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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 31, 2006
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-25142
Mitcham Industries, Inc.
(Exact name of registrant as specified in its charter)
| Texas | 76-0210849 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 8141 SH 75 South | ||
| P.O. Box 1175 | ||
| Huntsville, Texas | 77342 | |
| (Address of principal executive offices) | (Zip Code) |
936-291-2277
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
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)
Common Stock, $.01 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act.
Yes o No þ
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark 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 a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer o
Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of July 31, 2005, the aggregate market value of the registrant’s common stock held by
non-affiliates of the registrant was $73,725,921 based on the closing sale price as reported on the
National Association of Securities Dealers Automated Quotation System National Market System.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date.
| Class | Outstanding at May 1, 2006 | ||
| Common Stock, $.01 par value per share | 9,572,610 shares | ||
DOCUMENTS INCORPORATED BY REFERENCE
| Proxy Statement for the Annual Meeting of Shareholders to be held July 27, 2006 (Proxy Statement) |
Part III |
MITCHAM
INDUSTRIES, INC.
ANNUAL
REPORT ON FORM 10-K/A
(AMENDMENT NO. 1)
(AMENDMENT NO. 1)
EXPLANATORY
NOTE
We
are filing this Amendment No. 1 to our Annual Report on Form 10-K for
the fiscal year ended January 31, 2006, as filed with the U.S.
Securities and Exchange Commission (“SEC”) on May 10, 2006, to amend
the disclosure in Item 9A to (i) clarify that the Company’s
disclosure controls and procedures are effective as of January 31,
2006 at the reasonable assurance level, (ii) clarify how management
reached its conclusions that the Company did not have a material weakness in
internal controls as of January 31, 2006 and that the Company’s
disclosure controls and procedures were effective as of January 31,
2006 at the reasonable assurance level, and (iii) expand the
Company’s disclosures regarding changes in internal control over
financial reporting. In addition, this amendment corrects certain
minor typographical errors contained in the original Form 10-K.
Other
than the changes referred to above, all other information included in
the above described Form 10-K, as amended, remains unchanged. This
amendment does not reflect events occurring after the filing of such
Form 10-K, as amended, and does not modify or update the disclosures
therein in any way other than as required to reflect the amendment as
described above and set forth below.
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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 four wholly owned subsidiaries, Mitcham Canada Ltd., Seismic Asia
Pacific Pty Ltd. (“SAP”), Seamap International Holdings Pte Ltd. (“Seamap”), which the Company
acquired on July 12, 2005, and Mitcham Seismic Eurasia LLC (“MSE”), which the Company
established in November 2005. Seamap operates through its three wholly owned subsidiaries,
Seamap Inc., Seamap (UK) Ltd., and Seamap Pte. Ltd. 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.
We lease and sell geophysical and other equipment used primarily by seismic data
acquisition contractors to perform seismic data acquisition surveys
on land, in transition
zones (marsh and shallow water areas) and marine 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, nor 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 many electronic components of land, transition zone and
marine seismic data acquisition
systems, geophones and cables, earth vibrators, peripheral equipment, survey and other
equipment. A substantial amount of our seismic 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, 2006,
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. Seamap designs, manufactures and sells a
broad range of proprietary products for the seismic, hydrographic and offshore industries with
product sales and support facilities based in Huntsville, Texas, Singapore and the United
Kingdom. Seamap’s primary products include the industry leading range of GunLink seismic source
acquisition and control systems which now provide marine operators more precise control of their
exploration tools and the BuoyLink GPS tracking system used to provide precise positioning of
seismic sources and streamers.
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We have supply and exclusive lease referral agreements with several leading seismic
equipment manufacturers, including Sercel and Pelton Company, Inc., a
subsidiary of I/O (“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 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. | ||
| • | Continue to expand international operations. Historically, North and South America have been our core operating areas, with a limited amount of other international leasing activities; however, our revenues from international sources have increased. We intend to expand our international leasing and sales activities utilizing Seamap’s and MSE’s activities and locations to exploit new opportunities. We believe there are significant opportunities to continue to expand our international leasing and sales 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 July 12, 2005, we acquired Seamap, which designs, develops and markets a broad range of
proprietary products for the seismic, hydrographic and offshore industries with product sales
and support facilities based in Huntsville, Texas, Singapore and the United Kingdom. Seamap’s
primary products include the industry leading range of GunLink seismic source acquisition and
control systems which now provide marine operators more precise control of their exploration tools and
the BuoyLink GPS tracking system used to provide precise positioning of seismic sources and
streamers. While benefiting from the sales of existing designs, Seamap continues to develop new
products for the seismic industry, including a new fairlead that streamlines streamer
deployment. Financial results from Seamap are included from the acquisition date of July 12,
2005.
In
November 2005, MSE established an office in Ufa, Bashkortostan,
Russia. MSE
will perform equipment rental and technical assistance services
primarily for our Russian, CIS
and Eurasian operations.
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.
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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
large earth vibrators. As the acoustic wave travels through the earth, it is partially reflected
by the underlying rock layers and the reflected energy is captured by the geophones, which are
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,
disk or other recording media 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.
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Business and Operations
Seismic Equipment Leasing. We own a comprehensive lease pool of seismic equipment for
short-term leasing to our customers, which primarily includes 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 40,100 seismic
recording land channels (each channel capable of electronically converting seismic data from analog to digital
format and transmitting the digital data), geophones and cables,
large 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 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 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 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 January through March or April. Similarly, in Russia, the major seismic season runs from
December through April. 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 and northern Russia, most of
the seismic survey work is not usually affected by weather. Southern Russia and the C.I.S.
seismic season is not affected by the weather and we are able to conduct business within these
areas year round. As a result of Canadian and Russian weather conditions, we attempt to manage
our equipment lease pool to meet seasonal demands. Equipment leased in Canada and Russia during
the winter months is typically moved to other markets during these periods of slack 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 sell used equipment from our lease pool. From time to time we
also buy equipment for resale in response to specific customer orders. When equipment is
purchased in response to a specific customer order, we will typically invoice the equipment to
the customer with a nominal markup. The cost of this equipment is recorded directly to cost of
sales. Used equipment sold from our lease pool can have a wide range of gross margin depending
upon the amount of depreciation that has been recorded on the item. When used equipment is sold
from our lease pool, the net book value plus any cost associated with the sale is recorded to
cost of goods sold. The Company does not take title to equipment held on consignment but does take title to equipment sold by SAP.
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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. Seamap designs, manufactures and sells a broad range of
proprietary products for the seismic, hydrographic and offshore industries with product sales
and support facilities based in Huntsville, Texas, Singapore and the United Kingdom. Seamap’s
primary products include the industry leading range of GunLink seismic source acquisition and
control systems which now provide marine operators more precise control of their exploration tools and
the BuoyLink GPS tracking system used to provide precise positioning of seismic sources and
streamers. While benefiting from the sales of existing designs, Seamap continues to develop new
products for the seismic industry including a new fairlead which streamlines streamer
deployment.
Key Supplier Agreements
The Sercel Lease Agreement
Effective January 1, 2005, 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 with Pelton, a leading manufacturer and
supplier of vibrator control electronics,. (the “Pelton
Agreement”). 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 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.
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.
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We recorded an asset impairment charge of $700,000 in 2004 related to the sale of DSI’s
assets. The impairment charge was 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. There was no
income or loss from discontinued operations during fiscal 2006.
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, 2006, we had lease customers
with 73 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 lease and sale on our website, www.mitchamindustries.com.
In addition to our newly acquired subsidiary, Seamap and our newly opened facility in
Russia, we continue to 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.
A summary of the Company’s revenues from customers by geographic region, outside the U.S.,
is as follows:
| Year Ended January 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
Canada |
$ | 9,530,000 | $ | 6,587,000 | $ | 8,914,000 | ||||||
UK / Europe |
808,000 | 1,950,000 | 2,355,000 | |||||||||
Mexico |
110,000 | 31,000 | 13,000 | |||||||||
South America |
1,012,000 | 2,931,000 | 3,220,000 | |||||||||
Asia/South
Pacific |
4,569,000 | 7,170,000 | 10,479,000 | |||||||||
Other |
513,000 | 458,000 | 220,000 | |||||||||
Totals |
$ | 16,542,000 | $ | 19,127,000 | $ | 25,201,000 | ||||||
Two customers represented approximately 11% and 10% of fiscal 2004 total revenues. One
customer represented approximately 10% of fiscal 2005 and fiscal 2006 total revenues. No other
customer exceeded 10% of revenues for fiscal 2004, 2005 and 2006.
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.
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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 two equipment manufacturers, Sercel and I/O. Other
suppliers of peripheral seismic equipment include OYO Geospace Corporation (geophones and
cables), 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, 2006, we employed 111 people, none of whom is covered by a collective
bargaining agreement. We consider our employee relations to be satisfactory.
Website Access to Our Periodic SEC Reports
Our
internet address is http://www.mitchamindustries.com. We file Annual
Reports on Form 10-K, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K with the U.S.
Securities and Exchange Commission (“SEC”), which are
available free of charge through our website. 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 website, as allowed by SEC
rules. Information on our website is not incorporated into this Form
10-K.
Forward-Looking Statements
Certain information
contained in this Annual Report on Form 10-K (including statements
contained in Item 1. “Business”, Item 3.
“Legal Proceedings”, Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and 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 21E 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; and | ||
| o | predicted improvement in energy industry and seismic service industry conditions. |
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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 in Item 1A. “Risk
Factors” and elsewhere within this Annual Report on Form 10-K.
Item 1A.
Risk Factors
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, transition zone and marine 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; and | ||
| o | 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, 2004, 2005 and 2006, the single largest customer accounted for approximately
11%, 10% and 10%, respectively, of our consolidated revenues. Because our customer base is
relatively small, the loss of one or more customers for any reason could adversely affect our
results of operations.
Significant Defaults of Past-Due Customer Accounts Would Adversely Affect Our Results of Operations
On January 31, 2006, we had approximately $9.7 million of customer accounts and notes
receivable of which $2.3 million was over 90 days past due. At January 31, 2006 we had an
allowance of $1.2 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 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, 2006. Since the majority of our lease and sales contracts with our customers are
denominated in U.S., Australian, Canadian and Singapore dollars and British pounds, there is
some risk of economic 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.
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Foreign Currency Exchange Rates Have Increasingly Materially Affected Our Results of Operations
For accounting purposes, balance sheet accounts of the Canadian, Australian, United
Kingdom, Singapore and Russian 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 and
Australian operations and the fluctuations in the Canadian and Australian dollar exchange rates
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 on the initial lease. 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 customers
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.
Michael Pinnington, our Managing Director of Seamap (UK) and Mr. Mark Welker, our Managing
Director of Seamap Pte Ltd. 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. Both Mr. Pinnington and Mr. Welker have a five-year employment
agreement with the Company effective July 2005 that prohibits them from engaging in a similar
business as the Company for a period of seven years, should they leave employment of the
Company. The loss of the services of Mr. Mitcham, Mr. Pinnington or Mr. Welker could have a
material adverse effect on the Company.
Our Seismic Lease Pool is Subject to Technological Obsolescence
We have a substantial capital investment in seismic data acquisition equipment. The
development by manufacturers of seismic equipment of newer technology systems or component parts
that have significant competitive advantages over seismic systems and component parts now in use
could have an adverse effect on our ability to profitably lease and sell our existing seismic
equipment. Significant improvements in technology may also require us to recognize an asset
impairment charge to our lease pool investment, and to correspondingly invest significant sums
to upgrade or replace our existing lease pool with newer-technology equipment demanded by our
customers.
Weather Conditions Cause Seasonal 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 leasing
revenues is primarily due to the increased seismic survey activity in Canada from January
through March or April. 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.
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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. 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.
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 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 required 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.
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.
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 1B.
Unresolved Staff Comments
Not applicable.
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 feet of office and warehouse space in
Salisbury, Australia. Seamap leases approximately 11,800 square feet of office and warehouse
space in Somerset, United Kingdom and approximately 20,000 square feet of office and warehouse
space in Singapore. MSE leases approximately 500 square feet of office space in Ufa,
Bashkortostan, Russia. Our facilities are adequately utilized for our current operations.
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Item 3. Legal Proceedings
From time to time, the Company is a party to legal proceedings arising in the ordinary
course of business. The Company is not currently a party to any litigation that it believes
could have a material adverse effect on the results of operations or financial condition of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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 | Low | |||||||
Fiscal Year Ended January 31, 2005: |
||||||||
First Quarter |
$ | 5.35 | $ | 3.10 | ||||
Second Quarter |
5.25 | 3.42 | ||||||
Third Quarter |
7.68 | 4.20 | ||||||
Fourth Quarter |
8.94 | 5.40 | ||||||
Fiscal Year Ended January 31, 2006: |
||||||||
First Quarter |
7.90 | 6.03 | ||||||
Second Quarter |
9.63 | 6.34 | ||||||
Third Quarter |
11.89 | 8.05 | ||||||
Fourth Quarter |
26.18 | 10.55 | ||||||
As
of May 1, 2006, there were approximately 4,200 holders of
record of our 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.
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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, 2006:
EQUITY COMPENSATION PLAN INFORMATION
| Number of Securities | Weighted-Average | Number of Securities | ||||||||||
| to be Issued Upon | Exercise Price of | Remaining Available | ||||||||||
| Exercise of | Outstanding | for Future Issuance | ||||||||||
| Outstanding Options, | Options, Warrants | Under Equity | ||||||||||
| Plan Category | Warrants and Rights | and Rights | Compensation Plans (1) | |||||||||
Equity compensation plans approved
by our shareholders (2) |
1,054,920 | $ | 5.15 | 218,530 | ||||||||
Equity compensation plans not
approved by our shareholders |
0 | 0 | 0 | |||||||||
Total |
1,054,920 | $ | 5.15 | 218,530 | ||||||||
| (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 17 to our Consolidated Financial Statements filed elsewhere herein. |
Purchases of Equity Securities By the Issuer and Affiliated Purchasers
The Company did not purchase any of its securities during the fiscal year ended January
31, 2006.
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 including the footnotes thereto.
| Year Ended January 31, | ||||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||
| (Amounts in thousands, except per share amounts) | ||||||||||||||||||||
Net sales and other revenues |
$ | 27,183 | $ | 14,139 | $ | 22,406 | $ | 26,368 | $ | 34,589 | ||||||||||
Income (loss) from continuing operations |
(8,457 | ) | (7,677 | ) | (3,574 | ) | 2,049 | 10,855 | ||||||||||||
Income (loss) from continuing operations per common
share — basic |
(0.95 | ) | (0.88 | ) | (0.41 | ) | 0.23 | 1.19 | ||||||||||||
Income (loss) from continuing operations per common
share — diluted |
(0.95 | ) | (0.88 | ) | (0.41 | ) | 0.22 | 1.10 | ||||||||||||
Cash dividends declared per common share |
— | — | — | — | — | |||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Cash and short-term investments |
8,244 | 5,137 | 6,834 | 13,138 | 18,976 | |||||||||||||||
Seismic equipment lease pool and property and
equipment, net |
45,567 | 33,154 | 25,359 | 19,725 | 19,924 | |||||||||||||||
Total assets |
58,795 | 44,340 | 40,730 | 41,395 | 57,620 | |||||||||||||||
Long-term debt |
4,079 | 4,622 | 2,418 | — | 3,000 | |||||||||||||||
Total liabilities |
16,192 | 10,682 | 9,933 | 7,518 | 10,169 | |||||||||||||||
Total shareholders’ equity |
42,603 | 33,658 | 30,797 | 33,877 | 47,451 | |||||||||||||||
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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, 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, transition zone and marine 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, 2006 were for a
term of less than one year. Seismic equipment held for lease is carried at cost, net of
accumulated depreciation. From time to time, we sell lease pool equipment to our customers. These sales are usually transacted when we have equipment that we do
not have immediate or near term need for in our leasing business or if we desire to upgrade our lease pool. 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. Seamap’s primary products include the
industry leading range of GunLink seismic source acquisition and control systems which now
provide marine operators more precise control of their exploration tools and the BuoyLink GPS tracking
system used to provide precise positioning of seismic sources and streamers. While benefiting
from the sales of existing designs, Seamap continues to develop new products for the seismic
industry including a new fairlead which streamlines streamer deployment.
