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MIND TECHNOLOGY, INC - Quarter Report: 2005 April (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


         
(Mark One)
x
   
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
   
 
 
       
  For the quarterly period ended April 30, 2005    
 
       
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
   
 

Commission file number 000-25142


MITCHAM INDUSTRIES, INC.

(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 77342

(Address of principal executive offices)

(936) 291-2277
(Registrant’s telephone number, including area code)


     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes o    No x

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 9,046,732 shares of Common Stock, $0.01 par value, were outstanding as of June 7, 2005.

 
 

 


Table of Contents

MITCHAM INDUSTRIES, INC.
INDEX

         
  PART I. FINANCIAL INFORMATION    
 
       
  Financial Statements
   
 
       
       Condensed Consolidated Balance Sheets.   3
       Condensed Consolidated Statements of Operations.   4
       Condensed Consolidated Statements of Cash Flows.   5
       Notes to Condensed Consolidated Financial Statements.   6
 
       
  Management’s Discussion and Analysis of Financial Condition and Results of Operations.   9
 
       
  Quantitative and Qualitative Disclosures About Market Risk.   13
 
       
  Controls and Procedures.   13
 
       
  PART II. OTHER INFORMATION    
 
       
  Legal Proceedings.   14
 
       
  Exhibits.   14
 
       
  Signatures.   15
 Certification of Billy F. Mitcham, Jr. - CEO
 Certification of Michael A. Pugh - CFO
 Certification of Billy F. Mitcham, Jr. - CEO
 Certification of Michael A. Pugh - CFO

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PART I. FINANCIAL INFORMATION
 

Item 1. Financial Statements

MITCHAM INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)

                 
    January 31,     April 30,  
    2005     2005  
            (Unaudited)  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 13,138     $ 12,229  
Accounts receivable, net of allowance for doubtful accounts of $723 and $845
    6,021       5,860  
Current portion of notes receivable, net of allowance for doubtful notes of $286 and $243
    1,192       980  
Prepaid expenses and other current assets
    705       797  
Current assets of discontinued operations
    393       432  
 
           
Total current assets
    21,449       20,298  
 
Seismic equipment lease pool, property and equipment
    74,792       74,204  
Accumulated depreciation of seismic equipment lease pool, property and equipment
    (55,067 )     (55,752 )
Long-term assets of discontinued operations
    216       145  
Notes receivable
          41  
Other assets
    5       2  
 
           
Total assets
  $ 41,395     $ 38,938  
 
           
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 4,893     $ 1,299  
Current maturities — long-term debt
    918       338  
Deferred revenue
    652       102  
Income taxes payable
    284       340  
Wages payable
    299       278  
Accrued expenses and other current liabilities
    458       697  
Current liabilities of discontinued operations
    14       7  
 
           
Total current liabilities
    7,518       3,061  
Commitments and contingencies
               
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; 9,893,732 and 9,909,732 shares issued, respectively
    99       99  
Additional paid-in capital
    62,702       62,720  
Treasury stock, at cost (915,000 shares)
    (4,686 )     (4,686 )
Deferred compensation
    (94 )     (58 )
Accumulated deficit
    (26,282 )     (24,140 )
Accumulated other comprehensive income
    2,138       1,942  
 
           
Total shareholders’ equity
    33,877       35,877  
 
           
Total liabilities and shareholders’ equity
  $ 41,395     $ 38,938  
 
           

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MITCHAM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share and per share data)
(Unaudited)

                 
    Three Months Ended  
    April 30,  
    2004     2005  
Revenues:
               
Equipment leasing
  $ 5,401     $ 6,196  
Equipment sales
    2,805       1,442  
 
           
Total revenues
    8,206       7,638  
 
Costs and expenses:
               
Direct costs — seismic leasing
    689       597  
Cost of equipment sales
    1,551       692  
General and administrative
    1,837       1,874  
Provision for doubtful accounts
          79  
Depreciation and amortization
    2,707       2,177  
 
