an average cost of $1.97 per share. We did not repurchase any shares of our common
stock during fiscal 2005 or 2004. We
may incur substantial capital expenditures related to the potential acquisition of Seamaps three subsidiaries and the contemplated expansion into other international
markets. 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. The following table sets forth estimates of future payments of our consolidated contractual
obligations as of January 31, 2005: Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsLong-term debt and financed
vehicle notes payable
    
    $
    1,061,000
    
    
    $
    976,000
    
    
    $
    78,000
    
    
    $
    7,000
    
    
    $
    0Operating leases
    
    
    675,000
    
    
    
    232,000
    
    
    
    382,000
    
    
    
    61,000
    
    
    
    0Total
    
    $
    1,736,000
    
    
    $
    1,208,000
    
    
    $
    460,000
    
    
    $
    68,000
    
    
    $
    0
 16




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Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and assumptions in
determining the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
period. Significant estimates made by us in the accompanying consolidated financial statements relate to reserves for uncollectible accounts receivable and useful lives of our lease
pool assets and their valuation. Critical accounting policies are those that are most important to the portrayal of a
companys financial position and results of operations and require managements subjective
judgment. Below is a brief discussion of our critical accounting policies. Revenue Recognition Leases We recognize lease revenue ratably over the term of the lease until there is a question as to
whether it is collectible. Commission income is recognized once it has been paid to us. We do not
enter into leases with embedded maintenance obligations. Under our standard lease, the lessee
is responsible for maintenance and repairs to the equipment, excluding normal 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 agreement of terms
and when delivery has occurred, 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. Allowance for Doubtful Accounts We make provisions to the allowance for doubtful accounts periodically, as conditions
warrant, based on whether 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 shorter of useful life or 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, 2004 and 2005, we have recorded a net deferred tax asset of $10.1 million and $9.9
million, respectively. As we believe it is not assured that these net deferred tax assets will be
realized, we have provided valuation allowances of $10.1 million and $9.9 million at January 31,
2004 and 2005, respectively. We periodically reevaluate these estimates and assumptions as
circumstances change. Such factors may significantly impact our results of operations from period
to period. 17




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New Accounting Pronouncement In December 2004, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standards 123, (revised 2004) Share-Based Payment (SFAS 123(R)). This
statement is a revision of SFAS 123, Accounting for Stock-Based Compensation as amended (SFAS
123), and requires entities to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award. The cost will be
recognized over the period during which an employee is required to provide services in exchange
for the award (usually the vesting period). SFAS 123(R) covers various share-based compensation
arrangement rights and employee share purchase plans. SFAS 123(R) eliminates the ability to use
the intrinsic value methods of accounting for share options, as provided in Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS 123(R) is
effective is fiscal year 2007, with early adoption encouraged. The Company is currently
evaluating the statements transition methods and does not expect this statement to have an effect
materially different than that of the pro forma SFAS 123 disclosures provided in Note 1 to the
Companys consolidated financial statements. 
 Item 7A.Quantitative and Qualitative Disclosures about Market Risk Market Risk We are exposed to market risk, which is the potential loss arising from adverse changes in
market prices and rates. We have not entered, or intend to enter, into derivative financial
instruments for hedging or speculative purposes. Foreign Currency 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 do not
currently hold or issue forward exchange contract or other derivative instruments for hedging or
speculative purposes. (A foreign exchange contract is an arrangement to exchange different
currencies at a given date and at a specified rate.) Foreign exchange gains and losses are the
result of fluctuations in the U.S. dollar against foreign currencies and are included in other
income in the statements of operations. We recognized foreign exchange losses in countries where
the USD weakened against the local currency and we had net monetary liabilities denominated in the
local currency and in countries where the USD strengthened against the local currency and we had
net monetary assets denominated in the local currency. We recognized foreign exchange gains in
countries where the USD strengthened against the local currency and we had net monetary
liabilities denominated in the local currency and in countries where the USD weakened against the
local currency and we had net monetary assets denominated in the local currency. Our financial results may be affected by changes in foreign currency exchange rates. Our
consolidated balance sheet at January 31, 2005 reflected approximately $4.8 million of net working
capital related to our foreign subsidiaries. A majority of our foreign net working capital is
within Canada and Australia. The subsidiaries in those countries receive their income and pay
their expenses primarily in Canadian and Australian dollars, respectively. To the extent that
transactions of these subsidiaries are settled in Canadian and Australian dollars, a devaluation
of these currencies versus the U.S. dollar could reduce the contribution from these subsidiaries
to our consolidated results of operations as reported in U.S. dollars. A weakened U.S. dollar and its impact on foreign currency exchange rates had the effect of
increasing consolidated revenues during the year ended January 31, 2005 by $0.8 million over the
prior year. 
 Item 8.Financial Statements and Supplementary Data The information required by this item appears as pages F-1 through F-21 hereof and
incorporated herein by reference. 
 Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None 
 Item 9A.Controls and Procedures As required by SEC Rule 13a-15(b), we have evaluated, under the supervision and with the
participation of our 18




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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 disclosure controls and procedures 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 January 31, 2005, we have made no change in our internal
control over financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. 
 PART III 
 Item 10.Directors and Executive Officers of the Registrant Information regarding our directors and executive officers will be set forth in the proxy
statement for the 2005 Annual Meeting of Shareholders under the heading Election of Directors.
Information regarding compliance by our officers, directors and control persons with Section 16(a)
of the Securities Exchange Act of 1934 will be set forth in our proxy statement for the 2005
Annual Meeting of Shareholders under the heading Other Matters-Compliance with Section 16(a) of
the Exchange Act. 
 Item 11.Executive Compensation Information regarding executive compensation will be set forth in our proxy statement for the
2005 Annual Meeting of Shareholders. 
 Item 12.Security Ownership of Certain Beneficial Owners and Management Information regarding security ownership of certain beneficial owners and management and
related stockholder matters will be set forth in our proxy statement for the 2005 Annual Meeting
of Stockholders. 
 Item 13.Certain Relationships and Related Transactions Information regarding certain relationships and related transactions will be set forth in our
proxy statement for the 2005 Annual Meeting of Shareholders. 
 Item 14.Principal Accounting Fees and Services Information regarding principal accounting fees and services will be set forth in our proxy
statement for the 2005 Annual Meeting of Shareholders. 
 PART IV 
 Item 15.Exhibits and Financial Statement Schedules (a) List of Documents Filed (1) Financial Statements The financial statements filed as part of this Annual Report are listed in Index to
Consolidated Financial Statements on page F-l. (2) Financial Statement Schedules 19




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##### Table of Contents



This Annual Report includes the following financial statement
schedule: Schedule II  Valuation and Qualifying
Accounts (3) Exhibits- The exhibits required by Item 601 of Regulation S-K are listed in subparagraph
(c) below. ( c) Exhibits ExhibitNumber3.1
    
    -
    
    Amended and Restated Articles of Incorporation of Mitcham Industries, Inc. (1) (Exhibit 3.1)3.2
    
    -
    
    Second Amended and Restated Bylaws of Mitcham Industries, Inc. (11)9
    
    -
    
    Voting Agreement, dated September 20, 1993, among the company, Billy F. Mitcham, Jr. and
certain shareholders (2) (Exhibit 9)*10.1
    
    -
    
    Employment Agreement, dated January 15, 1997, between the Company and Billy F. Mitcham, Jr.
(3) (Exhibit 10.4)10.2
    
    -
    
    Exclusive Lease Referral Agreement, dated May 14, 1996, between the Company and Pelton
Company, Inc., an Oklahoma corporation (Pelton) (4)10.3
    
    -
    
    First Amendment to Exclusive Lease Referral Agreement, dated January 15, 1997, between the
Company and Pelton (3) (Exhibit 10.17)10.4
    
    -
    
    Second Amendment to Exclusive Lease Referral Agreement, dated November 24, 1997, between
Mitcham Industries, Inc. and Pelton (5) (Exhibit 10.3)*10.5
    
    -
    
    Mitcham Industries, Inc. 1994 Stock Option Plan (2) (Exhibit 10.9)*10.6
    
    -
    
    Mitcham Industries, Inc. 1994 Non-Employee Director Stock Option Plan (2) (Exhibit 10.12)*10.7
    
    -
    
    Mitcham Industries, Inc. 1998 Stock Awards Plan (6)*10.7.1
    
    -
    
    Amended and Restated 1998 Stock Awards Plan (12) (Exhibit 10.3)*10.7.2
    
    -
    
    Form of Restricted Stock Agreement (12) (Exhibit 10.1)*10.7.3
    
    -
    
    Form of Nonqualified Stock Option Agreement (12) (Exhibit 10.2)*10.7.4
    
    -
    
    Form of Incentive Stock Option Agreement (12) (Exhibit 10.4)*10.7.5
    
    -
    
    Form of Phantom Stock Award Agreement (12) (Exhibit 10.5)*10.7.6
    
    -
    
    Form of Stock Appreciation Rights Agreement (12) (Exhibit 10.6)*10.8
    
    -
    
    Mitcham Industries, Inc. 2000 Stock Option Plan (7)*10.8.1
    
    -
    
    Form of Incentive Stock Option Agreement (12) (Exhibit 10.7)*10.8.2
    
    -
    
    Form of Nonqualified Stock Option Agreement (12) (Exhibit 10.8)10.9
    
    -
    
    Warrant No. M-7, dated July 18, 2001, issued to Bear Ridge Capital, L.L.C. (8)10.10
    
