##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED October 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.
  Texas
(State or other jurisdiction of 
incorporation or organization)
    
    76-0210849
(I.R.S. Employer
Identification No.)
 8141 SH 75 South
P.O. Box 1175
Huntsville, Texas 77342
 (936) 291-2277
  þ o
  o o þ
  o þ




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##### 



MITCHAM INDUSTRIES, INC.
INDEX
 PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of October 31, 2006
and January 31, 2006
    
    
    3Condensed Consolidated Statements of Operations for the three
and nine months ended October 31, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine
months ended October 31, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    24Signatures
    
    
    26Certification of CEO Pursuant to Rule 13a-14(a)Certification of EVP & CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Section 1350Certification of EVP & CFO Pursuant to Section 1350




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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)
 October 31,
    
    
    January 31,2006
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,185
    
    
    $
    16,438Short-term investments
    
    
    
    
    
    
    2,550Trade accounts receivable, net
    
    
    9,900
    
    
    
    5,793Current portion of notes receivable, net
    
    
    2,024
    
    
    
    3,088Inventories, net
    
    
    6,407
    
    
    
    1,155Prepaid expenses and other current assets
    
    
    1,815
    
    
    
    717Current portion of deferred tax asset
    
    
    2,094
    
    
    
    Total current assets
    
    
    40,425
    
    
    
    29,741Seismic equipment lease pool and property and equipment, net
    
    
    23,965
    
    
    
    19,924Intangible assets, net
    
    
    2,241
    
    
    
    2,584Goodwill
    
    
    3,358
    
    
    
    2,358Deferred tax asset, net
    
    
    2,919
    
    
    
    3,000Long-term portion of notes receivable and other assets
    
    
    1,260
    
    
    
    13Total assets
    
    $
    74,168
    
    
    $
    57,620LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,615
    
    
    $
    4,436Accrued expenses and other current liabilities
    
    
    3,668
    
    
    
    2,066Current portion of long-term debt
    
    
    1,500
    
    
    
    Deferred revenue
    
    
    1,166
    
    
    
    381Income taxes payable
    
    
    518
    
    
    
    286Total current liabilities
    
    
    13,467
    
    
    
    7,169Long-term debt, net of current maturities
    
    
    1,500
    
    
    
    3,000Total liabilities
    
    
    14,967
    
    
    
    10,169Shareholders equity:Preferred stock, $1.00 par value; 1,000 shares authorized;
none issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 20,000 shares authorized;
10,538 and 10,360 shares issued, respectively
    
    
    106
    
    
    
    104Additional paid-in capital
    
    
    66,966
    
    
    
    64,396Treasury stock, at cost (919 and 915 shares)
    
    
    (4,781
    )
    
    
    (4,686
    )Accumulated deficit
    
    
    (6,872
    )
    
    
    (15,427
    )Accumulated other comprehensive income
    
    
    3,782
    
    
    
    3,064Total shareholders equity
    
    
    59,201
    
    
    
    47,451Total liabilities and shareholders equity
    
    $
    74,168
    
    
    $
    57,620
 The accompanying notes are an integral part of these condensed consolidated financial statements.
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MITCHAM INDUSTRIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 (Unaudited)
 For the Three Months Ended
    
    
    For the Nine Months EndedOctober 31,
    
    
    October 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Equipment leasing
    
    $
    6,161
    
    
    $
    6,676
    
    
    $
    18,141
    
    
    $
    17,668Lease pool equipment sales
    
    
    842
    
    
    
    673
    
    
    
    3,991
    
    
    
    2,342Other equipment sales
    
    
    5,738
    
    
    
    2,466
    
    
    
    15,683
    
    
    
    4,445Total revenues
    
    
    12,741
    
    
    
    9,815
    
    
    
    37,815
    
    
    
    24,455Direct costs:Equipment leasing
    
    
    433
    
    
    
    968
    
    
    
    1,809
    
    
    
    2,174Lease pool depreciation
    
    
    1,956
    
    
    
    2,120
    
    
    
    5,507
    
    
    
    6,299Cost of lease pool equipment sales
    
    
    236
    
    
    
    47
    
    
    
    1,876
    
    
    
    510Cost of other equipment sales
    
    
    4,206
    
    
    
    1,261
    
    
    
    10,284
    
    
    
    2,562Total direct costs
    
    
    6,831
    
    
    
    4,396
    
    
    
    19,476
    
    
    
    11,545Gross profit
    
    
    5,910
    
    
    
    5,419
    
    
    
    18,339
    
    
    
    12,910Operating costs:General and administrative
    
    
    3,330
    
    
    
    2,463
    
    
    
    10,693
    
    
    
    6,649Depreciation and amortization
    
    
    337
    
    
    
