e10vq
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2008
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
incorporation or organization)
  (I.R.S. Employer Identification No.)
8141 SH 75 South
P.O. Box 1175
Huntsville, Texas 77342

(Address of principal executive offices, including Zip Code)
(936) 291-2277
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 9,803,580 shares of common stock, $0.01 par value, were outstanding as of September 5, 2008.
 
 

 


 

MITCHAM INDUSTRIES, INC.
Table of Contents
             
           
   
 
       
Item 1.          
   
 
       
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Item 2.       10  
   
 
       
Item 3.       17  
   
 
       
Item 4.       18  
   
 
       
           
   
 
       
Item 1.       18  
   
 
       
Item 1A.       18  
   
 
       
Item 2.       18  
   
 
       
Item 3.       18  
   
 
       
Item 4.       19  
   
 
       
Item 5.       19  
   
 
       
Item 6.       19  
   
 
       
        20  
 Certification of CEO Pursuant to Rule 13a-14(a)
 Certification of CFO Pursuant to Rule 13a-14(a)
 Certification of CEO & CFO Pursuant to Section 906

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MITCHAM INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
                 
    July 31, 2008        
    (unaudited)     January 31, 2008  
ASSETS
               
 
               
Current assets:
               
Cash and cash equivalents
  $ 6,152     $ 13,884  
Restricted cash
    1,413        
Accounts receivable, net
    15,898       12,816  
Current portion of contracts receivable
    4,904       2,964  
Inventories, net
    5,229       6,352  
Deferred tax asset
    708       1,230  
Prepaid expenses and other current assets
    711       1,491  
 
           
Total current assets
    35,015       38,737  
Seismic equipment lease pool and property and equipment, net
    64,180       53,179  
Intangible assets, net
    3,386       3,692  
Goodwill
    4,320       4,358  
Net deferred tax asset
    1,624       1,505  
Long-term portion of contracts receivable and other assets
    1,268       2,430  
 
           
Total assets
  $ 109,793     $ 103,901  
 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
Current liabilities:
               
Accounts payable
  $ 9,623     $ 16,729  
Current maturities — long-term debt
    2,000       1,500  
Income taxes payable
    702       1,967  
Deferred revenue
    1,138       872  
Accrued expenses and other current liabilities
    9,425       3,674  
 
           
Total current liabilities
    22,888       24,742  
Non-current income taxes payable
    3,820       3,391  
 
           
Total liabilities
    26,708       28,133  
Shareholders’ equity:
               
Preferred stock, $1.00 par value; 1,000 shares authorized; none issued and outstanding
           
Common stock $0.01 par value; 20,000 shares authorized; 10,726 and 10,708 shares issued at July 31, 2008 and January 31, 2008, respectively
    107       107  
Additional paid-in capital
    73,350       71,929  
Treasury stock, at cost (921 shares at July 31, 2008 and January 31, 2008)
    (4,814 )     (4,805 )
Retained earnings
    6,565       662  
Accumulated other comprehensive income
    7,877       7,875  
 
           
Total shareholders’ equity
    83,085       75,768  
 
           
Total liabilities and shareholders’ equity
  $ 109,793     $ 103,901  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

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MITCHAM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
                                 
    For the Three Months Ended     For the Six Months Ended  
    July 31,     July 31,  
    2008     2007     2008     2007  
Revenues:
                               
 
                               
Equipment leasing
  $ 7,500     $ 6,249     $ 19,873     $ 16,330  
Lease pool equipment sales
    1,844       775       2,405       1,492  
Seamap equipment sales
    3,285       5,605       8,567       15,663  
Other equipment sales
    4,866       2,770       5,184       4,928  
 
                       
Total revenues
    17,495       15,399       36,029       38,413  
 
                       
 
                               
Cost of sales:
                               
Direct costs — equipment leasing
    343       351       785       821  
Direct costs — lease pool depreciation
    3,673       2,442       7,313       4,846  
Cost of equipment sales
    6,365       6,033       9,189       16,069  
 
                       
Total cost of sales
    10,381       8,826       17,287       21,736  
 
                       
Gross profit
    7,114       6,573       18,742       16,677  
 
                               
Operating expenses:
                               
General and administrative
    4,430       3,620       9,305       7,640  
Depreciation and amortization
    364       366       759       721  
 
                       
Total operating expenses
    4,794       3,986       10,064       8,361  
 
                       
 
                               
Operating income
    2,320       2,587       8,678       8,316  
 
                               
Other income
                               
Interest, net
    223       64       373       142  
Other, net
    3             8       2  
 
                       
Total other income
    226       64       381       144  
 
                       
 
                               
Income before income taxes
    2,546       2,651       9,059       8,460  
 
                               
Provision for income taxes
    (921 )     (930 )     (3,156 )     (2,799 )
 
                       
 
                               
Net income
  $ 1,625     $ 1,721     $ 5,903     $ 5,661  
 
                       
 
                               
Net income per common share:
                               
 
                               
Basic
  $ 0.17     $ 0.18     $ 0.61     $ 0.59  
 
                               
Diluted
  $ 0.16     $ 0.17     $ 0.57     $ 0.55  
 
                               
Shares used in computing net income per common share:
                               
 
                               
Basic
    9,764       9,672       9,758       9,657  
 
                               
Diluted
    10,385       10,271       10,361       10,219  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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MITCHAM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
                 
    For the Six Months Ended  
    July 31,  
    2008     2007  
Cash flows from operating activities:
               
Net income
  $ 5,903     $ 5,661  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    8,153       5,567  
Stock-based compensation
    1,163       985  
Provision for (recovery of) doubtful accounts
    95       (134 )
Provision for inventory obsolescence
    249       288  
Gross profit from sale of lease pool equipment
    (1,173 )     (818 )
Excess tax benefit from exercise of non-qualified stock options
    (96 )     (483 )
Deferred tax provision
    474       1,794  
Changes in:
               
Accounts receivable
    (1,246 )     1,222  
Contracts receivable
    (779 )     1,111  
Inventories
    916       653  
Prepaid expenses and other current assets
    1,273       245  
Income taxes payable
    (1,190 )     109  
Accounts payable, accrued expenses, other current liabilities and deferred revenue
    (7,298 )     1,304  
 
           
Net cash provided by operating activities
    6,444       17,504  
 
           
 
               
Cash flows from investing activities:
               
Purchases of seismic equipment held for lease
    (15,411 )     (17,240 )
Purchases of property and equipment
    (470 )     (355 )
Sale of used lease pool equipment
    2,405       1,492  
 
           
Net cash used in investing activities
    (13,476 )     (16,103 )
 
           
 
               
Cash flows from financing activities:
               