    -
    
    Share Sale Agreement, dated December 2002, between Mitcham Industries, Inc. and Nautronix
Inc. (9)*10.11
    
    -
    
    Agreement, dated April 4, 2003, between Mitcham Industries, Inc. and William J. Sheppard (10)
(Exhibit 10.14)*10.12
    
    -
    
    Second Consultant Agreement, dated April 1, 2003, but effective January 1, 2004. between
Mitcham Industries, Inc. and William J. Sheppard (10) (Exhibit 10.16)10.13
    
    -
    
    Equipment Lease Agreement, dated April 9, 2003, between Mitcham Industries, Inc. and Sercel,
Inc., and Oklahoma corporation (Sercel) (10) (Exhibit 10.17)10.14
    
    -
    
    Amendment to the Equipment Lease Agreement, dated as of December 17, 2003, between
Mitcham Industries, Inc. and Sercel (11) (Exhibit 10.14)10.15
    
    -
    
    Promissory Note of Mitcham Industries, Inc., dated as of February 11, 2002, payable to First
Victoria National Bank in the original principal amount of $8,518,919 (11) (Exhibit 10.15)10.16
    
    -
    
    Loan Agreement, dated March 30, 2004, by and between Mitcham Industries, Inc. and First
Victoria National Bank (11) (Exhibit 10.16)*10.17
    
    -
    
    Separation Agreement, Consulting Agreement and Release, dated June 24, 2004, between P.
Blake Dupuis and Mitcham Industries, Inc. (13)21
    
    -
    
    Subsidiaries of the Company**23
    
    -
    
    Consent of Hein & Associates LLP**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***
 20




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##### Table of Contents



ExhibitNumber31.2
    
    -
    
    Certification of Michael A. Pugh, Chief Financial Officer, pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act, as amended***32.1
    
    -
    
    Certification of Billy F. Mitcham,
Jr., Chief Executive Officer, under Section 906 of the Sarbanes
Oxley Act of 2002, 18 U.S.C. § 1350***32.2
    
    -
    
    Certification of Michael A. Pugh, Chief Financial Officer, under Section 906 of the Sarbanes
Oxley Act of 2002, 18 U.S.C. § 1350***
   *
    Management contract or compensatory plan or arrangement**
    Previously filed***
    Filed herewith  (1)
    Incorporated by reference to the indicated exhibit number of the Companys
Registration Statement on
Form S-8 (File No. 333-67208), filed with the SEC on August 9, 2001.(2)
    Incorporated by reference to the indicated exhibit number of the Companys
Registration Statement on
Form SB-2, filed with the SEC on July 5, 1994.(3)
    Incorporated by reference to the indicated exhibit number of the Companys
Registration Statement on
Form S-l (File No. 333-19997), filed with the SEC on January 17, 1997.(4)
    Incorporated by reference to Exhibit 10.1 of the Companys Registration Statement on
Form S-3/A
(File No. 333-10555), filed with the SEC on October 25, 1996.(5)
    Incorporated by reference to the indicated exhibit number of the Companys
Registration Statement on
Form S-3/A (File No. 333-40507), filed with the SEC on December 17,1997.(6)
    Incorporated by reference to Exhibit A of the Companys proxy statement for the
fiscal year ended
January 31, 1998, filed with the SEC on June 1, 1998.(7)
    Incorporated by reference to Exhibit A of the Companys proxy statement for the
fiscal year ended
January 31, 2000, filed with the SEC on May 26, 2000.(8)
    Incorporated by reference to Exhibit 10.14 of the Companys Annual Report on Form
10-K for the fiscal
year ended January 31, 2002, filed with the SEC on May 1, 2002.(9)
    Incorporated by reference to Exhibit 2.1 of the Companys Current Report on Form 8-K,
filed with the
SEC on January 13, 2003.(10)
    Incorporated by reference to the indicated exhibit number of the Companys Annual
Report on
Form 10-K for the fiscal year ended January 31, 2003, filed with the SEC on May 1, 2003.(11)
    Incorporated by reference to the indicated exhibit number of the Companys Annual
Report on
Form 10-K for the fiscal year ended January 31, 2004, filed with the SEC on May 28, 2004.(12)
    Incorporated by reference to the indicated exhibit number of the Companys Current
Report on Form 8-K, filed with the SEC on September 8, 2004.(13)
    Incorporated by reference to Exhibit 10.1 of the Companys Quarterly Report on Form
10-Q for the period ended July 31, 2004, filed with the SEC on September 14, 2004. 21




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on the
8th day
of June, 2005. MITCHAM INDUSTRIES, INC.By:
    /s/     BILLY F. MITCHAM, JR.Billy F. Mitcham, Jr.,President and Chief Executive Officer
(principal executive officer) 22




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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of January 31, 2004 and 2005
    
    F-3Consolidated Statements of Operations for the Years Ended January 31, 2003, 2004 and 2005
    
    F-4Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income for the Years Ended January 31, 2003, 2004 and 2005
    
    F-5Consolidated Statements of Cash Flows for the Years Ended January 31, 2003, 2004 and 2005
    
    F-6Notes to Consolidated Financial Statements
    
    F-7
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and
Shareholders
Mitcham Industries, Inc.
Huntsville, Texas We have audited the accompanying consolidated balance sheets of Mitcham Industries, Inc. and
Subsidiaries as of January 31, 2004 and 2005, and the related consolidated statements of
operations, changes in shareholders equity and comprehensive income and cash flows for each of
the years in the three-year period ended January 31, 2005. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company has determined that it is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Mitcham Industries, Inc. and Subsidiaries as of January 31,
2004 and 2005, and the results of their operations and their cash flows for each of the years in
the three-year period ended January 31, 2005, in conformity with accounting principles generally
accepted in the United States of America. /s/       HEIN & ASSOCIATES LLPHein & Associates LLP Houston, Texas
April 13, 2005 F-2




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MITCHAM INDUSTRIES, INC. 
 CONSOLIDATED BALANCE SHEETS January 31,2004
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,834,000
    
    
    $
    13,138,000Accounts receivable, net of allowance for doubtful accounts of $847,000 and
$723,000 at January 31, 2004 and 2005, respectively
    
    
    5,635,000
    
    
    
    6,021,000Current portion of notes receivable, net of allowance for doubtful notes of $28,000
and $286,000 at January 31, 2004 and 2005, respectively
    
    
    811,000
    
    
    
    1,192,000Prepaid expenses and other current assets
    
    
    700,000
    
    
    
    705,000Current assets of discontinued operations
    
    
    898,000
    
    
    
    393,000Total current assets
    
    
    14,878,000
    
    
    
    21,449,000Seismic equipment lease pool, property and equipment
    
    
    84,624,000
    
    
    
    74,792,000Accumulated depreciation of seismic equipment lease pool, property and equipment
    
    
    (59,265,000
    )
    
    
    (55,067,000
    )Long-term assets of discontinued operations
    
    
    491,000
    
    
    
    216,000Other assets
    
    
    2,000
    
    
    
    5,000Total assets
    
    $
    40,730,000
    
    
    $
    41,395,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,532,000
    
    
    $
    4,893,000Current maturities  long-term debt
    
    
    2,203,000
    
    
    
    918,000Equipment notes payable
    
    
    1,296,000
    
    
    
    Income taxes payable
    
    
    
    
    
    
    284,000Deferred revenue
    
    
    345,000
    
    
    
    652,000Wages payable
    
    
    495,000
    
    
    
    299,000Accrued expenses and other current liabilities
    
    
    1,245,000
    
    
    
    458,000Current liabilities of discontinued operations
    
    
    399,000
    
    
    
    14,000Total current liabilities
    
    
    7,515,000
    
    
    
    7,518,000Long-term debt
    
    
    2,418,000
    
    
    
    Total liabilities
    
    
    9,933,000
    
    
    
    7,518,000Commitments and contingencies (Notes 9 and 15)Shareholders 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
9,893,732 shares issued, respectively
    
    
    97,000
    
    
    
    99,000Additional paid-in capital
    
    
    61,913,000
    
    
    
    62,702,000Treasury stock, at cost (915,000 shares)
    
    
    (4,686,000
    )
    
    
    (4,686,000
    )Deferred compensation
    
    
    (83,000
    )
    
    
    (94,000
    )Accumulated deficit
    
    
    (28,411,000
    )
    
    
    (26,282,000
    )Accumulated other comprehensive income
    
    
    1,967,000
    
    
    
    2,138,000Total shareholders equity
    
    
    30,797,000
    
    
    
    33,877,000Total liabilities and shareholders equity
    
    $
    40,730,000
    
    
    $
    41,395,000
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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##### Table of Contents



MITCHAM INDUSTRIES, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended January 31,2003
    
    
    2004
    
    
    2005Revenues:Equipment leasing
    
    $
    8,306,000
    
    
    $
    13,765,000
    
    
    $
    17,086,000Equipment sales
    
    
    5,829,000
    
    
    
    8,641,000
    
    
    
    9,282,000Commissions
    
    
    4,000
    
    
    
    
    
    
    
    Total revenues
    
    
    14,139,000
    
    
    
    22,406,000
    
    
    
    26,368,000Costs and expenses:Direct costs - seismic leasing
    
    
    1,369,000
    
    
    
    2,326,000
    
    
    
    1,644,000Cost of equipment sales
    
    
    4,561,000
    
    
    
    4,715,000
    
    
    
    4,626,000General and administrative
    
    
    4,502,000
    
    
    