Seismic equipment leasing is susceptible to weather patterns in certain geographic
regions. Our lease revenue is seasonal, especially in Canada and Russia, where a
significant percentage of seismic survey activity occurs in the winter months, from January
through March or April. 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.
Current
prices of oil and natural gas have resulted in increased activity in the oil and gas industry
resulting in an increased demand for seismic services. This has
contributed to an increased demand for leasing of our equipment. We cannot predict how long the
current trend will last, but we have learned that a depressed oil and gas industry results in
lower demand, thus lower revenues from leasing our equipment.
The Company does not quantitatively calculate utilization rates for its equipment lease pool.
However, we do subjectively monitor factors which we believe reflect trends in utilization. For
example, we believe that the increase in our leasing revenues and the relatively constant size of
our lease pool can be attributed to an increase in utilization of our lease pool equipment. The
Company has relatively fixed costs within certain revenue ranges and,
as a result, our earnings are
particularly sensitive to changes in utilization and demand for our lease equipment.
Our operations and the utilization of our lease pool depend upon these levels of activity.
Such activity levels typically decline when there is a significant reduction in oil and gas prices
or significant instability in energy markets. In recent years, oil and gas prices have been
extremely volatile. Our revenues increased during 2004 and 2005, which we believe resulted from an
improvement in market conditions. We believe that increased activity will result in a greater
demand for our lease pool equipment, which will result in increased utilization of our lease pool
equipment.
For the years ended January 31, 2004, 2005 and 2006, revenues from international customers
totaled $16.5 million, $19.1 million and $25.2 million, representing 74%, 73% and 73% of
consolidated revenues in those fiscal years, respectively. The majority of our transactions
with foreign customers are denominated in United States, Australian, Canadian and Singapore
dollars and British pounds.
Results
of Operations – Mitcham Consolidated
For
the fiscal year ended January 31, 2006, we recorded income from
continuing operations of $10.9 million, compared to income from
continuing operations of approximately $2.0 million for the
fiscal year ended January 31, 2005 and a loss of $3.6 million
for the fiscal year ended January 31, 2004. We had no income or
loss from discontinued operations for the fiscal year ended
January 31, 2006 compared to income of $0.1 million for the
fiscal year ended January 31, 2005 and a loss of
$2.7 million for the fiscal year ended January 31, 2004.
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During fiscal 2006, our results of operations were affected by several significant
factors. Our revenues increased $8.2 million, reflecting a significant increase in leasing
revenues of $5.0 million and an increase in equipment sales of $3.2 million primarily as a
result of our acquisition of Seamap. Our increase in leasing revenues was largely attributable to the significant increase
in leasing activities recorded by our U.S. operations.
Our
fixed and variable costs are important factors affecting our results of operations.
Depreciation expense totaled $9.0 million, and includes amortization of intangible assets in
the amount of $0.3, for the year ended January 31, 2006. This expense will vary between periods
based on 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 – Mitcham Consolidated
For fiscal 2006, our consolidated revenues increased $8.2 million, or 31%, to $34.6
million from fiscal 2005, representing increases in both leasing and sales activity for the
year. During fiscal 2006, leasing revenues increased $5.0 million, while Seamap contributed
$4.0 million in equipment sales. Additionally, our leasing revenues significantly increased in
our U.S. operations and were complemented by moderate increases in our Canadian and Australian
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, 2006 by $0.2
million over the prior year.
For fiscal 2005, consolidated revenues increased $4.0 million, or 18%, to $26.4 million
from fiscal 2004, driven by increases in both leasing and sales activity during the year.
Consolidated revenues for fiscal 2004 increased approximately $8.3 million, or 58%, from fiscal
2003 due mainly to increases in both leasing and sales activities for the year.
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.
Seismic equipment sales for fiscal 2006 were $12.5 million as compared to $9.3 million and
$8.6 million for fiscal 2005 and 2004, respectively. Cost of sales for the fiscal years ended
January 31, 2006, 2005 and 2004 were $5.0 million, $4.6 million and $4.7 million, respectively.
Gross margins on equipment sales were 60%, 50% and 45% for fiscal years 2006, 2005 and 2004,
respectively. Seamap operations contributed $4.0 million in equipment sales.
Costs and Expenses – Mitcham Consolidated
Depreciation expense for fiscal 2006 amounted to $9.0 million, including $0.3 million
amortization on intangible assets, which was $1.6 million, or 15%, lower than fiscal 2005. The
depreciation totals are a sum of “Direct costs – lease pool depreciation” in the amount of $8.3
million and “Depreciation and amortization” totaling $0.7 million. For fiscal 2005,
depreciation expense was $10.6 million, which was $3.1 million, or 23%, lower than fiscal 2004
depreciation expense. During fiscal 2004, we recorded depreciation expense in the amount of
$13.7 million. At January 31, 2005, approximately $24.3 million of our lease pool assets were
fully depreciated. This compares to $41.1 million at January 31, 2006. These assets, though
fully depreciated, are expected to generate revenue by either leasing activity or through a
sale of that equipment. Foreign currency translation rates had the effect of increasing fiscal
2006 depreciation expense by approximately $0.1 million. For fiscal 2005, foreign currency
translation rates had the effect of increasing depreciation expense by $0.1 million from the
fiscal 2004 amount.
Our business generally parallels trends in the oil and gas industry. When the oil and gas
industry was depressed over the period from 1998 to 2004, we experienced net losses for those
periods. As the oil and gas industry is on an upward trend and we are experiencing increased
demand for our equipment, including
15
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equipment that has been fully depreciated. Increased demand for our equipment results in higher
revenues and generally has no impact on depreciation in the short term as our equipment is
depreciated from the first month it is placed in service until it is fully depreciated.
Depreciation expense is recorded monthly whether or not the equipment is actually generating
revenue on a lease contract. During periods of high demand, such as the one we are currently
experiencing, our ability to lease older equipment, (including fully depreciated equipment) is
enhanced; whereas in periods of low demand, the opposite is true. As a result, revenues and
depreciation expense will not necessarily directly correlate. Over the long-term, depreciation
expense is impacted by increases in equipment purchases to meet growing demand for our leased
equipment. For example, we have been able to purchase equipment at discounts through volume
purchase arrangements. A lower purchase price results in lower depreciation expense than in
previous periods. These lower purchase prices are the sole reasons for the decrease in our
cost basis as the total number of units of lease pool equipment have not materially decreased.
On the other hand, although some of the equipment in our lease pool has reached the end of its
depreciable life, given the increased demand, that equipment continues to be in service and
continues to generate revenue. Because the depreciable life of our equipment in our industry
is determined more by technical obsolescence than by usage or wear and tear, some of our
equipment, although fully depreciated, is still capable of functioning appropriately.
Currently, in our industry, higher demand is generating more leasing revenue and older
equipment is more in demand than in times past.
We recorded direct costs related to seismic leasing for fiscal 2006 in the amount of $2.9
million, which was approximately $1.3 million higher than fiscal 2005. The increase was
primarily due to the increase in activity related to seismic leasing during fiscal 2006.
Direct costs for fiscal 2005 were $1.6 million, which was approximately $0.7 million lower than
fiscal 2004 direct costs. For fiscal 2004, direct costs totaled $2.3 million, representing an
increase of $1.0 million from the fiscal 2003. Direct costs typically fluctuate with leasing
revenues, as the three main components of direct costs are freight, repairs and sublease
expense.
Sales
of new equipment will typically have gross margins of 10 to 25%. The
gross margins on used equipment, on the other hand, will vary widely
depending on the level of depreciation for each item at the time of
sale. In fiscal 2006 we had used lease pool equipment sales of $5.2 million compared to
$6.3 million and $4.7 million in fiscal 2005 and 2004
respectively. Cost of sales for this equipment was $1.0 million,
$2.6 million and $2.0 million for years 2006, 2005 and 2004
respectively. This yielded margins of 82% in 2006, 59% in 2005 and
58% in 2004. We had other equipment sales of $7.3 million,
$3.0 million and $3.9 million in fiscal 2006, 2005 and 2004
respectively. The cost of sales for other equipment sales was
$4.1 million, $2.0 million and $2.7 million for fiscal 2006, 2005 and 2004 respectively. This resulted in margins of 44% for fiscal 2006, 32% for fiscal 2005 and 30% in fiscal 2004.
General and administrative expenses for fiscal 2006 totaled $9.4 million, or $2.4 million
greater than fiscal 2005 expenses of $7.0 million. General and administrative expenses for
fiscal 2005 totaled $7.0 million, or $1.9 million greater than fiscal 2004 expenses of $5.1
million. The acquisition of Seamap in fiscal 2006 resulted in an increase of general and
administrative costs of $2.6 million over the prior year along with additional increases in
accounting fees of $0.1 million and consulting fees of $0.1 million. These increases were
offset by a decrease in legal fees of $0.5 million for fiscal 2006. 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 in 2005 was primarily
due to an increase in travel, customer relations, investor relations, insurance, compensation
expenses, rent and utilities and professional fees.
During fiscal 2006, 2005 and 2004, we recorded a provision for doubtful accounts in the
amount of $188,000, $155,000 and $25,000 respectively. At January 31, 2006 and 2005, we had
past due trade accounts and note receivables in the approximate
amount of $2.3 million and $1.6
million, respectively. As of January 31, 2006 and 2005, our allowance for doubtful accounts and
notes receivable amounted to $1.2 million and $1.0 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; however, we recorded a $0.5 million non-cash impairment
charge against our seismic equipment lease pool in fiscal 2006. Of this amount, $0.4 million
was attributable to land systems, cables, geophones and land peripherals and $0.1 million was
impaired in marine and other equipment. We also recorded impairment of $0.1 for slow moving
and obsolete lease pool inventory during the year.
For fiscal 2006, we had an income tax benefit of $3.0 million as a result of a reduction
of our valuation allowance by that same amount. This compares to a $0.3 million income tax
expense in fiscal 2005 and no income tax expense in fiscal 2004.
16
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Segment Reporting
We
have two reportable segments for reporting results of operations.
The Mitcham segment consists of the operations of Mitcham Industries, Inc. in Huntsville, Texas,
Mitcham Canada Ltd and SAP. This segment is comprised of operations that primarily lease and
sell seismic equipment worldwide. The other segment is the Seamap segment. Seamap’s operations
are the manufacture and sale of marine seismic equipment.
Results
of Operations – Mitcham Segment
For the fiscal year ended January 31, 2006, the Mitcham segment recorded income from
continuing operations of $11.4 million, compared to income from continuing operations of
approximately $2.0 million for the fiscal year ended January 31, 2005 and a loss of $3.6
million for the fiscal year ended January 31, 2004. We had no income or loss from discontinued
operations for the fiscal year ended January 31, 2006 compared to income of $0.1 million for
the fiscal year ended January 31, 2005 and a loss of $2.7 million for the fiscal year ended
January 31, 2004.
During fiscal 2006, our results of operations were affected by several significant
factors. Revenues increased by $4.2 million, reflecting a significant increase in leasing
revenues of $5.0 million and a decrease in equipment sales of $0.8 million. Our increase in
leasing revenues was largely attributable to the significant increase in leasing activities
recorded by our U.S. operations.
Our fixed and variable costs are an important factor affecting our results of operations.
Depreciation expense totaled $8.6 million for the year ended January 31, 2006 and was 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 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 – Mitcham Segment
For fiscal 2006, revenues from the Mitcham segment increased $4.2 million, or 16%, to
$30.6 million from fiscal 2005, representing an increase in leasing revenue and a decrease in
equipment sales for the year. During fiscal 2006, leasing revenues increased $5.0 million to a
total of $22.1 million. Our leasing revenues significantly increased in our U.S. operations
and were complemented by moderate increases in our Canadian and Australian operations.
For fiscal 2005, consolidated revenues increased $4.0 million, or 18%, to $26.4 million
from fiscal 2004, driven by increases in both leasing and sales activity during the year.
Consolidated revenues for fiscal 2004 increased approximately $8.3 million, or 58%, from fiscal
2003 due mainly to increases in both leasing and sales activities for the year.
Seismic equipment sales for fiscal 2006 were $8.5 million as compared to $9.3 million and
$8.6 million for fiscal 2005 and 2004, respectively. Cost of sales for the fiscal years ended
January 31, 2006, 2005 and 2004 were $3.3 million, $4.6 million and $4.7 million, respectively.
Gross margins on equipment sales were 60%, 50% and 45% for fiscal years 2006, 2005 and 2004,
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.
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Costs and Expenses – Mitcham Segment
Depreciation expense for fiscal 2006 amounted to $8.6 million, which was $1.9 million, or
18%, lower than fiscal 2005. For fiscal 2005, depreciation expense was $10.6 million, which
was $3.1 million, or 23%, lower than fiscal 2004 depreciation expense. During fiscal 2004, we
recorded depreciation expense in the amount of $13.7 million.
We recorded direct costs related to seismic leasing for fiscal 2006 in the amount of $2.9
million, which was approximately $1.3 million higher than fiscal 2005. The increase was
primarily due to the increase in activity related to seismic leasing during fiscal 2006.
Direct costs for fiscal 2005 were $1.6 million, which was approximately $0.7 million lower than
fiscal 2004 direct costs. For fiscal 2004, direct costs totaled $2.3 million, representing an
increase of $1.0 million from the fiscal 2003. Direct costs typically fluctuate with leasing
revenues, as the three main components of direct costs are freight, repairs and sublease
expense.
General and administrative expenses for fiscal 2006 totaled $6.8 million, or $0.2 million
lower than fiscal 2005 expenses of $7.0 million. The decrease is mainly attributable to the
reduction in legal fees of $0.5 million which were partially offset with increases in
accounting fees of $0.1 million and in consulting fees of $0.1 million. 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 for 2005 was primarily due to an increase in travel,
customer relations, investor relations, insurance, compensation expenses, rent and utilities
and professional fees.
During fiscal 2006, 2005 and 2004, we recorded a provision for doubtful accounts in the
amount of $161,000, $155,000 and $25,000 respectively. At January 31, 2006 and 2005, we had
past due trade accounts and note receivables in the approximate
amount of $2.3 million and $1.6
million, respectively. As of January 31, 2006 and 2005, our allowance for doubtful accounts and
notes receivable amounted to $1.1 million and $1.0 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; however, we recorded a $0.5 million non-cash impairment
charge against our seismic equipment lease pool in fiscal 2006. Of this amount, $0.4 million
was attributable to land systems, cables, geophones and land peripherals and $0.1 million was
impaired in marine and other equipment. We also recorded impairment of $0.1 for slow moving
and obsolete lease pool inventory during the year.
For fiscal 2006, we had an income tax benefit of $3.0 million after reducing our valuation
allowance by that same amount. This compared to a $0.3 million income tax expense in fiscal
2005 and no income tax expense in fiscal 2004.