Net proceeds from line of credit
    2,000       4,500  
Payments on borrowings
    (1,500 )     (6,000 )
Purchase of short-term investments
    (1,413 )      
Proceeds from issuance of common stock upon exercise of warrants and stock options, net of stock surrendered
    196       322  
Excess tax benefit from exercise of non-qualified stock options
    96       483  
 
           
Net cash used in financing activities
    (621 )     (695 )
 
               
Effect of changes in foreign exchange rates on cash and cash equivalents
    (79 )     424  
 
           
 
               
Net (decrease) increase in cash and cash equivalents
    (7,732 )     1,130  
 
               
Cash and cash equivalents, beginning of period
    13,884       12,582  
 
           
 
               
Cash and cash equivalents, end of period
  $ 6,152     $ 13,712  
 
           
 
               
Supplemental cash flow information:
               
 
               
Interest paid
  $ 135     $ 244  
Income taxes paid
  $ 3,306     $ 588  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Mitcham Industries, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)
1. Basis of Presentation
     The condensed consolidated balance sheet as of January 31, 2008 for Mitcham Industries, Inc. (for purposes of these notes the “Company”) has been derived from audited consolidated financial statements. The unaudited interim condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2008. In the opinion of the Company, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position as of July 31, 2008, the results of operations for the three and six months ended July 31, 2008 and 2007, and the cash flows for the six months ended July 31, 2008 and 2007, have been included in these financial statements. The foregoing interim results are not necessarily indicative of the results of the operations to be expected for the full fiscal year ending January 31, 2009.
2. Organization
     Mitcham Industries, Inc., a Texas corporation, was incorporated in 1987. The Company, through its wholly owned Canadian subsidiary, Mitcham Canada, Ltd. (“MCL”) and its wholly owned Russian subsidiary, Mitcham Seismic Eurasia LLC (“MSE”), provides full-service equipment leasing, sales and service to the seismic industry worldwide. The Company, through its wholly owned Australian subsidiary, Seismic Asia Pacific Pty Ltd. (“SAP”), provides seismic, oceanographic and hydrographic leasing and sales worldwide, primarily in Southeast Asia and Australia. The Company, through its wholly owned subsidiary, Seamap International Holdings Pte. Ltd. (“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 Singapore and the United Kingdom. All intercompany transactions and balances have been eliminated in consolidation.
3. New Accounting Pronouncements
     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”), to define fair value, establish a framework for measuring fair value and expand disclosures about the use of fair value to measure assets and liabilities. SFAS 157 requires quantitative disclosures using a tabular format in all periods (interim and annual) and qualitative disclosures about the valuation techniques used to measure fair value in all annual periods. SFAS 157 was effective for the Company’s fiscal year beginning February 1, 2008. The adoption of SFAS 157 had no material effect on the Company’s consolidated financial position and results of operations.
     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 was effective for the Company’s fiscal year beginning February 1, 2008. The adoption of SFAS 159 had no material effect on the Company’s consolidated financial position and results of operations.
4. Restricted Cash
     In connection with a contract awarded in May 2008, SAP has pledged approximately $1.4 million in short-term time deposits to secure performance obligations under the contract. The amount of the security will be released as the contract obligations are performed over the life of the contract, which is estimated to be nine to twelve months.

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5. Balance Sheet
                 
    July 31,     January 31,  
    2008     2008  
Accounts receivable:
               
Accounts receivable
  $ 16,678     $ 14,328  
Allowance for doubtful accounts
    (780 )     (1,512 )
 
           
Total accounts receivable, net
  $ 15,898     $ 12,816  
 
           
     Accounts receivable at July 31, 2008 increased over the amount at January 31, 2008 due primarily to significant transactions occurring near to July 31, 2008. During the three months ended July 31, 2008 certain accounts receivable were charged-off against the allowance for doubtful accounts.
                 
Contracts receivable:
               
Contracts receivable
  $ 6,139     $ 5,360  
Less current portion of contracts receivable
    (4,904 )     (2,964 )
 
           
Long-term portion of contracts receivable
  $ 1,235     $ 2,396  
 
           
 
               
Inventories:
               
 
Raw materials
  $ 3,362     $ 3,565  
Finished goods
    794       898  
Work in progress
    2,203       2,693  
 
           
 
    6,359       7,156  
Less allowance for obsolescence
    (1,130 )     (804 )
 
           
Total inventories, net
  $ 5,229     $ 6,352  
 
           
     The allowance for obsolescence increased from January 31, 2008 to July 31, 2008 based on revised estimates of net realizable amounts.
                 
Seismic equipment lease pool and property and equipment:
               
Seismic equipment lease pool
  $ 133,594     $ 116,676  
Land and buildings
    366       366  
Furniture and fixtures
    5,768       5,026  
Autos and trucks
    622       605  
 
           
 
    140,350       122,673  
Accumulated depreciation and amortization
    (76,170 )     (69,494 )
 
           
Total seismic equipment lease pool and property and equipment, net
  $ 64,180     $ 53,179  
 
           

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6. Goodwill and Other Intangible Assets
                                                         
    Weighted     July 31, 2008     January 31, 2008  
    Average     Gross             Net     Gross             Net  
    Life at     Carrying     Accumulated     Carrying     Carrying     Accumulated     Carrying  
    7/31/08     Amount     Amortization     Amount     Amount     Amortization     Amount  
Goodwill
          $ 4,320             $ 4,320     $ 4,358             $ 4,358  
 
                                               
 
                                                       
Proprietary rights
    11.9     $ 3,861     $ (475 )   $ 3,386     $ 3,886     $ (333 )   $ 3,553  
Covenants not-to-compete
          1,000       (1,000 )           1,000       (861 )     139  
 
                                           
Amortizable intangible assets
          $ 4,861     $ (1,475 )   $ 3,386     $ 4,886     $ (1,194 )   $ 3,692  
 
                                           
     As of July 31, 2008, the Company had goodwill of $4,320, all of which is allocated to the Seamap segment. During the three months ended July 31, 2008 the Company recorded a decrease in goodwill in the amount of $38 resulting from the recognition of certain tax credits relating to the operations of Seamap. These tax credits related to the period prior to the acquisition of Seamap by the Company. No impairment has been recorded against the goodwill account.
     Amortizable intangible assets are amortized over their estimated useful lives of three to 15 years using the straight-line method. Aggregate amortization expense was $127 and $114 for the three months ended July 31, 2008 and 2007, respectively, and $282 and $228 for the six months ended July 31, 2008 and 2007, respectively. As of July 31, 2008, future estimated amortization expense related to amortizable intangible assets is estimated to be:
         
For fiscal years ending January 31:
       
2009
  $ 142  
2010
     284  
2011
    284  
2012
    284  
2013 and thereafter
    2,392  
 