    5,095,000
    
    
    
    6,969,000Provision (benefit) for doubtful accounts
    
    
    (1,920,000
    )
    
    
    25,000
    
    
    
    155,000Depreciation and amortization
    
    
    14,681,000
    
    
    
    13,677,000
    
    
    
    10,596,000Total costs and expenses
    
    
    23,193,000
    
    
    
    25,838,000
    
    
    
    23,990,000Operating income (loss)
    
    
    (9,054,000
    )
    
    
    (3,432,000
    )
    
    
    2,378,000Other income (expense):Interest expense (net of interest income of approximately
$186,000, $100,000 and $120,000, respectively)
    
    
    (281,000
    )
    
    
    (176,000
    )
    
    
    (71,000
    )Other, net
    
    
    11,000
    
    
    
    34,000
    
    
    
    19,000Total other income (expense)
    
    
    (270,000
    )
    
    
    (142,000
    )
    
    
    (52,000
    )Income (loss) from continuing operations before income
taxes
    
    
    (9,324,000
    )
    
    
    (3,574,000
    )
    
    
    2,326,000Provision (benefit) for income taxes
    
    
    (1,647,000
    )
    
    
    
    
    
    
    277,000Income (loss) from continuing operations
    
    
    (7,677,000
    )
    
    
    (3,574,000
    )
    
    
    2,049,000Income (loss) from discontinued operations, net of income
taxes of
$0.00 (including impairment charge of $700,000 in 2004)
    
    
    (2,422,000
    )
    
    
    (2,715,000
    )
    
    
    80,000Net income (loss)
    
    $
    (10,099,000
    )
    
    $
    (6,289,000
    )
    
    $
    2,129,000Income (loss) per common share from continuing operations:Basic
    
    $
    (0.88
    )
    
    $
    (0.41
    )
    
    $
    0.23Diluted
    
    $
    (0.88
    )
    
    $
    (0.41
    )
    
    $
    0.22Income (loss) per common share from discontinued operations:Basic and diluted
    
    $
    (0.28
    )
    
    $
    (0.31
    )
    
    $
    0.01Net income (loss) per common share - basic
    
    $
    (1.15
    )
    
    $
    (0.72
    )
    
    $
    0.24Net income (loss) per common share - diluted
    
    $
    (1.15
    )
    
    $
    (0.72
    )
    
    $
    0.23Shares used in computing income (loss) per common share:Basic
    
    
    8,747,000
    
    
    
    8,772,000
    
    
    
    8,849,000Dilutive effect of common stock equivalents
    
    
    
    
    
    
    
    
    
    
    455,000Diluted
    
    
    8,747,000
    
    
    
    8,772,000
    
    
    
    9,304,000
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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MITCHAM INDUSTRIES, INC. 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME Years Ended January 31, 2003, 2004 and 2005AccumulatedUnearned
    
    
    OtherAdditional
    
    
    
    
    
    
    
    
    
    
    Compensation
    
    
    ComprehensiveCommon Stock
    
    
    Paid-In
    
    
    Treasury
    
    
    Accumulated
    
    
    & Restricted
    
    
    IncomeShares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Deficit
    
    
    Stock
    
    
    (Loss)
    
    
    TotalBalances, January 31, 2002
    
    
    9,658,000
    
    
    $
    97,000
    
    
    $
    61,814,000
    
    
    $
    (4,671,000
    )
    
    $
    (12,023,000
    )
    
    $
    
    
    
    $
    (2,614,000
    )
    
    $
    42,603,000Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,099,000
    )
    
    
    
    
    
    
    
    
    
    
    (10,099,000
    )Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,169,000
    
    
    
    1,169,000Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,930,000
    )Acquisition of treasury
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,000
    )Balances, January 31, 2003
    
    
    9,658,000
    
    
    
    97,000
    
    
    
    61,814,000
    
    
    
    (4,686,000
    )
    
    
    (22,122,000
    )
    
    
    
    
    
    
    (1,445,000
    )
    
    
    33,658,000Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,289,000
    )
    
    
    
    
    
    
    
    
    
    
    (6,289,000
    )Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,412,000
    
    
    
    3,412,000Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,877,000
    )Issuance of common
stock upon exercise of
warrants and options
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted stock issued
    
    
    53,000
    
    
    
    
    
    
    
    99,000
    
    
    
    
    
    
    
    
    
    
    
    (99,000
    )
    
    
    
    
    
    
    Amortization of restricted
stock grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,000
    
    
    
    
    
    
    
    16,000Balances, January 31, 2004
    
    
    9,715,000
    
    
    
    97,000
    
    
    
    61,913,000
    
    
    
    (4,686,000
    )
    
    
    (28,411,000
    )
    
    
    (83,000
    )
    
    
    1,967,000
    
    
    
    30,797,000Comprehensive loss:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,129,000
    
    
    
    
    
    
    
    
    
    
    
    2,129,000Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171,000
    
    
    
    171,000Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,300,000Issuance of common
stock upon exercise of
warrants and options
    
    
    171,000
    
    
    
    2,000
    
    
    
    317,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319,000Restricted stock issued
    
    
    20,000
    
    
    
    
    
    
    
    95,000
    
    
    
    
    
    
    
    
    
    
    
    (95,000
    )
    
    
    
    
    
    
    Amortization of restricted
stock grants, net of
cancellations
    
    
    (12,000
    )
    
    
    
    
    
    
    (23,000
    )
    
    
    
    
    
    
    
    
    
    
    84,000
    
    
    
    
    
    
    
    61,000Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    400,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400,000Balances, January 31, 2005
    
    
    9,894,000
    
    
    $
    99,000
    
    
    $
    62,702,000
    
    
    $
    (4,686,000
    )
    
    $
    (26,282,000
    )
    
    $
    (94,000
    )
    
    $
    2,138,000
    
    
    $
    33,877,000
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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##### Table of Contents



MITCHAM INDUSTRIES, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended January 31,2003
    
    
    2004
    
    
    2005Cash flows from operating activities:Income (loss) from continuing operations
    
    $
    (7,677,000
    )
    
    $
    (3,574,000
    )
    
    $
    2,049,000Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    14,681,000
    
    
    
    13,677,000
    
    
    
    10,596,000Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    461,000Provision (benefit) for doubtful accounts, net of
charge-offs and recoveries
    
    
    (2,398,000
    )
    
    
    106,000
    
    
    
    133,000Net book value of equipment sold
    
    
    3,853,000
    
    
    
    2,975,000
    
    
    
    1,944,000Changes in:Trade accounts and notes receivable
    
    
    2,112,000
    
    
    
    (4,167,000
    )
    
    
    (1,098,000
    )Federal income taxes, current
    
    
    (43,000
    )
    
    
    
    
    
    
    284,000Accounts payable, accrued expenses and other current
liabilities
    
    
    (6,923,000
    )
    
    
    846,000
    
    
    
    2,685,000Other, net
    
    
    (228,000
    )
    
    
    62,000
    
    
    
    (13,000
    )Net cash provided by operating
activities
    
    
    3,377,000
    
    
    
    9,925,000
    
    
    
    17,041,000Cash flows from investing activities:Purchases of seismic equipment held for lease
    
    
    (4,622,000
    )
    
    
    (3,576,000
    )
    
    
    (5,668,000
    )Purchases of property and equipment
    
    
    (132,000
    )
    
    
    (59,000
    )
    
    
    (377,000
    )Net cash used in investing activities
    
    
    (4,754,000
    )
    
    
    (3,635,000
    )
    
    
    (6,045,000
    )Cash flows from financing activities:Proceeds from debt
    
    
    2,000,000
    
    
    
    
    
    
    
    Payments on borrowings
    
    
    (1,880,000
    )
    
    
    (2,093,000
    )
    
    
    (4,999,000
    )Purchase of common stock for treasury
    
    
    (15,000
    )
    
    
    
    
    
    
    Proceeds from issuance of common stock upon exercise of
warrants and options
    
    
    
    
    
    
    
    
    
    
    319,000Net cash provided by (used in) financing
activities
    
    
    105,000
    
    
    
    (2,093,000
    )
    
    
    (4,680,000
    )Net increase (decrease) in cash and cash equivalents -
continuing operations
    
    
    (1,272,000
    )
    
    
    4,197,000
    
    
    
    6,316,000Net decrease in cash and cash equivalents  discontinued
operations
    
    
    (1,835,000
    )
    
    
    (2,500,000
    )
    
    
    (12,000
    )Cash, beginning of year
    
    
    8,244,000
    
    
    
    5,137,000
    
    
    
    6,834,000Cash, end of year
    
    $
    5,137,000
    
    
    $
    6,834,000
    
    
    $
    13,138,000
 The accompanying notes are an integral part of these consolidated financial statements. F-6




