##### 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 April 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 000-25142
 
 MITCHAM INDUSTRIES, INC.
  Texas
    
    76-0210849(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 8141 SH 75 South
P.O. Box 1175
Huntsville, Texas 77342
 (936) 291-2277
 
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  o þ




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##### 



MITCHAM INDUSTRIES, INC.
INDEX
 PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    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
    
    
    21Item 4. Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 1A.. Risk Factors
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    23Item 6. Exhibits
    
    
    23Signatures
    
    
    23Certification of CEO pursuant to Rule 13a-14a/15d-14aCertification of CFO pursuant to Rule 13a-14a/15d-14aCertification of CEO under Section 906Certification of CFO under Section 906




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MITCHAM INDUSTRIES, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share data)
 April 30,2006
    
    
    January 31,(Unaudited)
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,978
    
    
    $
    16,426Short-term investments
    
    
    2,000
    
    
    
    2,550Accounts receivable, net of allowance for doubtful accounts of
$926 and $1,125
    
    
    12,235
    
    
    
    5,793Current portion of notes receivable, net of allowance for
doubtful notes of $148 and $48
    
    
    3,056
    
    
    
    2,734Inventories, net of allowance for obsolescence of $65 and $62
    
    
    2,148
    
    
    
    1,155Prepaid expenses and other current assets
    
    
    757
    
    
    
    717Current portion of deferred tax asset
    
    
    1,266
    
    
    
    Current assets of discontinued operations
    
    
    320
    
    
    
    366Total current assets
    
    
    34,760
    
    
    
    29,741Seismic equipment lease pool and property and equipment
    
    
    81,341
    
    
    
    79,023Accumulated depreciation of seismic lease pool and property and
equipment
    
    
    (60,243
    )
    
    
    (59,099
    )Intangible assets, net of amortization of $380 and $266
    
    
    2,470
    
    
    
    2,584Goodwill
    
    
    3,358
    
    
    
    2,358Deferred tax asset, net of valuation allowance of $4,897 and 4,378
    
    
    1,734
    
    
    
    3,000Other assets
    
    
    11
    
    
    
    13Total assets
    
    $
    63,431
    
    
    $
    57,620LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,339
    
    
    $
    4,436Deferred revenue
    
    
    630
    
    
    
    381Income taxes payable
    
    
    446
    
    
    
    286Current liabilities of discontinued operations
    
    
    14
    
    
    
    10Accrued expenses and other current liabilities
    
    
    2,693
    
    
    
    2,056Total current liabilities
    
    
    8,122
    
    
    
    7,169Long-term debt
    
    
    3,000
    
    
    
    3,000Total liabilities
    
    
    11,122
    
    
    
    10,169Shareholders equity:Preferred stock, $1.00 par value; 1,000,000 shares authorized;
none issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 20,000,000 shares authorized;
10,501,190 and 10,360,110 shares issued, respectively
    
    
    105
    
    
    
    104Additional paid-in capital
    
    
    65,578
    
    
    
    64,404Treasury stock, at cost (919,000 and 915,000 shares)
    
    
    (4,781
    )
    
    
    (4,686
    )Deferred compensation
    
    
    (263
    )
    
    
    (8
    )Accumulated deficit
    
    
    (11,984
    )
    
    
    (15,427
    )Accumulated other comprehensive income
    
    
    3,654
    
    
    
    3,064Total shareholders equity
    
    
    52,309
    
    
    
    47,451Total liabilities and shareholders equity
    
    $
    63,431
    
    
    $
    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 EndedApril 30,2006
    
    
    2005Revenues:Equipment leasing
    
    $
    7,010
    
    
    $
    6,196Lease pool equipment sales
    
    
    2,707
    
    
    
    713Other equipment sales
    
    
    4,398
    
    
    
    729Total revenues
    
    
    14,115
    
    
    
    7,638Costs and expenses:Direct costs  equipment leasing
    
    
    855
    
    
    
    597Direct costs  lease pool depreciation
    
    
    1,740
    
    
    
    2,101Cost of lease pool equipment sales
    
    
    1,477
    
    
    
    167Cost of other equipment sales
    
    
    2,746
    
    
    
    525General and administrative includes $297
and $36 related to
stock-based compensation
    
    
    3,534
    
    
    
    1,953Depreciation and amortization
    
    
    298
    
    
    
    76Total costs and expenses
    
    
    10,650
    
    
    
    5,419Operating income
    
    
    3,465
    
    
    