     
Total
  $ 3,386  
 
     
7. Long-Term Debt and Notes Payable
     The Company entered into a $12,500 revolving loan agreement with First Victoria National Bank (the “Bank”) which expires on February 1, 2009. The facility bears interest at the prime rate. Amounts available for borrowing under the facility are determined by a borrowing base. The borrowing base is computed based on certain outstanding accounts receivable, certain portions of the Company’s lease pool and any lease pool assets that are to be purchased with proceeds of the facility. Borrowings under the facility are secured by essentially all of the Company’s domestic assets. Interest on any outstanding principal balance is payable monthly, while the principal is due at maturity. The loan agreement also contains certain financial covenants that require, among other things, that the Company maintain a debt to shareholders’ 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 $1,000 without the prior written approval of the Bank, except for indebtedness incurred as a result of the Seamap acquisition and other specific exceptions. As of July 31, 2008, $2,000 is outstanding under this facility.
     In connection with the Seamap acquisition in July 2005, the Company issued $3,000 in promissory notes payable to the former shareholders of Seamap, of which $1,500 was outstanding at January 31, 2008. The notes bear interest at 5%, which is payable annually on the anniversary of the notes. A partial principal payment of $637 was made in February 2008 and the remaining principal payment of $863 was made in July 2008.
8. Shareholders’ Equity
     During the six months ended July 31, 2008, approximately 18 shares were issued upon the exercise of stock options by employees pursuant to various stock option plans of the Company.

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9. Comprehensive Income
     Comprehensive income generally represents all changes in shareholders’ equity during the period, except those resulting from investments by, or distributions to, shareholders. The Company has comprehensive income related to changes in foreign currency to U.S. dollar exchange rates, which is recorded as follows:
                                 
    Three Months Ended     Six Months Ended  
    July 31,     July 31,  
    2008     2007     2008     2007  
Net income
  $ 1,625     $ 1,721     $ 5,903     $ 5,661  
Gain (loss) from foreign currency translation adjustment
    (299 )     1,248       2       3,554  
 
                       
Comprehensive income
  $ 1,326     $ 2,969     $ 5,905     $ 9,215  
 
                       
10. Income Taxes
     The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). Under SFAS 109, deferred tax assets and liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. SFAS 109 requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized. The Company has adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”). As required by FIN 48, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
     The Company and its subsidiaries file consolidated and separate income tax returns in the U.S. federal jurisdiction and in foreign jurisdictions. The Company is subject to U.S. federal income tax examinations for all tax years beginning with its fiscal year ended January 31, 2002. The Internal Revenue Service has not commenced an examination of any of the Company’s U.S. federal income tax returns.
     The Company is subject to examination by taxing authorities throughout the world, including major foreign jurisdictions such as Australia, Canada, Russia, Singapore and the United Kingdom. With few exceptions, the Company and its subsidiaries are no longer subject to foreign income tax examinations for tax years before 2002. With respect to ongoing audits, in the second quarter of fiscal 2008, the Canadian federal tax authorities commenced an audit of the Company’s Canadian income tax returns for tax years ended January 31, 2004 through 2007. To date, no adjustments have been proposed as a result of this audit.
     The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as reductions in income tax expense.
     The Company’s U.S. federal income tax returns for the year ended January 31, 2005 and all prior years will close during the twelve month period ending July 31, 2009, unless extended by examination or agreement. Also, the tax returns of MCL, the Company’s Canadian subsidiary, for the years ended January 31, 2004 through the year ended January 31, 2007 are being examined by Canadian federal taxing authorities. Accordingly, it is reasonably possible that some uncertain tax positions will be resolved within the next twelve months. Should these uncertain tax positions be resolved, the amount of unrecognized tax benefits would decrease by up to approximately $1,978, which amount would decrease income tax expense.

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11. Earnings per Share
     Net income per basic common share is computed using the weighted average number of common shares outstanding during the period, excluding unvested restricted stock. Net income per diluted common share is computed using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Potential common shares result from the assumed exercise of outstanding warrants and common stock options having a dilutive effect using the treasury stock method, from the assumed vesting of phantom stock units, and from the assumed vesting of unvested shares of restricted stock using the treasury stock method. The following table presents the calculation of basic and diluted weighted average common shares used in the earnings per share calculation for the three and six months ended July 31, 2008 and 2007:
                                 
    Three Months Ended     Six Months Ended  
    July 31,     July 31,  
    2008     2007     2008     2007  
Basic weighted average common shares outstanding
    9,764       9,672       9,758       9,657  
 
                               
Stock options
    596       562       583       527  
Unvested restricted stock
    14       22       15       20  
Phantom stock
    11             5        
Warrants
          15             15  
 
                       
Total weighted average common share equivalents
    621       599       603       562  
 
                       
Diluted weighted average common shares outstanding
    10,385       10,271       10,361       10,219  
 
                       
12. Stock-Based Compensation
     Total compensation expense recognized for stock-based awards granted under the Company’s various equity incentive plans during the three and six months ended July 31, 2008 was approximately $527 and $1,163, respectively, and during the three and six months ended July 31, 2007 was approximately $429 and $985, respectively. During the six months ended July 31, 2008, options to purchase 150 shares of common stock were granted to the non-employee members of the Company’s Board of Directors.

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13. Segment Reporting
     The following information is disclosed as required by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.
     The Equipment Leasing 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. The Equipment Leasing segment is headquartered in Huntsville, Texas, with sales and services offices in Calgary, Canada; Brisbane, Australia; and Ufa, Bashkortostan, Russia.
     The Seamap segment is engaged in the design, manufacture and sale of state-of-the-art seismic and offshore telemetry systems. Manufacturing, support and sales facilities are maintained in the United Kingdom and Singapore.
     Financial information by business segment is set forth below (net of any allocations):
                 
    As of July 31,     As of January 31,  
    2008     2008  
    Total assets     Total assets  
Equipment Leasing
  $ 93,175     $ 86,057  
Seamap
    17,130       18,434  
Eliminations
    (512 )     (590 )
 
           
Consolidated
  $ 109,793     $ 103,901  
 
           
     Results for the three months ended July 31, 2008 and 2007 were as follows:
                                                 
    Revenues     Operating income (loss)     Income (loss) before taxes  
    2008     2007     2008     2007     2008     2007  
Equipment Leasing
  $ 14,210     $ 9,794     $ 2,676     $ 2,227     $ 2,928     $ 2,361  
Seamap
    3,302       5,754       (413 )     363       (439 )     293  
Eliminations
    (17 )     (149 )     57       (3 )     57       (3 )
 
                                   
Consolidated
  $ 17,495     $ 15,399     $ 2,320     $ 2,587     $ 2,546     $ 2,651  
 
                                   
     Results for the six months ended July 31, 2008 and 2007 were as follows:
                                                 
    Revenues     Operating income (loss)     Income (loss) before taxes  
    2008     2007     2008     2007     2008     2007  
Equipment Leasing
  $ 27,462     $ 22,750     $ 7,813     $ 7,442     $ 8,250     $ 7,725  
Seamap
    8,607       16,118       781       1,013       725       874  
Eliminations
    (40 )     (455 )     84       (139 )     84       (139 )
 
                                   
Consolidated
  $ 36,029     $ 38,413     $ 8,678     $ 8,316     $ 9,059     $ 8,460  
 
                                   
     Sales from the Seamap segment to the Equipment Leasing segment are eliminated in the consolidated revenues. Consolidated income before taxes reflects the elimination of profit from intercompany sales and depreciation expense on the difference between the sales price and the cost to manufacture the equipment. Fixed assets are reduced by the difference between the sales price and the cost to manufacture the equipment, less the accumulated depreciation related to the difference.