    134
    
    
    
    944
    
    
    
    286Total operating costs
    
    
    3,667
    
    
    
    2,597
    
    
    
    11,637
    
    
    
    6,935Operating income
    
    
    2,243
    
    
    
    2,822
    
    
    
    6,702
    
    
    
    5,975Interest and other income, net
    
    
    296
    
    
    
    85
    
    
    
    664
    
    
    
    281Income before income taxes
    
    
    2,539
    
    
    
    2,907
    
    
    
    7,366
    
    
    
    6,256Benefit from (provision for) income taxes
    
    
    1,324
    
    
    
    (57
    )
    
    
    1,189
    
    
    
    (25
    )Net income
    
    $
    3,863
    
    
    $
    2,850
    
    
    $
    8,555
    
    
    $
    6,231Net income per common share:Basic
    
    $
    0.40
    
    
    $
    0.31
    
    
    $
    0.89
    
    
    $
    0.69Diluted
    
    $
    0.38
    
    
    $
    0.29
    
    
    $
    0.84
    
    
    $
    0.64Shares used in computing net
income per common share:Basic
    
    
    9,609
    
    
    
    9,152
    
    
    
    9,584
    
    
    
    9,061Diluted
    
    
    10,069
    
    
    
    9,902
    
    
    
    10,157
    
    
    
    9,745
 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 Nine Months EndedOctober 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    8,555
    
    
    $
    6,231Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    6,451
    
    
    
    6,585Stock-based compensation
    
    
    1,198
    
    
    
    82Provision for doubtful accounts, net of charge offs
    
    
    
    
    
    
    162Gross profit from sale of lease pool equipment
    
    
    (2,115
    )
    
    
    (1,806
    )Excess tax benefit from exercise of non-qualified stock options
    
    
    (497
    )
    
    
    Deferred tax benefit
    
    
    (2,009
    )
    
    
    Changes in:Trade accounts receivable
    
    
    (1,622
    )
    
    
    (58
    )Notes receivable
    
    
    (3,259
    )
    
    
    Inventories
    
    
    (4,725
    )
    
    
    (792
    )Income taxes payable
    
    
    730
    
    
    
    (133
    )Accounts payable, accrued expenses, other current liabilities and
deferred revenue
    
    
    4,561
    
    
    
    (4,503
    )Current assets of discontinued operations
    
    
    354
    
    
    
    5Prepaid expenses and other current assets
    
    
    (1,099
    )
    
    
    322Net cash provided by operating activities
    
    
    6,523
    
    
    
    6,095Cash flows from investing activities:Purchases of seismic equipment held for lease
    
    
    (10,177
    )
    
    
    (3,655
    )Maturities (purchases) of short-term investments
    
    
    2,550
    
    
    
    (1,000
    )Purchases of property and equipment
    
    
    (1,585
    )
    
    
    (374
    )Acquisition of subsidiary, net of cash acquired
    
    
    (1,000
    )
    
    
    (2,529
    )Sale of used lease pool equipment
    
    
    3,991
    
    
    
    2,341Long-term assets of discontinued operations
    
    
    
    
    
    
    216Net cash used in investing activities
    
    
    (6,221
    )
    
    
    (5,001
    )Cash flows from financing activities:Payments on borrowings
    
    
    
    
    
    
    (918
    )Proceeds from issuance of common stock upon exercise of stock options
    
    
    783
    
    
    
    882Excess tax benefits from exercise of non-qualified stock options
    
    
    497
    
    
    
    Net cash provided by (used in) financing activities
    
    
    1,280
    
    
    
    (36
    )Effect of changes in foreign exchange rates on cash and cash equivalents
    
    
    165
    
    
    
    Net increase in cash and cash equivalents
    
    
    1,747
    
    
    
    1,058Cash and cash equivalents, beginning of period
    
    
    16,438
    
    
    
    13,138Cash and cash equivalents, end of period
    
    $
    18,185
    
    
    $
    14,196Supplemental cash flow information:Interest paid
    
    $
    154
    
    
    $
    70Income taxes paid
    
    $
    139
    
    
    
    Non-cash transactionsNote payable issued during acquisition
    
    
    
    
    
    $
    3,000
 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
 (unaudited)
 1.
    
    Basis of PresentationThe condensed consolidated financial statements of Mitcham Industries, Inc. (Mitcham or
the Company) have been prepared by the Company, without audit, 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 of America have been condensed
or omitted pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Companys Annual Report on Form 10-K for
the year ended January 31, 2006. In the opinion of the Company, all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the financial position as
of October 31, 2006; the results of operations for the three and nine months ended October
31, 2006 and 2005; and the cash flows for the nine months ended October 31, 2006 and 2005,
have been included. The foregoing interim results are not necessarily indicative of the
results of the operations to be expected for the full fiscal year ending January 31, 2007.Certain fiscal 2006 amounts have been reclassified to conform to the fiscal 2007
presentation. Such reclassifications had no effect on net income.2.
    
