##### Table of Contents



UNITED STATE 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 JUNE 30, 2005 OR
 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROMTO
 Commission file number 1-2199
 ALLIS-CHALMERS ENERGY INC.
  DELAWARE
    
    39-0126090(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 5075 WESTHEIMER, SUITE 890, HOUSTON, TEXAS 77056
 (713) 369-0550
 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 Title of Security:
    
    Name of Exchange:Common Stock, par value $0.01 per share
    
    American Stock Exchange
 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
 þ o
 o þ




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ALLIS-CHALMERS ENERGY INC.
 FORM 10-Q
 For the Quarterly Period Ended June 30, 2005
 TABLE OF CONTENTS
 PART I
 ITEM
    
    
    
    PAGE1.
    
    Financial StatementsConsolidated Condensed Balance Sheets as of June 30, 2005 and December 31, 2004
    
    
    3Consolidated Condensed Income Statements for the three months and six months ended June 30, 2005 and 2004
    
    
    4Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2005 and 2004
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    62.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    223.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    324.
    
    Controls and Procedures
    
    
    32PART II1.
    
    Legal Proceedings
    
    
    336.
    
    Exhibits and Reports on Form 8-K
    
    
    33Signatures and Certifications
    
    
    34Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO & CFO Pursuant to Section 906
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
 June 30,
    
    
    December 31,2005
    
    
    2004(unaudited)AssetsCash and cash equivalents
    
    $
    2,693
    
    
    $
    7,344Trade receivables, net
    
    
    18,001
    
    
    
    12,986Inventory
    
    
    3,901
    
    
    
    2,373Lease receivable, current
    
    
    180
    
    
    
    180Prepaid expenses and other
    
    
    1,650
    
    
    
    1,495Total current assets
    
    
    26,425
    
    
    
    24,378Property and equipment, net
    
    
    49,585
    
    
    
    37,679Goodwill
    
    
    11,892
    
    
    
    11,776Other intangible assets, net
    
    
    6,175
    
    
    
    5,057Debt issuance costs, net
    
    
    671
    
    
    
    685Lease receivable, less current portion
    
    
    432
    
    
    
    558Other assets
    
    
    119
    
    
    
    59Total assets
    
    $
    95,299
    
    
    $
    80,192Liabilities and Stockholders EquityCurrent maturities of long-term debt
    
    $
    3,952
    
    
    $
    5,541Trade accounts payable
    
    
    6,907
    
    
    
    5,694Accrued salaries, benefits and payroll taxes
    
    
    834
    
    
    
    615Accrued interest
    
    
    509
    
    
    
    470Accrued expenses
    
    
    2,815
    
    
    
    1,852Accounts payable, related parties
    
    
    75
    
    
    
    740Total current liabilities
    
    
    15,092
    
    
    
    14,912Accrued postretirement benefit obligations
    
    
    661
    
    
    
    687Long-term debt, net of current maturities
    
    
    33,938
    
    
    
    24,932Other long-term liabilities
    
    
    502
    
    
    
    129Total liabilities
    
    
    50,193
    
    
    
    40,660Commitments and contingenciesMinority interests
    
    
    4,911
    
    
    
    4,423Stockholders EquityCommon stock, $0.01 par value (20,000,000 shares authorized;
14,022,800 and 13,611,525 issued and outstanding at June 30, 2005
and December 31, 2004, respectively)
    
    
    140
    
    
    
    136Capital in excess of par value
    
    
    42,077
    
    
    
    40,331Accumulated deficit
    
    
    (2,022
    )
    
    
    (5,358
    )Total stockholders equity
    
    
    40,195
    
    
    
    35,109Total liabilities and stockholders equity
    
    $
    95,299
    
    
    $
    80,192
  3




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED CONDENSED INCOME STATEMENTS
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Revenues
    
    $
    23,588
    
    
    $
    11,422
    
    
    $
    42,922
    
    
    $
    21,083Cost of revenuesDirect costs
    
    
    15,691
    
    
    
    7,833
    
    
    
    28,476
    
    
    
    14,742Depreciation
    
    
    1,092
    
    
    
    586
    
    
    
    2,006
    
    
    
    1,205Total cost of revenues
    
    
    16,783
    
    
    
    8,419
    
    
    
    30,482
    
    
    
    15,947Gross margin
    
    
    6,805
    
    
    
    3,003
    
    
    
    12,440
    
    
    
    5,136General and administrative
    
    
    3,465
    
    
    
    1,670
    
    
    
    6,459
    
    
    
    2,554Amortization
    
    
    426
    
    
    
    183
    
    
    
    820
    
    
    
    402Income from operations
    
    
    2,914
    
    
    
    1,150
    
    
    
    5,161
    
    
    
    2,180Other income (expense):Interest
    
    
    (645
    )
    
    
    (499
    )
    
    
    (1,166
    )
    