    2,219Other income, net
    
    
    10
    
    
    
    85Interest income, net
    
    
    148
    
    
    
    Income before income taxes
    
    
    3,623
    
    
    
    2,304Provision for income taxes
    
    
    184
    
    
    
    162Net income
    
    $
    3,439
    
    
    $
    2,142Net income per common shareBasic
    
    $
    0.36
    
    
    $
    0.24Diluted
    
    $
    0.33
    
    
    $
    0.22Shares used in computing net income per
common share:Basic
    
    
    9,563
    
    
    
    8,976Dilutive effect of common stock
equivalents
    
    
    744
    
    
    
    612Diluted
    
    
    10,307
    
    
    
    9,588
 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 Three Months Ended April 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    3,439
    
    
    $
    2,142Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    2,038
    
    
    
    2,177Stock-based compensation
    
    
    297
    
    
    
    36Provision for doubtful accounts, net of charge offs
    
    
    
    
    
    
    79Provision for inventory obsolescence
    
    
    3Gross profit from sale of lease pool equipment
    
    
    (1,230
    )
    
    
    (545
    )Changes in:Trade accounts receivable
    
    
    (6,764
    )
    
    
    253Inventories
    
    
    (1,058
    )
    
    
    Prepaid expenses and other assets
    
    
    (40
    )
    
    
    Currents assets of discontinued operations
    
    
    46
    
    
    
    (39
    )Income taxes payable
    
    
    160
    
    
    
    56Accounts payable, accrued expenses and other current liabilities
    
    
    791
    
    
    
    (3,926
    )Current liabilities of discontinued operations
    
    
    14
    
    
    
    (7
    )Other
    
    
    (7
    )
    
    
    (15
    )Net cash (used in) provided by operating activities
    
    
    (2,311
    )
    
    
    211Cash flows from investing activities:Purchases of seismic equipment held for lease
    
    
    (3,475
    )
    
    
    (1,158
    )Long-term assets of discontinued operations
    
    
    
    
    
    
    71Sales and maturities of short-term investments
    
    
    550
    
    
    
    Purchases of property and equipment
    
    
    (447
    )
    
    
    (184
    )Seamap purchase price adjustment
    
    
    (1,000
    )Sale of used lease pool equipment
    
    
    2,707
    
    
    
    713Net cash used in investing activities
    
    
    (1,665
    )
    
    
    (558
    )Cash flows from financing activities:Proceeds from issuance of common stock upon exercise of options
    
    
    623
    
    
    
    18Repurchase of common stock
    
    
    (95
    )Payments on borrowings
    
    
    
    
    
    
    (580
    )Net cash provided by (used in) financing activities
    
    
    528
    
    
    
    (562
    )Net decrease in cash and cash equivalents
    
    
    (3,448
    )
    
    
    (909
    )Cash and cash equivalents, beginning of period
    
    
    16,426
    
    
    
    13,138Cash and cash equivalents, end of period
    
    $
    12,978
    
    
    $
    12,229Supplemental cash flow information:Interest paid
    
    $
    2
    
    
    $
    12
 The accompanying notes are an integral part of these condensed consolidated financial
statements.
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MITCHAM INDUSTRIES, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    Basis of 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. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the disclosures
are adequate to make the information presented not misleading. These condensed consolidated
financial statements should be read in conjunction with the financial statements and the
notes thereto included in the Companys latest Annual Report on Form 10-K for the year ended
January 31, 2006. In the opinion of the Company, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position as of April 30,
2006; the results of operations for the three months ended April 30, 2006 and 2005; and the
cash flows for the three months ended April 30, 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 or loss.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, develops and sells a broad range of proprietary products for
the seismic, hydrographic and offshore industries with product sales and support facilities
based in Huntsville, Texas, Singapore and the United Kingdom. All intercompany transactions
and balances have been eliminated in consolidation.3.
    