           
Total costs and expenses
    6,784       5,419  
 
           
 
Operating income
    1,422       2,219  
 
Other income (expense) — net
    (52 )     85  
 
           
 
Income before income taxes
    1,370       2,304  
 
Provision for income taxes
          162  
 
           
 
Net income
    1,370       2,142  
 
           
 
Net income per common share
               
Basic
  $ 0.16     $ 0.24  
Diluted
  $ 0.15     $ 0.22  
 
Shares used in computing net income per common share:
               
Basic
    8,800,000       8,976,000  
Dilutive effect of common stock equivalents
    381,000       612,000  
 
           
Diluted
    9,181,000       9,588,000  
 
           

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MITCHAM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

                 
    Three Months Ended  
    April 30,  
    2004     2005  
Cash flows from operating activities:
               
Net income
  $ 1,370     $ 2,142  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    2,707       2,177  
Stock-based compensation
          36  
Provision for doubtful accounts, net of charge offs
          79  
Net book value of seismic equipment sold
    940       91  
Changes in:
               
Trade accounts receivable
    (27 )     253  
Federal income taxes, current
          56  
Accounts payable, accrued expenses and other current liabilities
    (336 )     (3,926 )
Other, net
    44       (89 )
 
           
Net cash provided by operating activities
    4,698       819  
 
           
 
Cash flows from investing activities:
               
Purchases of seismic equipment held for lease
    (404 )     (1,007 )
Purchases of property and equipment
    (33 )     (184 )
 
           
Net cash used in investing activities
    (437 )     (1,191 )
 
           
 
Cash flows from financing activities:
               
Proceeds from issuance of common stock upon exercise of options
          18  
Payments on borrowings
    (907 )     (580 )
 
           
Net cash used in financing activities
    (907 )     (562 )
 
           
Net increase (decrease) in cash and cash equivalents-continuing operations
    3,354       (934 )
Net increase (decrease) in cash and cash equivalents-discontinued operations
    (73 )     25  
Cash and cash equivalents, beginning of period
    6,834       13,138  
 
           
Cash and cash equivalents, end of period
  $ 10,115     $ 12,229  
 
           

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MITCHAM INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   Basis of Presentation
 
    The condensed consolidated financial statements of Mitcham Industries, Inc. (the “Company”) have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended January 31, 2005. In the opinion of the Company, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position as of April 30, 2005; the results of operations for the three months ended April 30, 2005 and 2004; and the cash flows for the three months ended April 30, 2005 and 2004, have been included. The foregoing interim results are not necessarily indicative of the results of the operations to be expected for the full fiscal year ending January 31, 2006.

2.   Organization
 
    Mitcham Industries, Inc., a Texas corporation, was incorporated in 1987. The Company and Mitcham Canada Ltd., its wholly-owned Canadian subsidiary, provide full-service equipment leasing, sales and service to the seismic industry worldwide, primarily in North and South America. The Company, through its wholly-owned Australian subsidiary, Seismic Asia Pacific Pty Ltd. (“SAP”), provides seismic, oceanographic and hydrographic leasing and sales worldwide, primarily in Asia and Australia. Through its wholly-owned U.S. subsidiary, Drilling Services, Inc. (“DSI”), the Company provided seismic survey program design, quality control, permit acquisition, geographical surveying and shot hole drilling, all commonly referred to as “front-end services”. In August 2003, the Company sold the operating assets of DSI. The operating results and assets and liabilities of DSI are classified as discontinued operations and all prior period statements have been reclassified accordingly. See Note 8. All intercompany transactions and balances have been eliminated in consolidation.

3.   Earnings Per Share
 
    For the three months ended April 30, 2004 and 2005, the following table sets forth the number of dilutive shares that may be issued pursuant to options currently outstanding, which number was used in the per share calculations.
                 