    
    (1,068
    )Other
    
    
    10
    
    
    
    18
    
    
    
    158
    
    
    
    205Total other income (expense)
    
    
    (635
    )
    
    
    (481
    )
    
    
    (1,008
    )
    
    
    (863
    )Net income before minority interest
and income taxes
    
    
    2,279
    
    
    
    669
    
    
    
    4,153
    
    
    
    1,317Minority interest in income of subsidiaries
    
    
    (344
    )
    
    
    (139
    )
    
    
    (488
    )
    
    
    (212
    )Provision for foreign taxes
    
    
    (166
    )
    
    
    (117
    )
    
    
    (329
    )
    
    
    (220
    )Net income
    
    
    1,769
    
    
    
    413
    
    
    
    3,336
    
    
    
    885Preferred stock dividend
    
    
    
    
    
    
    (36
    )
    
    
    
    
    
    
    (124
    )Net income attributed to common
shareholders
    
    $
    1,769
    
    
    $
    377
    
    
    $
    3,336
    
    
    $
    761Net income per common share:Basic
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.24
    
    
    $
    0.15Diluted
    
    $
    0.12
    
    
    $
    0.05
    
    
    $
    0.22
    
    
    $
    0.13Weighted average shares outstanding:Basic
    
    
    13,967
    
    
    
    6,256
    
    
    
    13,800
    
    
    
    5,091Diluted
    
    
    15,103
    
    
    
    7,619
    
    
    
    14,900
    
    
    
    6,907
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ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 For the Six Months EndedJune 30,2005
    
    
    2004(Restated)Cash Flows from Operating Activities:Net income
    
    $
    3,336
    
    
    $
    885Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    2,006
    
    
    
    1,205Amortization
    
    
    820
    
    
    
    402Amortization of note discount
    
    
    6
    
    
    
    109Minority interest in income of subsidiaries
    
    
    488
    
    
    
    212Changes in operating assets and liabilities, net of acquisitions:(Increase) in accounts receivable
    
    
    (3,024
    )
    
    
    (1,482
    )(Increase) in other current assets
    
    
    (889
    )
    
    
    (236
    )Decrease (increase) in other assets
    
    
    (375
    )
    
    
    84Increase in accounts payable
    
    
    610
    
    
    
    258Increase in accrued interest
    
    
    35
    
    
    
    60(Decrease) in accrued expenses
    
    
    (296
    )
    
    
    (429
    )(Decrease) increase in accrued salaries, benefits
and payroll taxes
    
    
    172
    
    
    
    (185
    )(Decrease) in other long-term liabilities
    
    
    
    
    
    
    (141
    )Net Cash Provided By Operating Activities
    
    
    2,889
    
    
    
    742Cash Flows from Investing Activities:Acquisition of Delta, net of cash received
    
    
    (4,481
    )
    
    
    Acquisition of Capcoil, net of cash received
    
    
    (2,607
    )
    
    
    Purchase of equipment
    
    
    (5,463
    )
    
    
    (1,879
    )Net Cash Used In Investing Activities
    
    
    (12,551
    )
    
    
    (1,879
    )Cash Flows from Financing Activities:Proceeds from issuance of common stock, net
    
    
    
    
    
    
    1,865Proceeds from long-term debt, net
    
    
    5,210
    
    
    
    Repayments on long-term debt
    
    
    
    
    
    
    (1,331
    )Debt issuance costs
    
    
    (199
    )
    
    
    (211
    )Net Cash Provided By Financing Activities
    
    
    5,011
    
    
    
    323Net change in cash
    
    
    (4,651
    )
    
    
    (814
    )Cash and cash equivalents at beginning of year
    
    
    7,344
    
    
    
    1,299Cash and cash equivalents at end of period
    
    $
    2,693
    
    
    $
    485Supplemental information:Interest paid
    
    $
    1,166
    
    
    $
    1,068Foreign taxes paid
    
    $
    329
    
    
    $
    220Non-cash investing and financing transactions in
connection with the acquisitions of Delta and Capcoil:Fair value of net assets acquired
    
    $
    (8,449
    )
    
    $
    Goodwill and other intangibles
    
    
    (1,515
    )
    
    
    Value of common stock issued
    
    
    1,750
    
    
    
    Notes payable to Sellers of Delta
    
    
    350
    
    
    
    Debt assumed at closing
    
    
    776
    
    
    
    Net cash paid to acquire subsidiaries
    
    $
    (7,088
    )
    
    $
    
  5




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Operations
   Basis of Presentation
    Accounting for Income Taxes
 Share-Based Payment Accounting for Stock-Based Compensation
 6




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Accounting Changes and Error Corrections
 NOTE 2  ACQUISITIONS
    For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    $
    24,215
    
    
    $
    16,744
    
    
    $
    45,904
    
    
    $
    31,019Operating income
    
    
    2,273
    
    
    
    1,897
    
    
    