    AcquisitionsOn July 12, 2005, the Company acquired 100% of the stock of Seamap. Seamap is engaged in the
design, manufacture and sale of state-of-the-art seismic and offshore telemetry systems. The
proprietary products of Seamap expanded Mitchams market and diversified its customer base
and is a complement to Mitchams marine rental and sales business. Mitcham now has a
broader range of product offerings and Seamaps strategic facilities support Mitchams
expanding global operations. The consolidated financial statements include the assets and
liabilities and the operating results of Seamap from the acquisition date. Pursuant to
Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations, Mitcham
applied purchase accounting to the transaction, resulting in the initial recognition of
additional property and equipment of $153,000. Mitcham initially obtained intangible assets
of $2.9 million and recognized goodwill of approximately $2.5 million from the transaction.
None of the goodwill recognized is deductible for tax purposes.
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The purchase included all the net assets of Seamap, which are located in Huntsville, Texas,
Singapore and the United Kingdom. Seamap was purchased for a total of $6.5 million,
consisting of $3.5 million paid in cash at closing and $3.0 million issued in promissory
notes payable to the former shareholders of Seamap (see Note 5). The terms of the purchase
and sale agreement provide for two additional earn-out payments of $1.0 million each (a
maximum of $2.0 million). Seamap will receive $1.0 million in any measurement period
(defined as a twelve month period beginning May 1 and ending April 30) that it reaches
either $8.0 or $10.0 million in revenues during a five-year period ending April 30, 2010.
Seamap earned revenues in excess of $8.0 million during the first measurement period ended
April 30, 2006 and earned the first $1.0 million additional payment. The payment will be
made in July or August 2006. Mitcham believes that the purchase price of Seamap will be
economically recovered from future cash flow of Seamap.The following is a summary of the allocations of the aggregate purchase price to the
estimated fair values of the assets acquired and liabilities assumed at the respective date
of acquisition, adjusted for the additional $1.0 million earn-out payment:
 (in thousands)Working capital
    
    $
    1,203Equipment
    
    
    153Covenant not to compete
    
    
    1,000Proprietary rights
    
    
    1,850Goodwill
    
    
    3,358Total purchase price
    
    $
    7,564
 At the time of the acquisition, Seamap had approximately $153,000 of fixed assets. These
assets consisted primarily of vehicles, computer and workshop equipment and will remain in
use in the same manner as prior to the acquisition.Pro Forma Results of OperationsThe following pro forma results of operations for the three months ended April 30, 2005
assumes the acquisition occurred on February 1, 2005. The pro forma results have been
prepared for comparative purposes only and do not purport to indicate the results of
operations that would actually have occurred had the acquisition been in effect on the date
indicated, or which may occur in the future.
 Three Months EndedApril 30, 2005(in thousands, except per share amounts)Revenues
    
    $
    10,131Net Income
    
    $
    2,411Earnings per share:Basic
    
    $
    0.27Diluted
    
    $
    0.25
 4.
    
    InventoriesInventories are stated at the lower of cost (first-in, first-out) or market. Inventories
consist of the following:
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April 30,
    
    
    January 31,(in thousands)
    
    2006
    
    
    2006Raw materials
    
    $
    1,257
    
    
    $
    590Finished goods
    
    
    193
    
    
    
    199Work in progress
    
    
    763
    
    
    
    4282,213
    
    
    
    1,217Less allowance for obsolescence
    
    
    (65
    )
    
    
    (62
    )Total inventories
    
    $
    2,148
    
    
    $
    1,155
 5.
    
    DebtOn June 27, 2005, we obtained a $12.5 million revolving loan agreement and credit line with
First Victoria National Bank. This line replaced and increased the expiring credit line of
$4.0 million with First Victoria National Bank. The new facility has a two-year term and
bears interest at the prime rate. The credit line allows us to borrow funds to purchase
equipment and is secured by the equipment purchased and any leases on that equipment.
Interest on any outstanding principle balance is payable monthly, while the principal is due
at the end of the two-year term. The revolving loan agreement also contains certain
financial covenants that require, among other things, that 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 prior written approval of First Victoria National
Bank, except for indebtedness incurred as a result of the Seamap acquisition and other
specific exceptions. We have not borrowed any funds available under this credit line.In connection with the Seamap acquisition, the Company issued $3.0 million in promissory
notes payable to the former shareholders of Seamap. The notes are three-year, 5% notes with
no principal or interest due in the first 12 months. Interest on the full amount of the
principal is due on the first anniversary of the notes in the amount of $150,000. No
further interest or principal payments are due until the second anniversary of the notes.
At that time, interest on the full amount of the notes and 50% or $1.5 million of the
principal amount of $3.0 million is due. On the third anniversary of the notes, interest on
the unpaid principal and the remainder of the principal is due.6.
    