    Three Months Ended April 30,  
    2004     2005  
Stock options
    381,000       603,000  
Warrants
          9,000  
 
           
Total dilutive securities
    381,000       612,000  
 
           

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4.   Comprehensive Income
 
    SFAS 130 “Reporting Comprehensive Income” establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income generally represents all changes in shareholders’ equity (deficit) during the period, except those resulting from investments by, or distributions to, shareholders. The Company has comprehensive income related to changes in foreign currency to U.S. dollar exchange rates, which is recorded as follows:
                 
    Three Months Ended April 30,  
    2004     2005  
Net income
  $ 1,370     $ 2,142  
Change in foreign currency translation adjustment
    (544 )     (196 )
 
           
Comprehensive income (loss)
  $ 826     $ 1,946  
 
           

5.   Supplemental Statements of Cash Flows Information
 
    Supplemental disclosures of cash flow information for the three months ended April 30, 2004 and 2005 are as follows:
                 
    Three Months Ended April 30,  
    2004     2005  
Interest paid
  $ 66     $ 12  
 
           

6.   Reclassifications
 
    Certain 2004 amounts have been reclassified to conform to the 2005 presentation. Such reclassifications had no effect on net income or loss.

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7.   Stock Options
 
    The Company accounts for its stock-based compensation plans under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. The pro forma information below is based on provisions of Statement of Financial Accounting Standard (“FAS”) No. 123, Accounting for Stock-Based Compensation, as amended by FAS 148, Accounting for Stock-Based Compensation-Transition and Disclosure, issued in December 2002.
                 
    Three Months Ended April 30,  
    2004     2005  
Pro forma impact of fair value method (FAS 148)
               
Reported net income
  $ 1,370     $ 2,142  
Less: fair value impact of employee stock compensation
    (83 )     (218 )
 
           
Pro forma net income
  $ 1,287     $ 1,924  
 
           
Income per common share
               
Reported net income per share:
               
Basic
  $ 0.16     $ 0.24  
Diluted
  $ 0.15     $ 0.22  
Pro forma net income per share:
               
Basic
  $ 0.15     $ 0.21  
Diluted
  $ 0.14     $ 0.20  
Weighted average Black-Scholes fair value assumptions
               
Risk free interest rate
    3-5%       3-5%  
Expected life
  8 yrs.     8 yrs.
Expected volatility
    65%       68%  
Expected dividend yield
    0.0%       0.0%  

8.   Discontinued Operations
 
    On August 1, 2003, the Company sold the operating assets of DSI, which comprised all of the operating assets of the Company’s front-end services segment. The Company’s decision to sell DSI resulted from the over-capacity in that market segment. Proceeds from the sale were $250,000 cash and an $800,000 note receivable due over three years. Additionally, the buyer assumed $143,000 of capitalized lease obligations. Effective with the October 31, 2003 financial statements, the operating results of DSI are presented as discontinued operations and all prior period statements have been reclassified accordingly. A summary of DSI’s revenues and pretax income (loss) is reflected as follows.
                 
    Three Months Ended April 30,  
    2004     2005  
Revenues
  $     $  
Pretax income (loss)
  $     $  

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8.   Discontinued Operations (continued)
 
    A summary of DSI’s assets and liabilities is reflected as follows:
                 
    January 31,     April 30,  
    2005     2005  
Accounts and notes receivable of discontinued operations
  $ 498     $ 465  
Other current assets of discontinued operations
  $ 111     $ 112  
Accounts payable and accrued liabilities of discontinued operations
  $ 14     $ 7  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Our revenues are directly related to the level of worldwide oil and gas exploration activities and the profitability and cash flows of oil and gas companies and seismic contractors, which in turn are affected by expectations regarding the supply and demand for oil and natural gas, energy prices and finding and development costs. Seismic data acquisition activity levels are measured in terms of the number of active recording crews, known as the “crew count’’, and the number of recording channels deployed by those crews. Because an accurate and reliable census of active crews does not exist, it is not possible to make definitive statements regarding the absolute levels of seismic data acquisition activity. Furthermore, a significant number of seismic data acquisition contractors are either private or state-owned enterprises and information about their activities is not available in the public domain. Due to our unique position as the largest independent lessor of seismic equipment, we are privy to information about future projects from many data acquisition contractors. Based on our analysis of various indicators, including recent bid activity, equipment movement and public announcement of companies adding crew capacity, it appears that the seismic exploration market is in an uptrend. We believe that this increase is being driven by historically high world oil and North American natural gas prices, combined with the maturation of the world’s hydrocarbon producing basins. The future direction and magnitude of changes in seismic data acquisition activity levels will continue to be dependent upon oil and natural gas prices.