    5,147
    
    
    
    3,401Net income
    
    
    1,359
    
    
    
    1,161
    
    
    
    3,478
    
    
    
    1,733Net income per common share:Basic
    
    $
    0.10
    
    
    $
    0.17
    
    
    $
    0.25
    
    
    $
    0.32Diluted
    
    $
    0.09
    
    
    $
    0.15
    
    
    $
    0.23
    
    
    $
    0.25
 NOTE 3  STOCK-BASED COMPENSATION
 Accounting For Stock-Based Compensation
 7




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 3  STOCK-BASED COMPENSATION (Continued)
  For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income as reported
    
    $
    1,769
    
    
    $
    377
    
    
    $
    3,336
    
    
    $
    761Less: stock based employee
compensation expense determined
under fair value based method for
all awards, net of tax
    
    
    (836
    )
    
    
    
    
    
    
    (1,505
    )
    
    
    Pro forma net income
    
    $
    933
    
    
    $
    377
    
    
    $
    1,831
    
    
    $
    761
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Basic net income per common share:As reported
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.24
    
    
    $
    0.15Pro forma
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    0.13
    
    
    $
    0.15Diluted net income per common share:As reported
    
    $
    0.12
    
    
    $
    0.05
    
    
    $
    0.22
    
    
    $
    0.13Pro forma
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.13
  For the Three
    
    
    For the SixMonths Ended
    
    
    Months EndedJune 30, 2005
    
    
    June 30, 2005Expected dividend yield
    
    
    
    
    
    
    Expected price volatility
    
    
    89.91
    %
    
    
    98.65
    %Risk-free interest rate
    
    
    6.25
    %
    
    
    6.63
    %Expected life of options
    
    7 years
    
    7 yearsWeighted average fair value of options
granted at market value
    
    $
    4.01
    
    
    $
    3.12
 NOTE 4  INCOME PER COMMON SHARE
 Earnings Per
Share
 8




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 4  INCOME PER COMMON SHARE (Continued)
  For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(restated)
    
    
    
    
    
    
    (restated)Numerator:Net income available for common
stockholders
    
    $
    1,769
    
    
    $
    377
    
    
    $
    3,336
    
    
    $
    761Plus income impact of assumed
conversions:Preferred stock dividends
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    124Net income applicable to common
stockholders plus assumed conversions
    
    $
    1,769
    
    
    $
    413
    
    
    $
    3,336
    
    
    $
    885Denominator:Basic earnings per share  weighted
average shares outstanding
    
    
    13,967
    
    
    
    6,256
    
    
    
    13,800
    
    
    
    5,091Effect of potentially dilutive common
shares:Convertible preferred stock and
employee and director stock
options
    
    
    1,136
    
    
    
    1,363
    
    
    
    1,100
    
    
    
    1,816Diluted
earnings per share  weighted average shares
outstanding and assumed
conversions
    
    
    15,103
    
    
    
    7,619
    
    
    
    14,900
    
    
    
    6,907Net income per share  basic
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.24
    
    
    $
    0.15Net income per share  diluted
    
    $
    0.12
    
    
    $
    0.05
    
    
    $
    0.22
    
    
    $
    0.13
 NOTE 5  GOODWILL AND INTANGIBLE ASSETS
 Goodwill and Other Intangible Assets
  9




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 6  RESTATEMENT
 Earning
Per Share.
 AirComp
Acquisition.  Business Combinations Accounting for
Sales of Stock by a Subsidiary.
 Increase
in Book Value of Fixed Assets.
 Increase
in Minority Interest and Capital in Excess of Par Value.
 10




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 6  RESTATEMENT (Continued)
  AsPreviously
    
    
    At June 30, 2004
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedAssetsCash and cash equivalents
    
    $
    485
    
    
    $
    
    
    
    $
    485Trade receivables, net
    
    
    10,305
    
    
    
    
    
    
    
    10,305Lease receivable, current
    
    
    180
    
    
    
    
    
    
    
    180Prepaid expenses and other
    
    
    1,137
    
    
    
    
    
    
    
    1,137Total current assets
    
    
    12,107
    
    
    
    
    
    
    
    12,107Property and equipment, net
    
    
    27,234
    
    
    
    4,571
    
    
    
    31,805Goodwill
    
    
    7,661
    
    
    
    
    
    
    
    7,661Other intangible assets, net
    
    
    2,054
    
    
    
    
    
    
    
    2,054Debt issuance costs, net
    
    
    612
    
    
    
    
    
    
    
    612Lease receivable, less current portion
    
    
    664
    
    
    
    
    
    
    
    664Deferred offering costs
    
    
    2,650
    
    
    
    
    
    
    
    2,650Other
    
    
    79
    
    
    
    
    
    
    
    79Total Assets
    
    $
    53,061
    
    
    $
    4,571
    
    
    $
    57,632Liabilities and Stockholders EquityCurrent maturities of long-term debt
    