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##### Table of Contents



MITCHAM INDUSTRIES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies Organization- Mitcham Industries, Inc. (the Company) is a Texas corporation formed on
January 29, 1987. The Company and its wholly-owned Canadian subsidiary provide full-service
equipment leasing, sales and services to the seismic industry worldwide. 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 Southeast 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 presented as discontinued operations and all prior period statements have
been restated accordingly. All intercompany transactions and balances have been eliminated in
consolidation. Revenue Recognition of Leasing Arrangements- The Company leases various types of seismic
equipment to seismic data acquisition companies. The majority of leases at January 31, 2004 and
2005 are for one year or less. Lease revenue is recognized ratably over the term of the lease. The
Company does not enter into leases with embedded maintenance obligations. The standard lease
provides that the lessee is responsible for maintenance and repairs to the equipment, excluding
normal wear and tear. The Company provides technical advice to its customers without additional
compensation as part of its customer service practices. Repairs or maintenance performed by the
Company is charged to the lessee, generally on a time and materials basis. Revenue Recognition of Equipment Sales- Revenue and cost of goods sold from the sale of
equipment is recognized upon acceptance of terms and when delivery has occurred,
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. Sales allowances and incentives- From time to time the Company will offer incentives to
customers as part of leasing transactions. These allowances or incentives may take the form of
free equipment rent, credits on future purchases of equipment or credits on existing equipment
repair charges. These allowances and incentives are accounted for as a reduction of revenue. Notes receivable- In certain instances when customers have been unable to repay their open
accounts receivable balances, the Company has agreed to a structured repayment program using an
interest bearing promissory note. In these cases, the Company provides a reserve for doubtful
accounts against the balance. Due to the uncertainty of collection, the Company does not
recognize the interest earned until the entire principal balance has been collected. In most
cases where the Company has 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. Allowance for doubtful accounts- Trade receivables are uncollateralized customer obligations
due under normal trade terms. Payments on trade receivables are allocated to the specific invoices
identified on the customers remittance advice or, if unspecified, are applied to the earliest
unpaid invoices. The carrying amount of trade receivables and notes receivable is reduced by a valuation
allowance that reflects managements best estimate of the amounts that will not be collected.
Management reviews all trade receivable balances that exceed 90 days past due and any notes
receivable that are delinquent as to payments and based on an assessment of current
creditworthiness, estimates the portion, if any, of the balance that
may  not be collected.
In addition, management establishes a general allowance based on its assessment of the
overall credit risk the Company is exposed to from its trade receivables and notes receivables. F-7




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##### Table of Contents



MITCHAM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Cash and Cash Equivalents- The Company considers all highly liquid investments with maturity
of three months or less at the date of purchase to be cash equivalents. Property and Equipment- Property and equipment is carried at cost, net of accumulated
depreciation. Depreciation is computed on the straight-line method over the estimated useful lives
of the property and equipment. The estimated useful lives of equipment range from three to
seven years. Buildings are depreciated over 40 years and property improvements are
amortized over 10 years. Leasehold improvements are amortized over the shorter of useful
life or the life of the respective leases. Seismic Equipment Lease Pool- Seismic equipment held for lease consists primarily of
recording channels and peripheral equipment and is carried at cost, net of accumulated
depreciation. Depreciation is computed on the straight-line method over the estimated useful lives
of the equipment, which is five years for channel boxes and 2  10 years for other peripheral
equipment. Impairment The Financial Accounting Standards Board (FASB) approved Statement of
Financial Accounting Standards (SFAS) 144, Accounting For the Impairment or Disposal of
Long-Lived Assets, in October 2001. SFAS 144 supersedes SFAS 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS 144 requires that
long-lived assets be measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations. The Companys assessment
resulted in the recognition of impairment expense of $700,000 related to the sale of DSIs
operating assets in fiscal 2004. Income Taxes- The Company files separate federal returns for its foreign subsidiaries. The
Company accounts for its income taxes under the liability method, whereby the Company recognizes,
on a current and long-term basis, deferred tax assets and liabilities which represent differences
between the financial and income tax reporting bases of its 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, 2004 and 2005, the Company has recorded a net deferred tax asset of
$10.1 million and $9.9 million, respectively. The Company believes it is not assured that these
net deferred tax assets will be realized and has recorded valuation allowances of $10.1 million
and $9.9 million at January 31, 2004 and 2005, respectively. Use of Estimates- The preparation of the Companys consolidated financial statements in
conformity with accounting principles generally accepted in the United States of America requires
the Companys management to make estimates and assumptions that affect the amounts reported in
these consolidated financial statements and accompanying notes. Estimates are used for, but not
limited to: allowance for doubtful accounts, lease pool valuations, valuation allowance on
deferred tax assets and depreciable lives of assets. Future events and their effects cannot be
perceived with certainty. Accordingly, these accounting estimates require the exercise of
judgment. The accounting estimates used in the preparation of the consolidated financial
statements will change as new events occur, as more experience is acquired, as additional
information is obtained and as the Companys operating environment changes. Actual results could
differ from these estimates. Substantial judgment is necessary in the determination of the appropriate levels for the
Companys allowance for doubtful accounts because of the extended payment terms the Company often
offers to its customers and the limited financial wherewithal of many of these customers. As a
result, the Companys allowance for doubtful accounts could change in the future, and such change
could be material to the financial statements taken as a whole. Foreign Currency Translation- All balance sheet accounts of the Canadian and Australian
subsidiaries have been translated at the current exchange rate as of the end of the accounting
period. Statement of operations items have been translated at average currency exchange rates. The
resulting translation adjustment is recorded as a separate component of comprehensive income within
shareholders equity. F-8




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##### Table of Contents



MITCHAM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Stock-Based Compensation- 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
(SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, issued in December 2002. Years Ended January 31,2003
    
    
    2004
    
    
    2005Pro forma impact of fair value method (FAS 148)Reported income (loss) from continuing operations
attributable to common shareholders
    
    $
    (7,677,000
    )
    
    $
    (3,574,000
    )
    
    $
    2,049,000Less: fair value impact of employee stock
compensation
    
    $
    (609,000
    )
    
    $
    (340,000
    )
    
    $
    (402,000
    )Pro forma income (loss) from continuing
operations
attributable to common shareholders
    
    $
    (8,286,000
    )
    
    $
    (3,914,000
    )
    
    $
    1,647,000Reported net income (loss)
    
    $
    (10,099,000
    )
    
    $
    (6,289,000
    )
    
    $
    2,129,000Less: fair value impact of employee stock
compensation
    
    $
    (609,000
    )
    
    $
    (340,000
    )
    
    $
    (402,000
    )Pro forma net income (loss)
    
    $
    (10,708,000
    )
    
    $
    (6,629,000
    )
    
    $
    1,727,000Income (loss) per common shareBasic  as reported income (loss) from
continuing operations
    
    $
    (0.88
    )
    
    $
    (0.41
    )
    
    $
    0.23Diluted  as reported income (loss) from
continuing operations
    
    $
    (0.88
    )
    
    $
    (0.41
    )
    
    $
    0.22Basic  pro forma income (loss) from continuing
operations
    
    $
    (0.95
    )
    
    $
    (0.45
    )
    
    $
    0.19Diluted  pro forma income (loss) from continuing
operations
    
    $
    (0.95
    )
    
    $
    (0.45
    )
    
    $
    0.18Basic  as reported net income (loss)
    
    $
    (1.15
    )
    
    $
    (0.72
    )
    
    $
    0.24Diluted  as reported net income (loss)
    
    $
    (1.15
    )
    
    $
    (0.72
    )
    
    $
    0.23Basic  pro forma net income (loss)
    
    $
    (1.22
    )
    
    $
    (0.76
    )
    
    $
    0.20Diluted  pro forma net income (loss)
    
    $
    (1.22
    )
    
    $
    (0.76
    )
    
    $
    0.19
 The fair value of each option grant was estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions: risk free rates of 3.0% to 5.0%;
volatility ranging from 63% to 69%; no assumed dividend yield; and
expected lives of 8 years. Earnings Per Share- For the fiscal years ended January 31, 2003, 2004 and 2005, the following
table sets forth the number of dilutive shares that may be issued pursuant to options and warrants
currently outstanding, which number was used in the per share calculations for 2005 but excluded in
2003 and 2004 due to their anti-dilutive effect. Years Ended January 31,2003
    
    
    2004
    
    
    2005Stock options
    
    
    35,000
    
    
    
    90,000
    
    
    
    451,000Warrants
    
    
    
    
    
    
    
    
    
    
    4,000Total dilutive shares
    
    
    35,000
    
    
    
    90,000
    
    
    
    455,000
 Reclassifications- Certain prior year amounts have been reclassified to conform to the
current year presentation. Such reclassifications had no effect on the results of operations or
comprehensive income. F-9




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##### Table of Contents



MITCHAM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 2. New Accounting Pronouncements In December 2004, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standards 123, (revised 2004) Share-Based Payment (SFAS 123(R)). This
statement is a revision of SFAS 123, Accounting for Stock-Based Compensation as amended (SFAS
123), and requires entities to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award. The cost will
be recognized over the period during which an employee is required to provide services in
exchange for the award (usually the vesting period). SFAS 123(R) covers various share-based
compensation arrangement rights and employee share purchase plans. SFAS 123(R) eliminates the
ability to use the intrinsic value methods of accounting for share options, as provided in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25). SFAS 123(R) is effective in fiscal year 2007, with early adoption encouraged. The
Company is currently evaluating the statements transition methods and does not expect this
statement to have an effect materially different than that of the pro forma SFAS 123 disclosures
provided in Note 1 to the Companys consolidated financial statements. 3. Long-Term Debt and Equipment Notes Payable In February 2002, the Company closed an $8.5 million term loan with First Victoria National
Bank. The loan is payable in 48 equal installments of approximately $197,000 beginning in March
2002 and bears interest at the rate of prime plus one-half percent. The loan is collateralized by
lease pool equipment and all proceeds from lease pool leases and asset sales. The balance
outstanding under this term loan amounted to $918,000 at January 31, 2005. In 2004, the Company executed 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, all of which has been repaid as of January
31, 2005. The notes provided for monthly payments aggregating approximately $121,000 and bore
interest ranging from 0% to 8%. All three notes had twelve-month repayment terms and matured
during fiscal 2005. On March 30, 2004, the Company closed a $4 million revolving loan agreement and credit line
with First Victoria National Bank. The line allows the Company 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 one-half percent. 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. The Company has not borrowed any funds
available under this line. In connection with the formation of DSI, the Company closed a $75,000 term loan in December
2001 with Regions Bank. This loan amortized over 12 months and bore interest at the rate of
prime minus one percent, adjusted daily. The quarterly payments of principal and interest,
beginning March 7, 2002, were approximately $19,000. During fiscal 2003, the Company repaid all
outstanding principal under this note. Long-term debt repayments are scheduled to be $918,000 in fiscal 2006. F-10