Results of Operations – Seamap Segment
On
July 12, 2005, the Company acquired Seamap, which designs,
develops and sells a broad
range of proprietary products for the seismic, hydrographic and offshore industries with
product sales and support facilities based in Huntsville, Texas, Singapore and the United
Kingdom. Seamap’s primary products include the industry leading range of GunLink seismic
source acquisition and control systems which now provide marine operators more precise control of
their exploration tools and the BuoyLink GPS tracking system used to
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provide precise positioning of seismic sources and streamers. While benefiting from the
sales of existing designs, Seamap continues to develop new products for the seismic industry
including a new fairlead which streamlines streamer deployment. Financial results from Seamap
are included from the acquisition date of July 12, 2005.
For the fiscal year ended January 31, 2006, the Seamap segment recorded a loss from
continuing operations of $0.6 million. During fiscal 2006, Seamap was undergoing a period of
growth in both physical facilities and in staff in order to complete the orders it had
received. This growth is reflected in its costs and contributed to the loss recorded for fiscal
2006.
Depreciation and amortization expense totaled $0.3 million, the majority of which is the
amortization of intangible assets related to the allocation of the purchase price of Seamap.
Revenues
— Seamap Segment
For fiscal 2006, revenues from the Seamap segment totaled $4.0 million. The revenues were
generated primarily from the sales of Seamap’s proprietary GunLink and BuoyLink products.
Seamap’s cost of sales for the year was $1.7 million resulting in a gross margin of 57%.
Costs and Expenses — Seamap Segment
General and administrative expenses for fiscal 2006 totaled $2.6 million. Salaries and
research and development costs accounted for $1.4 million while overhead allocated from the
corporate office totaled $.6 million.
During fiscal 2006 we recorded a provision for doubtful accounts in the amount of $27,000.
At January 31, 2006, we had past due trade accounts and note receivables in the approximate
amount of $101,000.
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Liquidity and Capital Resources
Our
cash flow statements for fiscal 2004 and 2005 have been restated.
Footnote 20 to the financials has a detailed breakdown of the
changes that occurred due to the restatement.
Our
principal sources of cash have been cash flows from our short-term
leasing operations. During fiscal 2004, 2005 and 2006, our cash flows
from operating activities were affected by several significant
factors. The principal factor that has affected our cash flows is a
marked increase in oil and gas exploration and development
activities. Increases in the price of oil and natural gas, combined
with the maturation of the world’s hydrocarbon producing basins, have
improved market conditions and have increased demand for our
equipment.
As of January 31, 2006, we had net working capital of approximately $22.6 million as
compared to net working capital of $13.9 million at
January 31, 2005 and $7.4 million in 2004. From 2005 to
2006 and 2004 to 2005, our working capital
increases are due to the increase in revenue of $8.2 million
and $4.0 million respectively, an increase in
trade receivables of $1.3 million and $0.8 million
respectively and an increase in inventory of $1.1 million. Also affecting
the increase in working capital from 2005 to 2006 and from 2004 to
2005 is a decrease in accounts payable of $0.5 million and an
increase of $3.4 million respectively, and a
decrease in current maturities of long-term debt of $0.9 million
and $1.3 million respectively. 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,
2006 was $11.2 million, as compared to net cash provided by
operating activities of $11.0
million and $3.6 million for the years ended January 31,
2005 and 2004, respectively. Net cash used in investing activities for
2006 was $8.6 million compared to $0.1 million in 2005 and net
cash provided by investing activities in 2004 of $0.7 million. Net cash
provided by financing activities for the year ended January 31, 2006 was $0.7 million,
compared to net cash used in financing activities for the years ended January 31, 2005 and
January 31, 2004 of $4.7 million and $2.5 million, respectively.
Capital expenditures for the 2006 fiscal year totaled approximately $9.0 million as
compared to capital expenditures of $6.6 million and $4.4 million for fiscal 2005 and 2004,
respectively. Our capital expenditures during the past three fiscal years were made primarily
to fulfill specific lease contracts. The Company has been able to purchase new equipment for
our lease pool at lower prices in recent years through volume purchasing discounts, which has
allowed the Company to maintain a constant level of equipment at a lower unit cost. We do not
anticipate that we will need to purchase more equipment than we would customarily purchase in
order to sustain equipment leasing revenue growth; however, we may purchase additional
equipment should favorable economic factors continue to exist. $2.5 million, net of $1.0
million in cash, was used on the acquisition of Seamap. During fiscal 2006, the Company
purchased $6.0 million in certificates of deposit and redeemed
$3.5 million, with interest
rates varying from 2.50% to 4.56% and maturities of six to nine months. Sales of used lease
pool equipment generated cash flow of $5.2 million in fiscal 2006 as compared to $6.3 million
and $4.7 million in fiscal 2005 and 2004, respectively. During fiscal 2005, we fulfilled our
$2.25 million Sercel purchase commitment in its entirety.
At
January 31, 2006, we had trade accounts and notes receivable of
$2.3 million that were
more than 90 days past due. As of January 31, 2006, our allowance for doubtful accounts was
approximately $1.2 million, which management believes is sufficient to cover any losses in our trade accounts
receivable and notes receivable.
In certain instances when customers have been unable to repay their open accounts
receivable balances, we have agreed to a structured repayment program using an interest bearing
promissory note. In these cases, we provide a reserve for doubtful accounts against the
balance. Due to the uncertainty of collection, we do not recognize the interest earned until
the entire principal balance has been collected. In most cases where we have a chronic
collection problem with a particular customer, future business is done on a prepayment basis or
if additional credit is extended, revenues are not recognized until collected. Although the
extension of repayment terms on open accounts receivables temporarily reduces our cash flow
from operations, we believe that this practice is necessary in light of seismic industry
conditions and that it has not adversely affected our ability to conduct routine business.
During 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 are
recognized upon agreement of terms and delivery has occurred.
On June 27, 2005, we obtained a $12.5 million revolving loan agreement and credit line
with First Victoria National Bank. This line replaced and increased the expiring credit line
of $4.0 million with First Victoria National Bank. The new facility has a two-year term and
bears interest at the prime rate. The credit line allows the Company to borrow funds to
purchase equipment and is secured by the equipment purchased and any leases on that equipment.
Interest on any outstanding principle balance is payable monthly, while the principal is due at
the end of the two-year term. The revolving loan agreement also contains certain financial
covenants that require, among other things, that the Company maintain a debt to shareholder’s
equity ratio of a maximum of 1.3 to 1.0, maintain a current assets to current liabilities ratio
of a minimum of 1.25 to 1.0, and not
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incur or maintain any indebtedness or obligations or guarantee the debts or obligations of
others in a total aggregate amount which exceeds $1.0 million without the prior written
approval of First Victoria National Bank, except for indebtedness incurred as a result of the
Seamap acquisition and other specific exceptions. We had not borrowed any funds available under
this credit line as of January 31, 2006.
In connection with the Seamap acquisition, we issued $3.0 million in promissory notes
payable to the shareholders of Seamap. The notes are three-year, 5% notes with no principal or
interest due in the first 12 months. Interest on the full amount of the principal is due on
the first anniversary of the notes in the amount of $150,000. No further interest or principal
payments are due until the second anniversary of the notes. At that time, interest on the full
amount of the notes and 50% or $1.5 million of the principal amount of $3.0 million is due. On
the third anniversary of the notes, interest on the unpaid principal and the remainder of the
principal is due. The terms of the purchase and sale agreement provide for additional earn-out
payments of $2.0 million, subject to Seamap achieving certain annual revenue thresholds of $8.0
million and $10.0 million over a five-year period.
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 or other sources of
capital.
The following table sets forth estimates of future payments of our consolidated
contractual obligations as of January 31, 2006:
| Payments Due by Period | ||||||||||||||||||||
| Less Than | More Than | |||||||||||||||||||
| Contractual Obligations | Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | |||||||||||||||
Long-term debt |
$ | 3,300,000 | $ | — | $ | 3,300,000 | $ | — | $ | — | ||||||||||
Operating
leases |
1,935,000 | 553,000 | 1,003,000 | 379,000 | — | |||||||||||||||
Total |
$ | 5,235,000 | $ | 553,000 | $ | 4,303,000 | $ | 379,000 | $ | — | ||||||||||
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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, useful lives of amortizable intangible assets and our impairment assessment
of the lease pool and various intangible assets.
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 two to ten years. Cables are depreciated over 2 years,
geophones over 3 years, channel boxes over a 5 year period and earth vibrators and
other heavy equipment are depreciated over a 10 year period. Buildings are depreciated
over 40 years, property improvements are amortized 10 years and leasehold improvements
are amortized over the shorter of useful life or the life of the leases. Intangible
assets are amortized from 3 to 15 years. 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 5 years for channel boxes and 2 -
10 years for other peripheral equipment. As this equipment is subject to technological
obsolescence and wear and tear, no salvage value is assigned to it.
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The estimated useful lives for rental equipment are based on the Company’s experience
as to the economic useful life of its products. We review and consider industry trends in
determining the appropriate useful life for our lease pool equipment, including
technological obsolescence, market demand and actual historical useful service life of our
lease pool equipment. Additionally, to the extent information is publicly available, the
Company also compares its depreciation policies to other companies with similar rental
products for reasonableness. When we purchase new equipment for our lease pool, we begin to depreciate it upon its
first use and depreciation continues each month until the equipment is fully
depreciated, whether the equipment is actually in use during that entire time period.
Our policy regarding the removal of assets that are fully depreciated from our books is
the following: if an asset is fully depreciated and is still expected to generate
revenue, then the asset will remain on our books. However if a fully depreciated asset
is not expected to have any revenue generating capacity, then it is removed from our
books.
In accordance with SFAS 144, the Company performs a review of its lease pool assets
for potential impairment when events or changes in circumstances indicate that the
carrying amount may not be fully recoverable. We typically review all major categories of assets
(not each individual asset) in our consolidated lease pool with remaining
net book value to ascertain whether or not we believe that a particular asset group will
generate sufficient cash flow over their remaining life to recover the remaining
carrying value of those assets. Assets that we believe will not generate cash flow
sufficient to cover the remaining net book value are subject to impairment. We make our
assessments based on customer demand, current market trends and market value of our
equipment to determine if it will be able to recover its remaining net book value from
future leasing or sales. During fiscal 2004, we recorded a non-cash impairment
charge of $0.7 million related to the sale of DSI’s operating assets. During fiscal
2006, we recorded an impairment charge of $0.6 million related to the valuation of our
seismic equipment lease pool.
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Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences
between income and expenses reported for financial reporting and tax reporting. We have
assessed, using all available positive and negative evidence, the likelihood that the deferred
tax assets will be recovered from future taxable income.
Under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, an
enterprise must use judgment in considering the relative impact of negative and positive
evidence. The weight given to the potential effect of negative and positive evidence should be
commensurate with the extent to which it can be objectively verified. The more negative evidence
that exists (a) the more positive evidence is necessary and (b) the more difficult it is to
support a conclusion that a valuation allowance is not needed for some portion or all of the
deferred tax asset. Among the more significant types of evidence that we consider are:
| • | taxable income projections in future years; | ||
| • | whether the carryforward period is so brief that it would limit realization of tax benefits; | ||
| • | future sales and operating cost projections that will produce more than enough taxable income to realize the deferred tax asset based on existing sales prices and cost structures; and | ||
| • | our earnings history exclusive of the loss that created the future deductible amount coupled with evidence indicating that the loss is an aberration rather than a continuing condition. |
We intend to maintain the recorded valuation allowances until sufficient positive evidence
exists to support a reversal of the tax valuation allowances. In determining the 2006
valuation allowance, we considered the following positive indicators:
| • | the current level of worldwide oil and gas exploration activities resulting from historically high prices for oil and natural gas; | ||
| • | increasing world demand for oil; | ||
| • | our anticipated positive income in certain jurisdictions; and | ||
| • | our existing customer relationships. |
We also considered the following negative indicators:
| • | the risk of the world oil supply increasing, thereby depressing the price of oil and natural gas; | ||
| • | the risk of decreased global demand for oil; and | ||
| • | the potential for increased competition in the seismic equipment leasing and sales business. |
Based on our evaluation of the evidence, we believe that it is appropriate to reduce our
valuation allowance on the deferred tax asset by $3.0 million, leaving a valuation allowance
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on our books of $4.9 million, which will give rise to a deferred tax asset of $3.0 million at
January 31, 2006.
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) in 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.
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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 foreign exchange contracts 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 U.S. dollar weakened against the local currency and we had net
monetary liabilities denominated in the local currency and in countries where the U.S. dollar
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 U.S. dollar strengthened
against the local currency and we had net monetary liabilities denominated in the local
currency and in countries where the U.S. dollar 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, 2006 reflected approximately $12.1 million of net
working capital related to our foreign subsidiaries. A majority of our foreign net working
capital is within Canada, Australia, Singapore and the United Kingdom. The subsidiaries in
these countries receive their income and pay their expenses primarily in Canadian, Australian
and Singapore dollars and British pounds. To the extent that transactions of these
subsidiaries are settled in Canadian, Australian and Singapore dollars and British pounds, 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.
Item 8. Financial Statements and Supplementary Data
The information required by this item appears as pages F-1 through F-26 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
I. Restatement of Financial Statements and Impact on Internal Control over Financial Reporting and
Disclosure Controls and Procedures
Restatement of Financial Statements
As discussed in Note 20 to the consolidated financial statements contained in this annual
report on Form 10-K, the Company has restated its Consolidated Statements of Cash Flows as of and
for the fiscal years ended January 31, 2005 and 2004 and for each of the quarters of fiscal 2006.
The Company’s Consolidated Statements of Cash Flows have been restated as follows:
| • | Historically, the Company has reflected cash flows from continuing operations within the operating, investing and financing categories and has aggregated operating, investing and financing cash flows from discontinued operations as a single line item in its Consolidated Statements of Cash Flows. The Company has now restated its Consolidated Statements of Cash Flows to reflect cash flows from discontinued operations within each category of operating, investing and financing activities. | ||
| • | The Company had also previously reported cash receipts from the sale of lease pool equipment as operating activities. The Company has now determined that cash receipts from the sale of used lease pool equipment should be classified as investing activities and the “Gross profit from sale of lease pool equipment” should be reflected as a deduction in operating activities. | ||
| • | Finally, the Company has reclassified certain of its investments in certificates of deposit from cash and cash equivalents to short-term investments. |
The last reclassification results in a decrease in cash and cash equivalents for the quarters
ended July 31, 2005 and October 31, 2005. However, none of the adjustments otherwise affect the
Company’s reported revenues, net income, net income per share, total assets, shareholders’ equity,
net increase in cash and cash equivalents, current cash or liquidity position for the restated
periods or for the year ended January 31, 2006 as announced in our press release dated April 18,
2006. The adjustments also do not affect the Company’s compliance with the financial covenants
under its credit facility.
The Company has had discussions with the staff of the SEC regarding these matters, and
subsequent to these discussions the Company determined that it should restate the aforementioned
consolidated financial statements to correct the errors described above.
II. Evaluation of Disclosure Controls and Procedures
As
required by SEC Rule 13a-15(b), we have 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 disclosure controls and procedures are designed to provide reasonable
assurance that the information required to be disclosed by the Company in reports that it files
under the Exchange Act is accumulated and communicated to the Company’s management, including our
principal executive officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure and is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the SEC. Our principal executive officer and
principal financial officer have concluded that our current disclosure controls and procedures
were effective as of January 31, 2006 at the reasonable assurance level.