    OrganizationMitcham 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, primarily in North
and South America, Russia, CIS and Eurasia. 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 Huntsville, Texas, Singapore and the United Kingdom. All intercompany
transactions and balances have been eliminated in consolidation.3.
    
    InventoriesInventories are stated at the lower of cost (first-in, first-out) or market. Inventories
consist of the following:
 October 31,
    
    
    January 31,2006
    
    
    2006(in thousands)Raw materials
    
    $
    3,353
    
    
    $
    542Finished goods
    
    
    2,368
    
    
    
    293Work in progress
    
    
    758
    
    
    
    3826,479
    
    
    
    1,217Less allowance for obsolescence
    
    
    (72
    )
    
    
    (62
    )Total inventories, net
    
    $
    6,407
    
    
    $
    1,155
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4.
    
    Balance Sheet Detail
 October 31,
    
    
    January 31,2006
    
    
    2006(in thousands)Accounts receivable, net:Accounts receivable
    
    $
    10,948
    
    
    $
    6,918Allowance for doubtful accounts
    
    
    (1,048
    )
    
    
    (1,125
    )$
    9,900
    
    
    $
    5,793Notes receivable, net:Notes receivable
    
    $
    3,290
    
    
    $
    3,136Allowance for doubtful accounts
    
    
    (12
    )
    
    
    (48
    )3,278
    
    
    
    3,088Less current portion of notes receivable
    
    
    (2,024
    )
    
    
    (3,088
    )Long-term portion of notes receivable
    
    $
    1,254
    
    
    $
    Seismic equipment lease pool and property
and equipment, net:Seismic equipment lease pool
    
    $
    79,126
    
    
    $
    75,692Land and buildings
    
    
    366
    
    
    
    366Furniture and fixtures
    
    
    4,073
    
    
    
    2,608Autos and trucks
    
    
    381
    
    
    
    35783,946
    
    
    
    79,023Accumulated depreciation and amortization
    
    
    (59,981
    )
    
    
    (59,099
    )$
    23,965
    
    
    $
    19,924Intangible assets, net:Covenant not to compete
    
    $
    1,000
    
    
    $
    1,000Proprietary rights
    
    
    1,850
    
    
    
    1,8502,850
    
    
    
    2,850Accumulated amortization
    
    
    (609
    )
    
    
    (266
    )$
    2,241
    
    
    $
    2,584
 5.
    
    DebtOn June 27, 2005, the Company obtained a $12.5 million revolving loan agreement and credit
line with First Victoria National Bank (the Bank). The facility has a two-year term and
bears interest at the prime rate. Borrowings under the facility are subject to a borrowing
base computed based upon the Companys existing seismic equipment lease pool, accounts
receivable and any new seismic equipment to be purchased with proceeds from the facility.
Management believes that the full amount of the facility was available as of October 31,
2006. The credit line is secured by essentially all of the Companys assets. 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 we 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 Banks prior written approval, except for indebtedness incurred as a
result of the Seamap acquisition and other specific exceptions. No amounts are currently
outstanding under this facility.In connection with the Seamap acquisition in July 2005, the Company issued $3.0 million in
promissory notes payable to Seamaps former shareholders. 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 was paid on the first anniversary of the notes in July 2006 in the amount
of $150,000. No further interest or principal payments are due until July 2007 when accrued
interest and 50%, or $1.5 million, of the principal amount of $3.0
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million is due. Accrued
interest on the unpaid principal and the remainder of the principal is due in July 2008. The
notes are secured by a pledge of Seamaps outstanding stock.6.
    
    Comprehensive IncomeComprehensive income generally represents all changes in shareholders equity (deficit)
during the period, except those resulting from investments by, or distributions to,
shareholders. The Company has comprehensive income related to changes in foreign currency
to U.S. dollar exchange rates, which is recorded as follows:
 Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Net income
    
    $
    3,863
    
    
    $
    2,850
    
    
    $
    8,555
    
    
    $
    6,231Gain from foreign
currency
translation
adjustment
    
    
    350
    
    
    
    418
    
    
    
    718
    
    
    
    491Comprehensive income
    
    $
    4,213
    
    
    $
    3,268
    
    
    $
    9,273
    
    
    $
    6,722
 7.
    