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##### Table of Contents



MITCHAM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 4. Supplemental Statements of Cash Flows Information Supplemental disclosures of cash flow information for the years ended January 31, 2003, 2004
and 2005 are as follows: Year Ended January 31,2003
    
    
    2004
    
    
    2005Interest paid, continuing operations
    
    $
    400,000
    
    
    $
    273,000
    
    
    $
    190,000Interest paid, discontinued operations
    
    $
    10,000
    
    
    $
    3,000
    
    
    $
    8,000Taxes paid (refunded), net
    
    $
    (1,647,000
    )
    
    $
    
    
    
    $
    Seismic equipment acquired in exchange for
cancellation of accounts receivable
    
    $
    3,000
    
    
    $
    48,000
    
    
    $
    685,000Seismic equipment acquired as recovery of previously
written off receivables
    
    $
    1,933,000
    
    
    $
    
    
    
    $
    Seismic equipment acquired from vendor in exchange
for debt
    
    $
    
    
    
    $
    1,733,000
    
    
    $
    Equipment sold in exchange for notes receivable (Note 5)
 Non-monetary transactions for the fiscal year ended January 31, 2005 consisted of seismic
equipment acquired in exchange for cancellation of accounts receivables. In July 2004, the Company
agreed to accept certain marine seismic equipment owned by a customer and valued at $610,000 as
partial payment for outstanding invoices as of that date. The equipment was appraised by a
third-party and such values were used as the basis for the settlement of those outstanding
receivables. Additionally, the Company also agreed during fiscal 2005 to accept certain seismic
equipment owned by two other customers in the approximate amount of $75,000 as settlement of
outstanding receivables. No gain or loss was recognized on any of these transactions. 5. Notes Receivable Notes receivable consisted of $2,037,000, of which $739,000 is included in the assets of
discontinued operations, due from six customers and $1,965,000, of which $487,000 is included in
the assets of discontinued operations, due from nine customers as of January 31, 2004 and 2005,
respectively. These notes bear interest ranging from 0% - 12% with repayment terms ranging from 6
to 39 months. Notes issued related to the purchase of equipment are secured by the equipment sold
and notes issued for the financing of trade receivables are unsecured. During fiscal 2005, the Company established six new notes receivable in the aggregate amount
of $1,272,000 related to the sales of seismic equipment. These notes bear interest ranging from 8%
- 10% with repayment terms ranging from 3 to 12 months. Additionally, the Company established two
notes receivable related to the financing of trade receivables in the approximate amount of
$531,000. The Company has provided a reserve of $215,000 for the unpaid balance of these two notes
as of January 31, 2005. These two notes bear interest of 0% and 10%, respectively, with repayment
terms of 8 and 12 months, respectively. Also, during fiscal 2005, the Company received final
payments on five notes receivable that had been established in prior fiscal years. During fiscal 2004, the Company established seven new notes receivable in the aggregate amount
of $1,960,000 related to the sales of seismic equipment. Additionally, during fiscal 2004, the
Company issued a note receivable in the amount of $800,000 related to the sale of DSIs
operating assets. This note bears interest
at the rate of 7% annually and has repayment terms of 39 months. The first three monthly
payments were interest only and the remaining 36 monthly payments of principal and
interest are in the approximate amount of $25,000. As of January 31, 2004, the
outstanding balance of this note was $739,000. Additionally, during fiscal 2004 the
Company received final payments on two notes receivable that had been established in prior
fiscal years. F-11




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##### Table of Contents



MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 6. 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. During fiscal 2004, the Company recorded
an asset impairment charge of $700,000 related to those assets. The impairment charge is included
in the loss from discontinued operations. Effective with the January 31, 2004 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 revenue, income (loss), assets
and liabilities are as follows: Years Ended January 31,2004
    
    
    2005Revenues
    
    $
    4,524,000
    
    
    $
    Pretax income (loss)
    
    $
    (2,715,000
    )
    
    $
    80,000
 January 31,2004
    
    
    2005Accounts and notes receivable from discontinued
operations
    
    $
    815,000
    
    
    $
    498,000Other current assets from discontinued operations
    
    $
    83,000
    
    
    $
    111,000Net property plant and equipment from discontinued
operations
    
    $
    4,000
    
    
    $
    Accounts payable and accrued liabilities from discontinued
operations
    
    $
    399,000
    
    
    $
    14,000
 7. Concentrations Credit Risk- As of January 31, 2004 and 2005, amounts due from customers which exceeded 10%
of accounts receivable amounted to an aggregate of $2.5 million from two customers and $2.2 million
from two customers, respectively. The Company maintains deposits with banks which exceed the Federal Deposit Insurance
Corporation (FDIC) insured limit and has money market accounts included in its cash balances
which are not FDIC insured. Management believes the risk of loss in connection with these accounts
is minimal. Industry Concentration- The Companys revenues are derived from seismic equipment leased and
sold to companies providing seismic acquisition services. The seismic industry has rapidly expanded
its 3-D seismic acquisition capabilities over the past few years as this technology has gained
broad market acceptance from oil and gas exploration companies. With this expansion, some of the
seismic acquisition companies in North America, while experiencing rapid growth in 3-D seismic
acquisition revenues, have not experienced corresponding increases in profitability and have become
increasingly leveraged. Should the financial performance of the companies in this industry not
improve, the Company could be exposed to additional credit risk and be subjected to declining
demand for its leasing services. Supplier Concentration- The Company purchases the majority of its seismic equipment for its
lease pool from a small number of suppliers, each being an industry leader for its product. The
Company believes that two of its suppliers manufacture most of the land-based seismic systems and
equipment in use. The Company has satisfactory relationships with its suppliers. However, should
those relationships deteriorate, the Company may have difficulty in obtaining new technology
demanded by its customers and maintaining the existing equipment in accordance with manufacturers
specifications. F-12




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##### Table of Contents



MITCHAM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 8. Seismic Equipment Lease Pool, Property and Equipment Seismic equipment lease pool, property and equipment consisted of the following as of: January 31,2004
    
    
    2005Recording channels
    
    $
    32,711,000
    
    
    $
    31,372,000Other peripheral equipment
    
    
    49,681,000
    
    
    
    40,993,000Seismic equipment lease pool
    
    
    82,392,000
    
    
    
    72,365,000Land
    
    
    25,000
    
    
    
    25,000Buildings and improvements
    
    
    582,000
    
    
    
    594,000Furniture and fixtures
    
    
    1,399,000
    
    
    
    1,548,000Autos and trucks
    
    
    226,000
    
    
    
    260,000Property and equipment
    
    
    2,232,000
    
    
    
    2,427,000Seismic equipment lease pool, property
and equipment
    
    
    84,624,000
    
    
    
    74,792,000Less: accumulated
depreciation
    
    
    (59,265,000
    )
    
    
    (55,067,000
    )$
    25,359,000
    
    
    $
    19,725,000
 At January 31, 2005, our seismic equipment lease pool, property and equipment, on a cost
basis, consisted of $39,449,000 in the U.S., $33,650,000 in Canada and $1,693,000 in Australia. 9. Leases The Company leases and subleases seismic equipment to customers under operating leases with
non-cancelable terms of one year or less. These leases are generally renewable on a
month-to-month basis. All taxes (other than U.S. federal income taxes) and
assessments are the contractual responsibility of the lessee. To the extent that
foreign taxes are not paid by the lessee, the relevant foreign taxing authorities might seek to
collect such taxes from the Company. Under the terms of its lease agreements, any amounts paid by
the Company to such foreign taxing authorities may be billed and collected from the
lessee. If the Company is unable to collect the foreign taxes it paid on behalf of its
lessees, the Company may have foreign tax credits in the amounts paid which could be
applied against its U.S. income tax liability subject to certain limitations. The Company is not
aware of any foreign tax obligations as of January 31, 2004 and 2005 that are not reflected on the
accompanying consolidated financial statements. The Company leases seismic equipment from others under month-to-month operating leases. Lease
expense incurred by the Company in connection with such leases amounted to $358,000, $886,000 and
$526,000 for the years ended January 31, 2003, 2004 and 2005, respectively. The Company leases its office facilities in Canada and Australia under operating leases. The
Calgary, Canada lease is a seven-year lease expiring in 2007 and the Brisbane, Australia lease is a
five-year lease expiring in 2009. The aggregate minimum annual lease payments for these buildings
are scheduled to be approximately $208,000, $214,000, $150,000 and $60,000 in fiscal 2006, 2007,
2008 and 2009, respectively, and none thereafter. The Company recorded lease expense of $129,000,
$165,000 and $197,000 for the years ended January 31, 2003, 2004 and 2005, respectively. F-13




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##### Table of Contents



MITCHAM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 10. Income Taxes The components of income expense (benefit) were as follows: Year Ended January 31,2003
    