    $
    4,848
    
    
    $
    
    
    
    $
    4,848Trade accounts payable
    
    
    3,391
    
    
    
    
    
    
    
    3,391Accrued salaries, benefits and payroll taxes
    
    
    677
    
    
    
    
    
    
    
    677Accrued interest
    
    
    212
    
    
    
    
    
    
    
    212Accrued expenses
    
    
    1,332
    
    
    
    
    
    
    
    1,332Accounts payable, related parties
    
    
    541
    
    
    
    
    
    
    
    541Total current liabilities
    
    
    11,001
    
    
    
    
    
    
    
    11,001Accrued postretirement benefit obligations
    
    
    520
    
    
    
    
    
    
    
    520Long-term debt, net of current maturities
    
    
    26,163
    
    
    
    
    
    
    
    26,163Other long-term liabilities
    
    
    129
    
    
    
    
    
    
    
    129Redeemable warrants
    
    
    1,500
    
    
    
    
    
    
    
    1,500Total Liabilities
    
    
    39,313
    
    
    
    
    
    
    
    39,313Commitments and contingenciesMinority interests
    
    
    2,782
    
    
    
    1,411
    
    
    
    4,193Stockholders EquityCommon stock
    
    
    63
    
    
    
    
    
    
    
    63Capital in excess of par value
    
    
    18,593
    
    
    
    955
    
    
    
    19,548Accumulated (deficit)
    
    
    (7,690
    )
    
    
    2,205
    
    
    
    (5,485
    )Total Stockholders Equity
    
    
    10,966
    
    
    
    3,160
    
    
    
    14,126Total Liabilities and Stockholders Equity
    
    $
    53,061
    
    
    $
    4,571
    
    
    $
    57,632
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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 6  RESTATEMENT (Continued)
 Increase in Net Income.
  Three Months Ended June 30, 2004AsPreviously
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedRevenue
    
    $
    11,422
    
    
    $
    
    
    
    $
    11,422Cost of revenues
    
    
    8,340
    
    
    
    79
    
    
    
    8,419Gross margin
    
    
    3,082
    
    
    
    (79
    )
    
    
    3,003General and administrative expense
    
    
    1,853
    
    
    
    
    
    
    
    1,853Income (loss) from operations
    
    
    1,229
    
    
    
    (79
    )
    
    
    1,150Other income (expense):Interest
    
    
    (499
    )
    
    
    
    
    
    
    (499
    )Minority interests in income of subsidiaries
    
    
    (161
    )
    
    
    22
    
    
    
    (139
    )Other
    
    
    18
    
    
    
    
    
    
    
    18Total other income (expense)
    
    
    (642
    )
    
    
    22
    
    
    
    (620
    )Net income (loss) before income taxes
    
    
    587
    
    
    
    (57
    )
    
    
    530Provision for foreign income tax
    
    
    (117
    )
    
    
    
    
    
    
    (117
    )Net income (loss)
    
    
    470
    
    
    
    (57
    )
    
    
    413Preferred stock dividend
    
    
    (36
    )
    
    
    
    
    
    
    (36
    )Net income (loss) attributed to common stockholders
    
    $
    434
    
    
    $
    (57
    )
    
    $
    377Net income per common share  basic
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    0.06Net income per common share  diluted
    
    $
    0.04
    
    
    $
    
    
    
    $
    0.04Weighted average number of common shares outstanding:Basic
    
    
    6,253
    
    
    
    
    
    
    
    6,253Diluted
    
    
    10,237
    
    
    
    
    
    
    
    10,237
 12




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 6  RESTATEMENT (Continued)
 Increase
in Net Income.
  Six Months Ended June 30, 2004AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedRevenue
    
    $
    21,083
    
    
    $
    
    
    
    $
    21,083Cost of revenues
    
    
    15,729
    
    
    
    218
    
    
    
    15,947Gross margin
    
    
    5,354
    
    
    
    (218
    )
    
    
    5,136General and administrative expense
    
    
    2,956
    
    
    
    
    
    
    
    2,956Income (loss) from operations
    
    
    2,398
    
    
    
    (218
    )
    
    
    2,180Other income (expense):Interest
    
    
    (1,068
    )
    
    
    
    
    
    
    (1,068
    )Minority interests in income of subsidiaries
    
    
    (256
    )
    
    
    44
    
    
    
    (212
    )Other
    
    
    205
    
    
    
    
    
    
    
    205Total other income (expense)
    
    
    (1,119
    )
    
    
    44
    
    
    
    (1,075
    )Net income (loss) before income taxes
    
    
    1,279
    
    
    
    (174
    )
    
    
    1,105Provision for foreign income tax
    
    
    (220
    )
    
    
    
    
    
    
    (220
    )Net income (loss)
    
    
    1,059
    
    
    
    (174
    )
    
    
    885Preferred stock dividend
    
    
    (124
    )
    