    Earnings Per ShareNet 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 warrants and outstanding common stock options having a
dilutive effect using the treasury stock method, and from the 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 nine months ended October 31, 2006 and 2005:
 Three Months Ended
    
    Nine Months EndedOctober 31,
    
    October 31,2006
    
    2005
    
    2006
    
    2005(in thousands)Basic common shares outstanding
    
    
    9,609
    
    
    
    9,152
    
    
    
    9,584
    
    
    
    9,061Stock options
    
    
    431
    
    
    
    737
    
    
    
    545
    
    
    
    673Restricted stock
    
    
    15
    
    
    
    
    
    
    
    12
    
    
    
    Warrants
    
    
    14
    
    
    
    13
    
    
    
    16
    
    
    
    11Total common share equivalents
    
    
    460
    
    
    
    750
    
    
    
    573
    
    
    
    684Diluted common shares outstanding
    
    
    10,069
    
    
    
    9,902
    
    
    
    10,157
    
    
    
    9,745
 8.
    
    Stock OptionsStock-Based CompensationGeneralEffective February 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standard (SFAS) No. 123R, Share-Based Payment(SFAS 123R) using the modified
prospective transition method. Under this method, stock-based compensation expense
recognized for share-based awards during the three and nine months ended October 31, 2006
includes: (a) compensation expense for all stock-based compensation awards granted prior to,
but not yet vested as of, February 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS 123, Accounting for Stock-Based Compensation
(SFAS 123), and (b) compensation expense for all stock-based compensation awards granted
subsequent to February 1, 2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS 123R. In accordance with the modified prospective transition
method, results
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for the prior periods have not been restated. Prior to the adoption of SFAS
123R, the Company recognized stock-based compensation expense in accordance with Accounting
Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees(APB 25) and related Interpretations, as
permitted by SFAS 123.At October 31, 2006, the Company had stock-based compensation plans as described in more
detail below. The total compensation expense related to stock-based awards granted under
these plans during the three and nine months ended October 31, 2006, reflecting the impact
of the implementation of the modified prospective transition method in accordance with SFAS
123R, was approximately $404,000 and $1,198,000 respectively. The total compensation expense
related to stock-based awards granted under these plans during the three and nine months
ended October 31, 2005, reflecting compensation expense recognized in accordance with APB
25, was approximately $17,000 and $72,000. Effective February 1, 2006, the Company
recognized stock-based compensation costs net of a forfeiture rate for only those shares
expected to vest over the requisite service period of the award. The Company estimated the
forfeiture rate for fiscal 2007 based on its historical experience regarding employee
terminations and forfeitures.The fair value of each option award is estimated as of the date of grant using a
Black-Scholes-Merton option pricing formula. Expected volatility is based on historical
volatility of the Companys stock over a preceding period commensurate with the expected
term of the option. The simplified method described in SEC Staff Accounting Bulletin No.
107 was used to determine the expected term of our options. This has resulted in a shorter
expected term than the terms calculated under SFAS 123 for pro forma purposes. The risk-free
rate for the expected term of the option is based on the U.S. Treasury yield curve in effect
at the time of grant. Expected dividend yield was not considered in the option pricing
formula since the Company does not pay dividends and has no plans to do so in the future.
The weighted average grant-date fair value of options granted during the nine months ended
October 31, 2006 and 2005 was $13.47 and $8.41, respectively. The assumptions for the
periods indicated are noted in the following table.
 Weighted average Black-Scholes-Merton fair value assumptions
 Nine Months Ended October 31,2006
    
    2005Risk free interest rate
    
    
    4.7  5.2
    %
    
    
    3.0
    %Expected life
    

    5.5  6.3

    yrs

    

    8
    yrsExpected volatility
    
    
    65 - 67
    %
    
    
    67 - 68
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
 As a result of adopting SFAS 123R, the impact on income before income taxes and net income
for the three and nine months ended October 31, 2006 was a reduction of approximately
$373,000 and $1.1 million, respectively, from what would have been presented if the Company
had continued to account for stock option awards under APB 25. The impact on basic and
diluted earnings per share for the three months ended October 31, 2006 was a reduction of
$0.04 per share. For the nine months ended October 31, 2006 the impact on basic and diluted
earnings per share was $0.12 and $0.11, respectively.In addition, prior to the adoption of SFAS 123R, the Company presented all tax benefits
related to deductions resulting from the exercise of stock options, if any, as operating
activities in the consolidated statement of cash flows. SFAS 123R requires that cash flows
resulting from tax benefits attributable to tax deductions in excess of the compensation
expense recognized for those options (excess tax benefits) be classified as financing in
flows and operating out-flows. The Company had excess tax benefits of approximately $497,000
during the nine months ended October 31, 2006. Because the Company had net operating loss
(NOL) carry-forwards in the prior year, no excess tax deductions were recorded.The pro forma table below illustrates the effect on net income and earnings per share as if
the Company had applied the fair value recognition provisions of SFAS No. 123, as amended by
SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure(SFAS
148), to all stock-based employee compensation for the three and nine months ended October
31, 2005.
 9