In coming to the conclusion that our disclosure controls and procedures were effective as of
January 31, 2006 at the reasonable assurance level, our management considered, among other things,
the nature of each reclassification
as further discussed below. However, the Company believes that the reclassifications that gave
rise to the restatement do not directly bear on the Company’s disclosure controls and
procedures. In particular, the Company believes in each case that its original classifications
did not result from a misapplication of U.S. GAAP; rather, the Company has reinterpreted SFAS 95
in the light of new guidance from the Staff. The Company notes that disclosure controls and
procedures as defined under Rule 13a-15(e) mean controls and other procedures designed to ensure
that information required to be disclosed in SEC filings and reports is “recorded, processed,
summarized and reported” within the required time periods. As further discussed below, the
Company believes that the disclosure controls and procedures were effective at the reasonable
assurance level, based on its analysis and interpretation of SFAS 95 at the time and the
information then available. The information included in this filing was in fact timely recorded,
processed, summarized and reported. Furthermore, based on the analysis and interpretation of
SFAS 95 then being employed, the information was recorded, processed, summarized and reported
accurately.
In addition, management does not believe that the three deficiencies discussed below,
constitute, individually or in the aggregate, a material weakness in our internal controls over
financial reporting. This conclusion is based on the relative nature of each of the deficiencies
and the circumstances leading to such deficiencies.
Cash Flows from Discontinued Operations. Historically, we presented cash flows from
discontinued operations as a single line item in the statements of cash flows and as a part of
this presentation reconciled the change in cash and cash equivalents from “income from
continuing operations,” rather than from “net income.” Based on our review of prevalent
practice, we believed this practice to be widespread and consistent with the intent of
Accounting Principles Board (“APB”) Opinion No. 30. Moreover, SFAS 95 is silent regarding any
specific application to discontinued operations. As a result of the
Staff’s comments and in
light of guidance provided by the Staff at the national conference of the American Institute of
Certified Public Accountants (“AICPA”) in December 2005, the Company elected to modify its
presentation of cash flows from discontinued operations to reflect such cash flows within each
of the three categories of “operating activities,” “investing activities” and “financing
activities.” Furthermore, in conjunction with this change in the statements of cash flows we
also modified the presentation to reconcile changes in cash and cash equivalents from “net
income,” rather than “income from continuing operations.” As provided in the AICPA’s Center for
Public Company Audit Firms’ Alert No. 90, “SEC Staff Position Regarding Changes to the
Statement of Cash Flows Relating to Discontinued Operations” published on February 16, 2006
(“CPCAF Alert 90”), we understand that the Staff is allowing companies to revise their
classifications regarding cash flows relating to discontinued operations in their next periodic
report without referring to such amendments as a correction of an error. Accordingly, in
connection with the other revisions of our statements of cash flow that are discussed below, we
have restated previous periods in the presentation of our Annual Report on Form 10-K for the
fiscal year ended January 31, 2006, as amended. Because this restatement resulted from a
reinterpretation of SFAS 95 in the light of new guidance from the Staff, we do not consider
this change to reflect a material weakness in our internal control over financial reporting.
Proceeds from Sale of Lease Pool Equipment. In connection with the preparation of our
Annual Report on Form 10-K for our fiscal year ended January 31, 2005, we determined, in
consultation with our independent public accounting firm, that our presentation of the proceeds
from the sale of lease pool equipment as an operating activity was a more accurate presentation
of our cash flows. As described herein, we acquire lease pool equipment in order to lease such
equipment over a long period of time, through a series of short-term leases and from time to
time sell such equipment. We believed that sales of equipment out of our lease pool were more
accurately reflected as operating activities as opposed to investing activities because of the
recurring nature of these sales transactions. Furthermore, this presentation was consistent
with the classification of these transactions in our Consolidated Statements of Operations. For
these reasons, we also believed this presentation more clearly disclosed to the readers of our
financial statements the operating cash flows of the Company.
However,
in light of the Staff’s comments, we have modified our presentation of the proceeds
from the sale of lease pool equipment to reclassify it as an investing activity rather than an
operating activity. Inasmuch as this deficiency and related restatement resulted from
differences in interpretations, we and our outside auditors do not consider this to be a
material weakness in our internal control over financial reporting.
Determination of Cash and Cash Equivalents. For the second and third quarters of fiscal
2006, we classified approximately $3,900,000 of certificates of deposits with maturities of
greater than three months as cash equivalents. These CDs were acquired to temporarily earn
interest until we needed the cash for our operations.
Paragraph 8 of SFAS 95 provides that generally (emphasis added) securities with a maturity greater
than three months should not be considered cash equivalents. However, paragraph 8 of SFAS 95
further states that the criteria
for cash equivalents are short-term, highly liquid investments that are both (a) readily
convertible into known amounts of cash and (b) present insignificant risk of changes in value
because of changes in interest rates. In this circumstance, the certificates could be redeemed at
any time with only a penalty in the form of a reduction in the interest that would otherwise have
been earned; therefore the principal amount of the investment was not at risk. Changes in interest
rates have no bearing on the value of the certificates of deposit. While we still believe a good
argument exists that the CDs are cash equivalents, upon further review of SFAS 95 in light of the
other issues noted above, we have determined to take a more conservative approach and book all CDs
with maturities of greater than three months as temporary investments in accordance with paragraph
8 of SFAS 95. This change resulted in a revision of our statements of cash flows for the six
months ended July 31, 2005 and the nine months ended October 31, 2005 to reflect the purchase and
redemption of certificates of deposit with maturities of more than three months as investing
activities. The change also resulted in a decrease in the net cash provided from investing
activities of $1,000,000 and a decrease in cash and cash equivalents
of $1,000,000 at the end of
each of those periods.
After reviewing and analyzing the Securities and Exchange Commission’s Staff Accounting
Bulletin (“SAB”) No. 99, “Materiality” and APB Opinion No. 20, “Accounting Changes” (“APB 20”)
given the (a) nature of the reclassification, (b) the amount involved (less than 8% of cash and
cash equivalent balances), (c) the determination that the principal amount invested was not at
risk, and (d) the likelihood that a reasonable investor would not view this change as having
significantly altered the total mix of information made available, we determined that these
changes were not material. We do not believe restatement of such amounts was required; however, in
light of the other restatements being made to the statements of cash flows, we elected to include
such restatements in our Annual Report on Form 10-K for the fiscal year ended January 31, 2006.
Accordingly, we determined that this deficiency did not constitute a material weakness in our
controls over financial reporting.
After reviewing and analyzing the APB 20 and taking into consideration (1) the periods in
which the errors occurred, (2) that the restatement adjustments did not impact revenues, net
income, net income per share, total assets, shareholders’ equity, net increase in cash and cash
equivalents (except with respect to the quarters ended July 31, 2005 and October 31, 2005),
current cash or liquidity position, and (3) in the case of the temporary investment
reclassification, the amounts involved, our management concluded that the control deficiencies
that resulted in the restatement of our Consolidated Statements of Cash Flows do not represent a
material weakness in our internal control over financial reporting. Following our identification
of these control deficiencies, we have modified our process for preparing our statements of cash
flows by performing a more thorough review of the classifications of our cash flows to comply
with SFAS No. 95 “Statement of Cash Flows” and SFAS No. 102 “Statement of Cash Flows — Exemption
of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for
Resale — An Amendment of FASB Statement No. 95.” In addition, we will continue to monitor GAAP
developments and changes in our business to reduce the risk of classification errors in our
statements of cash flows.
III. Changes in Internal Control over Financial Reporting
There was no change in our system of internal control over financial reporting during our
fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
However,
during our quarter ended January 31, 2006, we installed the “Navision” accounting
system in our Australian subsidiary’s (SAP’s) office in Brisbane, Australia. We use this system to
accumulate financial data used in financial reporting. We also use this new system to track
inventory and to generate quotes and contracts for leasing and sales transactions. Previously, SAP
had used another system to perform accounting and financial reporting functions. We have
determined to standardize all of our subsidiaries and locations on a common accounting platform
and have selected ‘“Navision” as that common platform. We intend to systematically migrate our
other significant subsidiaries to the “Navision” system.
The decision to standardize our accounting systems was not made in reaction to a weakness in
our system of internal controls and was not a result of the restatement of our Consolidated
Statements of Cash Flows. The installation of the common accounting systems has not, and is not
expected to, materially affect our internal control over financial reporting. However, we believe
that operating on a common accounting platform will provide
significant efficiencies in our operations and in our accounting systems. As our business expands
and grows we believe that common accounting systems will enhance our internal controls and will
enable us to respond effectively to changes in our business.
Item 9B.
Other Information
None.
26
Table of Contents
PART III
Item 10. Directors and Executive Officers of the Registrant
Information
regarding our directors and executive officers will be set forth in
our proxy statement for the 2006 Annual Meeting of Shareholders.
Item 11. Executive Compensation
Information regarding executive compensation will be set forth in our proxy statement for
the 2006 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management and
related stockholder matters will be set forth in our proxy statement for the 2006 Annual
Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions will be set forth in
our proxy statement for the 2006 Annual Meeting of Shareholders.
Item 14.
Principal Accountant Fees and Services
Information regarding principal accounting fees and services will be set forth in our
proxy statement for the 2006 Annual Meeting of Shareholders.
PART IV
Item 15. Exhibits, 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
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
| Exhibit | ||||
| Number | ||||
3.1
|
- | 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) |
27
Table of Contents
| Exhibit | ||||
| Number | ||||
10.2
|
- | Exclusive Lease Referral Agreement, dated May 14, 1996, between the Company and Pelton Company, Inc., a 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., a 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) | ||
*10.18
|
- | Separation Agreement, dated June 6, 2005 between Chris Siffert and Mitcham Industries, Inc. (14) | ||
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*** | ||
31.2
|
- | 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. |
28
Table of Contents
| (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. | |
| (14) | Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed with the SEC on June 7, 2005. |
29
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 14th
day of June 2006.
| MITCHAM INDUSTRIES, INC. |
||||
| By: | /s/ BILLY F. MITCHAM, JR. | |||
| Billy F. Mitcham, Jr., | ||||
| President and Chief Executive Officer (principal executive officer) | ||||
30
Table of Contents
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders Mitcham Industries, Inc.
Huntsville, Texas
Huntsville, Texas
We have audited the accompanying consolidated balance sheets of Mitcham Industries, Inc.
and Subsidiaries as of January 31, 2005 and 2006, 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, 2006 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,
2005 and 2006, and the results of their operations and their cash flows for each of the years
in the three-year period ended January 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.
As
discussed in Note 20, the Company has restated its Statement of
Cash Flows for the years ended January 31, 2004 and 2005.
| /s/ HEIN & ASSOCIATES LLP | ||||
| Hein & Associates LLP | ||||
Houston, Texas
April 13, 2006
April 13, 2006
F-2
Table of Contents
MITCHAM INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
| January 31, | ||||||||
| 2005 | 2006 | |||||||
| ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 13,138,000 | $ | 16,426,000 | ||||
Short-term investments |
— | 2,550,000 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $723,000 and
$1,125,000 at January 31, 2005 and 2006, respectively
respectively |
6,021,000 | 5,793,000 | ||||||
Current portion of notes receivable, net of allowance for doubtful notes of
$286,000
and $48,000 at January 31, 2005 and 2006, respectively |
1,192,000 | 2,734,000 | ||||||
Inventories, net of allowance for obsolescence of $62,000 |
— | 1,155,000 | ||||||
Prepaid expenses and other current assets |
705,000 | 717,000 | ||||||
Current assets of discontinued operations |
393,000 | 366,000 | ||||||
Total current assets |
21,449,000 | 29,741,000 | ||||||
Seismic equipment lease pool and property and equipment |
74,792,000 | 79,023,000 | ||||||
Accumulated depreciation of seismic lease pool and property and equipment |
(55,067,000 | ) | (59,099,000 | ) | ||||
Long-term assets of discontinued operations |
216,000 | — | ||||||
Intangible assets, net of amortization of $266,000 |
— | 2,584,000 | ||||||
Goodwill |
— | 2,358,000 | ||||||
Deferred tax asset, net of valuation allowance of $4,897,000 |
— | 3,000,000 | ||||||
Other assets |
5,000 | 13,000 | ||||||
Total assets |
$ | 41,395,000 | $ | 57,620,000 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 4,893,000 | $ | 4,436,000 | ||||
Current maturities — long-term debt |
918,000 | — | ||||||
Income taxes payable |
284,000 | 286,000 | ||||||
Deferred revenue |
652,000 | 381,000 | ||||||
Wages payable |
299,000 | 383,000 | ||||||
Current liabilities of discontinued operations |
14,000 | 10,000 | ||||||
Accrued expenses and other current liabilities |
458,000 | 1,673,000 | ||||||
Total current liabilities |
7,518,000 | 7,169,000 | ||||||
Long-term debt |
— | 3,000,000 | ||||||
Total liabilities |
7,518,000 | 10,169,000 | ||||||
Commitments and contingencies (Notes 9 and 16) |
||||||||
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
10,360,110 shares issued at January 31, 2005 and January 31, 2006,
respectively |
99,000 | 104,000 | ||||||
Additional paid-in capital |
62,702,000 | 64,404,000 | ||||||
Treasury stock, at cost (915,000 shares) |
(4,686,000 | ) | (4,686,000 | ) | ||||
Deferred compensation |
(94,000 | ) | (8,000 | ) | ||||
Accumulated deficit |
(26,282,000 | ) | (15,427,000 | ) | ||||
Accumulated other comprehensive income |
2,138,000 | 3,064,000 | ||||||
Total shareholders’ equity |
33,877,000 | 47,451,000 | ||||||
Total liabilities and shareholders’ equity |
$ | 41,395,000 | $ | 57,620,000 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
MITCHAM INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended January 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
Revenues: |
||||||||||||
Equipment leasing |
$ | 13,765,000 | $ | 17,086,000 | $ | 22,104,000 | ||||||
Lease pool equipment sales |
4,734,000 | 6,282,000 | 5,218,000 | |||||||||
Other equipment sales |
3,907,000 | 3,000,000 | 7,267,000 | |||||||||
Total revenues |
22,406,000 | 26,368,000 | 34,589,000 | |||||||||
Costs and expenses: |
||||||||||||
Direct costs — equipment leasing |
2,326,000 | 1,644,000 | 2,907,000 | |||||||||
Direct costs — lease pool depreciation |
13,500,000 | 10,359,000 | 8,309,000 | |||||||||
Cost of
lease pool equipment sales |
1,994,000 | 2,583,000 | 950,000 | |||||||||
Cost of other equipment sales |
2,721,000 | 2,043,000 | 4,080,000 | |||||||||
General and administrative |
5,095,000 | 6,969,000 | 9,437,000 | |||||||||
Provision for doubtful accounts |