    
    
    
    
    
    (124
    )Net income (loss) attributed to common stockholders
    
    $
    935
    
    
    $
    (174
    )
    
    $
    761Net income per common share  basic
    
    $
    0.18
    
    
    $
    (0.03
    )
    
    $
    0.15Net income per common share  diluted
    
    $
    0.11
    
    
    $
    (0.02
    )
    
    $
    0.19Weighted average number of common shares outstanding:Basic
    
    
    5,077
    
    
    
    
    
    
    
    5,077Diluted
    
    
    8,394
    
    
    
    
    
    
    
    8,394
 13




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 6  RESTATEMENT (Continued)
  Six Months Ended June 30, 2004AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedCash Flows From Operating Activities:Net income (loss)
    
    $
    1,059
    
    
    $
    (174
    )
    
    $
    885Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Depreciation and amortization expense
    
    
    1,389
    
    
    
    218
    
    
    
    1,607Fair value of warrant issued to consultant
    
    
    14
    
    
    
    
    
    
    
    14Amortization of discount on debt
    
    
    109
    
    
    
    
    
    
    
    109Minority interest in income of subsidiaries
    
    
    256
    
    
    
    (44
    )
    
    
    212Changes in operating assets and liabilities:(Increase) in accounts receivable
    
    
    (1,482
    )
    
    
    
    
    
    
    (1,482
    )(Increase) in other current assets
    
    
    (250
    )
    
    
    
    
    
    
    (250
    )Decrease in other assets
    
    
    84
    
    
    
    
    
    
    
    84Increase in accounts payable
    
    
    258
    
    
    
    
    
    
    
    258Increase in accrued interest
    
    
    60
    
    
    
    
    
    
    
    60(Decrease) in accrued expenses
    
    
    (429
    )
    
    
    
    
    
    
    (429
    )(Decrease) in other long-term liabilities
    
    
    (141
    )
    
    
    
    
    
    
    (141
    )(Decrease) in accrued employee benefits and payroll taxes
    
    
    (185
    )
    
    
    
    
    
    
    (185
    )Net Cash Provided by Operating Activities
    
    
    742
    
    
    
    
    
    
    
    742Cash Flows From Investing Activities:Purchase of equipment
    
    
    (1,879
    )
    
    
    
    
    
    
    (1,879
    )Proceeds from sale of equipment
    
    
    
    
    
    
    
    
    
    
    Net Cash Used by Investing Activities
    
    
    (1,879
    )
    
    
    
    
    
    
    (1,879
    )Cash Flows From Financing Activities:Proceeds from issuance of common stock, net
    
    
    1,865
    
    
    
    
    
    
    
    1,865Repayments of long-term debt
    
    
    (1,331
    )
    
    
    
    
    
    
    (1,331
    )Debt issuance costs
    
    
    (211
    )
    
    
    
    
    
    
    (211
    )Net Cash Provided by Financing Activities
    
    
    323
    
    
    
    
    
    
    
    323Net decrease in cash and cash equivalents
    
    
    (814
    )
    
    
    
    
    
    
    (814
    )Cash and cash equivalents at beginning of the year
    
    
    1,299
    
    
    
    
    
    
    
    1,299Cash and cash equivalents at end of the period
    
    $
    485
    
    
    $
    
    
    
    $
    485Supplemental information:Interest paid
    
    $
    1,068
    
    
    $
    
    
    
    $
    1,068
 14




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 7  INVENTORIES
  June 30,
    
    
    December 31,2005
    
    
    2004Hammer bitsFinished goods
    
    $
    660
    
    
    $
    857Work in process
    
    
    495
    
    
    
    385Raw materials
    
    
    375
    
    
    
    151Total hammer bits
    
    
    1,530
    
    
    
    1,393Hammers
    
    
    577
    
    
    
    417Chemicals
    
    
    204
    
    
    
    254Coiled tubing and related inventory
    
    
    1,193
    
    
    
    309Shop supplies and related inventory
    
    
    397
    
    
    
    Total inventory
    
    $
    3,901
    
    
    $
    2,373
 NOTE 8  DEBT
  June 30,
    
    
    December 31,2005
    
    
    2004Debt of Allis-Chalmers EnergyRevolving line of credit
    
    $
    6,875
    
    
    $
    2,353Bank term loan
    
    
    5,064
    
    
    
    6,335Capital expenditure and acquisition line
    
    
    6,000
    
    
    
    Notes payable to former directors
    
    
    96
    
    
    
    402Debt of Jens Oilfield Service, Inc.Subordinated seller note
    
    
    3,331
    
    
    
    4,000Note payable under non-compete agreement
    
    
    391
    
    
    
    514Bank term loans
    
    
    1,030
    
    
    
    584Debt of Strata Directional Technology, Inc.Vendor financing
    
    
    420
    
    
    