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded
    
    
    EndedOctober 31,
    
    
    October 31,2005
    
    
    2005(in thousands, except per share amounts)Pro forma impact of fair value methodReported net income
    
    $
    2,850
    
    
    $
    6,231Less: fair value impact of employee stock
compensation
    
    
    (346
    )
    
    
    (830
    )Pro forma net income
    
    $
    2,504
    
    
    $
    5,401Income per common shareReported net income per share:Basic
    
    $
    0.31
    
    
    $
    0.69Diluted
    
    $
    0.29
    
    
    $
    0.64Pro forma net income per share:Basic
    
    $
    0.27
    
    
    $
    0.60Diluted
    
    $
    0.25
    
    
    $
    0.55
 Stock Option PlansThe Company has share-based awards outstanding under five different plans: the 1994 Stock
Option Plan (1994 Plan), the 1998 Amended and Restated Stock Awards Plan (1998 Plan),
the 2000 Stock Option Plan (2000 Plan), the Mitcham Industries, Inc. Stock Awards Plan
(2006 Plan) and the 1994 Non-Employee Director Plan (Director Plan), (collectively, the
Plans). Stock options granted and outstanding under each of the plans generally vest
evenly over three years (except for the Director Plan, under which options generally vest
after one year) and have a 10-year contractual term. The exercise price of a stock option
generally is equal to the fair market value of the Companys common stock on the option
grant date. All Plans except for the 2006 Plan have been closed for future grants. All shares available but not granted under the 1998 and 2000 Plans as of the date of the
approval of the 2006 Plan were transferred to the 2006 Plan. As of October 31, 2006 there
were 712,488 shares available for grant under the 2006 Plan. The 2006 Plan provides for
awards of nonqualified stock options, incentive stock options, restricted stock awards and
restricted stock units.Stock Based Compensation ActivityThe following table presents a summary of the Companys stock option activity for the nine
months ended October 31, 2006:
 WeightedAverageWeighted
    
    RemainingAverage
    
    Contractual
    
    AggregateNumber of
    
    Exercise
    
    Term
    
    Intrinsic ValueShares
    
    Price
    
    (in years)
    
    (in thousands)Outstanding, beginning of period
    
    
    1,054,920
    
    
    $
    5.15Granted
    
    
    332,000
    
    
    
    13.47Exercised
    
    
    (177,920
    )
    
    
    4.91Canceled or expired
    
    
    (6,520
    )
    
    
    4.14Outstanding, end of period
    
    
    1,202,480
    
    
    $
    7.42
    
    
    
    5.97
    
    
    $
    5,549Vested and expected to vest in the
future at October 31, 2006
    
    
    1,183,852
    
    
    $
    7.35
    
    
    
    7.01
    
    
    $
    5,535Exercisable at October 31, 2006
    
    
    829,914
    
    
    $
    5.14
    
    
    
    2.34
    
    
    $
    5,276
 10




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##### Table of Contents



The aggregate intrinsic value in the table above represents the total pre-tax intrinsic
value (the difference between the Companys closing stock price on the last trading day of
the third quarter of fiscal 2007 and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option holders had all option
holders exercised their options on October 31, 2006. This amount changes based upon the fair
market value of the Companys common stock. Total intrinsic value of options exercised for
the nine months ended October 31, 2006 was $2.7 million. The fair value of options that
vested during the nine months ended October 31, 2006 was approximately $300,000. For the
nine months ended October 31, 2005 approximately 190,000 options vested.As of October 31, 2006, there was approximately $2.3 million of total unrecognized
compensation expense related to unvested stock options granted under the Companys
share-based compensation plans. That expense is expected to be recognized over a weighted
average period of 2.3 years.Cash received from option exercises for the nine months ended October 31, 2006 was an
aggregate of approximately $783,000. During the nine months ended October 31, 2006, income
taxes payable were reduced by approximately $497,000 as a result of the tax deduction from
option exercises.Restricted stock awards as of October 31, 2006 and changes during the nine months ended
October 31, 2006 were as follows:
 Nine Months Ended October 31, 2006WeightedNumber of
    
    Average GrantShares
    
    Date Fair ValueUnvested, beginning of period
    
    
    8,500
    
    
    $
    1.90Granted
    
    
    37,000
    
    
    
    13.21Vested
    
    
    (8,500
    )
    
    
    5.15Canceled
    
    
    500
    
    
    
    16.64Unvested, end of period
    
    
    15,500
    
    
    $
    13.16
 As of October 31, 2006, there was approximately $421,000 of unrecognized stock-based
compensation expense related to unvested restricted stock awards. That cost is expected to
be recognized over a weighted average period of 2.7 years.9.
    