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

Cautionary Statement about Forward-Looking Statements
     Certain statements contained in this Quarterly Report on Form 10-Q (this “Form 10-Q”) may be deemed to be forward-looking statements within the meaning of Section 2lE of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended. This information includes, without limitation, statements concerning:
    our future financial position and results of operations;
 
    planned capital expenditures;
 
    our business strategy and other plans for future operations;
 
    the future mix of revenues and business;
 
    future demand for our services; and
 
    general conditions in the energy industry and seismic service industry.
Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can not assure you that these expectations will prove to be correct. When used in this Form 10-Q, the words “anticipate,” “believe,” “estimate,” “expect,” “may” and similar expressions, as they relate to our company and management, are intended to identify forward-looking statements. The actual results of future events described in these forward-looking statements could differ materially from the results described in the forward-looking statements due to risks and uncertainties including, but are not limited to, those summarized below:
    decline in the demand for seismic data and our services;
 
    loss of significant customers;
 
    defaults by customers on amounts due us;
 
    risks associated with our manufacturing operations and
 
    foreign currency exchange risk
Other factors that could cause our actual results to differ from our projected results are described in (1) Part II, “Item 1A. Risk Factors” and elsewhere in this Form 10-Q, (2) our Annual Report on Form 10-K for the fiscal year ended January 31, 2008, (3) our reports and registration statements filed from time to time with the Securities and Exchange Commission (“SEC”) and (4) other announcements we make from time to time.
     Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
     Overview
     We operate in two segments, equipment leasing and equipment manufacturing. Our equipment leasing operations are conducted from our Huntsville, Texas headquarters and from our locations in Calgary, Canada; Brisbane, Australia; and Ufa, Russia. This includes the operations of our Mitcham Canada, Ltd. (“MCL”), Seismic Asia Pacific Pty. Ltd., (“SAP”) and Mitcham Seismic Eurasia LLC (“MSE”) subsidiaries. The equipment manufacturing segment is conducted by our Seamap subsidiaries and therefore is referred to as our Seamap segment. We acquired Seamap in July 2005. Seamap operates from its locations near Bristol, United Kingdom and in Singapore.
     Management believes that the performance of our Equipment Leasing segment is indicated by revenues from equipment leasing and by the level of our investment in lease pool equipment. Management further believes that the performance of our Seamap segment is indicated by revenues from equipment sales and by gross profit from those sales. Management monitors EBITDA and Adjusted EBITDA, both as defined in the following table, as key indicators of our overall performance.

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     The following table presents certain operating information by operating segment.
                                 
    For the Three Months Ended     For the Six Months Ended  
    July 31,     July 31,  
    2008     2007     2008     2007  
    (in thousands)     (in thousands)  
Revenues:
                               
Equipment Leasing
  $ 14,210     $ 9,794     $ 27,462     $ 22,750  
Seamap
    3,302       5,754       8,607       16,118  
Inter-segment sales
    (17 )     (149 )     (40 )     (455 )
 
                       
Total revenues
    17,495       15,399       36,029       38,413  
 
                       
Cost of sales:
                               
Equipment Leasing
    8,483       5,107       12,971       9,953  
Seamap
    1,972       3,864       4,441       12,099  
Inter-segment costs
    (74 )     (145 )     (125 )     (316 )
 
                       
Total cost of sales
    10,381       8,826       17,287       21,736  
 
                       
Gross profit
    7,114       6,573       18,742       16,677  
Operating expenses:
                               
General and administrative
    4,430       3,620       9,305       7,640  
Depreciation and amortization
    364       366       759       721  
 
                       
Total operating expenses
    4,794       3,986       10,064       8,361  
 
                       
Operating income
  $ 2,320     $ 2,587     $ 8,678     $ 8,316  
 
                       
 
                               
EBITDA (1)
  $ 6,400     $ 5,395     $ 16,839     $ 13,885  
Adjusted EBITDA (1)
  $ 6,927     $ 5,824     $ 18,002     $ 14,870  
 
                               
Reconciliation of Net Income to EBITDA and Adjusted EBITDA
                               
Net income
  $ 1,625     $ 1,721     $ 5,903     $ 5,661  
Interest income, net
    (223 )     (64 )     (373 )     (142 )
Depreciation and amortization
    4,077       2,808       8,153       5,567  
Provision for income taxes
    921       930       3,156       2,799  
 
                       
EBITDA (1)
    6,400       5,395       16,839       13,885  
Stock-based compensation
    527       429       1,163       985  
 
                       
Adjusted EBITDA (1)
  $ 6,927     $ 5,824     $ 18,002     $ 14,870  
 
                       
 
(1)   EBITDA is defined as earnings (loss) before (a) interest income, net of interest expense, (b) provision for (or benefit from) income taxes and (c) depreciation and amortization. Adjusted EBITDA excludes stock-based compensation. We consider EBITDA and Adjusted EBITDA to be important indicators for the performance of our business, but not measures of performance calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We have included these non-GAAP financial measures because they provide management with important information for assessing our performance and as indicators of our ability to make capital expenditures and finance working capital requirements. EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP and should not be considered in isolation or as alternatives to cash flow from operating activities or as alternatives to net income as indicators of operating performance or any other measures of performance derived in accordance with GAAP. Other companies in our industry may calculate EBITDA or Adjusted EBITDA differently than we do, and EBITDA and Adjusted EBITDA may not be comparable with similarly titled measures reported by other companies.
     In our Equipment Leasing segment, we lease 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. The majority of all active leases at July 31, 2008 were for a term of less than one year. Seismic equipment held for lease is carried at cost, net of accumulated depreciation. We acquire some marine lease pool equipment from our Seamap segment. These amounts are reflected in the accompanying condensed consolidated financial statements at the cost to our Seamap segment. From time to time, we sell lease pool equipment to our customers. These sales are usually transacted when we have equipment for which we do not have near term needs in our leasing business and if the proceeds from the sale exceed the estimated present value of future lease income from that equipment. We also occasionally sell new seismic equipment that we acquire from other companies and sometimes provide financing on those sales. In