We lease and sell seismic data acquisition equipment primarily to seismic data acquisition companies conducting land and transition zone seismic surveys worldwide. We provide short-term leasing of seismic equipment to meet a customer’s requirements and offer technical support during the lease term. The majority of all active leases at April 30, 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 of seismic equipment, SAP sells equipment, consumables, systems integration, engineering hardware and software maintenance support services to the seismic, hydrographic, oceanographic, environmental and defense industries throughout South East Asia and Australia.

Seismic equipment leasing is susceptible to weather patterns in certain geographic regions. Our lease revenue is seasonal, especially in Canada, where a significant percentage of seismic survey activity occurs in the winter months, from November through March. During the months in which the weather is warmer, certain areas are not accessible to trucks, earth vibrators and other equipment because of the unstable terrain. This seasonal leasing activity by our Canadian customers has historically resulted in increased lease revenues in our first and fourth fiscal quarters.

Results of Operations

For the quarter ended April 30, 2005, we recorded net income from continuing operations of $2.1 million, compared to net income for the comparable quarter of 2004 of $1.4 million.

During the quarter ended April 30, 2005, our results of operations were affected by several significant factors, which are discussed below. Our revenues decreased approximately $0.6 million, reflecting a decrease in sales of $1.4 million which was partially offset by an increase in leasing revenues of $0.8 million from the corresponding quarter in the prior fiscal year.

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Our fixed and variable costs are important factors affecting our results of operations. Due to the size and age of our seismic equipment lease pool, depreciation expense, which amounted to $2.2 million for the quarter ended April 30, 2005, is our single largest expense item. This expense will vary between periods based on acquisitions of new equipment and sales of equipment with remaining depreciable life. Direct costs of seismic leasing are variable expenses that fluctuate with our equipment leasing revenues. The main components of this cost are freight, sublease expenses and repairs and maintenance, to the extent that repairs performed are normal wear and tear and not billable to the lease customer.

Revenues

For the quarter ended April 30, 2005, consolidated revenues decreased by $0.6 million, or 7%, to a total of $7.6 million, as compared to $8.2 million for the corresponding quarter in 2004. The decrease in revenues was principally due to two large sales recorded in the prior year’s first quarter. For the quarter ended April 30, 2005, leasing revenues increased to $6.2 million compared to $5.4 million in the prior year. Additionally, our leasing revenues significantly increased in our Australian operations to $1.2 million from $0.2 million in 2005 and 2004, respectively, while our Canadian and U.S. operations reported relatively flat revenues in the quarter ended April 30, 2005 as compared to the corresponding quarter in 2004. Foreign currency exchange rates had the effect of increasing consolidated revenues in the quarter ended April 30, 2005 by $0.2 million over the comparable quarter in 2004.

Equipment sales for the quarter ended April 30, 2005 were $1.4 million as compared to $2.8 million for the comparable quarter in 2004. Cost of equipment sales for the quarters ended April 30, 2005 and 2004 were $0.7 million and $1.6 million, respectively. Gross margins on equipment sales were 52% and 45% for the quarters ended April 30, 2005 and 2004, respectively. Gross margins on equipment sales may vary significantly between periods due to the mix of sales revenue between new seismic and oceanographic equipment as compared to sales of depreciated seismic equipment sold from our lease pool.