    Income TaxThe Companys provision for income taxes for the three and nine month periods ended October
31, 2006 is less than expected from applying a statutory rate primarily due to the reduction
of the valuation allowances provided against deferred tax assets that arose in prior
periods. For the three months ended October 31, 2006 the Company recorded current tax
expense of approximately $200,000, offset by a deferred tax benefit of approximately
$1,500,000. For the nine months ended October 31, 2006 the Company recorded current tax
expense of approximately $800,000, offset by a deferred tax benefit of approximately
$2,000,000.10.
    
    Discontinued OperationsOn August 1, 2003, the Company sold the operating assets of its front-end services segment
(DSI) due to the over-capacity in that market segment. The Company accepted a note
receivable from the purchaser for a portion of the sales price, which was paid in full
during the current fiscal year. The note receivable was the only remaining asset of the
discontinued operations.
 October 31,
    
    January 31,2006
    
    2006(in thousands)Accounts and notes receivable of discontinued operations
    
    $
    
    
    
    $
    355Other current assets of discontinued operations
    
    $
    
    
    
    $
    11Accounts payable and accrued liabilities of discontinued
operations
    
    $
    
    
    
    $
    10
 11




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##### Table of Contents



11.
    
    Segment ReportingThe following information is disclosed as required by SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information.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. The Mitcham segment is headquartered in Huntsville, Texas, with sales and
services offices in Calgary, Canada; Brisbane, Australia; Ufa, Bashkortostan, Russia.On July 12, 2005, the Company acquired 100% of the outstanding stock of Seamap. For a brief
description of the operations of this segment, see Note 2. Manufacturing, support and sales
facilities are maintained in the UK and Singapore with a sales office in Huntsville, Texas.Financial information by business segment is set forth below net of any allocations (in
thousands):
 As of October 31, 2006Mitcham
    
    Seamap
    
    ConsolidatedFixed assets, net
    
    $
    22,733
    
    
    $
    1,232
    
    
    $
    23,965Intangible assets, net
    
    $
    
    
    
    $
    2,241
    
    
    $
    2,241Goodwill
    
    $
    
    
    
    $
    3,358
    
    
    $
    3,358
 For the Three Months Ended
    
    For the Three Months EndedOctober 31, 2006
    
    October 31, 2005Mitcham
    
    Seamap
    
    Consolidated
    
    Mitcham
    
    Seamap
    
    ConsolidatedRevenues
    
    $
    10,139
    
    
    $
    2,602
    
    
    $
    12,741
    
    
    $
    8,159
    
    
    $
    1,656
    
    
    $
    9,815Interest income, net
    
    $
    281
    
    
    $
    3
    
    
    $
    284
    
    
    $
    83
    
    
    $
    2
    
    
    $
    85Income (loss) before taxes
    
    $
    3,261
    
    
    $
    (722
    )
    
    $
    2,539
    
    
    $
    2,859
    
    
    $
    48
    
    
    $
    2,907Capital expenditures
    
    $
    6,131
    
    
    $
    290
    
    
    $
    6,421
    
    
    $
    926
    
    
    $
    28
    
    
    $
    954Depreciation and
amortization expense
    
    $
    2,069
    
    
    $
    224
    
    
    $
    2,293
    
    
    $
    2,228
    
    
    $
    26
    
    
    $
    2,254
 For the Nine Months Ended
    
    For the Nine Months EndedOctober 31, 2006
    
    October 31, 2005Mitcham
    
    Seamap
    
    Consolidated
    
    Mitcham
    
    Seamap
    
    ConsolidatedRevenues
    
    $
    29,222
    
    
    $
    8,593
    
    
    $
    37,815
    
    
    $
    22,326
    
    
    $
    2,129
    
    
    $
    24,455Interest income, net
    
    $
    610
    
    
    $
    7
    
    
    $
    617
    
    
    $
    277
    
    
    $
    2
    
    
    $
    279Income (loss) before taxes
    
    $
    8,768
    
    
    $
    (1,402
    )
    
    $
    7,366
    
    
    $
    6,149
    
    
    $
    107
    
    
    $
    6,256Capital expenditures
    
    $
    10,380
    
    
    $
    1,382
    
    
    $
    11,762
    
    
    $
    3,746
    
    
    $
    283
    
    
    $
    4,029Depreciation and
amortization expense
    
    $
    5,856
    
    
    $
    595
    
    
    $
    6,451
    
    
    $
    6,554
    
    
    $
    31
    
    
    $
    6,585
 12




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##### Table of Contents



12.
    