25,000 | 155,000 | 188,000 | |||||||||
Depreciation and amortization |
177,000 | 237,000 | 649,000 | |||||||||
Impairment of assets |
— | — | 617,000 | |||||||||
Total costs and expenses |
25,838,000 | 23,990,000 | 27,137,000 | |||||||||
Operating income (loss) |
(3,432,000 | ) | 2,378,000 | 7,452,000 | ||||||||
Other income (expense): |
||||||||||||
Interest income (expense), net of interest income of
$97,000, $119,000 and $528,000, respectively |
(176,000 | ) | (71,000 | ) | 422,000 | |||||||
Other, net |
34,000 | 19,000 | 17,000 | |||||||||
Total other income (expense) |
(142,000 | ) | (52,000 | ) | 439,000 | |||||||
Income (loss) from continuing operations before income
taxes |
(3,574,000 | ) | 2,326,000 | 7,891,000 | ||||||||
Provision (benefit) for income taxes |
— | 277,000 | (2,964,000 | ) | ||||||||
Income (loss) from continuing operations |
(3,574,000 | ) | 2,049,000 | 10,855,000 | ||||||||
Income (loss) from discontinued operations, net of income
taxes of
$0 (including impairment charge of $700,000 in 2004) |
(2,715,000 | ) | 80,000 | — | ||||||||
Net income (loss) |
$ | (6,289,000 | ) | $ | 2,129,000 | $ | 10,855,000 | |||||
Income (loss) per common share from continuing operations: |
||||||||||||
Basic |
$ | (0.41 | ) | $ | 0.23 | $ | 1.19 | |||||
Diluted |
$ | (0.41 | ) | $ | 0.22 | $ | 1.10 | |||||
Income (loss) per common share from discontinued operations: |
||||||||||||
Basic and diluted |
$ | (0.31 | ) | $ | 0.01 | $ | — | |||||
Net income (loss) per common share — basic |
$ | (0.72 | ) | $ | 0.24 | $ | 1.19 | |||||
Net income (loss) per common share — diluted |
$ | (0.72 | ) | $ | 0.23 | $ | 1.10 | |||||
Shares used in computing income (loss) per common share: |
||||||||||||
Basic |
8,772,000 | 8,849,000 | 9,126,000 | |||||||||
Dilutive effect of common stock equivalents |
— | 455,000 | 718,000 | |||||||||
Diluted |
8,772,000 | 9,304,000 | 9,844,000 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
MITCHAM INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
| Years Ended January 31, 2004, 2005 and 2006 | ||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Unearned | Other | |||||||||||||||||||||||||||||||
| Additional | Compensation | Comprehensive | ||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Treasury | Accumulated | & Restricted | Income | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Stock | Deficit | Stock | (Loss) | Total | |||||||||||||||||||||||||
Balances, January 31,
2003 |
9,658,000 | $ | 97,000 | $ | 61,814,000 | $ | (4,686,000 | ) | $ | (22,122,000 | ) | $ | — | $ | (1,445,000 | ) | $ | 33,658,000 | ||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | (6,289,000 | ) | — | — | (6,289,000 | ) | ||||||||||||||||||||||
Foreign currency
translation |
— | — | — | — | — | — | 3,412,000 | 3,412,000 | ||||||||||||||||||||||||
Comprehensive 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 | — | 16,000 | ||||||||||||||||||||||||
Balances, January 31,
2004 |
9,715,000 | 97,000 | 61,913,000 | (4,686,000 | ) | (28,411,000 | ) | (83,000 | ) | 1,967,000 | 30,797,000 | |||||||||||||||||||||
Comprehensive gain: |
||||||||||||||||||||||||||||||||
Net income |
— | — | — | — | 2,129,000 | — | — | 2,129,000 | ||||||||||||||||||||||||
Foreign currency
translation |
— | — | — | — | — | — | 171,000 | 171,000 | ||||||||||||||||||||||||
Comprehensive gain |
2,300,000 | |||||||||||||||||||||||||||||||
Issuance of common
stock upon exercise of
warrants and options |
171,000 | 2,000 | 317,000 | — | — | — | — | 319,000 | ||||||||||||||||||||||||
Restricted stock issued |
20,000 | — | 95,000 | — | — | (95,000 | ) | — | — | |||||||||||||||||||||||
Amortization of
restricted
stock grants, net of
cancellations |
(12,000 | ) | — | (23,000 | ) | — | — | 84,000 | — | 61,000 | ||||||||||||||||||||||
Stock-based compensation |
— | — | 400,000 | — | — | — | — | 400,000 | ||||||||||||||||||||||||
Balances, 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 | |||||||||||||||||||||
Comprehensive gain: |
||||||||||||||||||||||||||||||||
Net income |
— | — | — | — | 10,855,000 | — | — | 10,855,000 | ||||||||||||||||||||||||
Foreign currency
translation |
— | — | — | — | — | — | 926,000 | 926,000 | ||||||||||||||||||||||||
Comprehensive gain |
11,781,000 | |||||||||||||||||||||||||||||||
Issuance of common
stock upon exercise of
warrants and options |
471,000 | 5,000 | 1,635,000 | — | — | — | — | 1,640,000 | ||||||||||||||||||||||||
Amortization of
restricted
stock grants, net of
cancellations |
(5,000 | ) | — | (9,000 | ) | — | — | 86,000 | — | 77,000 | ||||||||||||||||||||||
Stock-based compensation |
— | — | 76,000 | — | — | — | — | 76,000 | ||||||||||||||||||||||||
Balances, January 31,
2006 |
10,360,000 | $ | 104,000 | $ | 64,404,000 | $ | (4,686,000 | ) | $ | (15,427,000 | ) | $ | (8,000 | ) | $ | 3,064,000 | $ | 47,451,000 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
MITCHAM INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended January 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
| (Restated) | (Restated) | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | (6,289,000 | ) | $ | 2,129,000 | $ | 10,855,000 | |||||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
13,963,000 | 10,596,000 | 8,958,000 | |||||||||
Impairment of assets |
700,000 | — | 617,000 | |||||||||
Stock-based compensation |
— | 461,000 | 153,000 | |||||||||
Provision for doubtful accounts, net of
charge-offs and recoveries |
106,000 | 133,000 | 104,000 | |||||||||
Gross profit from sale of lease pool equipment |
(2,740,000 | ) | (3,699,000 | ) | (4,268,000 | ) | ||||||
Reversal of deferred tax valuation allowance |
— | — | (3,000,000 | ) | ||||||||
Changes in: |
||||||||||||
Trade accounts and notes receivable |
(3,680,000 | ) | (1,585,000 | ) | (808,000 | ) | ||||||
Inventories |
— | — | (268,000 | ) | ||||||||
Current assets of discontinued operations |
(213,000 | ) | 505,000 | 27,000 | ||||||||
Federal income taxes, current |
— | 284,000 | 2,000 | |||||||||
Accounts payable, accrued expenses and other current
liabilities |
846,000 | 2,685,000 | (1,093,000 | ) | ||||||||
Current liabilities of discontinued operations |
798,000 | (385,000 | ) | (4,000 | ) | |||||||
Other, net |
62,000 | (67,000 | ) | (86,000 | ) | |||||||
Net cash provided by operating activities |
3,553,000 | 11,057,000 | 11,189,000 | |||||||||
Cash flows from investing activities: |
||||||||||||
Sales from used lease pool equipment |
4,734,000 | 6,282,000 | 5,218,000 | |||||||||
Acquisition of Seamap, net of $1,027,000 cash acquired |
— | — | (2,473,000 | ) | ||||||||
Seamap acquisition costs |
— | — | (64,000 | ) | ||||||||
Purchases of short-term investments |
— | — | (6,000,000 | ) | ||||||||
Redemptions of short-term investments |
— | — | 3,450,000 | |||||||||
Purchases of seismic equipment held for lease |
(4,313,000 | ) | (6,253,000 | ) | (8,186,000 | ) | ||||||
Purchases of property and equipment |
(59,000 | ) | (377,000 | ) | (784,000 | ) | ||||||
Long-term assets of discontinued operations |
312,000 | 275,000 | 216,000 | |||||||||
Net cash provided by (used in) investing activities |
674,000 | (73,000 | ) | (8,623,000 | ) | |||||||
Cash flows from financing activities: |
||||||||||||
Payments on borrowings |
(2,530,000 | ) | (4,999,000 | ) | (918,000 | ) | ||||||
Proceeds from issuance of common stock upon exercise of
warrants and options |
— | 319,000 | 1,640,000 | |||||||||
Net cash provided by (used in) financing
activities |
(2,530,000 | ) | (4,680,000 | ) | 722,000 | |||||||
Net increase in cash and cash equivalents |
1,697,000 | 6,304,000 | 3,288,000 | |||||||||
Cash, beginning of year |
5,137,000 | 6,834,000 | 13,138,000 | |||||||||
Cash, end of year |
$ | 6,834,000 | $ | 13,138,000 | $ | 16,426,000 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization - Mitcham Industries, Inc., a Texas corporation, was incorporated in 1987.
The Company and Mitcham Canada Ltd., it’s 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 Southeast Asia and Australia. The Company, through its wholly owned
subsidiary, Seamap International Holdings Pte, Ltd. (“Seamap”), designs, develops and markets a
broad range of proprietary products for the seismic, hydrographic and offshore industries with
product sales and support facilities based in Huntsville, Texas, Singapore and the United
Kingdom. The Company, through its wholly owned subsidiary, Mitcham Seismic Eurasia LLC (“MSE”),
provides full-service equipment leasing, sales and service to the seismic industry in Russia and
other parts of Eurasia. 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 6. All
inter-company 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, 2005 and
2006 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. The Company does not take title to equipment held on
consignment but does take title to equipment sold by SAP. The Company
believes it is appropriately reporting revenues as gross because (1)
it is the obligor in the sales arrangement; (2) it has full latitude
in pricing the product for sale; (3) it has general inventory risk
should there be a problem with the equipment being sold to the
customer or if they do not complete payment for the items purchased;
(4) it has discretion in supplier selection if the equipment
ordered is not unique to one manufacturer; and (5) the Company
assumes credit risk for equipment sold to its customers.
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.
F-7
Table of Contents
MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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.
Short-term Investments – The Company considers all highly liquid investments with an
original maturity greater than three months, but less than twelve months, to be short-term
investments.
Inventories - Inventories are stated at the lower of cost (first-in, first-out) or market.
An allowance for obsolescence is maintained to cover any materials or parts that may become
obsolete. As the parts produced by the Company are of a high technology basis, inventories are
periodically monitored to ensure that any obsolete items are covered by the reserve for
obsolescence.
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 5 years for channel boxes and 2 — 10 years for other
peripheral equipment. As this equipment is subject to technological obsolescence and wear and
tear, no salvage value is assigned to it. Should equipment remain in acceptable condition and
still meet acceptable technical standards, the Company will continue to lease the equipment
after it has been fully depreciated. This fully depreciated equipment is not removed from the
lease pool. However, if a fully depreciated asset is not expected to
generate future revenues, then we will remove it from our books.
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. No salvage value is assigned to property and
equipment.
Intangible Assets – Intangible assets are carried at cost, net of accumulated amortization.
Amortization is computed on a straight-line method over the estimated life of the asset. The
covenant not to compete is being amortized over a three-year period. The proprietary rights are
being amortized over a fifteen-year period.
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. 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; however, we recorded a $0.6 million non-cash impairment charge against
our seismic equipment lease pool in fiscal 2006. Of this amount, $0.4 million was attributable
to land systems, cables, geophones and land peripherals and $0.1 million was impaired in marine
and other equipment, $0.1 million for slow moving and obsolete lease pool inventory during the
year.
F-8
Table of Contents
MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. Deferred tax assets and liabilities are determined based on temporary
differences between income and expenses reported for financial reporting and tax reporting. We
have assessed, using all available positive and negative evidence, the likelihood that the
deferred tax assets will be recovered from future taxable income.
Under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, an
enterprise must use judgment in considering the relative impact of negative and positive
evidence. The weight given to the potential effect of negative and positive evidence should be
commensurate with the extent to which it can be objectively verified. The more negative evidence
that exists (a) the more positive evidence is necessary and (b) the more difficult it is to
support a conclusion that a valuation allowance is not needed for some portion or all of the
deferred tax asset. Among the more significant types of evidence that we consider are:
| • | taxable income projections in future years; | ||
| • | whether the carryforward period is so brief that it would limit realization of tax benefits; | ||
| • | future sales and operating cost projections that will produce more than enough taxable income to realize the deferred tax asset based on existing sales prices and cost structures; and | ||
| • | our earnings history exclusive of the loss that created the future deductible amount coupled with evidence indicating that the loss is an aberration rather than a continuing condition. |
We intend to maintain the recorded valuation allowances until sufficient positive evidence
exists to support a reversal of the tax valuation allowances. In determining the 2006
valuation allowance, we considered the following positive indicators:
| • | the current level of worldwide oil and gas exploration activities resulting from historically high prices for oil and natural gas; | ||
| • | increasing world demand for oil; | ||
| • | our anticipated positive income in certain jurisdictions; and | ||
| • | our existing customer relationships. |
We also considered the following negative indicators:
| • | the risk of the world oil supply increasing, thereby depressing the price of oil and natural gas; | ||
| • | the risk of decreased global demand for oil; and |
F-9
Table of Contents
| • | the potential for increased competition in the seismic equipment leasing and sales business. |
Based on our evaluation of the evidence, we believe that it is appropriate to reduce our
valuation allowance on the deferred tax asset by $3.0 million, leaving a valuation allowance on
our books of $4.9 million, which will give rise to a deferred tax asset of $3 million at January
31, 2006.
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, depreciable lives of assets, depreciable lives of intangible
assets and impairment of intangible 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. The Company must also
make substantial judgments regarding the valuation allowance on deferred tax assets. We are
required to record a valuation allowance to reduce our net deferred tax assets to the amount
that we believe is more likely than not to be realized. In assessing the need for a valuation
allowance, we have considered all positive and negative evidence, including scheduled reversals
of deferred tax liabilities, prudent and feasible tax planning strategies, projected future
taxable income and recent financial performance.
Foreign Currency Translation - All balance sheet accounts of the Canadian, Australian,
Singapore, United Kingdom and Russian 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.
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.
F-10
Table of Contents
MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Year Ended January 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
Pro forma impact of fair value method (FAS
148) |
||||||||||||
Reported income (loss) from continuing operations
attributable to common shareholders |
$ | (3,574,000 | ) | $ | 2,049,000 | $ | 10,855,000 | |||||
Less: fair value impact of employee stock
compensation |
(340,000 | ) | (402,000 | ) | (1,104,000 | ) | ||||||
Pro forma income (loss) from continuing
operations
attributable to common shareholders |
$ | (3,914,000 | ) | $ | 1,647,000 | $ | 9,751,000 | |||||
Reported net income (loss) |
$ | (6,289,000 | ) | $ | 2,129,000 | $ | 10,855,000 | |||||
Income (loss) per common share |
||||||||||||
Basic — as reported income (loss) from
continuing operations |
$ | (0.41 | ) | $ | 0.23 | $ | 1.19 | |||||
Diluted — as reported income (loss) from
continuing operations |
$ | (0.41 | ) | $ | 0.22 | $ | 1.10 | |||||
Basic — pro forma income (loss) from continuing
operations |
$ | (0.45 | ) | $ | 0.19 | $ | 1.07 | |||||
Diluted — pro forma income (loss) from continuing
operations |
$ | (0.45 | ) | $ | 0.18 | $ | 0.99 | |||||
Basic — as reported net income (loss) |
$ | (0.72 | ) | $ | 0.24 | $ | 1.19 | |||||
Diluted — as reported net income (loss) |
$ | (0.72 | ) | $ | 0.23 | $ | 1.10 | |||||
Basic — pro forma net income (loss) |
$ | (0.76 | ) | $ | 0.20 | $ | 1.07 | |||||
Diluted — pro forma net income (loss) |
$ | (0.76 | ) | $ | 0.19 | $ | 0.99 | |||||
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, 2004, 2005 and 2006, 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 2006
and 2005 but excluded in 2004 due to their anti-dilutive effect.
| Year Ended January 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
Stock
options |
90,000 | 451,000 | 706,000 | |||||||||
Warrants |
— | 4,000 | 12,000 | |||||||||
Total dilutive
shares |
90,000 | 455,000 | 718,000 | |||||||||
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-11
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
On June 27, 2005, the Company entered into a $12.5 million revolving loan agreement and
credit line with First Victoria National Bank. This line replaced and increased the expiring
credit line of $4.0 million with First Victoria National Bank. The new facility has a two-year
term and bears interest at the prime rate. The credit line allows the Company to borrow funds to
purchase equipment and is secured by the equipment purchased and any leases on that equipment.