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addition to conducting seismic equipment leasing operations, 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.
     Our Seamap segment designs, manufactures and sells a variety of products used primarily in marine seismic applications. Seamap’s primary products include (1) the GunLink seismic source acquisition and control systems, which provide marine operators more precise control of their exploration systems, and (2) the BuoyLink GPS tracking system used to provide precise positioning of seismic sources and streamers (marine recording channels that are towed behind a vessel).
     Seismic equipment leasing is susceptible to weather patterns in certain geographic regions. In Canada and Russia, a significant percentage of the seismic survey activity occurs in winter months, from December through March or 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 unstable terrain. In other areas of the world, such as Southeast Asia and the Pacific Rim, periods of heavy rain, known as monsoons, can impair seismic operations. We are able, in many cases, to transfer our equipment from one region to another in order to deal with seasonal demand and to increase our equipment utilization.
     The oil and gas exploration industry has enjoyed generally sustained growth in recent periods, fueled primarily by historically high commodity prices for oil and natural gas. We, along with much of the seismic industry, have benefited from this growth. 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. Land 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, known as “channel count”. 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. Nonetheless, we believe the seismic industry is currently enjoying a period of stable and sustained growth. This is evidenced by increased demand for our equipment, improving financial results as reported by many seismic contractors and announcements by some seismic contractors of increased crew count and channel count. We believe that this increase is being driven by relatively high world oil prices and, to a lesser degree, 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 to a large degree.
     The market for products sold by Seamap and the demand for the leasing of marine seismic equipment is dependent upon activity within the offshore, or marine, seismic industry, including the re-fitting of existing seismic vessels and the equipping of new vessels.
     Current prices of oil and natural gas have resulted in increased activity in the oil and gas industry and, in turn, resulted 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 believe that a depressed oil and gas industry results in lower demand for and, therefore, lower revenues from, the leasing of our equipment. We do not quantitatively calculate utilization rates for our equipment lease pool. However, we do subjectively monitor factors that we believe reflect trends in utilization. We have relatively fixed costs within certain revenue ranges and, as a result, our earnings are particularly sensitive to changes in utilization rates and demand for our lease equipment.
     We have responded to the increased demand for our services and products by adding new equipment to our lease pool and by introducing new products from our Seamap segment. During the six months ended July 31, 2008, we added approximately $19.8 million of equipment to our lease pool. During the fiscal years ended January 31, 2008 and 2007, we added approximately $26.0 million and $25.5 million, respectively, of equipment to our lease pool. We have also attempted to improve the utilization of our lease pool by establishing test facilities in Russia and Singapore. Should the present growth for the seismic industry continue, we expect to add new equipment to our lease pool. We may also establish operating facilities in new geographic areas, but we have no plans to do so at this time.
     We also may seek to expand our lease pool by acquiring different types of equipment or equipment that can be used in different types of seismic applications. We have done this in the past by adding marine seismic equipment to our lease pool. During the six months ended July 31, 2008, we added equipment used in vertical seismic profiling (“VSP”) applications to our lease pool. VSP is a technology in which seismic recording devices are introduced into a well bore, such as an oil or gas well. VSP technology has a wide variety of applications, some of which are not related to oil and gas exploration. These applications include 3D surface seismic surveys, well and

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reservoir monitoring, analysis of fluid treatments of oil and gas wells and underground storage monitoring. Of the approximately $19.8 million of lease pool equipment added in the six months ended July 31, 2008, approximately $2.6 million related to VSP equipment.
     Our revenues and results of operations during the six months ended July 31, 2008 have not been materially impacted by inflation or changing prices, except as described above.
     A significant portion of our revenues are generated from sources outside the United States. For the six months ended July 31, 2008, revenues from international customers totaled approximately $28.2 million. This amount represents 78% of consolidated revenues for that period. The majority of our transactions with international customers are denominated in United States, Australian and Canadian dollars, Russian rubles and British pounds sterling.
     Results of Operations
     Revenues for the three and six months ended July 31, 2008 were approximately $17.5 million and $36.0 million, respectively, compared to approximately $15.4 million and $38.4 million, respectively in the three and six months ended July 31, 2007. The increase in revenues in the three months ended July 31, 2008 over the same period in the prior year is attributable to increased revenues in the Equipment Leasing segment and is despite a decrease in revenues from the Seamap segment during those periods. Revenues for the six-month period ended July 31, 2008 declined, despite an increase in revenues from the Equipment Leasing segment. As more fully discussed below, in the first quarter of fiscal 2008 our Seamap segment had unusually high sales, which distorts the comparison between the two six-month periods. For the three months ended July 31, 2008, we recorded operating income of approximately $2.3 million, compared to approximately $2.6 million for the same fiscal quarter a year ago, a decrease of approximately 12%. The decrease was due primarily to lower gross profits from the Seamap segment and higher general and administrative expenses. For the six months ended July 31, 2008, operating profit amounted to approximately $8.7 million as compared to approximately $8.3 million for the six months ended July 31, 2007. The increase in operating income is primarily the result of improved margins from our Seamap segment and higher equipment leasing revenues. A more detailed explanation of the variations noted above follows.
     Revenues and Cost of Sales
          Equipment Leasing
     Revenue and cost of sales from our Equipment Leasing segment are as follows:
                                 
    Three Months Ended     Six Months Ended  
    July 31,     July 31,  
    2008     2007     2008     2007  
    ($ in thousands)     ($ in thousands)  
Revenue:
                               
Equipment leasing
  $ 7,500     $ 6,249     $ 19,873     $ 16,330  
Lease pool equipment sales
    1,844       775       2,405       1,492  
New seismic equipment sales
    3,518       1,666       3,647       3,446  
SAP equipment sales
    1,348       1,104       1,537       1,482  
 
                       
 
    14,210     $ 9,794       27,462     $ 22,750  
 
                       
Cost of sales:
                               
Lease pool depreciation
    3,712       2,480       7,392       4,913  
Direct costs-equipment leasing
    343       401       785       821  
Cost of lease pool equipment sales
    1,107       201       1,232       479  
Cost of new seismic equipment sales
    2,398       1,305       2,485       2,820  
Cost of SAP equipment sales
    923       720       1,077       920  
 
                       
 