    New Accounting PronouncementsIn June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes(FIN 48). FIN 48 clarifies how
uncertain tax positions that have been taken or are expected to be taken on a companys tax
return should be recognized, measured, presented and disclosed in the financial statements.
The cumulative effect of applying this pronouncement to uncertain tax positions at the date
of adoption will be recorded during the fiscal year beginning February 1, 2007. The Company
is currently evaluating the effect that the adoption of FIN 48 will have on its consolidated
financial position and results of operations.
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements and Risk Factors
  Business Overview
   For the Three Months Ended
    
    
    For the Nine Months EndedOctober 31,
    
    
    October 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Revenues:Mitcham
    
    $
    10,139
    
    
    $
    8,159
    
    
    $
    29,222
    
    
    $
    22,326Seamap
    
    
    2,602
    
    
    
    1,656
    
    
    
    8,593
    
    
    
    2,129Total revenues
    
    
    12,741
    
    
    
    9,815
    
    
    
    37,815
    
    
    
    24,455Direct costs:Mitcham
    
    
    4,628
    
    
    
    3,658
    
    
    
    13,858
    
    
    
    10,597Seamap
    
    
    2,203
    
    
    
    738
    
    
    
    5,618
    
    
    
    948Total direct costs
    
    
    6,831
    
    
    
    4,396
    
    
    
    19,476
    
    
    
    11,545
 13




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##### Table of Contents



For the Three Months Ended
    
    
    For the Nine Months EndedOctober 31,
    
    
    October 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Gross profit
    
    
    5,910
    
    
    
    5,419
    
    
    
    18,339
    
    
    
    12,910Operating costs:General and administrative
    
    
    3,330
    
    
    
    2,463
    
    
    
    10,693
    
    
    
    6,649Depreciation and amortization
    
    
    337
    
    
    
    134
    
    
    
    944
    
    
    
    286Total operating costs
    
    
    3,667
    
    
    
    2,597
    
    
    
    11,637
    
    
    
    6,935Operating income
    
    $
    2,243
    
    
    $
    2,822
    
    
    $
    6,702
    
    
    $
    5,975EBITDA(1)
    
    $
    4,548
    
    
    $
    5,076
    
    
    $
    13,200
    
    
    $
    12,562Adjusted EBITDA(1)
    
    $
    4,954
    
    
    $
    5,093
    
    
    $
    14,398
    
    
    $
    12,634Reconciliation of Net Income to EBITDA
and Adjusted EBITDANet income
    
    $
    3,863
    
    
    $
    2,850
    
    
    $
    8,555
    
    
    $
    6,231Interest income, net
    
    
    (284
    )
    
    
    (85
    )
    
    
    (617
    )
    
    
    (279
    )Depreciation and amortization
    
    
    2,293
    
    
    
    2,254
    
    
    
    6,451
    
    
    
    6,585Provision for (benefit from) income taxes
    
    
    (1,324
    )
    
    
    57
    
    
    
    (1,189
    )
    
    
    25EBITDA (1)
    
    
    4,548
    
    
    
    5,076
    
    
    
    13,200
    
    
    
    12,562Stock-based compensation
    
    
    404
    
    
    
    17
    
    
    
    1,198
    
    
    
    72Adjusted EBITDA (1)
    
    $
    4,954
    
    
    $
    5,093
    
    
    $
    14,398
    
    
    $
    12,634
 
 (1)
    
    EBITDA is defined as net income (loss) before (i) interest income, net of
interest expense, (ii) provision for (or benefit from) income taxes and (iii) 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.    14




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##### Table of Contents



For the Three
    
    
    For the Nine MonthsMonths Ended
    
    
    EndedOctober 31,
    
    
    October 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Equipment leasing
    
    
    48
    %
    
    
    68
    %
    
    
    48
    %
    
    
    72
    %Lease pool equipment sales
    
    
    7
    
    
    
    8
    
    
    
    11
    
    
    
    10Other equipment sales
    
    
    45
    
    
    
    24
    
    
    
    41
    
    
    
    18Total revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Direct costs:Equipment leasing
    
    
    4
    
    
    
    10
    
    
    
    5
    
    
    
    9Lease pool depreciation
    
    
    15
    
    
    
    22
    
    
    
    15
    
    
    
    25Cost of lease pool equipment sales
    
    
    2
    
    
    
    
    
    
    
    5
    
    
    
    Cost of other equipment sales
    
    
    33
    
    
    
    13
    
    
    
    26
    
    
    
    13Total direct costs
    
    
    54
    
    
    
    45
    
    
    
    51
    
    
    
    47Gross profit
    
    
    46
    
    
    
    55
    
    
    
    49
    
    
    
    53Operating expenses:General and administrative
    
    
    26
    
    
    