    Comprehensive IncomeSFAS No. 130, Reporting Comprehensive Income,establishes standards for the reporting and
display of comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income generally represents all changes in
shareholders equity (deficit) during the period, except those resulting from investments
by, or distributions to, shareholders. The Company has comprehensive income related to
changes in foreign currency to U.S. dollar exchange rates, which is recorded as follows:
 Three Months EndedApril 30,(in thousands)
    
    2006
    
    
    2005Net income
    
    $
    3,439
    
    
    $
    2,142Change in foreign currency translation adjustment
    
    
    590
    
    
    
    (196
    )Comprehensive income
    
    $
    4,029
    
    
    $
    1,946
 7.
    
    Earnings Per ShareNet income (loss) per basic common share is computed using the weighted average number of
common shares outstanding during the period, excluding unvested restricted stock. Net income
(loss) 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 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 common shares for the three months ended April 30, 2006 and 2005:
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Three Months Ended April 30,(in thousands)
    
    2006
    
    
    2005Common shares outstanding
    
    
    9,570
    
    
    
    8,976Unvested restricted stock
    
    
    (7
    )
    
    
    Basic common shares outstanding for
earnings per share calculation
    
    
    9,563
    
    
    
    8,976Stock options
    
    
    718
    
    
    
    603Restricted stock
    
    
    9
    
    
    
    Warrants
    
    
    17
    
    
    
    9Total common share equivalents
    
    
    744
    
    
    
    612Diluted common shares outstanding for
earnings per share calculation
    
    
    10,307
    
    
    
    9,588
 8.
    
    Stock OptionsStock-Based CompensationGeneralEffective February 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standard No. 123R, Share-Based Payment(SFAS 123R) using the modified
prospective transition method. Under this transition method, stock-based compensation
expense recognized for share-based awards during the three months ended April 30, 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, 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 for the prior period 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 April 30, 2006, the Company had stock-based compensation plans as more particularly
described below. The total compensation expense related to stock-based awards granted under
these plans during the three months ended April 30, 2006, reflecting the impact of the
implementation of the modified prospective transition method in accordance with SFAS 123R,
was $0.3 million. The total compensation expense related to stock-based awards granted under
these plans during the three months ended April 30, 2005, reflecting compensation expense
recognized in accordance with APB 25, was $36,000. Effective February 1, 2006 and subsequent
thereto, the Company recognizes 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 the first quarter of fiscal 2006 based on its
historical experience.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 current plans to do so in the
future. The weighted average grant-date fair value of options granted during the three
months ended March 31, 2006 and 2005 was $16.64 and $7.01, respectively. The weighted
average assumptions for the periods indicated are noted in the following table.
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Weighted average Black-Scholes fair value assumptions
 Three Months Ended April 30,2006
    
    2005Risk free interest rate
    
    
    4.81
    %
    
    
    3-5
    %Expected life
    
    6 yrs
    

    
    8 yrs.Expected volatility
    
    
    64.88
    %
    
    
    63-69
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
 As a result of adopting SFAS 123R, the impact to the consolidated statements of income for
the three months ended April 30, 2006 on income before income taxes and net income was a
reduction of $0.3 million and $0.3 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 April 30, 2006 was
a reduction of $0.03 per share.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 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 no tax benefits or excess tax benefits during the
quarter ended April 30, 2006.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, to all
stock-based employee compensation for the three months ended April 30, 2005:
 Three Months EndedApril 30,(in thousands, except per share amounts)
    
    2005Pro forma impact of fair value method (FAS 148)Reported net income
    
    $
    2,142Less: fair value impact of employee stock compensation
    
    
    (218
    )Pro forma net income
    
    $
    1,924Income per common shareReported net income per share:Basic
    
    $
    0.24Diluted
    
    $
    0.22Pro forma net income per share:Basic
    
    $
    0.21Diluted
    
    $
    0.20
 Stock Option PlansThe Company has share-based awards outstanding under four 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) and the 1994 Non-Employee Director Plan (Director
Plan), and together, 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 1 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. No new grants will be made under the Companys existing 1994 Plan
or Director Plan, and such existing plans remain in effect only for purposes of
administering options that are outstanding. The Plans provide for awards of nonqualified
stock options, incentive stock options (except for the Director Plan), restricted stock
awards and restricted stock units.
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Restricted stock awards are stock awards that are not
vested when received. The following table shows the shares available for awards under the
current plans.
 SharesPlan
    
    Available1994 Stock Option Plan
    
    Expired1994 Non-Employee Director Plan
    
    Expired1998 Amended and Restated Stock Awards Plan
    
    
    56,6472000 Stock Option Plan
    
    
    8,341Total
    
    
    64,988
 Stock Based Compensation ActivityThe following table presents a summary of the Companys stock option activity for the three
months ended April 30, 2006:
 WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateNumber of
    