    1,164Debt of Safco Oil Field Products, Inc. and DeltaNote payable under non-compete agreement
    
    
    150
    
    
    
    150Note payable to former owners of Delta
    
    
    350
    
    
    
    Debt of Downhole Injection Services, LLC and CapcoilVehicle and equipment installment notes
    
    
    160
    
    
    
    60Note payable under non-compete agreements
    
    
    330
    
    
    
    Debt of Mountain Compressed Air Inc.Term loan
    
    
    172
    
    
    
    198Seller note
    
    
    500
    
    
    
    1,600Debt of AirCompRevolving line of credit
    
    
    520
    
    
    
    1,520Bank term loan
    
    
    6,203
    
    
    
    6,775Delayed draw term loan
    
    
    1,480
    
    
    
    Subordinated note payable to M-I
    
    
    4,818
    
    
    
    4,818Total debt
    
    
    37,890
    
    
    
    30,473Less: short-term debt and current maturities
    
    
    3,952
    
    
    
    5,541Long-term debt obligations
    
    $
    33,938
    
    
    $
    24,932
 15




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 8  DEBT (Continued)
  
    
    A $10.0 million revolving line of credit. Borrowings were limited to 85% of eligible
accounts receivables, as defined. Outstanding borrowings under this line of credit were
$6.9 million as of June 30, 2005.
    
    A term loan with a principal balance at June 30, 2005 of $5.1 million payable in
monthly payments of principal of $105,583. We were also required to prepay this term loan
by an amount equal to 20% of receipts from our largest customer in Mexico.
    
    A $6.0 million capital expenditure and acquisition line of credit. Borrowings under
this facility were payable monthly over four years beginning in January 2006. Outstanding
borrowings under this line of credit were $6.0 million as of June 30, 2005.
      16




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 8  DEBT (Continued)
    
    
    A $3.5 million bank line of credit of which $520,000 was outstanding at June 30, 2005.
Interest accrued at an adjustable rate based on the prime rate. The average interest rate
was 7.0% as of June 30, 2005. We paid a 0.5% per annum fee on the undrawn portion.
Borrowings under the line of credit were subject to a borrowing base consisting of 80% of
eligible accounts receivable.
    
    A term loan with a principal balance of $6.2 million as of June 30, 2005 that accrued
interest at an adjustable rate based on either LIBOR or the prime rate. The average
interest rate was 8.25% as of June 30, 2005. Principal payments of $286,000 plus interest
were due quarterly, with a final maturity date of June 27, 2007.
    
    A delayed draw term loan facility in the amount of $1.5 million to be used for
capital expenditures. Interest accrued at an adjustable rate based on either the LIBOR or
the prime rate. Quarterly principal payments were to commence on March 31, 2006 in an
amount equal to 5.0% of the outstanding balance as of December 31, 2005, with a final
maturity of June 27, 2007. The outstanding principal balance was $1.5 million as of June
30, 2005.
     17




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 8  DEBT (Continued)
  NOTE 9  STOCKHOLDERS EQUITY
   NOTE 10- REVERSE STOCK SPLIT
  NOTE 11- SEGMENT INFORMATION
  For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)RevenuesDirectional drilling services
    
    $
    10,934
    
    
    $
    6,422
    
    
    $
    20,835
    
    
    $
    11,675Casing and tubing services
    
    
    3,933
    
    
    
    2,447
    
    
    
    7,493
    
    
    
    4,386Compressed air drilling services
    
    
    4,866
    
    
    
    2,553
    
    
    
    9,047
    
    
    
    5,022Production services
    
    
    2,289
    
    
    
    
    
    
    
    3,607
    
    
    
    Rental tools
    
    
    1,566
    
    
    
    
    
    
    
    1,940
    
    
    
    $
    23,588
    
    
    $
    11,422
    
    
    $
    42,922
    
    
    $
    21,083Operating Income (Loss):Directional drilling services
    
    $
    1,495
    
    
    $
    727
    
    
    $
    3,373
    
    
    $
    1,389Casing and tubing services
    
    
    1,354
    
    
    
    783
    
    
    
    2,679
    
    
    
    1,225Compressed air drilling services
    
    
    1,002
    
    
    
    339
    
    
    
    1,529
    
    
    
    594Production services
    
    
    36
    
    
    
    
    
    
    
    (2
    )
    
    
    Rental tools
    
    
    405
    
    
    
    
    
    
    
    326
    
    
    
    General corporate
    
    
    (1,378
    )
    
    
    (699
    )
    
    
    (2,744
    )
    
    
    (1,028
    )$
    2,914
    
    
    $
    1,150
    
    
    $
    5,161
    
    
    $
    2,180
 18




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 11  SEGMENT INFORMATION (Continued)
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Depreciation and Amortization:Directional drilling services
    
    $
    207
    
    
    $
    113
    
    
    $
    357
    
    
    $
    214Casing and tubing services
    
    
    468
    
    
    