Costs and Expenses

For the quarter ended April 30, 2005, depreciation expense was $2.2 million, which was $0.5 million, or 19%, lower than the depreciation expense in the comparable quarter in 2004. The decrease in depreciation expense from the quarter ended April 30, 2004 to 2005 was primarily due to certain equipment reaching the end of its depreciable life during each of those years, coupled with the sales of assets with remaining depreciable life. For the quarter ended April 30, 2005, foreign currency exchange rates had the effect of increasing depreciation expense by $0.1 million as compared to the amount in the comparable quarter in 2004.

Direct costs for the quarter ended April 30, 2005 were $0.6 million, which was approximately $0.1 million less than direct costs for the comparable quarter in 2004 primarily due to a decrease in repair expenses.

General and administrative expenses for the quarter ended April 30, 2005 totaled approximately $1.9 million, or $0.1 million greater than 2004 expenses of $1.8 million. The increase in general and administrative expenses was primarily due to an increase in wages and accounting and consulting expenses, offset by a decrease in legal costs as compared to 2004.

Provision for doubtful accounts expense increased $0.1 million for the quarter ended April 30, 2005 compared to the quarter ended April 30, 2004, related to past due receivables for one customer.

For the quarter ended April 30, 2005, we recorded estimated income tax expense in the amount of $0.2 million, compared to no income tax expense in the comparable quarter of the prior year. The estimated tax expense is primarily attributable to the operations of SAP, after taking into account all net operating loss carryforwards available to us.

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Liquidity and Capital Resources

As of April 30, 2005, we had net working capital of approximately $17.2 million as compared to net working capital of $13.9 million at January 31, 2005. 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 three months ended April 30, 2005 was $0.8 million, as compared to net cash provided by operating activities of $4.7 million for the three months ended April 30, 2004. Net cash used in financing activities for the three months ended April 30, 2005 was $0.6 million, compared to net cash used in financing activities for the comparable period in 2004 of $0.9 million.

Capital expenditures for the three months ended April 30, 2005 totaled approximately $1.2 million as compared to capital expenditures of $0.4 million for the comparable period in 2004. Our 2005 and 2004 capital expenditures for the seismic equipment lease pool were made to fulfill specific lease contracts.

At April 30, 2005, we had trade accounts and notes receivable of $1.1 million that were more than 90 days past due. As of April 30, 2005, our allowance for doubtful accounts was approximately $1.1 million, which management believes is sufficient to cover any losses in our receivable balances.

In certain instances when customers have been unable to repay their open accounts receivable balances, we have agreed to a structured repayment program using an interest-bearing promissory note. In these cases, we provide a reserve for doubtful accounts against the balance. Due to the uncertainty of collection, we do not recognize the interest earned until the entire principal balance has been collected. In most cases where we have a chronic collection problem with a particular customer, future business is done on a prepayment basis or, if additional credit is extended, revenues are not recognized until collected. Although the extension of repayment terms on open accounts receivables temporarily reduces our cash flow from operations, we believe that this practice is necessary in light of seismic industry conditions and that it has not adversely affected our ability to conduct routine business.

Additionally, we occasionally offer extended payment terms on equipment sales transactions. These terms are generally less than one year in duration. Until there is a question as to whether an account is collectible, the sales revenue and cost of goods sold is recognized at the inception of the transaction.

In February 2002, we obtained an $8.5 million term loan with First Victoria National Bank, the remaining principal balance of which was approximately $0.3 million at April 30, 2005. The loan is payable in forty-eight equal installments of approximately $197,000 and bears interest at the rate of prime plus 1/2%. The loan is secured by lease pool equipment and all proceeds from lease pool equipment leases and sales.

We paid for our $3.6 million in capital expenditures during the fiscal year ended January 31, 2004, using $1.8 million in cash and entering into separate short-term note agreements with three seismic equipment manufacturers related to the purchase of equipment for our lease pool. The aggregate amount financed by the manufacturers was $1.7 million, all of which was 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.