    
    2004
    
    
    2005Current:Federal
    
    $
    (1,647,000
    )
    
    $
    
    
    
    $
    108,000Foreign
    
    
    
    
    
    
    
    
    
    
    169,000State
    
    
    
    
    
    
    
    
    
    
    (1,647,000
    )
    
    
    
    
    
    
    277,000Deferred
    
    
    
    
    
    
    
    
    
    
    $
    (1,647,000
    )
    
    $
    
    
    
    $
    277,000
 The components of the Companys deferred taxes consisted of the following as of: January 31,2004
    
    
    2005Deferred tax assets:Allowance for doubtful
accounts
    
    $
    297,000
    
    
    $
    343,000Canadian net operating loss
carryforward
    
    
    4,823,000
    
    
    
    5,616,000Australian net operating loss
carryforward
    
    
    27,000
    
    
    
    U.S. net operating loss
carryforward
    
    
    4,224,000
    
    
    
    2,734,000Inventory valuation
allowance
    
    
    66,000
    
    
    
    137,000Depreciation
    
    
    225,000
    
    
    
    555,000Accruals not yet deductible for tax
purposes
    
    
    236,000
    
    
    
    220,000AMT credit
    
    
    202,000
    
    
    
    310,000Gross deferred tax assets
    
    
    10,100,000
    
    
    
    9,915,000Valuation allowance
    
    
    (10,100,000
    )
    
    
    (9,915,000
    )Net assets
    
    
    
    
    
    
    Deferred tax liabilities
    
    
    
    
    
    
    Deferred tax assets, net
    
    $
    
    
    
    $
    
 The following is a reconciliation of expected to actual income tax expense (benefit): Year Ended January 31,2003
    
    
    2004
    
    
    2005Federal income tax
expense (benefit) at
34%
    
    $
    (3,994,000
    )
    
    $
    (2,138,000
    )
    
    $
    818,000Deferred benefit not
currently recognized
    
    
    2,693,000
    
    
    
    2,192,000
    
    
    
    Utilization of valuation
allowance
    
    
    
    
    
    
    
    
    
    
    (388,000
    )Permanent
differences
    
    
    27,000
    
    
    
    21,000
    
    
    
    (20,000
    )Foreign rate
differential
    
    
    (446,000
    )
    
    
    (98,000
    )
    
    
    (133,000
    )Other
    
    
    73,000
    
    
    
    23,000
    
    
    
    $
    (1,647,000
    )
    
    $
    
    
    
    $
    277,000
 F-14




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##### Table of Contents



MITCHAM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) The Company had Canadian net operating loss carry forwards of approximately $13,371,000 as of
January 31, 2005. The Canadian net operating losses expire in various years through 2012. The
Company has U.S. net operating losses of approximately $8,043,000, as of January 31, 2005, which
if unused will begin to expire in 2021. The Company recorded a valuation allowance of approximately $10,100,000 as of January 31,
2004 and $9,915,000 as of January 31, 2005 (a change of $185,000). 11. Acquisition On December 30, 2002, Mitcham Industries, Inc., purchased all of the issued and outstanding
shares of capital stock of SAP, for approximately $764,000. Headquartered in Brisbane, Australia,
SAP provides equipment, consumables, systems integration, engineering hardware and software
maintenance support services to the geophysical, hydrographic, oceanographic, environment and
defense industries as well as leases seismic data acquisition equipment throughout Southeast Asia
and Australia. 12. Sales and Major Customers A summary of the Companys revenues from foreign customers by geographic region is as
follows: Years Ended January 31,2003
    
    
    2004
    
    
    2005Canada
    
    $
    9,481,000
    
    
    $
    9,530,00
    
    
    $
    6,587,000UK / Europe
    
    
    408,000
    
    
    
    808,000
    
    
    
    1,950,000Mexico
    
    
    64,000
    
    
    
    110,000
    
    
    
    31,000South America
    
    
    1,135,000
    
    
    
    1,012,000
    
    
    
    2,931,000Asia
    
    
    625,000
    
    
    
    4,569,000
    
    
    
    7,170,000Other
    
    
    281,000
    
    
    
    513,000
    
    
    
    458,000Totals
    
    $
    11,994,000
    
    
    $
    16,542,000
    
    
    $
    19,127,000
 One customer represented approximately 13% of fiscal 2003 total revenues and two customers
represented approximately 11% and 10% of fiscal 2004 total revenues, respectively. One customer
represented approximately 10% of fiscal 2005 total revenues. No other customer exceeded 10% of
revenues for fiscal 2003, 2004 and 2005. 13. Fair Value of Financial Instruments The Companys financial instruments consist of trade receivables, marketable securities,
notes receivable and accounts and notes payables. The Company believes the carrying value of these
financial instruments approximates their estimated fair value due to the short maturity of these
financial instruments. 14. Shareholders Equity The Company has 1,000,000 shares of preferred stock authorized, none of which are outstanding
as of January 31, 2004 and 2005. The preferred stock may be issued in multiple series with various
terms, as authorized by the Companys Board of Directors. The Company has 20,000,000 shares
of common stock authorized, of which 9,714,994 and 9,893,732 are issued as of January 31, 2004
and 2005, respectively. F-15




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##### Table of Contents



MITCHAM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) In July 2001, in exchange for services, the Company issued warrants to an investment banking
firm to purchase 20,000 shares of its common stock for $5.00 per share, exercisable beginning July
18, 2002 for a period of five years thereafter. The exercise price of the warrants was reduced to
$4.42 per share and the number of issuable upon exercise of the warrants increased by 2,624
shares, as a result of the anti-dilution provisions of those warrants. There were 22,624 warrants
outstanding as of January 31, 2003, 2004 and 2005, respectively. The Company has repurchased 915,000 shares of its common stock at an average cost of $5.12
per share as of January 31, 2005 and has classified these shares as treasury stock in
the accompanying financial statements. In July 2003, the Compensation Committee of the Companys Board of Directors granted 52,500
shares of restricted stock awards to certain members of management as deferred
compensation. The shares vest ratably over three years from the date of grant. On the
date of the award, the restricted stock had a market value of $99,750. During fiscal
2005, 12,000 shares of restricted stock were forfeited and subsequently cancelled, related to the
resignation of the Companys former Chief Financial Officer. In September 2004, the Board of
Directors granted 20,000 shares of restricted stock awards to the Companys outside directors as
deferred director compensation. The shares vest in whole on the one-year anniversary of the
grant. On the date of the award, the restricted stock had a market value of $95,000. The
deferred compensation amount for both of these grants is amortized to compensation expense ratably
over the associated vesting period. The unamortized aggregate balance of the deferred compensation
is $94,000 at January 31, 2005 and is classified as a component of shareholders equity in the
financial statements. 15. Commitments and Contingencies Sercel Lease Agreement- Effective April 9, 2003, the Company renewed its exclusive leasing
arrangement with Sercel by entering into a new Equipment Lease Agreement (the New Sercel
Agreement). The New Sercel Agreement replaces the parties Exclusive Equipment Lease Agreement
that was entered into in December 1999 and that expired December 31, 2002. Under the New Sercel
Agreement, the Company is Sercels exclusive third-party worldwide short-term (for leases of a
duration of less than one year) leasing representative for land-based seismic equipment and its
non-exclusive leasing representative with respect to certain marine seismic equipment. While there
are no restrictions on Sercels ability to undertake short-term or long-term leasing of either
land-based or marine seismic equipment, Sercel will provide the Company with information regarding
any potential leases or sales opportunities that Sercel does not
undertake. The agreement expires on December 31, 2006, subject to earlier termination by Sercel on the occurrence of
certain events. Employment Agreement- Effective January 15, 1997, the Company
entered into an employment agreement with the Companys president for a
term of five years, beginning January 15, 1997, which term is
automatically extended for successive one-year periods unless either party
gives written notice of termination at least 30 days prior to the end of
the current term. The agreement provides for an annual salary of $150,000,
subject to increase by the Board of Directors. It may be terminated prior
to the end of the initial term or any extension thereof if the president
dies; if it is determined that the president has become disabled; if the
Board of Directors determines that the president has breached the
employment agreement in any material respect, has appropriated a material
business opportunity of the Company or has engaged in fraud or dishonesty
with respect to the Companys business that is punishable by imprisonment.
If the presidents employment is terminated by the Company prior to the
end of the initial five-year term other than for a reason enumerated
above, the president will be entitled to payments equal to $450,000,
payable ratably over the 24 months following such termination. For a
period of two years after the termination of the agreement, the president
is prohibited from engaging in any business activities that are
competitive with the Companys business and from diverting any of the
Companys customers to a competitor. F-16