    25
    
    
    
    29
    
    
    
    27Depreciation and amortization
    
    
    2
    
    
    
    1
    
    
    
    2
    
    
    
    1Total operating expenses
    
    
    28
    
    
    
    26
    
    
    
    31
    
    
    
    28Operating income
    
    
    18
    
    
    
    29
    
    
    
    18
    
    
    
    25Interest and other income, net
    
    
    2
    
    
    
    1
    
    
    
    2
    
    
    
    1Income before income taxes
    
    
    20
    
    
    
    30
    
    
    
    20
    
    
    
    26(Provision for) benefit from income taxes
    
    
    (10
    )
    
    
    1
    
    
    
    (3
    )
    
    
    Net income
    
    
    30
    %
    
    
    29
    %
    
    
    23
    %
    
    
    26
    %
 15




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##### Table of Contents



Results of Operations
 Three Months Ended October 31, 2006 Compared to Three Months Ended October 31, 2005
 Revenues
  Mitcham Industries
  Seamap
  Direct Costs
 Mitcham Industries
     16




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##### Table of Contents



Seamap
  Operating Costs
  Interest and Other Income, net
  Provision for Income Taxes
  Nine Months Ended October 31, 2006 Compared to Nine Months Ended October 31, 2005
 Revenues
  Mitcham Industries
  Seamap
  17




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##### Table of Contents



Direct Costs
 Mitcham Industries
   Seamap
  Operating Costs
  Interest and Other Income, net
  Provision for Income Taxes
  18




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##### Table of Contents



Liquidity and Capital Resources
       19




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##### Table of Contents



Russian Operations
  Critical Accounting Policies and Estimates
   Revenue Recognition
 Leases
  20




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##### Table of Contents



Equipment Sales
  Allowance for Doubtful Accounts
  Long-Lived Assets
     Income Taxes
  Accounting for Income Taxes
 21




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##### Table of Contents




    
    taxable income projections in future years;
    
    whether the carry forward 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.
  
    
    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.
  
    
    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.
  Stock Options
 Share-Based Payments
    22




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##### Table of Contents



New Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk
  Foreign Currency Risk
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  23




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##### Table of Contents



Changes in Internal Controls over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  3.1
    
    
    
    Amended and Restated Articles of Incorporation of Mitcham Industries, Inc. (1)3.2
    
    
    
    Second Amended and Restated Bylaws of Mitcham Industries, Inc. (2)10.1
    
    
    
    Exclusive Equipment Lease Agreement, dated September 12, 2006, between Sercel, Inc. and
Mitcham Industries, Inc.(3)31.1
    
    
    
    Certification of Billy F. Mitcham, Jr., Chief Executive Officer, pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    
    
    
    Certification of Robert P. Capps, Executive Vice President-Finance and Chief Financial
Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.32.1
    
    
    
    Certification of Billy F. Mitcham, Jr., Chief Executive Officer, pursuant to 18 U.S.C. §
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    Certification of Robert P. Capps, Executive Vice President-Finance and Chief Financial
Officer, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 24




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##### Table of Contents



(1)
    
    Incorporated by reference to Exhibit 3.1 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 Exhibit 3.2 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.(3)
    
    Incorporated by reference to Exhibit 10.1 of the Companys Current Report on form 8-K, filed
with the SEC on September 12, 2006. 25




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##### Table of Contents



SIGNATURES
  MITCHAM INDUSTRIES, INC./s/ Robert P. CappsDate: December 12, 2006
    
    Robert P. CappsExecutive Vice President-Finance and Chief Financial
Officer(Duly Authorized Officer and Chief Accounting
Officer)
 26




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##### Table of Contents



3.1
    
    
    
    Amended and Restated Articles of Incorporation of Mitcham Industries, Inc. (1)3.2
    
    
    
    Second Amended and Restated Bylaws of Mitcham Industries, Inc. (2)10.1
    
    
    
    Exclusive Equipment Lease Agreement, dated September 12, 2006, between Sercel, Inc. and
Mitcham Industries, Inc.(3)31.1
    
    
    
    Certification of Billy F. Mitcham, Jr., Chief Executive Officer, pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    
    
    
    Certification of Robert P. Capps, Executive Vice President-Finance and Chief Financial
Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.32.1
    
    
    
    Certification of Billy F. Mitcham, Jr., Chief Executive Officer, pursuant to 18 U.S.C. §
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    Certification of Robert P. Capps, Executive Vice President-Finance and Chief Financial
Officer, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Incorporated by reference to Exhibit 3.1 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 Exhibit 3.2 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.(3)
    
    Incorporated by reference to Exhibit 10.1 of the Companys Current Report on form 8-K, filed
with the SEC on September 12, 2006.