Interest on any outstanding principal balance is payable monthly, while the principal is due at
the end of the two-year term. The revolving loan agreement also contains certain financial
covenants that require, among other things, that the Company maintain a debt to shareholder’s
equity ratio of a maximum of 1.3 to 1.0, maintain a current assets to current liabilities ratio
of a minimum of 1.25 to 1.0, and not incur or maintain any indebtedness or obligations or
guarantee the debts or obligations of others in a total aggregate amount which exceeds $1.0
million without the prior written approval of First Victoria National Bank, except for
indebtedness incurred as a result of the Seamap acquisition and other specific exceptions. As
of January 31, 2006, the Company had not borrowed any funds available under this credit line.
F-12
Table of Contents
MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In connection with the Seamap acquisition, the Company issued $3.0 million in promissory
notes payable to the former shareholders of Seamap. The notes are three-year, 5% notes with no
principal or interest due in the first 12 months. Interest on the full amount of the principal
is due on the first anniversary of the notes in the amount of $150,000. No further interest or
principal payments are due until the second anniversary of the notes. At that time, interest on
the full amount of the notes and 50% or $1.5 million of the principal amount of $3.0 million is
due. On the third anniversary of the notes, interest on the unpaid principal and the remainder
of the principal is due. The terms of the purchase and sale agreement provide for additional
earn-out payments of $1.0 million each year subject to Seamap achieving certain annual revenue
thresholds of $8.0 million and $10.0 million over a five-year period, but not more than $2.0
million total over the five-year period.
There are no long-term debt repayments scheduled in fiscal 2007.
4. Supplemental Statements of Cash Flows Information
Supplemental disclosures of cash flow information for the years ended January 31, 2004,
2005 and 2006 are as follows:
| Year Ended January 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
Interest paid, continuing operations |
$ | 273,000 | $ | 190,000 | $ | 22,000 | ||||||
Interest paid, discontinued operations |
$ | 3,000 | $ | 8,000 | $ | — | ||||||
Taxes paid (refunded), net |
$ | — | $ | — | $ | — | ||||||
Note payable to prior owners of Seamap |
$ | — | $ | — | $ | 3,000,000 | ||||||
Seismic equipment acquired in exchange for
cancellation of accounts receivable |
$ | 48,000 | $ | 685,000 | $ | 192,000 | ||||||
Seismic equipment acquired from vendor in exchange
for debt |
$ | 1,733,000 | $ | — | $ | — | ||||||
Equipment sold in exchange for notes receivable (Note 5)
|
||||||||||||
The Company agreed to accept seismic lease pool equipment valued at $ 685,000 and $192,000
from customers against outstanding accounts receivable during the fiscal years ended January 31,
2005 and 2006, respectively. 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 $1,965,000, of which $487,000 is included in the assets of
discontinued operations, all due from customers as of January 31, 2005 and $3,137,000, of which
$355,000 is included in the assets of discontinued operations, due from eight customers as of
January 31, 2006. 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.
F-13
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MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 bore 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 provided a reserve of $215,000 for the unpaid
balance of these two notes as of January 31, 2005. These two notes bore 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 2006, the Company established 6 new notes receivable in the aggregate amount
of $3,301,000 related to the sales of seismic equipment. These notes bear interest ranging from
0% — 12% with repayment terms ranging from 9 to 18 months. The Company has provided a reserve
of $48,000 for two notes which have past due balances as of January 31, 2006. Also, during
fiscal 2006, the Company received final payments on 6 notes receivable that had been established
in prior fiscal years.
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:
| Year Ended January 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
Revenues |
$ | 4,524,000 | $ | — | $ | — | ||||||
Pretax income (loss) |
$ | (2,715,000 | ) | $ | 80,000 | $ | — | |||||
| January 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
Accounts and notes receivable from discontinued
operations
peroperations |
$ | 815,000 | $ | 498,000 | $ | 355,000 | ||||||
Other current assets from discontinued operations
operations |
$ | 83,000 | $ | 111,000 | $ | 11,000 | ||||||
Net property plant and equipment from discontinued
operations |
$ | 4,000 | $ | — | $ | — | ||||||
Accounts payable and accrued liabilities from discontinued
operations |
$ | 399,000 | $ | 14,000 | $ | 10,000 | ||||||
7. Concentrations
Credit Risk - As of January 31, 2005 and 2006, amounts due from customers which exceeded
10% of accounts receivable amounted to an aggregate of $2.2 million from two customers and $3.9
million from two customers, respectively.
The Company maintains deposits and certificates of deposit 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.
F-14
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MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 requested by its customers and maintaining the existing equipment in accordance
with manufacturers’ specifications.
8. Seismic Equipment Lease Pool and Property and Equipment
Seismic equipment lease pool and property and equipment consisted of the following as of:
| January 31, | ||||||||
| 2005 | 2006 | |||||||
Recording channels |
$ | 31,372,000 | $ | 32,711,000 | ||||
Other peripheral equipment |
40,993,000 | 42,981,000 | ||||||
Cost of seismic equipment lease pool |
72,365,000 | 75,692,000 | ||||||
Land |
25,000 | 25,000 | ||||||
Buildings and improvements |
594,000 | 960,000 | ||||||
Furniture and fixtures |
1,548,000 | 1,989,000 | ||||||
Autos and trucks |
260,000 | 357,000 | ||||||
Cost of property and equipment |
2,427,000 | 3,331,000 | ||||||
Cost of seismic equipment lease pool and
property and equipment |
74,792,000 | 79,023,000 | ||||||
Less accumulated depreciation |
(55,067,000 | ) | (59,099,000 | ) | ||||
Net book value of property and equipment |
$ | 19,725,000 | $ | 19,924,000 | ||||
At January 31, 2006, our seismic equipment lease pool and property and equipment, on a cost
basis, consisted of $41,952,000 in the US, $27,837,000 in Canada, $8,982,000 in Australia,
$115,000 in Singapore and $137,000 in the United Kingdom.
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, 2005 and 2006 that are
not reflected in the accompanying consolidated financial statements.
F-15
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MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 $886,000,
$526,000 and $1,104,000 for the years ended January 31, 2004, 2005 and 2006, respectively.
The Company leases its office facilities in Canada, Australia, Singapore, United Kingdom
and Russia under operating leases. The Calgary, Canada lease is a seven-year lease expiring in
2007, the Salisbury, Australia lease is a five-year lease expiring in 2009, The Singapore lease
is a three-year lease expiring in 2009, the United Kingdom lease is a five-year lease expiring
in 2011, and the Russian lease is a one-year lease expiring in 2007. The aggregate minimum
annual lease payments for these facilities are scheduled to be approximately $489,000, $475,000,
$475,000, $256,000 and $123,000 in fiscal 2007, 2008, 2009, 2010 and 2011, respectively, and
none thereafter. The Company recorded lease expense of $165,000, $197,000 and $327,000 for the
years ended January 31, 2004, 2005 and 2006, respectively.
10. Inventories
Inventories stated at the lower of cost (first-in, first-out) or market consisted of the
following:
| January 31, | ||||||||
| 2005 | 2006 | |||||||
Raw materials |
$ | — | $ | 542,000 | ||||
Finished goods |
— | 293,000 | ||||||
Work in progress |
— | 382,000 | ||||||
Cost of inventories |
— | 1,217,000 | ||||||
Less allowance for obsolescence |
— | (62,000 | ) | |||||
Net inventories |
$ | — | $ | 1,155,000 | ||||
11. Income Taxes
The components of income tax expense (benefit) were as follows:
| Year Ended January 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
Current: |
||||||||||||
Federal |
$ | — | $ | 108,000 | $ | 130,000 | ||||||
Foreign |
— | 169,000 | (94,000 | ) | ||||||||
State |
— | — | — | |||||||||
| — | 277,000 | 36,000 | ||||||||||
Deferred |
— | — | (3,000,000 | ) | ||||||||
Income tax expense (benefit) |
$ | — | $ | 277,000 | $ | (2,964,000 | ) | |||||
F-16
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MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of the Company’s deferred taxes consisted of the following as of:
| January 31, | ||||||||
| 2005 | 2006 | |||||||
Deferred tax assets: |
||||||||
Allowance for doubtful accounts |
$ | 343,000 | $ | 367,000 | ||||
Canadian net operating loss carry forward |
5,616,000 | 4,355,000 | ||||||
U.S. net operating loss carry forward |
2,734,000 | 651,000 | ||||||
U.S. net operating loss carry forward attributable to
excess stock option deductions |
— | 903,000 | ||||||
Inventory valuation allowance |
137,000 | 263,000 | ||||||
Depreciation |
555,000 | 840,000 | ||||||
Accruals not yet deductible for tax
purposes |
220,000 | 92,000 | ||||||
AMT credit |
310,000 | 426,000 | ||||||
Gross deferred tax assets |
9,915,000 | 7,897,000 | ||||||
Valuation allowance |
(9,915,000 | ) | (4,897,000 | ) | ||||
Net assets |
— | 3,000,000 | ||||||
Deferred tax liabilities |
— | — | ||||||
Deferred tax assets, net |
$ | — | $ | 3,000,000 | ||||
The following is a reconciliation of expected to actual income tax expense (benefit):
| Year Ended January 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
Federal income tax
expense (benefit) at 34% |
$ | (2,138,000 | ) | $ | 818,000 | $ | 2,683,000 | |||||
Tax credit utilization |
— | — | (105,000 | ) | ||||||||
Deferred benefit not currently
recognized |
2,192,000 | — | — | |||||||||
Utilization of valuation
allowance |
— | (388,000 | ) | (2,921,000 | ) | |||||||
Reversal of valuation allowance |
— | — | (3,000,000 | ) | ||||||||
Permanent
differences |
21,000 | (20,000 | ) | 27,000 | ||||||||
Foreign rate
differential |
(98,000 | ) | (133,000 | ) | 258,000 | |||||||
Other |
23,000 | — | 94,000 | |||||||||
| $ | — | $ | 277,000 | $ | (2,964,000 | ) | ||||||
The Company had Canadian net operating loss carry forwards of approximately $10,369,000
(Canadian $11,862,000) as of January 31, 2006. The Canadian net operating losses expire in
various years through 2012. The Company has U.S. net operating losses of approximately
$4,570,000, as of January 31, 2006, which if unused will begin to expire in 2021.
The Company recorded a valuation allowance of approximately $9,915,000 as of January 31,
2005 and $4,897,000 as of January 31, 2006 (a change of $5,018,000).
F-17
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MITCHAM INDUSTRIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. 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 Salisbury,
Australia, SAP leases seismic data acquisition equipment throughout Southeast Asia and Australia
as well as provides equipment, consumables, systems integration, engineering hardware and
software maintenance support services to the geophysical, hydrographic, oceanographic,
environment and defense industries.
On July 12, 2005, the Company acquired 100% of the stock of Seamap. Seamap is engaged in
the design, manufacture and sale of state-of-the-art seismic and offshore telemetry systems. As a
result of this acquisition, Seamap’s proprietary products will expand Mitcham’s market and
diversify its customer base and will be a complement to Mitcham’s growing marine rental and
sales business. Mitcham will have a broader range of product offerings and the addition of
strategic facilities in support of Mitcham’s expanding global operations. The consolidated
financial statements for and as of the year ended January 31, 2006 include the assets and
liabilities and the operating results for the period from acquisition date through January 31,
2006. Pursuant to Statement of Financial Accounting Standard (“SFAS”) No. 141, Business
Combinations, Mitcham applied purchase accounting to the transaction. Mitcham recognized
intangible assets of $2.9 million and goodwill of $2.4 million on the transaction while
incurring $0.1 million in acquisition costs.
The purchase included all the net assets of Seamap, which are located in Huntsville, Texas,
Singapore and in the United Kingdom. Seamap was purchased for a total of $6.5 million,
consisting of $3.5 million paid in cash at closing and $3.0 million issued in promissory notes
payable to the former shareholders of Seamap (see Note 3). The terms of the purchase and sale
agreement provide for two additional earn-out payments of $1.0 million if Seamap achieves
certain annual revenue thresholds of $8.0 million and $10.0 million over a five-year period
ending April 30, 2010. Mitcham believes that the purchase price of Seamap will be economically
recovered from future cash flow of Seamap.
The following is a summary of the allocations of the aggregate purchase price to the
estimated fair values of the assets acquired and liabilities assumed at the respective date of
acquisition (in thousands):
Working capital |
$ | 1,203 | ||
Equipment |
153 | |||
Covenant not to compete |
1,000 | |||
Proprietary rights |
1,850 | |||
Goodwill |
2,358 | |||
Total purchase price |
$ | 6,564 | ||
At the time of the acquisition, Seamap had approximately $153,000 of fixed assets. These
assets consisted primarily of vehicles, computers and workshop equipment and will remain in use
in the same manner as prior to the acquisition.
The Company hired an outside consulting firm to assess the assets acquired in the Seamap
acquisition. The results of the study concluded that working capital and equipment were
appropriately valued at face value and net book value respectively. Additionally, allocations of
$1.0 million of the purchase price of Seamap were made to the covenant not to compete and $1.85
million was allocated to proprietary rights owned by Seamap. The remainder of the acquisition cost
of Seamap was charged to goodwill.
The covenant not to compete is being amortized
over a period of three years beginning in July 2005. The proprietary rights are being amortized
over fifteen years beginning in July 2005. The Company estimates
amortization expense related to these intangible assets will be
$457,000, $457,000, $262,000, $123,000 and $123,000 for fiscal years
2007, 2008, 2009, 2010 and 2011.
Pro Forma Results of Operations
The following pro forma results of operations for the years ended January 31, 2005 and 2006
assumes the acquisition of Seamap occurred on February 1, 2004, and reflects the full results of
operations for the periods presented. The pro forma results have been prepared for comparative
purposes only and do not purport to indicate the results of operations which would actually have
occurred had the combinations been in effect on the dates indicated, or which may occur in the
future.
F-18
Table of Contents
MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Year Ended January 31, | ||||||||
| 2005 | 2006 | |||||||
| (In thousands except per share amounts) | ||||||||
Revenues |
$ | 32,054 | $ | 39,629 | ||||
Income from continuing operations |
$ | 3,002 | $ | 8,824 | ||||
Net income from continuing operations |
$ | 2,613 | $ | 11,702 | ||||
Earnings per share: |
||||||||
Basic |
$ | 0.30 | $ | 1.28 | ||||
Diluted |
$ | 0.28 | $ | 1.19 | ||||
13. Sales and Major Customers
A summary of the Company’s revenues from customers by geographic region, outside the U.S.,
is as follows:
| Year Ended January 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
Canada |
$ | 9,530,000 | $ | 6,587,000 | $ | 8,914,000 | ||||||
UK / Europe |
808,000 | 1,950,000 | 2,355,000 | |||||||||
Mexico |
110,000 | 31,000 | 13,000 | |||||||||
South America |
1,012,000 | 2,931,000 | 3,220,000 | |||||||||
Asia |
4,569,000 | 7,170,000 | 10,479,000 | |||||||||
Other |
513,000 | 458,000 | 220,000 | |||||||||
Totals |
$ | 16,542,000 | $ | 19,127,000 | $ | 25,201,000 | ||||||
Two
customers represented approximately 11% and 10% of fiscal 2004 total
revenues. One customer
represented approximately 10% of fiscal 2005 and fiscal 2006 total revenues. No other customer exceeded 10% of revenues for
fiscal 2004, 2005 and 2006.