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##### Table of Contents



MITCHAM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 16. Stock Option Plans The Companys stock option plans consist of the 1994 Stock Option Plan, the 1998 Amended and
Restated Stock Awards Plan, the 2000 Stock Option Plan and the 1994 Non-Employee Director Plan
(the Director Plan). Under the 1994 Stock Option Plan, which is now expired, incentive stock options and
non-qualified stock options to purchase a maximum of 350,000 shares of common stock were
available to be issued to officers, employee directors, key employees and consultants of the
Company. Under the 1998 Amended and Restated Stock Awards Plan, up to 750,000 shares of common stock
may be issued in the form of stock options, stock appreciation rights, restricted stock awards,
performance awards and phantom stock awards to the Companys employees, non-employee directors and
consultants. Under the 2000 Stock Option Plan, up to 1,000,000 shares of common stock may be issued in the
form of incentive stock options and non-qualified stock options to the Companys employees,
consultants and non-employee directors. With respect to incentive stock options issued under the 1994 Stock Option Plan, the 1998
Amended and Restated Stock Awards Plan and the 2000 Stock Option Plan, no option may be granted
more than 10 years after the effective date of the stock option plan or exercised more than 10
years after the date of grant (five years if the optionee owns more than 10% of the common stock
of the Company at the date of grant). The vesting period for options will be determined by the
Compensation Committee, except that no option may be exercised sooner than six months from the
date of grant. With regard to incentive stock options, the exercise price of the option may not be
less than 100% of the fair market value of the common stock at the date of grant (110% if the
optionee owns more than 10% of the common stock of the Company). Subject to certain limited
exceptions, options may not be exercised unless, at the time of exercise, the optionee is in the
service of the Company. The Director Plan provides for the grant of up to 50,000 nonqualified stock options. Options
granted under the Director Plan must have an exercise price at least equal to the
fair market value of the Companys common stock on the date of grant. Pursuant to the
Director Plan, which is now expired, options were automatically granted annually to each
non-employee director. Outstanding options granted under the Director Plan are
fully vested and expire 10 years after the date of the grant. Restricted Stock Awards  60,500 shares are outstanding, as more fully discussed in
Note 14. The following is a summary of outstanding options as of January 31, 2005: 1994 Stock Option Plan- Granted shares total 287,270 and options to purchase 129,984 shares of
common stock are issued and outstanding, 21,000 of which are exercisable at $3.29 per
share, 11,500 of which are exercisable at $5.75 per share, 19,150 of which are exercisable at
$22.00 per share, 15,000 of which are exercisable at $5.38 per share and 63,334 of which are
exercisable at $1.90 per share. 1998 Amended and Restated Stock Awards Plan- Options to purchase an aggregate of 370,750
shares have been granted and options to purchase 343,650 shares of common stock are issued and
outstanding, 123,650 of which are exercisable at $3.56 per share, 25,000 of which are
exercisable at $4.16 per share, 125,000 of which are exercisable at $4.75 per share and 70,000
of which are exercisable at $6.18 per share. 2000 Stock Option Plan- Options to purchase an aggregate of 868,648 shares of common stock are
issued and outstanding, 160,500 of which are exercisable at $5.13 per share, 750 of which are
exercisable at $5.53 per share, 206,650 of which are exercisable at $5.00 per share, 10,000 of
which are exercisable at $4.60 per share, 2,500 of which are exercisable at $4.00 per share,
201,914 of which are exercisable at $1.99 per share, 63,334 of which are exercisable at $1.25 per
share, 90,000 of which are exercisable at $1.90 per share, F-17




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##### Table of Contents



MITCHAM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 110,000 of which are exercisable at $4.50 per share, 3,000 of which are exercisable at
$4.83 per share and 20,000 of which are exercisable at $5.75 per share. Director Plan- Options to purchase an aggregate of 41,000 shares of common stock were
issued and outstanding, 1,000 of which are exercisable at $2.88 per share, 1,000 of
which are exercisable at $3.13 per share, 10,000 of which are exercisable at $4.06 per
share, 15,000 of which are exercisable at $5.13 per share, 2,000 of which are
exercisable at $7.38 per share, 10,000 of which are exercisable at $11.00 per share
and 2,000 of which are exercisable at $11.13 per share. Stock option activity in the 1994 Stock Option Plan, 1998 Amended and Restated Stock Awards
Plan, 2000 Stock Option Plan and Director Plan for the years ended January 31, 2003, 2004 and 2005
was as follows: Weighted
    
    
    Weighted AverageAverage
    
    
    Fair ValueNumber of
    
    
    Exercise Price
    
    
    Per Share onShares
    
    
    Per Share
    
    
    Grant DateOutstanding,
January 31,
2002
    
    
    962,200
    
    
    $
    5.52Exercised
    
    
    
    
    
    
    Granted
    
    
    410,120
    
    
    
    1.77
    
    
    $
    1.18Forfeited
    
    
    (5,450
    )
    
    
    4.64Outstanding,
January 31, 2003
    
    
    1,366,870
    
    
    $
    4.40Exercised
    
    
    (10,000
    )
    
    
    1.99Granted
    
    
    182,500
    
    
    
    1.89
    
    
    $
    1.34Forfeited
    
    
    (144,580
    )
    
    
    6.10Outstanding,
January 31, 2004
    
    
    1,394,790
    
    
    $
    3.91Exercised
    
    
    (170,738
    )
    
    
    1.86Granted
    
    
    353,000
    
    
    
    4.97
    
    
    $
    3.65Forfeited
    
    
    (193,770
    )
    
    
    5.68Outstanding,
January 31, 2005
    
    
    1,383,282
    
    
    $
    4.19
 The weighted average remaining contractual life at January 2003, 2004 and 2005 was 6.5 years,
7.0 years and 6.7 years, respectively. As of January 31, 2005, options to acquire 1,001,671 shares of the Companys common stock
were fully vested and exercisable at a weighted average exercise price of $4.28 per share. The
remaining options, which have a weighted average exercise price of $3.93 per share, will vest
during the next three fiscal years. If not previously exercised, options outstanding at January
31, 2005 will expire as follows: 42,000 shares in 2005, 13,500 shares in 2006, 21,150 shares in
2007, 25,000 shares in 2008, 224,650 shares in 2009, 176,250 shares in 2010, 216,650 shares in
2011, 267,748 shares in 2012, 153,334 shares in 2013, 173,000 in 2014 and 70,000 in 2015. F-18




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##### Table of Contents



MITCHAM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 17. Quarterly Financial Data (Unaudited) Fiscal Year
    
    
    April 30
    
    
    July 31
    
    
    October 31
    
    
    January 31(In thousands, except per share amounts)Net sales, continuing operations:
    
    
    2005
    
    
    $
    8,206
    
    
    $
    6,393
    
    
    $
    4,738
    
    
    $
    7,0312004
    
    
    
    5,868
    
    
    
    3,929
    
    
    
    7,275
    
    
    
    5,334Gross profit:
    
    
    2005
    
    
    
    5,966
    
    
    
    4,919
    
    
    
    3,731
    
    
    
    5,4822004
    
    
    
    4,332
    
    
    
    2,860
    
    
    
    4,824
    
    
    
    3,349Income (loss) from continuing operations before income taxes:
    
    
    2005
    
    
    
    1,370
    
    
    
    75
    
    
    
    (559
    )
    
    
    1,4402004
    
    
    
    (526
    )
    
    
    (2,264
    )
    
    
    105
    
    
    
    (889
    )Incomes taxes (benefit):
    
    
    2005
    
    
    
    
    
    
    
    
    
    
    
    264
    
    
    
    132004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) from continuing operations:
    
    
    2005
    
    
    
    1,370
    
    
    
    75
    
    
    
    (823
    )
    
    
    1,4272004
    
    
    
    (526
    )
    
    
    (2,264
    )
    
    
    105
    
    
    
    (889
    )Net income (loss) from discontinued operations:
    
    
    2005
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    2004
    
    
    
    (914
    )
    
    
    (1,879
    )
    
    
    
    
    
    
    78Net income (loss):
    
    
    2005
    
    
    
    1,370
    
    
    
    155
    
    
    
    (823
    )
    
    
    1,4272004
    
    
    
    (1,440
    )
    
    
    (4,143
    )
    
    
    105
    
    
    
    (811
    )Net income
(loss) per common share from continuing operations  basic:
    
    
    2005
    
    
    $
    0.16
    
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    0.162004
    
    
    $
    (0.06
    )
    
    $
    (0.26
    )
    
    $
    0.01
    
    
    $
    (0.10
    )Net income
(loss) per common share from continuing operations 
    
    
    2005
    
    
    $
    0.15
    
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    0.15diluted:
    
    
    2004
    
    
    $
    (0.06
    )
    
    $
    (0.26
    )
    
    $
    0.01
    
    
    $
    (0.10
    )Net income
(loss) per common share from discontinued operations 
    
    
    2005
    
    
    $
    
    
    
    $
    0.01
    
    
    $
    
    
    
    $
    basic and diluted:
    
    
    2004
    
    
    $
    (0.10
    )
    
    $
    (0.21
    )
    
    $
    
    
    
    $
    0.01Net income (loss) per common share  basic:
    
    
    2005
    
    
    $
    0.16
    
    
    $
    0.02
    
    
    $
    (0.09
    )
    
    $
    0.162004
    
    
    $
    (0.16
    )
    
    $
    (0.47
    )
    
    $
    0.01
    
    
    $
    (0.09
    )Net income
(loss) per common share  diluted:
    
    
    2005
    
    
    $
    0.15
    
    
    $
    0.02
    
    
    $
    (0.09
    )
    
    $
    0.152004
    
    
    $
    (0.16
    )
    
    $
    (0.47
    )
    
    $
    0.01
    
    
    $
    (0.09
    )
 F-19




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders
Mitcham Industries, Inc.
Huntsville, Texas We have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements of Mitcham Industries, Inc. and
Subsidiaries included in this Form 10-K and have issued our report thereon dated April 13,
2005. Our audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The financial statement schedule listed in Item 15(a) herein
(Schedule II - Valuation and Qualifying Accounts) is the responsibility of the Companys
management and is presented for the purpose of complying with the Securities and Exchange
Commissions rules and is not part of the basic financial statements. The financial statement
schedule has been subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, is fairly stated in all material respects with the
financial data required to be set forth therein in relation to the basic financial
statements taken as a whole. /s/     HEIN & ASSOCIATES LLPHein & Associates LLP Houston, Texas
April 13, 2005 F-20