    8,483       5,107       12,971       9,953  
 
                       
Gross profit
  $ 5,727     $ 4,687     $ 14,491     $ 12,797  
 
                       
Gross profit %
    40 %     48 %     53 %     56 %
 
                       
     Equipment leasing revenues increased approximately 20% in the second quarter of fiscal 2009 over the second quarter of fiscal 2008 and increased approximately 22% in the first six months of fiscal 2009 over the first six months of fiscal 2008. These increases resulted from higher demand for seismic equipment, expansion into new geographic markets and expansion of our lease pool. During the fiscal year ended January 31, 2008, we added approximately $26.0 million of new lease pool equipment, including approximately $13.0 million in the fourth

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quarter of that year. This increase in our lease pool contributed significantly to the increase in equipment leasing revenues in the first six months of fiscal 2009 as compared to the same period of fiscal 2008. In the first six months of fiscal 2009, we added approximately $19.8 million of new lease pool equipment; however, approximately $13.0 million of these additions were made late in the second quarter of fiscal 2009 and did not contribute materially to our leasing revenues. The demand for seismic equipment is primarily driven by the global oil and gas exploration activity discussed above.
     We have recently added VSP equipment to our lease pool and have begun to lease this equipment. The amount of revenue from this equipment was not material, amounting to approximately $0.4 million in the first six months of fiscal 2009, but could have a more significant impact in future periods.
     From time to time, we sell equipment from our lease pool based on specific customer demand and as opportunities present themselves in order to redeploy our capital in other lease pool assets. Accordingly, these transactions are difficult to predict. The gross profit from the sales of lease pool equipment amounted to approximately $0.7 million and $0.6 million for the quarters ended July 31, 2008 and 2007, respectively. For the first six months of fiscal 2009 and 2008, the gross profit from lease pool equipment sales amounted to approximately $1.2 million and $1.0 million, respectively. Often, the equipment that is sold from our lease pool has been held by us, and therefore depreciated, for some period of time. Accordingly, the equipment sold may have a relatively low net book value at the time of the sale, resulting in a relatively high gross margin from the transaction. The amount of the margin on a particular transaction varies greatly based primarily upon the age of the equipment.
     Periodically, we will sell new seismic equipment that we acquire from others. On occasion, these sales may be structured with a significant down payment and the balance financed over a period of time at a market rate of interest. These sales are also difficult to predict and do not follow any seasonal patterns. During the three months ended July 31, 2008, the gross profit from these sales amounted to approximately $1.1 million, while in the three months ended July 31, 2007, the gross profit from these transactions amounted to approximately $0.4 million. For the six months ended July 31, 2008, the gross profit from the sale of new seismic equipment amounted to approximately $1.2 million, as compared to approximately $0.6 million in the first six months of fiscal 2008.
     SAP regularly sells new hydrographic and oceanographic equipment to customers in Australia and throughout the Pacific Rim. The gross profit from the sale of new seismic equipment and hydrographic and oceanographic equipment was approximately $0.4 million in both the fiscal quarter ended July 31, 2008 and the fiscal quarter ended July 31, 2007. For the first six months of fiscal 2009, the gross profit from these sales amounted to approximately $0.5 million versus approximately $0.6 million in the first six months of fiscal 2008. In May 2008, SAP entered into a contract with the Royal Australian Navy to provide certain equipment to the Republic of the Philippines. This contract did not contribute any revenues in the quarter ended July 31, 2008; however, we expect the contract to generate approximately $4.5 million of revenues over the next nine to twelve months, with gross profit margins generally consistent with SAP’s other equipment sales.
     Overall, the gross profit from our Equipment Leasing segment increased by approximately 22% to approximately $5.7 million in the second quarter of fiscal 2009 as compared to approximately $4.7 million in the second quarter of fiscal 2008. For the first six months of fiscal 2009 the gross profit from our Equipment Leasing segment amounted to approximately $14.5 million as compared to approximately $12.8 million in the first six months of fiscal 2008, an increase of approximately 13%. Despite higher depreciation charges within this segment, the increase in leasing revenues and increased gross profit from equipment sales has resulted in an overall increase in gross profit in he first six months of fiscal 2009.
     Depreciation expense related to lease pool equipment for the quarter and six months ended July 31, 2008 amounted to approximately $3.7 million and $7.4 million, respectively. These amounts compare to approximately $2.5 million and $4.9 million for the quarter and six months ended July 31, 2007, respectively. The increase in depreciation expense was primarily due to our acquisition of additional lease pool equipment during fiscal 2008 and 2009. Approximately $13.0 million of additions to our lease pool were made late in the second quarter of fiscal 2009 and therefore did not contribute materially to the increase in depreciation.
     Revenues and lease pool depreciation costs do not necessarily directly correlate. Over the long-term, depreciation costs are impacted by increases in equipment purchases to meet growing demand for our leased equipment. We have been able to purchase equipment at discounts through volume purchase arrangements. A lower purchase price results in lower depreciation costs. Although some of the equipment in our lease pool has reached the end of its depreciable life, given the increased demand within the seismic industry, the equipment continues to be in service and continues to generate revenue. The depreciable life of equipment in our industry is determined more by technical obsolescence than by usage or wear and tear. Some of our equipment is still capable of functioning appropriately, although fully depreciated. The current high demand for equipment has allowed us to

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lease older equipment that in periods of lower demand would be idle. Thus, we are able to generate leasing revenues from this older equipment with little or no associated depreciation costs.
     Direct costs related to seismic leasing did not vary materially between the three and six-month periods ended July 31, 2008 and the same periods in the prior fiscal year. Direct costs typically fluctuate with leasing revenues, as the three main components of direct costs are freight, repairs and sublease expense; however, costs as a percentage of revenues decreased in fiscal 2009 as compared to the same periods in the prior fiscal year. This decline was primarily due to greater reimbursement of costs from our customers, lower costs to lease certain equipment from third parties and the effect of slightly longer lease terms on average. Longer lease terms have the effect of increasing equipment utilization without increasing direct costs.
          Seamap
     Revenues and cost of sales for our Seamap segment were as follows:
                                 
    Three Months Ended July 31,     Six Months Ended July 31,  
    2008     2007     2008     2007  
    ($ in thousands)     ($ in thousands)  
Equipment sales
  $ 3,302     $ 5,754     $ 8,607     $ 16,118  
Cost of equipment sales
    1,972       3,864       4,441       12,099  
 