    356
    
    
    
    908
    
    
    
    717Compressed air drilling services
    
    
    422
    
    
    
    275
    
    
    
    870
    
    
    
    626Production services
    
    
    189
    
    
    
    
    
    
    
    325
    
    
    
    Rental tools
    
    
    176
    
    
    
    
    
    
    
    265
    
    
    
    General corporate
    
    
    56
    
    
    
    25
    
    
    
    101
    
    
    
    50$
    1,518
    
    
    $
    769
    
    
    $
    2,826
    
    
    $
    1,607Interest Expense:Directional drilling services
    
    $
    2
    
    
    $
    67
    
    
    $
    24
    
    
    $
    142Casing and tubing services
    
    
    97
    
    
    
    155
    
    
    
    196
    
    
    
    320Compressed air drilling services
    
    
    219
    
    
    
    158
    
    
    
    450
    
    
    
    317Production services
    
    
    3
    
    
    
    
    
    
    
    4
    
    
    
    Rental tools
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    General corporate
    
    
    323
    
    
    
    119
    
    
    
    491
    
    
    
    289$
    645
    
    
    $
    499
    
    
    $
    1,166
    
    
    $
    1,068Capital Expenditures:Directional drilling services
    
    $
    937
    
    
    $
    83
    
    
    $
    1,200
    
    
    $
    788Casing and tubing services
    
    
    217
    
    
    
    46
    
    
    
    1,857
    
    
    
    425Compressed air drilling services
    
    
    1,147
    
    
    
    338
    
    
    
    1,926
    
    
    
    664Production services
    
    
    253
    
    
    
    
    
    
    
    290
    
    
    
    Rental tools
    
    
    7
    
    
    
    
    
    
    
    7
    
    
    
    General corporate
    
    
    174
    
    
    
    1
    
    
    
    183
    
    
    
    2$
    2,735
    
    
    $
    468
    
    
    $
    5,463
    
    
    $
    1,879
 As ofJune 30,
    
    
    December 31,2005
    
    
    2004Goodwill:Directional drilling services
    
    $
    4,168
    
    
    $
    4,168Casing and tubing services
    
    
    3,673
    
    
    
    3,673Compressed air drilling services
    
    
    3,510
    
    
    
    3,510Production services
    
    
    541
    
    
    
    425Rental tools
    
    
    
    
    
    
    General corporate
    
    
    
    
    
    
    $
    11,892
    
    
    $
    11,776
 19




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 11  SEGMENT INFORMATION (Continued)
 As ofJune 30,
    
    
    December 31,2005
    
    
    2004Assets:Directional drilling services
    
    $
    18,094
    
    
    $
    14,166Casing and tubing services
    
    
    23,279
    
    
    
    21,197Compressed air drilling services
    
    
    28,186
    
    
    
    29,147Production services
    
    
    11,055
    
    
    
    5,472Rental tools
    
    
    8,573
    
    
    
    1,625General corporate
    
    
    6,112
    
    
    
    8,585$
    95,299
    
    
    $
    80,192
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Revenues:United States
    
    $
    21,832
    
    
    $
    10,259
    
    
    $
    39,393
    
    
    $
    18,891International
    
    
    1,756
    
    
    
    1,163
    
    
    
    3,529
    
    
    
    2,192$
    23,588
    
    
    $
    11,422
    
    
    $
    42,922
    
    
    $
    21,083
 NOTE 12  LEGAL MATTERS
    NOTE 13  SUBSEQUENT EVENTS
  
    
    A $13.0 million revolving line of credit. Borrowings are limited to 85% of eligible
accounts receivable and 50% of eligible inventory (up to a maximum of $2.0 million of
borrowings based on inventory). This facility will be used to finance working capital
requirements and other general corporate purposes, including the issuance of standby
letters of credit.
    
    Two term loans totaling $42.0 million.
  20




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 13  SUBSEQUENT EVENTS (Continued)
   
 21




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 This document contains forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from the results discussed in such forward-looking statements.
Factors that might cause such differences include, but are not limited to, the general condition of
the oil and natural gas drilling industry, demand for our oil and natural gas service and rental
products, and competition. Other factors are identified in our Securities and Exchange Commission
filings in our Form 10-K under the heading Risk Factors located at the end of Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations.
 The following discussion and analysis should be read in conjunction with our selected historical
financial data and our accompanying financial statements and the notes to those financial
statements included elsewhere in this document. The following discussion contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect
our plans, estimates and beliefs. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of risks and uncertainties, including, but not
limited to, those discussed above under Risk Factors.
 Overview of Our Business
     Restatement
  22




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##### Table of Contents



Comparison of Three Months Ended June 30, 2005 and June 30, 2004
        23




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##### Table of Contents



Revenues
    
    
    Income (Loss) from OperationsThree Months Ended
    
    
    Three Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    Change(in thousands)Directional drilling services
    