14. Fair Value of Financial Instruments
The Company’s financial instruments consist of trade receivables, marketable securities,
notes receivable and accounts payable. In connection with the Seamap acquisition, the Company
issued $3.0 million in promissory notes payable to the shareholders of Seamap. The notes are
three-year, 5% notes with no principal or interest due in the first 12 months. The Company
believes the carrying value of these financial instruments approximates the estimated fair value
of these financial instruments.
15. Shareholders’ Equity
The Company has 1,000,000 shares of preferred stock authorized, none of which are
outstanding as of January 31, 2005 and 2006. 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 9,893,732 and 10,360,110 are issued as of
January 31, 2005 and 2006, respectively.
F-19
Table of Contents
MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT — (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, 2004, 2005 and 2006,
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, 2006 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. During fiscal
2006, 5,000 awards were forfeited and subsequently cancelled. 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. As of January 31, 2006, there were 25,500 shares
of restricted stock awards outstanding to management personnel and 20,000 shares of restricted
stock awards outstanding to the Company’s outside directors for a total of 45,500 shares of
restricted stock awards outstanding. The unamortized aggregate balance of the deferred
compensation is $8,000 at January 31, 2006 and is classified as a component of shareholders’
equity in the financial statements.
16. Commitments and Contingencies
Sercel
Lease Agreement - Effective January 1, 2005, 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-20
Table of Contents
MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Seamap Acquisition – On July 12, 2005, the Company acquired 100% of the stock of Seamap.
Under the Purchase Agreement, the Company has agreed to pay to the sellers certain contingent
purchase price payments provided that certain earn-out earnings thresholds and prerequisites
are achieved. These contingent purchase price payments cover a five-year period ending April
30, 2010. Earn-out earnings thresholds are based upon total revenues of the Seamap Group,
excluding any revenues derived from sales to the Company or any of its affiliates (earn-out
revenues). The earn-out earnings threshold for the year ending April 30, 2006 shall mean
earn-out revenues in excess of $8.0 million. For the years ending April 30, 2007 through April
30, 2010, the earn-out earnings threshold will be $8.0 million in earn-out revenues if that
level of earn-out revenues has not been met in prior years, $10.0 million if earn-out revenues
are in excess of $8.0 million and less than $10.0 million in prior years, or $8.0 million if
earn-out revenues are in excess of $10.0 million for any prior period. The earn-out payments
are limited to $1.0 million for any year or $2.0 million over the entire five-year period. Any
earn-out payments will be accounted for as goodwill.
17. 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 — 45,500 shares are outstanding, as more fully discussed in Note
15.
F-21
Table of Contents
MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of outstanding options as of January 31, 2006:
1994 Stock Option Plan - Granted shares total 310,834 and options to purchase 70,000
shares of common stock are issued and outstanding, 11,000 of which are exercisable at
$5.75 per share, 16,500 of which are exercisable at $22.00 per share, and 42,500 of which are
exercisable at $1.90 per share. This plan expired in 2004; therefore, no further options are
available under this plan.
1998 Amended and Restated Stock Awards Plan - Options to purchase an aggregate of 546,250
shares have been granted and options to purchase 448,500 shares of common stock are issued and
outstanding, 78,000 of which are exercisable at $3.56 per share, 25,000 of which are
exercisable at $4.16 per share, 100,000 of which are exercisable at $4.75 per share, 70,000 of
which are exercisable at $6.18 per share, 50,000 of which are exercisable at $7.01, 500 which
are exercisable at $7.10 and 125,000 of which are exercisable at $8.98. There are 203,750
options remaining available for issuance under this plan.
2000 Stock Option Plan - Options to purchase an aggregate of 985,220 shares of common
stock have been granted and options to purchase 502,420 are issued and outstanding, 85,400 of
which are exercisable at $5.13 per share, 125,000 of which are exercisable at $5.00 per share,
10,000 of which are exercisable at $4.60 per share, 65,000 of which are exercisable at $4.50
per share, 2,500 of which are exercisable at $4.00 per share, 131,520 of which are exercisable
at $1.99 per share, 60,000 of which are exercisable at $1.90 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. There
are
14,780 options remaining available for issuance under this plan.
Director Plan - Options to purchase an aggregate of 41,000 shares of common stock have
been granted and 34,000 are issued and outstanding, 15,000 of which are exercisable at $5.13
per share, 5,000 of which are exercisable at $4.06 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. This plan expired in 2004; therefore, no further options are
available under this plan.
F-22
Table of Contents
MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2004,
2005 and 2006 was as follows:
| Weighted Average | ||||||||||||
| Weighted Average | Fair Value | |||||||||||
| Number of | Exercise Price | Per Share on | ||||||||||
| Shares | Per Share | Grant Date | ||||||||||
Outstanding, January
31, 2003 |
1,366,870 | $ | 4.40 | |||||||||
Exercised
|
(10,000 | ) | 1.99 | |||||||||
Granted |
182,500 | 1.89 | $ | 1.34 | ||||||||
Forfeited
|
(144,580 | ) | 6.10 | |||||||||
Outstanding, January 31,
2004 |
1,394,790 | $ | 3.91 | |||||||||
Exercised
|
(170,738 | ) | 1.86 | |||||||||
Granted |
353,000 | 4.97 | $ | 3.65 | ||||||||
Forfeited |
(193,770 | ) | 5.68 | |||||||||
Outstanding, January 31,
2005 |
1,383,282 | $ | 4.19 | |||||||||
Exercised |
(471,378 | ) | 3.86 | |||||||||
Granted |
175,500 | 8.41 | $ | 5.88 | ||||||||
Forfeited |
(32,484 | ) | 3.63 | |||||||||
Outstanding, January 31, 2006 |
1,054,920 | $ | 5.15 | |||||||||
The weighted average remaining contractual life at January 2004, 2005 and 2006 was 7.0
years, 6.7 years and 6.6 years, respectively.
As of January 31, 2006, options to acquire 886,920 shares of the Company’s common stock
were fully vested and exercisable at a weighted average exercise price of $4.77 per share. The
remaining options, which have a weighted average exercise price of $7.18 per share, will vest
during the next fiscal year. If not previously exercised, options outstanding at January 31,
2006 will expire as follows: 13,000 shares in fiscal 2007, 18,500 shares in fiscal 2008, 10,000
shares in fiscal 2009, 83,000 shares in fiscal 2010, 100,400 shares in fiscal 2011, 135,000
shares in fiscal 2012, 134,020 shares in fiscal 2013, 102,500 shares in fiscal 2014, 283,000
shares in fiscal 2015 and 175,500 shares in fiscal 2016.
F-23
Table of Contents
MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
18. Segment Reporting
The following information is disclosed as required by Financial Accounting Standards
Board (FASB) statement No. 131, Disclosures About Segments of an Enterprise and Related
Information. On July 12, 2005, the Company acquired 100% of the outstanding stock of Seamap.
Seamap’s primary products include the industry leading range of GunLink seismic source
acquisition and control systems which now provide operators more precise control of their
exploration tools and the BuoyLink GPS tracking system used to provide precise positioning of
seismic sources and streamers. While benefiting from the sales of existing designs, Seamap
continues to develop new products for the seismic industry including a new fairlead which
streamlines streamer deployment. Manufacturing and sales facilities are maintained in the UK
and Singapore with a sales office in Huntsville, Texas.
The Mitcham segment offers for lease or sale, new and “experienced” seismic equipment to
the oil and gas industry, seismic contractors, environmental agencies, government agencies and
universities. Mitcham is headquartered in Huntsville, Texas, with sales and services offices in
Calgary, Canada; Brisbane, Australia; Ufa, Bashkortostan, Russia; and associates throughout
Europe, South America and Asia.
Financial information by business segment is set forth below net of any allocations (in
thousands):
| For the Year Ended January 31, 2006 | ||||||||||||
| Mitcham | Seamap | Consolidated | ||||||||||
Revenues |
$ | 30,569 | $ | 4,020 | $ | 34,589 | ||||||
Percentage |
88 | % | 12 | % | 100 | % | ||||||
Interest income |
$ | 524 | $ | 4 | $ | 528 | ||||||
Percentage |
99 | % | 1 | % | 100 | % | ||||||
Interest expense |
$ | 106 | $ | — | $ | 106 | ||||||
Percentage |
100 | % | 0 | % | 100 | % | ||||||
Fixed assets, net |
$ | 19,694 | $ | 230 | $ | 19,924 | ||||||
Percentage |
99 | % | 1 | % | 100 | % | ||||||
Intangible assets, net |
$ | — | $ | 2,584 | $ | 2,584 | ||||||
Percentage |
0 | % | 100 | % | 100 | % | ||||||
Goodwill |
$ | — | $ | 2,358 | $ | 2,358 | ||||||
Percentage |
0 | % | 100 | % | 100 | % | ||||||
Capital expenditures |
$ | 8,857 | $ | 113 | $ | 8,970 | ||||||
Percentage |
99 | % | 1 | % | 100 | % | ||||||
Depreciation and amortization expense |
$ | 8,649 | $ | 309 | $ | 8,958 | ||||||
Percentage |
97 | % | 3 | % | 100 | % | ||||||
Income tax benefit |
$ | 2,931 | $ | 33 | $ | 2,964 | ||||||
Percentage |
99 | % | 1 | % | 100 | % | ||||||
Sales to Mitcham affiliates are made on the same basis as to any other customer. Upon
consolidation, the entire amount of affiliate sales is eliminated.
F-24
Table of Contents
MITCHAM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19. Quarterly Financial Data (Unaudited)
| Fiscal Year | April 30 | July 31 | October 31 | January 31 | ||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||
Net sales, continuing operations: |
2006 | $ | 7,638 | $ | 7,002 | $ | 9,815 | $ | 10,134 | |||||||||||
| 2005 | 8,206 | 6,393 | 4,738 | 7,031 | ||||||||||||||||
Gross profit, excluding depreciation expense: |
2006 | 6,349 | 5,321 | 7,539 | 7,443 | |||||||||||||||
| 2005 | 5,966 | 4,919 | 3,731 | 5,482 | ||||||||||||||||
Income (loss) from continuing operations |
2006 | 2,304 | 1,045 | 2,907 | 1,635 | |||||||||||||||
before income taxes: |
2005 | 1,370 | 75 | (559 | ) | 1,440 | ||||||||||||||
Incomes taxes (benefit): |
2006 | 162 | (194 | ) | 57 | (2,989 | ) | |||||||||||||
| 2005 | — | — | 264 | 13 | ||||||||||||||||
Income (loss) from continuing operations: |
2006 | 2,142 | 1,239 | 2,850 | 4,801 | |||||||||||||||
| 2005 | 1,370 | 75 | (823 | ) | 1,427 | |||||||||||||||
Income (loss) from discontinued operations: |
2006 | — | — | — | — | |||||||||||||||
| 2005 | — | 80 | — | — | ||||||||||||||||
Income (loss): |
2006 | 2,142 | 1,239 | 2,850 | 4,624 | |||||||||||||||
| 2005 | 1,370 | 155 | (823 | ) | 1,427 | |||||||||||||||
Income (loss) per common share from |
2006 | $ | 0.24 | $ | 0.14 | $ | 0.31 | $ | 0.50 | |||||||||||
continuing operations — basic: |
2005 | $ | 0.16 | $ | 0.01 | $ | (0.09 | ) | $ | 0.16 | ||||||||||
Income (loss) per common share from |
2006 | $ | 0.22 | $ | 0.13 | $ | 0.29 | $ | 0.46 | |||||||||||
continuing operations — diluted: |
2005 | $ | 0.15 | $ | 0.01 | $ | (0.09 | ) | $ | 0.15 | ||||||||||
Income (loss) per common share from |
2006 | $ | — | $ | — | $ | — | $ | — | |||||||||||
discontinued operations — basic and diluted: |
2005 | $ | — | $ | 0.01 | $ | — | $ | — | |||||||||||
Income (loss) per common share – basic: |
2006 | $ | 0.24 | $ | 0.14 | $ | 0.31 | $ | 0.50 | |||||||||||
| 2005 | $ | 0.16 | $ | 0.02 | $ | (0.09 | ) | $ | 0.16 | |||||||||||
Income (loss) per common share — diluted: |
2006 | $ | 0.22 | $ | 0.13 | $ | 0.29 | $ | 0.46 | |||||||||||
| 2005 | $ | 0.15 | $ | 0.02 | $ | (0.09 | ) | $ | 0.15 | |||||||||||
F-25
Table of Contents
20. Restatement of Consolidated Statements of Cash Flows
The Company has restated the Consolidated Statements of
Cash Flows for the years ended January 31, 2004
and 2005 and for each of the quarter end reporting periods during fiscal 2006. The previous cash
flow statements reflected changes in cash flow from continuing operations within each of the
operating, investing and financing sections, with a net increase or decrease in cash from
discontinued operations displayed separately in the statement. The restated statements of cash
flows reflects the cash activity of discontinued operations within each section of operating,
investing and financing activities. Previously, we had reported “Net book value of seismic
equipment sold” in the operating activities section. The restated cash flow
statements present the “Sales from used lease pool equipment” in the investing
activities section of the cash flow statement, with the “Gross profit from sale of lease pool
equipment” now shown as a deduction in the operating activities
section of the cash flow statement. Additionally, purchases and
redemptions of short-term investments are reflected in cash flows from
investing activities. This results in changes to net increase in
cash and cash equivalents for the quarters ended July 31, 2005
and October 31, 2005.
The following tables disclose the impact of the restatements for the years ended January 31, 2005
and 2004 and for each of the first three quarters of fiscal 2006.