    Exercise
    
    Contractual
    
    Intrinsic ValueShares
    
    Price
    
    Term
    
    (in thousands)Outstanding, beginning of period
    
    
    1,054,920
    
    
    $
    5.15Granted
    
    
    100,500
    
    
    
    16.64Exercised
    
    
    (146,500
    )
    
    
    4.74Canceled or expired
    
    
    (420
    )
    
    
    3.50Outstanding, end of period
    
    

1,008,500
    
    
    
    4.53
    
    
    
    6.90
    
    
    $
    9,802Vested and expected to vest in the
future at April 30, 2006
    
    
    987,918
    
    
    
    4.53
    
    
    
    6.89
    
    
    
    9,772Exercisable at April 30, 2006
    
    
    721,747
    
    
    
    4.35
    
    
    
    5.95
    
    
    
    8,466Available for grant at April 30, 2006
    
    
    64,988
 The aggregate intrinsic value in the table above represents the total pretax intrinsic value
(the difference between the Companys closing stock price on the last trading day of the
first quarter of fiscal 2006 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 April 30, 2006. This amount changes based upon the fair
market value of the Companys common stock. Total intrinsic value of options exercised for
the three months ended April 30, 2006 (based on the difference between the Companys stock
price on the respective exercise date and the respective exercise price, multiplied by the
number of respective options exercised) was $2.4 million. The fair value of options that
vested during the three months ended April 30, 2006 was $0.3 million. No options vested in
the quarter ended April 30, 2005.As of April 30, 2006, there was $1.3 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 first three months ended April 30, 2006 was an
aggregate of $0.6 million. We realized no actual tax benefit for the tax deduction from
option exercises for the three months ended April 30, 2006.Restricted stock awards as of April 30, 2006 and changes during the three months ended April
30, 2006 were as follows:
 11




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##### Table of Contents



Three months Ended April 30, 2006WeightedNumber of
    
    Average GrantShares
    
    Date Fair ValueNonvested, beginning of period
    
    
    8,500
    
    
    $
    1.90Granted
    
    
    16,000
    
    
    
    16.64Vested
    
    
    
    
    
    
    Canceled
    
    
    
    
    
    
    Nonvested, end of period
    
    
    24,500
    
    
    $
    11.53
 There was no restricted stock that vested during the three months ended April 30, 2006. As
of April 30, 2006, there was $0.3 million of unrecognized stock-based compensation expense
related to nonvested restricted stock awards. That cost is expected to be recognized over a
weighted average period of 2.0 years.9.
    
    Discontinued OperationsOn August 1, 2003, the Company sold the operating assets of DSI, which comprised all of the
operating assets of the Companys front-end services segment. The Companys decision to
sell DSI resulted from the over-capacity in that market segment. Proceeds from the sale
were $250,000 cash and an $800,000 note receivable due over three years. Additionally, the
buyer assumed $143,000 of capitalized lease obligations. Effective with the October 31,
2003 financial statements, the operating results of DSI are presented as discontinued
operations and all prior period statements have been reclassified accordingly.A summary of DSIs assets and liabilities is reflected as follows:
 April 30,
    
    January 31,(in thousands)
    
    2006
    
    2006Accounts and notes receivable of discontinued operations
    
    $
    308
    
    
    $
    355Other current assets of discontinued operations
    
    $
    12
    
    
    $
    11Accounts payable and accrued liabilities of
discontinued operations
    
    $
    14
    
    
    $
    10
 10.
    
    Segment ReportingThe following information is disclosed as required by Financial Accounting Standards Board
(FASB) statement No. 131, Disclosures About Segments of an Enterprise and Related
Information.On July 12, 2005, the Company acquired 100% of the outstanding stock of
Seamap. Seamaps primary products include the industry leading range of GunLink seismic
source acquisition and control systems which now provide operators more precise control of
their exploration tools and the BuoyLink GPS tracking system used to provide precise
positioning of seismic sources and streamers. While benefiting from the sales of existing
designs, Seamap continues to develop new products for the seismic industry including a new
fairlead which streamlines streamer deployment. Manufacturing and sales facilities are
maintained in the UK and Singapore with a sales office in Huntsville, Texas.The Mitcham segment offers for lease or sale, new and experienced seismic equipment
to the oil and gas industry, seismic contractors, environmental agencies, government
agencies and universities. Mitcham is headquartered in Huntsville, Texas, with sales and
services offices in Calgary, Canada; Brisbane, Australia; Ufa, Bashkortostan, Russia; and
associates throughout Europe, South America and Asia.Financial information by business segment is set forth below net of any allocations (in
thousands):
 12