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##### Table of Contents



SCHEDULE II MITCHAM INDUSTRIES, INC. VALUATION AND QUALIFYING ACCOUNTS Col. A
    
    Col. B
    
    
    Col. C(1)
    
    
    Col. D
    
    
    Col. EBalance at
    
    
    Additions Charged to
    
    
    Deductions -
    
    
    Balance atDescription
    
    Beginning of Period
    
    
    Costs and Expenses
    
    
    Describe
    
    
    End of PeriodJanuary 31, 2003Allowance for
doubtful
accounts
    
    $
    1,454,000
    
    
    $
    (500,000
    )
    
    $
    184,000
    (A)
    
    $
    770,000January 31, 2004Allowance for
doubtful
accounts
    
    $
    770,000
    
    
    $
    103,000
    
    
    $
    (3,000
    ) (A)
    
    $
    876,000January 31, 2005Allowance for
doubtful
accounts
    
    $
    876,000
    
    
    $
    155,000
    
    
    $
    22,000
    (A)
    
    $
    1,009,000
    Note:Column C(2)has been omitted, as all answers would be none. Col. A
    
    Col. B
    
    
    Col. C(1)
    
    
    Col. D
    
    
    Col. EBalance at
    
    
    Additions Charged to
    
    
    Deductions -
    
    
    Balance atDescription
    
    Beginning of Period
    
    
    Costs and Expenses
    
    
    Describe
    
    
    End of PeriodJanuary 31, 2003Allowance for
obsolete
equipment
    
    $
    255,000
    
    
    $
    30,000
    
    
    $
    42,000
    
    
    $
    243,000January 31, 2004Allowance for
obsolete
equipment
    
    $
    243,000
    
    
    $
    8,000
    
    
    $
    57,000
    
    
    $
    194,000January 31, 2005Allowance for
obsolete
equipment
    
    $
    194,000
    
    
    $
    409,000
    
    
    $
    84,000
    
    
    $
    519,000
 Note:Column C(2)has been omitted, as all answers would be none. F-21




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber3.1
    
    -
    
    Amended and Restated Articles of Incorporation of Mitcham Industries, Inc. (1) (Exhibit 3.1)3.2
    
    -
    
    Second Amended and Restated Bylaws of Mitcham Industries, Inc. (11)9
    
    -
    
    Voting Agreement, dated September 20, 1993, among the company, Billy F. Mitcham, Jr. and
certain shareholders (2) (Exhibit 9)*10.1
    
    -
    
    Employment Agreement, dated January 15, 1997, between the Company and Billy F. Mitcham, Jr.
(3) (Exhibit 10.4)10.2
    
    -
    
    Exclusive Lease Referral Agreement, dated May 14, 1996, between the Company and Pelton
Company, Inc., an Oklahoma corporation (Pelton) (4)10.3
    
    -
    
    First Amendment to Exclusive Lease Referral Agreement, dated January 15, 1997, between the
Company and Pelton (3) (Exhibit 10.17)10.4
    
    -
    
    Second Amendment to Exclusive Lease Referral Agreement, dated November 24, 1997, between
Mitcham Industries, Inc. and Pelton (5) (Exhibit 10.3)*10.5
    
    -
    
    Mitcham Industries, Inc. 1994 Stock Option Plan (2) (Exhibit 10.9)*10.6
    
    -
    
    Mitcham Industries, Inc. 1994 Non-Employee Director Stock Option Plan (2) (Exhibit 10.12)*10.7
    
    -
    
    Mitcham Industries, Inc. 1998 Stock Awards Plan (6)*10.7.1
    
    -
    
    Amended and Restated 1998 Stock Awards Plan (12) (Exhibit 10.3)*10.7.2
    
    -
    
    Form of Restricted Stock Agreement (12) (Exhibit 10.1)*10.7.3
    
    -
    
    Form of Nonqualified Stock Option Agreement (12) (Exhibit 10.2)*10.7.4
    
    -
    
    Form of Incentive Stock Option Agreement (12) (Exhibit 10.4)*10.7.5
    
    -
    
    Form of Phantom Stock Award Agreement (12) (Exhibit 10.5)*10.7.6
    
    -
    
    Form of Stock Appreciation Rights Agreement (12) (Exhibit 10.6)*10.8
    
    -
    
    Mitcham Industries, Inc. 2000 Stock Option Plan (7)*10.8.1
    
    -
    
    Form of Incentive Stock Option Agreement (12) (Exhibit 10.7)*10.8.2
    
    -
    
    Form of Nonqualified Stock Option Agreement (12) (Exhibit 10.8)10.9
    
    -
    
    Warrant No. M-7, dated July 18, 2001, issued to Bear Ridge Capital, L.L.C. (8)10.10
    
    -
    
    Share Sale Agreement, dated December 2002, between Mitcham Industries, Inc. and Nautronix
Inc. (9)*10.11
    
    -
    
    Agreement, dated April 4, 2003, between Mitcham Industries, Inc. and William J. Sheppard (10) (Exhibit 10.14)*10.12
    
    -
    
    Second Consultant Agreement, dated April 1, 2003, but effective January 1, 2004. between
Mitcham Industries, Inc. and William J. Sheppard (10) (Exhibit 10.16)10.13
    
    -
    
    Equipment Lease Agreement, dated April 9, 2003, between Mitcham Industries, Inc. and Sercel,
Inc., and Oklahoma corporation (Sercel) (10) (Exhibit 10.17)10.14
    
    -
    
    Amendment to the Equipment Lease Agreement, dated as of December 17, 2003, between
Mitcham Industries, Inc. and Sercel (11) (Exhibit 10.14)10.15
    
    -
    
    Promissory Note of Mitcham Industries, Inc., dated as of February 11, 2002, payable to First
Victoria National Bank in the original principal amount of $8,518,919 (11) (Exhibit 10.15)10.16
    
    -
    
    Loan Agreement, dated March 30, 2004, by and between Mitcham Industries, Inc. and First
Victoria National Bank (11) (Exhibit 10.16)*10.17
    
    -
    
    Separation Agreement, Consulting Agreement and Release, dated June 24, 2004, between P.
Blake Dupuis and Mitcham Industries, Inc. (13)21
    
    -
    
    Subsidiaries of the Company**23
    
    -
    
    Consent of Hein & Associates LLP**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***




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##### Table of Contents



ExhibitNumber31.2
    
    -
    
    Certification of Michael A. Pugh, Chief Financial Officer, pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act, as amended***32.1
    
    -
    
    Certification of Billy F. Mitcham,
Jr., Chief Executive Officer, under Section 906 of the Sarbanes
Oxley Act of 2002, 18 U.S.C. § 1350***32.2
    
    -
    
    Certification of Michael A. Pugh, Chief Financial Officer, under Section 906 of the Sarbanes
Oxley Act of 2002, 18 U.S.C. § 1350***
   *
    
    Management contract or compensatory plan or arrangement**
    
    Previously filed***
    
    Filed herewith(1)
    
    Incorporated by reference to the indicated exhibit number of the Companys
Registration Statement on
Form S-8 (File No. 333-67208), filed with the SEC on August 9, 2001.(2)
    
    Incorporated by reference to the indicated exhibit number of the Companys
Registration Statement on
Form SB-2, filed with the SEC on July 5, 1994.(3)
    
    Incorporated by reference to the indicated exhibit number of the Companys
Registration Statement on
Form S-l (File No. 333-19997), filed with the SEC on January 17, 1997.(4)
    
    Incorporated by reference to Exhibit 10.1 of the Companys Registration Statement on
Form S-3/A
(File No. 333-10555), filed with the SEC on October 25, 1996.(5)
    
    Incorporated by reference to the indicated exhibit number of the Companys
Registration Statement on
Form S-3/A (File No. 333-40507), filed with the SEC on December 17,1997.(6)
    
    Incorporated by reference to Exhibit A of the Companys proxy statement for the
fiscal year ended
January 31, 1998, filed with the SEC on June 1, 1998.(7)
    
    Incorporated by reference to Exhibit A of the Companys proxy statement for the
fiscal year ended
January 31, 2000, filed with the SEC on May 26, 2000.(8)
    
    Incorporated by reference to Exhibit 10.14 of the Companys Annual Report on Form
10-K for the fiscal
year ended January 31, 2002, filed with the SEC on May 1, 2002.(9)
    
    Incorporated by reference to Exhibit 2.1 of the Companys Current Report on Form 8-K,
filed with the
SEC on January 13, 2003.(10)
    
    Incorporated by reference to the indicated exhibit number of the Companys Annual
Report on
Form 10-K for the fiscal year ended January 31, 2003, filed with the SEC on May 1, 2003.(11)
    
    Incorporated by reference to the indicated exhibit number of the Companys Annual
Report on
Form 10-K for the fiscal year ended January 31, 2004, filed with the SEC on May 28, 2004.(12)
    
    Incorporated by reference to the indicated exhibit number of the Companys Current
Report on
Form 8-K, filed with the SEC on September 8, 2004.(13)
    
    Incorporated by reference to Exhibit 10.1 of the Companys Quarterly Report on Form
10-Q for the period
ended July 31, 2004, filed with the SEC on September 14, 2004.