                       
Gross profit
  $ 1,330     $ 1,890     $ 4,166       4,019  
 
                       
Gross profit %
    40 %     33 %     48 %     25 %
     The sale of Seamap products, while not generally impacted by seasonal factors, can vary significantly from quarter to quarter due to customer delivery requirements. In the three months ended July 31, 2008 sales of Seamap equipment declined from the fiscal quarter ended July 31, 2007 as we shipped fewer orders due to an expected temporary decline in deliveries during this period. For the six months ended July 31, 2007, sales of Seamap equipment were unusually high, and therefore not directly comparable to other periods. Included in sales for that period was approximately $3.5 million related to ancillary equipment that we do not normally sell and which contributed a relatively small gross margin. Also during this period, we recorded approximately $2.4 million of sales related to orders that had originally been intended to ship in the fourth quarter of fiscal 2007, but which were delayed due to production issues and customers’ requests. Absent these unusual items, Seamap equipment sales in the first six months of fiscal 2008 amounted to approximately $10.2 million. This compares with sales of approximately $8.6 million in the first six months of fiscal 2009. Changes in product prices did not contribute materially to the difference in sales between the fiscal 2009 and fiscal 2008 periods.
     The gross profit from the sale of Seamap equipment amounted to approximately $1.3 million, or 40% of Seamap revenues for the three months ended July 31, 2008, as compared to approximately $1.9 million, or 33% of Seamap revenues for the three months ended July 31, 2007. For the six months ended July 31, 2008 gross profit from the sale of Seamap equipment amounted to approximately $4.2 million, or 48% of Seamap revenues, as compared to approximately $4.0 million, or 25% of Seamap revenues for the six months ended July 31, 2007. Gross profit as a percentage of sales for the six months ended July 31, 2007 was negatively impacted by certain design issues related to the GunLink 4000 product and by the effect of the sale of low-margin ancillary products discussed above. The gross margins for Seamap have increased in recent periods due to the resolution of the GunLink 4000 design issues and improved margins related to the GunLink 2000 and GunLink 4000 products. The GunLink 2000 and 4000 margins have improved primarily due to increased production efficiencies. These production efficiencies have resulted from the normal maturation of the production process for new products, such as the GunLink 4000, and from moving most production activities to Singapore from the United Kingdom to take advantage of lower cost structures. Also, in December 2007, we acquired intellectual property related to the software utilized in the GunLink products. Prior to this acquisition, with the sale of each GunLink system we were required to pay a royalty to the party that had developed the software. Had we owned the software during the first six months of fiscal 2008, we estimate our gross profit from Seamap equipment sales would have been approximately $1.3 million higher in that period.

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     Operating Expenses
     General and administrative expenses for the quarter ended July 31, 2008 were approximately $4.4 million, compared to approximately $3.6 million for the quarter ended July 31, 2007. For the first six months of fiscal 2009 general and administrative expenses amounted to approximately $9.3 million as compared to approximately $7.6 million in the first six months of fiscal 2008. The increases in the fiscal 2009 periods resulted from generally higher personnel costs and increased stock-based compensation expense.
     Interest and Other Income, net
     Net interest and other income for the second quarter and first six months of fiscal 2009 amounted to approximately $0.2 million and $0.4 million, respectively, compared to approximately $0.1 million in each of the comparable periods of fiscal 2008. The increase is due to income from finance charges related to the sale of new seismic equipment.
     Provision for Income Taxes
     Our provision for income taxes for the six months of fiscal 2009 was approximately $3.2 million, an effective tax rate of approximately 35%, consisting of current taxes of approximately $2.7 million and deferred taxes of approximately $0.5 million. For the first six months of fiscal 2008, our provision for income taxes amounted to approximately $2.8 million, an effective tax rate of approximately 33%, consisting of current taxes of $1.0 million and deferred taxes of $1.8 million. The increase in effective tax rate results primarily from the effect of a decrease in Canadian tax rates on our deferred tax assets.
Liquidity and Capital Resources
     As of July 31, 2008, we had working capital of approximately $12.1 million and cash and cash equivalents of approximately $6.2 million as compared to working capital of approximately $14.0 million and cash and cash equivalents of approximately $13.9 million at January 31, 2008. Our working capital decreased during the six months ended July 31, 2008 primarily due to expenditures for new lease pool equipment.
     Net cash flows provided by operating activities was approximately $6.4 million in the first six months of fiscal 2009 as compared to cash flows provided by operating activities of approximately $17.5 million in the same six months in fiscal 2008. This decrease, despite the increase in net income in the fiscal 2009 period, resulted primarily from a decrease in accounts payable, accrued expenses, other current liabilities and deferred revenue.
     Net cash flows used in investing activities for the six months ended July 31, 2008 includes purchases of seismic equipment held for lease totaling approximately $15.4 million. This amount reflects approximately $8.6 million attributable to equipment purchased in fiscal 2008, but not paid for until the current year. Approximately $13.0 million of current year additions of equipment, for which payment had not been made as of July 31, 2008, are not included in the purchases of seismic equipment held for lease in the statements of cash flows. These amounts are reflected in accounts payable and accrued liabilities as of July 31, 2008. Accordingly, additions to our lease pool amounted to approximately $19.8 million in the first six months of fiscal 2009, as compared to approximately $4.6 million in the first six months of fiscal 2008. Additions to our lease pool in the first six months of fiscal 2009 included 1,000 stations (3,000 channels) of Sercel 428 DSU3 land recording equipment, VSP recording systems, Sercel 408 land recording equipment, Sercel 408 ULS submersible recording systems, geophones, as well as other land and marine seismic equipment.
     In the first six months of fiscal 2009, we received approximately $2.4 million in cash from the sale of lease pool equipment compared to approximately $1.5 million from the first six months of fiscal 2008. The amount we receive from the sale of lease pool equipment varies significantly based on market conditions and the demand for equipment. We generally do not seek to sell our lease pool equipment, but do so from time to time. In particular we will sell lease pool equipment in response to specific demand from customers if the selling price exceeds the estimated present value of projected future leasing revenue from that equipment.
     During the six months ended July 31, 2008, we incurred net borrowings of $2.0 million under our revolving credit agreement. Our credit agreement provides for borrowings of up to $12.5 million on a revolving basis through February 1, 2009. Amounts available for borrowing are determined by a borrowing base. The borrowing base is computed based upon eligible accounts receivable and eligible lease pool assets. Based upon the latest calculation of the borrowing base we believe that the entire $12.5 million of the facility is available to us. The revolving credit facility is secured by essentially all of our domestic assets. Interest is payable monthly at the prime rate. The credit agreement contains certain financial covenants that require, among other things, us to maintain a debt to shareholders’ equity ratio of no more than 1.3 to 1.0, maintain a current assets to current