On October 20, 2004, we issued a press release to announce that we entered into a nonbinding letter of intent with Seamap International Holdings Pte Ltd regarding a potential acquisition of Seamap International Holdings’ three subsidiaries. The letter of intent provides for a period during which we will conduct a due diligence review of Seamap and negotiate a definitive purchase agreement. We anticipate that the aggregate purchase price for Seamap will be $6.5 million in cash and notes and an earn out component based on performance of up to an additional $2.0 million.

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At the present time, we believe that cash on hand and cash provided by future operations will be sufficient to fund our anticipated capital and liquidity needs over the next 12 months. However, should demand warrant, we may pursue additional borrowings to fund capital expenditures and acquisitions.

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 contract, 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.

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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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We operate internationally, giving rise to exposure to market risks from changes in foreign exchange rates to the extent that transactions are not denominated in U.S. dollars. We typically denominate the majority of our lease and sales contracts in U.S., Canadian and Australian dollars to mitigate the exposure to fluctuations in foreign currencies. Since the majority of our lease and sales contracts with our customers are denominated in U.S., Canadian and Australian dollars, there is little risk of economic (as opposed to accounting) loss from fluctuations in foreign currencies.

Item 4. Controls and Procedures

As required by SEC Rule 13a-15(b), we evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Our principal executive officer and principal financial officer have concluded that our current disclosure controls and procedures are effective to timely alert them to material information regarding the Company that is required to be included in our periodic reports filed with the SEC, and that our internal controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles. During the three months ended April 30, 2005, we have made no change in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Forward-Looking Statements and Risk Factors

Certain information contained in this Quarterly Report on Form 10-Q (including statements contained in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Part I, Item 4. “Controls and Procedures” and in Part II, Item 1. “Legal Proceedings”), as well as other written and oral statements made or incorporated by reference from time to time by us and our representatives in other reports, filings with the United States Securities and Exchange Commission (the “SEC’’), press releases, conferences, or otherwise, may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act’’). This information includes, without limitation, statements concerning our future financial position and results of operations; planned capital expenditures; business strategy and other plans for future operations; the future mix of revenues and business; commitments and contingent liabilities; and future demand for our services and predicted improvement in energy industry and seismic service industry conditions. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. When used in this report, the words “anticipate,’’ “believe,’’ “estimate,’’ “expect,’’ “may,’’ and similar expressions, as they relate to the Company and our management, identify forward-looking statements. The actual results of future events described in such forward-looking statements could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth in our Annual Report on Form 10-K for the year ended January 31, 2005 and elsewhere within this Quarterly Report on Form 10-Q.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company is a party to legal proceedings arising in the ordinary course of business. The Company is not currently a party to any litigation that it believes could have a material adverse effect on the results of operations or financial condition of the Company.

Item 6. Exhibits

     The following documents are filed as exhibits to this Report:

     31.1 — Certification of Billy F. Mitcham, Jr., Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

     31.2 — Certification of Michael A. Pugh, Executive Vice President-Finance and 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, U.S.C. 1350

     32.2 — Certification of Michael A. Pugh, Executive Vice President-Finance and Chief Financial Officer, under Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. 1350

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

         
  MITCHAM INDUSTRIES, INC.
 
 
Date: June 13, 2005  /s/ Michael A. Pugh    
  Michael A. Pugh   
  Executive Vice President-Finance and Chief Financial Officer
(Authorized Officer and Principal Accounting Officer) 
 

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EXHIBIT INDEX

         
Exhibit
Number
       
Description
 
       
 
       
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
 
       
31.2
    Certification of Michael A. Pugh, Executive Vice President-Finance and 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, U.S.C. 1350
 
       
32.2
    Certification of Michael A. Pugh, Executive Vice President-Finance and Chief Financial Officer, under Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. 1350