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##### Table of Contents



As of or For the Three Months Ended April 30,2006Mitcham
    
    Seamap
    
    ConsolidatedRevenues
    
    $
    10,814
    
    
    $
    3,301
    
    
    $
    14,115Percentage
    
    
    77
    %
    
    
    23
    %
    
    
    100
    %Interest income
    
    $
    184
    
    
    $
    3
    
    
    $
    187Percentage
    
    
    98
    %
    
    
    2
    %
    
    
    100
    %Interest expense
    
    $
    39
    
    
    $
    0
    
    
    $
    39Percentage
    
    
    100
    %
    
    
    0
    %
    
    
    100
    %Fixed assets, net
    
    $
    20,777
    
    
    $
    321
    
    
    $
    21,098Percentage
    
    
    98
    %
    
    
    2
    %
    
    
    100
    %Intangible assets, net
    
    $
    0
    
    
    $
    2,470
    
    
    $
    2,470Percentage
    
    
    0
    %
    
    
    100
    %
    
    
    100
    %Goodwill
    
    $
    0
    
    
    $
    3,358
    
    
    $
    3,358Percentage
    
    
    0
    %
    
    
    100
    %
    
    
    100
    %Capital expenditures
    
    $
    3,762
    
    
    $
    160
    
    
    $
    3,922Percentage
    
    
    96
    %
    
    
    4
    %
    
    
    100
    %Depreciation and amortization expense
    
    $
    1,855
    
    
    $
    183
    
    
    $
    2,038Percentage
    
    
    91
    %
    
    
    9
    %
    
    
    100
    %
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
   13




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##### Table of Contents



Results of Operations  Mitcham Consolidated
 For the three months ended April 30, 2006 and 2005
    14




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##### Table of Contents



Revenues  Mitcham Consolidated
   Costs and Expenses  Mitcham Consolidated
    15




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##### Table of Contents



Segment Reporting
  Results of Operations  Mitcham Segment
 For the three months ended April 30, 2006 and 2005
    Revenues  Mitcham Segment
   Costs and Expenses  Mitcham Segment
  16




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##### Table of Contents



Results of Operations  Seamap Segment
 For the three months ended April 30, 2006
     Revenues  Seamap Segment
  Costs and Expenses  Seamap Segment
    Liquidity and Capital Resources
  17




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##### Table of Contents



18




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##### Table of Contents



New Russian Operation
  Critical Accounting Policies and Estimates
   Revenue Recognition
 Leases
  Equipment Sales
  19




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##### Table of Contents



Allowance for Doubtful Accounts
  Long-Lived Assets
     Income Taxes
  Accounting for Income Taxes
 
    
    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
 20




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##### Table of Contents




    
    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
 Accounting for Share-Based Payments
 Accounting for Stock-Based Compensation Accounting for Stock-Based Compensation, Transition and
Disclosure Accounting for Stock Issued to Employees
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  21




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##### Table of Contents



Item 4. Controls and Procedures
   Forward-Looking Statements and Risk Factors
  
 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
 22




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##### Table of Contents



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)31.1
    
    -
    
    Certification of Billy F. Mitcham, Jr., Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.31.2
    
    -
    
    Certification of Michael A. Pugh, Executive Vice President-Finance and Chief
Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.32.1
    
    -
    
    Certification of Billy F. Mitcham, Jr., Chief Executive Officer, under Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. 1350.32.2
    
    -
    
    Certification of Michael A. Pugh, Executive Vice President-Finance and Chief
Financial Officer, under Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. 1350.
 
 (1)
    
    Incorporated by reference to the indicated exhibit number of the Companys Registration
Statement on Form S-8 (File No. 333-67208), filed with the SEC on August 9, 2001.(2)
    
    Incorporated by reference to the indicated exhibit number of the Companys Annual Report
on Form 10-K for the fiscal year ended January 31, 2004, filed with the SEC on May 28, 2004. 
 SIGNATURES
  MITCHAM INDUSTRIES, INC.Date:  June 14, 2006
    /s/ Michel A. PughMichael A. PughExecutive Vice President-Finance and Chief Financial
Officer
(Authorized Officer and Principal Accounting Officer) 23