Consolidated Statements of Cash Flows
Amounts in thousands
Amounts in thousands
| Year Ended January 31, | ||||||||||||||||
| 2004 | 2005 | |||||||||||||||
| As | As | |||||||||||||||
| previously | previously | |||||||||||||||
| reported | Restated | reported | Restated | |||||||||||||
Cash flows from operating activities: |
||||||||||||||||
Net income (loss) |
$ | (3,574 | ) | $ | (6,289 | ) | $ | 2,049 | $ | 2,129 | ||||||
Depreciation and amortization |
13,677 | 13,963 | 10,596 | 10,596 | ||||||||||||
Impairment on assets |
— | 700 | — | — | ||||||||||||
Stock based compensation |
461 | 461 | ||||||||||||||
Provision for doubtful accounts, net of
charge-offs and recoveries |
106 | 106 | 133 | 133 | ||||||||||||
Net book value of equipment sold |
2,975 | 1,944 | ||||||||||||||
Gross profit from sale of lease pool equipment |
(2,740 | ) | (3,699 | ) | ||||||||||||
Changes in: |
||||||||||||||||
Trade accounts and notes receivable |
(4,167 | ) | (3,680 | ) | (1,098 | ) | (1,585 | ) | ||||||||
Federal income taxes current |
— | — | 284 | 284 | ||||||||||||
Current assets of discontinued operations |
— | (213 | ) | — | 505 | |||||||||||
Accounts payable, accrued expenses and other
current liabilities |
846 | 846 | 2,685 | 2,685 | ||||||||||||
Current liabilities of discontinued operations |
— | 798 | — | (385 | ) | |||||||||||
Other, net |
62 | 62 | (13 | ) | (67 | ) | ||||||||||
Net cash provided by operating activities |
9,925 | 3,553 | 17,041 | 11,057 | ||||||||||||
Cash flows from investing activities: |
||||||||||||||||
Purchases of seismic equipment held for lease |
(3,576 | ) | (4,313 | ) | (5,668 | ) | (6,253 | ) | ||||||||
Purchases of property and equipment |
(59 | ) | (59 | ) | (377 | ) | (377 | ) | ||||||||
Sales from used lease pool
equipment |
— | 4,734 | — | 6,282 | ||||||||||||
Long term assets of discontinued operations |
— | 312 | — | 275 | ||||||||||||
Net cash provided by (used in) investing
activities |
(3,635 | ) | 674 | (6,045 | ) | (73 | ) | |||||||||
F-26
Table of Contents
| Year Ended January 31, | ||||||||||||||||
| 2004 | 2005 | |||||||||||||||
| As | As | |||||||||||||||
| previously | previously | |||||||||||||||
| reported | Restated | reported | Restated | |||||||||||||
Cash flows from financing activities: |
||||||||||||||||
Payments on borrowings |
(2,093 | ) | (2,530 | ) | (4,999 | ) | (4,999 | ) | ||||||||
Proceeds from issuance of common stock upon
exercise of warrants and options |
— | — | 319 | 319 | ||||||||||||
Net cash provided by financing activities |
(2,093 | ) | (2,530 | ) | (4,680 | ) | (4,680 | ) | ||||||||
Net increase in cash and cash equivalents
continuing operations |
4,197 | 1,697 | 6,316 | 6,304 | ||||||||||||
Net increase in cash and cash equivalents —
discontinued operations |
(2,500 | ) | — | (12 | ) | — | ||||||||||
Cash, beginning of year |
5,137 | 5,137 | 6,834 | 6,834 | ||||||||||||
Cash, end of year |
$ | 6,834 | $ | 6,834 | $ | 13,138 | $ | 13,138 | ||||||||
Consolidated Statements of Cash Flows
Amounts in Thousands
Amounts in Thousands
| Three-month period | Six-month period ended | Nine-month period | ||||||||||||||||||||||
| ended April 30, 2005 | July 31, 2005 | ended October 31, 2005 | ||||||||||||||||||||||
| As | As | As | ||||||||||||||||||||||
| previously | previously | previously | ||||||||||||||||||||||
| reported | Restated | reported | Restated | reported | Restated | |||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net income |
$ | 2,142 | $ | 2,142 | $ | 3,381 | $ | 3,381 | $ | 6,231 | $ | 6,231 | ||||||||||||
Adjustments to reconcile net income
to net cash provided by
operating activities: |
||||||||||||||||||||||||
Depreciation and amortization |
2,177 | 2,177 | 4,332 | 4,332 | 6,585 | 6,585 | ||||||||||||||||||
Stock based compensation |
36 | 36 | 65 | 65 | 82 | 82 | ||||||||||||||||||
Provision for doubtful accounts, net
of charge-offs and recoveries |
79 | 79 | 79 | 79 | 162 | 162 | ||||||||||||||||||
Net book value of seismic equipment sold |
91 | 44 | 109 | |||||||||||||||||||||
Gross profit from sale of lease
pool equipment |
(545 | ) | (1,205 | ) | (1,806 | ) | ||||||||||||||||||
Changes in: |
||||||||||||||||||||||||
Trade accounts and notes receivable |
253 | 253 | 2,074 | 2,074 | (58 | ) | (58 | ) | ||||||||||||||||
Inventories |
— | — | — | — | (792 | ) | (792 | ) | ||||||||||||||||
Current assets of discontinued
operations |
(39 | ) | 78 | 5 | ||||||||||||||||||||
Federal income taxes current |
56 | 56 | (232 | ) | (232 | ) | (133 | ) | (133 | ) | ||||||||||||||
Accounts payable, accrued expenses and
other current
liabilities |
(3,926 | ) | (3,926 | ) | (4,143 | ) | (4,143 | ) | (4,494 | ) | (4,494 | ) | ||||||||||||
Current liabilities of discontinued
operations |
(7 | ) | (9 | ) | ||||||||||||||||||||
Other, net |
(89 | ) | (15 | ) | 361 | 279 | 367 | 322 | ||||||||||||||||
Net cash provided by operating activities |
819 | 211 | 5,961 | 4,708 | 8,059 | 6,095 | ||||||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Sales from used lease
pool equipment |
713 | 1,669 | 2,341 | |||||||||||||||||||||
Acquisition of Seamap, net of $1,027
cash acquired |
(2,474 | ) | (2,474 | ) | (2,473 | ) | (2,473 | ) | ||||||||||||||||
Seamap acquisition costs |
(39 | ) | (39 | ) | (56 | ) | (56 | ) | ||||||||||||||||
Long term assets of discontinued
operations |
71 | 143 | 216 | |||||||||||||||||||||
Purchases of short-term investments |
— | — | — | (3,950 | ) | — | (3,950 | ) | ||||||||||||||||
Redemption of short-term investments |
— | — | — | 2,950 | — | 2,950 | ||||||||||||||||||
Purchases of seismic equipment held
for lease |
(1,007 | ) | (1,158 | ) | (1,899 | ) | (2,237 | ) | (3,274 | ) | (3,655 | ) | ||||||||||||
Purchases of property and equipment |
(184 | ) | (184 | ) | (457 | ) | (457 | ) | (374 | ) | (374 | ) | ||||||||||||
F-27
Table of Contents
| Three-month period | Six-month period ended | Nine-month period | ||||||||||||||||||||||
| ended April 30, 2005 | July 31, 2005 | ended October 31, 2005 | ||||||||||||||||||||||
| As | As | As | ||||||||||||||||||||||
| previously | previously | previously | ||||||||||||||||||||||
| reported | Restated | reported | Restated | reported | Restated | |||||||||||||||||||
Net cash provided by (used in) investing
activities |
(1,191 | ) | (558 | ) | (4,869 | ) | (4,395 | ) | (6,177 | ) | (5,001 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Payments on borrowings |
(580 | ) | (580 | ) | (918 | ) | (918 | ) | (918 | ) | (918 | ) | ||||||||||||
Proceeds from issuance of common stock
upon exercise of warrants and options |
18 | 18 | 274 | 274 | 882 | 882 | ||||||||||||||||||
Net cash provided by financing activities |
(562 | ) | (562 | ) | (644 | ) | (644 | ) | (36 | ) | (36 | ) | ||||||||||||
Net increase in cash and cash
equivalents continuing operations |
(934 | ) | (909 | ) | 448 | (331 | ) | 1,846 | 1,058 | |||||||||||||||
Net increase in cash and cash
equivalents — discontinued operations |
25 | 221 | 212 | |||||||||||||||||||||
Cash, beginning of period |
13,138 | 13,138 | 13,138 | 13,138 | 13,138 | 13,138 | ||||||||||||||||||
Cash, end of period |
$ | 12,229 | $ | 12,229 | $ | 13,807 | $ | 12,807 | $ | 15,196 | $ | 14,196 | ||||||||||||
F-28
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders Mitcham Industries, Inc.
Huntsville, Texas
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, 2006. 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 LLP | ||||
| Hein & Associates LLP | ||||
Houston, Texas
April 13, 2006
April 13, 2006
F-29
Table of Contents
SCHEDULE II
MITCHAM INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
| Col. A | Col. B | Col. C(1) | Col. D | Col. E | ||||||||||||
| Balance at | Additions Charged to | Deductions - | Balance at | |||||||||||||
| Description | Beginning of Period | Costs and Expenses | Describe | End of Period | ||||||||||||
January 31, 2004 |
||||||||||||||||
Allowance for
doubtful
accounts |
$ | 770,000 | $ | 103,000 | $ | (3,000 | )(A) | $ | 876,000 | |||||||
January 31, 2005 |
||||||||||||||||
Allowance for
doubtful
accounts |
$ | 876,000 | $ | 155,000 | $ | 22,000 | (A) | $ | 1,009,000 | |||||||
January 31, 2006 |
||||||||||||||||
Allowance for
doubtful
accounts |
$ | 1,009,000 | $ | 188,000 | $ | 22,000 | (A) | $ | 1,175,000 | |||||||
| (A) | Represents recoveries and uncollectible accounts written off. |
Note: Column C(2) has been omitted, as all answers would be “none.”
| Col. A | Col. B | Col. C(1) | Col. D | Col. E | ||||||||||||
| Balance at | Additions Charged to | Deductions - | Balance at | |||||||||||||
| Description | Beginning of Period | Costs and Expenses | Describe | End of Period | ||||||||||||
January 31, 2004 |
||||||||||||||||
Allowance for
obsolete
equipment |
$ | 243,000 | $ | 8,000 | $ | 57,000 | (B) | $ | 194,000 | |||||||
January 31, 2005 |
||||||||||||||||
Allowance for
obsolete
equipment |
$ | 194,000 | $ | 409,000 | $ | 84,000 | (B) | $ | 519,000 | |||||||
January 31, 2006 |
||||||||||||||||
Allowance for
obsolete
inventory and lease pool equipment |
$ | 519,000 | $ | 15,000 | $ | 183,000 | (B) | $ | 351,000 | |||||||
| (B) | Represents sale or scrap of obsolete equipment. |
Note: Column C(2) has been omitted, as all answers would be
“none.”
F-30
Table of Contents
Exhibit Index
| Exhibit | ||||
| Number | Description of Exhibit | |||
3.1
|
- | 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) |
Table of Contents
| Exhibit | ||||
| Number | Description of Exhibit | |||
10.2
|
- | Exclusive Lease Referral Agreement, dated May 14, 1996, between the Company and Pelton Company, Inc., a 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., a 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) | ||
*10.18
|
- | Separation Agreement, dated June 6, 2005 between Chris Siffert and Mitcham Industries, Inc. (14) | ||
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*** | ||
31.2
|
- | 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. |
Table of Contents
| (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. | |
| (14) | Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed with the SEC on June 7, 2005. |
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to incorporation by reference in the registration statements (Nos. 333-120663, 333-11097
and 333-67208) on Form S-8 of Mitcham Industries, Inc. of our report dated April 13, 2006, which
report appears in the January 31, 2006 annual report on Form 10-K of Mitcham Industries, Inc.
/s/ Hein & Associates LLP
Certified Public Accountants
Houston, Texas
June 13, 2006
Exhibit 31.1
CERTIFICATION
I, Billy F. Mitcham, Jr., certify that:
1.
I have reviewed this report on Form 10-K/A of Mitcham Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is
being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
/s/ BILLY F. MITCHAM, JR.
Billy F. Mitcham, Jr.
Chief Executive Officer
June 14, 2006
Chief Executive Officer
June 14, 2006
Exhibit 31.2
CERTIFICATION
I, Michael A. Pugh, certify that:
1. I have reviewed this report on Form 10-K/A of Mitcham Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is
being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
/s/ MICHAEL A. PUGH
Michael A. Pugh
Executive Vice President-Finance and Chief Financial Officer
June 14, 2006
Executive Vice President-Finance and Chief Financial Officer
June 14, 2006
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with Amendment No. 1 to the Annual Report of Mitcham Industries, Inc. (the “Company”) on Form 10-K/A
for the year ended January 31, 2006, as filed with the Securities and Exchange Commission on the
date hereof (the “Report”), I, Billy F. Mitcham, Jr., Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
/s/ BILLY F. MITCHAM, JR.
Billy F. Mitcham, Jr.
Chief Executive Officer
June 14, 2006
Chief Executive Officer
June 14, 2006
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with Amendment No. 1 to the Annual Report of Mitcham Industries, Inc. (the “Company”) on Form 10-K/A
for the year ended January 31 2006, as filed with the Securities and Exchange Commission on the
date hereof (the “Report”), I, Michael A. Pugh, Executive Vice President-Finance and Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
/s/ MICHAEL A. PUGH
Michael A. Pugh
Executive Vice President-Finance and Chief Financial Officer
June 14, 2006
Executive Vice President-Finance and Chief Financial Officer
June 14, 2006
June 14, 2006
VIA EDGAR AND FACSIMILE
Ms. John Cash
Branch Chief
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, D.C. 20549-0405
Branch Chief
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, D.C. 20549-0405
| Re: | Mitcham Industries, Inc. Form 10-K for the fiscal year ended January 31, 2005 File No. 0-25142 |
Dear Mr. Cash:
On June 8, 2006, Mitcham Industries, Inc. (the “Company”) received the comments of the
staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange
Commission (the “Commission”) to Form 10-K for the fiscal year ended January 31, 2005 (the
“2005 Form 10-K”). As requested by the Staff, the Company is filing concurrently herewith
an amendment to its Form 10-K for the fiscal year ended January 31, 2006 (the “2006 Form
10-K/A”) to address the matters raised herein.
The following responses are for the Staff’s review. For your convenience, we have repeated in
bold type each comment of the Staff exactly as given in the Staff’s comment letter.
Item 9A. Controls and Procedures, page 26
II. Evaluation of Disclosure Controls and Procedures
1. We note your response to prior comment one. Please revise your disclosure to state, if
true, that your principal executive officer and principal financial officer have concluded that
your disclosure controls and procedures “are effective as of January 31, 2006 at the reasonable
assurance level.”
MITCHAM INDUSTRIES INC.
P.O. Box 1175 Huntsville, Texas 77342-1175 USA
HUNTSVILLE: +1 936.291.2277 HOUSTON: +1 281.353.4475 FAX: +1 936.295.1922 EMAIL:
sales@mitchamindustries.com
P.O. Box 1175 Huntsville, Texas 77342-1175 USA
HUNTSVILLE: +1 936.291.2277 HOUSTON: +1 281.353.4475 FAX: +1 936.295.1922 EMAIL:
sales@mitchamindustries.com
www.mitchamindustries.com
Page 2
of 2
Response: We acknowledge the Staff’s comments and will revise the disclosure in our
2006 Form 10-K/A accordingly.
2. We note your belief that you do not have a material weakness in internal controls and
that your disclosure controls and procedures are effective as of January 31, 2006 at the
reasonable assurance level. We recognize that management is in the best position to reach the
appropriate conclusions with regard to whether or not the control deficiencies you identified
should result in a conclusion that you have a material weakness in your internal controls or
that your disclosure controls and procedures were not effective. However, we believe you must
revise your disclosures in the second paragraph to better clarify how you reached these
conclusions. Specifically, revise your disclosures to clarify why, not withstanding each
restatement, you were able to reach your conclusions. As you indicated in your response, ensure
that your revised disclosure clarifies that your SAB 99 analysis related only to the
certificate of deposit reclassification.
Response: We acknowledge the Staff’s comments and will revise the disclosure in our
2006 Form 10-K/A accordingly.
III. Changes in Internal Control over Financial Reporting
3. We note your response to prior comment five. Revise your disclosures to provide the
information you have presented in your response.
Response: We acknowledge the Staff’s comments and will revise the disclosure in our
2006 Form 10-K/A accordingly.
Should the Staff have any questions or comments, please contact the undersigned at
281.353.4475 or Michael A. Pugh, Chief Financial Officer of Mitcham Industries, Inc. at the same
number.
| Very truly yours, MITCHAM INDUSTRIES, INC. |
||||
| By: | /s/ Billy F. Mitcham, Jr. | |||
| Billy F. Mitcham, Jr. | ||||
| President and Chief Executive Officer | ||||