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liabilities ratio of not less than 1.25 to 1.0. The credit agreement also provides that we may not incur or maintain indebtedness in excess of $1.0 million without the prior written consent of the Bank, except for borrowings related to the credit agreement. As of September 5, 2008 we had $4.5 million outstanding under this revolving credit agreement. We are negotiating an extension and expansion of this credit facility and expect to complete the transaction prior to the maturity of the existing agreement, although there is no assurance that we will be able to do so.
     During the six months ended July 31, 2008, we repaid the remaining $1.5 million of outstanding principle under the notes issued in connection with the acquisition of Seamap, utilizing net cash provided by operations. In addition, during this same period we invested approximately $1.4 million in short-term deposit accounts. These amounts were pledged to secure performance obligations under a contract entered into by SAP.
     As discussed above, we have purchased significant amounts of additional lease pool equipment in recent periods. We expect to purchase further amounts if we believe customer demand for equipment warrants further purchases; however, the amount and timing of any additional purchases are uncertain.
     We believe that the obligations discussed above, as well as our other liquidity needs, can be met from cash flows provided by operations and from amounts available under our revolving credit facility discussed above. Should we make additional substantial purchases of lease pool equipment or should we purchase other businesses, we may seek other sources of debt or equity financing.
     As of July 31, 2008, we had deposits in foreign banks consisting of both U.S. dollar and foreign currency deposits equal to approximately $6.0 million. These funds may generally be transferred to our accounts in the United States without restriction. However, the transfer of these funds may result in withholding taxes payable to foreign taxing authorities. Any such transfer taxes generally may be credited against our federal income tax obligations in the United States. Additionally, the transfer of funds from our foreign subsidiaries to the United States may result in currently taxable income in the United States.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
     Market Risk
     We are exposed to market risk, which is the potential loss arising from adverse changes in market prices and rates. We have not entered, or intend to enter, into derivative financial instruments for hedging or speculative purposes.
     Foreign Currency Risk
     We operate in a number of foreign locations, which give rise to risk from changes in foreign exchange rates. To the extent possible, we attempt to denominate our transactions in foreign locations in U.S. dollars. For those cases in which transactions are not denominated in U.S. dollars, we are exposed to risk from changes in exchange rates to the extent that non-U.S. dollar revenues exceed non-U.S. dollar expenses related to those operations. Our non-U.S. dollar transactions are denominated primarily in British pounds sterling, Canadian dollars, Australian dollars, Singapore dollars and the Russian ruble. As a result of these transactions, we generally hold cash balances that are denominated in these foreign currencies. At July 31, 2008, our consolidated cash and cash equivalents included foreign currency denominated amounts equivalent to approximately $4.0 million in U.S. dollars. A 10% increase in the U.S. dollar as compared to each of these currencies would result in a loss of approximately $0.4 million in the U.S. dollar value of these deposits, while a 10% decrease would result in an equal amount of gain. We do not currently hold or issue foreign exchange contracts or other derivative instruments to hedge these exposures.
     Some of our foreign operations are conducted through wholly owned foreign subsidiaries that have functional currencies other than the U.S. dollar. We currently have subsidiaries whose functional currencies are the Canadian dollar, British pound sterling, Australian dollar, Russian ruble and the Singapore dollar. Assets and liabilities from these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each balance sheet date. The resulting translation gains or losses are reflected as Accumulated Other Comprehensive Income in the Shareholders’ Equity section of our Consolidated Balance Sheets. Approximately 47% of our net assets are impacted by changes in foreign currencies in relation to the U.S. dollar.

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Item 4. Controls and Procedures
     Evaluation of Disclosure Controls and Procedures
     As required by Rule 13a-15(b) under the Exchange Act, 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 Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our 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 disclosure controls and procedures were effective as of July 31, 2008 at the reasonable assurance level.
     Changes in Internal Control over Financial Reporting
     There was no change in our system of internal control over financial reporting during the quarter ended July 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings
     From time to time, we are a party to legal proceedings arising in the ordinary course of business. We are not currently a party to any litigation that we believe could have a material adverse effect on our results of operations or financial condition.
Item 1A. Risk Factors
     The Risk Factors included in our Annual Report on Form 10-K for the year ended January 31, 2008 have not materially changed. In addition to the other information set forth in this form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, 2008, which could materially affect our business, financial condition or future results. The risks described in this Form 10-Q and in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     (a) Not applicable.
     (b) Not applicable.
     (c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers:
                                 
    (a)   (b)   (c)   (d)
                    Total number of   Maximum
                    shares   number of
                    purchased as   shares that may
    Total   Average   part of publicly   yet be
    number of   price   announced   purchased
    shares   paid per   plans or   under the plans
Period   purchased   share   programs   or programs
May 1-31, 2008
                       
June 1-30, 2008
                       
July 1-31, 2008
    352     $ 16.23              
 
                               
Total
    352     $ 16.23              
 
                               
          Note: All shares were surrendered in payment of taxes due upon the vesting of restricted stock.
Item 3. Defaults Upon Senior Securities
     Not applicable.

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Item 4. Submission of Matters to a Vote of Security Holders
     We held our Annual Meeting of Shareholders on July 24, 2008. Shareholders of record as of the close of business on May 27, 2008 were entitled to vote.
     Shareholders elected each of the six directors nominated for the board of directors. The votes were as follows:
                 
Name of Nominee   For   Withheld
Billy F. Mitcham, Jr.
    8,388,150       317,545  
Peter H. Blum
    8,397,153       308,542  
Robert P. Capps
    7,888,729       816,966  
R. Dean Lewis
    8,352,468       353,227  
John F. Schwalbe
    8,352,668       353,027  
Robert J. Albers
    8,414,309       291,386  
          The shareholders ratified the appointment of Hein & Associates LLP as our independent registered public accounting firm for the fiscal year ending January 31, 2009. The votes were as follows:
         
For   Against   Abstaining
8,452,143
  66,510   8,623
Item 5. Other Information
     Not applicable.
Item 6. Exhibits
     Exhibits
     The exhibits marked with the cross symbol (†) are filed or furnished (in the case of Exhibit 32.1) with this Form 10-Q.
                     
            SEC File or    
Exhibit           Registration   Exhibit
Number   Document Description   Report or Registration Statement   Number   Reference
 
                   
3.1
  Amended and Restated Articles of Incorporation of Mitcham Industries, Inc.   Incorporated by reference to Mitcham Industries, Inc.’s Registration Statement on Form S-8, filed with the SEC on August 9, 2001.   333-67208     3.1  
 
                   
3.2
  Second Amended and Restated Bylaws of Mitcham Industries, Inc.   Incorporated by reference to Mitcham Industries, Inc.’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004, filed with the SEC on May 28, 2004.   000-25142     3.2  
 
                   
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 Robert P. Capps, 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, and Robert P. Capps, Chief Financial Officer, under Section 906 of the Sarbanes Oxley Act of 2002, 18 U.S.C. § 1350                

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  MITCHAM INDUSTRIES, INC.
 
 
Date: September 9, 2008  /s/ Robert P. Capps    
  Robert P. Capps   
  Executive Vice President-Finance and Chief Financial Officer
(Duly Authorized Officer and Chief Accounting Officer) 
 
 

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