    $
    10,934
    
    
    $
    6,422
    
    
    $
    4,512
    
    
    $
    1,495
    
    
    $
    727
    
    
    $
    768Casing and tubing services
    
    
    3,933
    
    
    
    2,447
    
    
    
    1,486
    
    
    
    1,354
    
    
    
    783
    
    
    
    571Compressed air drilling services
    
    
    4,866
    
    
    
    2,553
    
    
    
    2,313
    
    
    
    1,002
    
    
    
    339
    
    
    
    663Production services
    
    
    2,289
    
    
    
    
    
    
    
    2,289
    
    
    
    36
    
    
    
    
    
    
    
    36Rental tools
    
    
    1,566
    
    
    
    
    
    
    
    1,566
    
    
    
    405
    
    
    
    
    
    
    
    405General corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,378
    )
    
    
    (699
    )
    
    
    (679
    )Total
    
    $
    23,588
    
    
    $
    11,422
    
    
    $
    12,166
    
    
    $
    2,914
    
    
    $
    1,150
    
    
    $
    1,764
 Directional Drilling Services Segment
  Casing and Tubing Services Segment
  Compressed Air Drilling Services Segment
  24




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##### Table of Contents



Production Services Segment
  Rental Tools Segment
  Comparison of Six Months Ended June 30, 2005 and June 30, 2004
       25




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##### Table of Contents



Revenues
    
    
    Income (Loss) from OperationsSix Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    Change(in thousands)Directional drilling services
    
    $
    20,835
    
    
    $
    11,675
    
    
    $
    9,160
    
    
    $
    3,373
    
    
    $
    1,389
    
    
    $
    1,984Casing and tubing services
    
    
    7,493
    
    
    
    4,386
    
    
    
    3,107
    
    
    
    2,679
    
    
    
    1,225
    
    
    
    1,454Compressed air drilling services
    
    
    9,047
    
    
    
    5,022
    
    
    
    4,025
    
    
    
    1,529
    
    
    
    594
    
    
    
    935Production services
    
    
    3,607
    
    
    
    
    
    
    
    3,607
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Rental tools
    
    
    1,940
    
    
    
    
    
    
    
    1,940
    
    
    
    326
    
    
    
    
    
    
    
    326General corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,744
    )
    
    
    (1,028
    )
    
    
    (1,716
    )Total
    
    $
    42,922
    
    
    $
    21,083
    
    
    $
    21,839
    
    
    $
    5,161
    
    
    $
    2,180
    
    
    $
    2,981
 Directional Drilling Services Segment
  Casing and Tubing Services Segment
  26




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##### Table of Contents



Compressed Air Drilling Services Segment
  Production Services Segment
  Rental Tools Segment
  Liquidity and Capital Resources
  Operating Activities
    27




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##### Table of Contents



Investing Activities
  Financing Activities
    
    
    A $10.0 million revolving line of credit. Borrowings were limited to 85% of eligible
accounts receivables, as defined. Outstanding borrowings under this line of credit were
$6.9 million as of June 30, 2005.
    
    A term loan with a principal balance at June 30, 2005 of $5.1 million payable in
monthly payments of principal of $105,583. We were also required to prepay this term loan
by an amount equal to 20% of the accounts receivables collections from our largest
customer in Mexico.
    
    A $6.0 million capital expenditure and acquisition line of credit. Borrowings under
this facility were payable monthly over four years beginning in January 2006. Outstanding
borrowings under this line of credit were $6.0 million as of June 30, 2005.
     28




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##### Table of Contents




    
    A $3.5 million bank line of credit of which $520,000 million was outstanding at June
30, 2005. Interest accrued at an adjustable rate based on the prime rate. The average
interest rate was 7.0% as of June 30, 2005. We paid a 0.5% per annum fee on the undrawn
portion. Borrowings under the line of credit were subject to a borrowing base consisting
of 80% of eligible accounts receivable.
    
    A term loan with a principal balance of $6.2 million as of June 30, 2005 that accrued
interest at an adjustable rate based on either LIBOR or the prime rate. The average
interest rate was 8.25% as of June 30, 2005. Principal payments of $286,000 plus interest
were due quarterly, with a final maturity date of June 27, 2007.
    
    A delayed draw term loan facility in the amount of $1.5 million to be used for
capital expenditures. Interest accrued at an adjustable rate based on either the LIBOR or
the prime rate. Quarterly principal payments were to commence on March 31, 2006 in an
amount equal to 5.0% of the outstanding balance as of December 31, 2005, with a final
maturity of June 27, 2007. The outstanding principal balance was $1.5 million as of June
30, 2005.
      29




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##### Table of Contents



Capital Requirements
   Recent Developments
  
    
    A $13.0 million revolving line of credit. Borrowings are limited to 85% of eligible
accounts receivable and 50% of eligible inventory (up to a maximum of $2.0 million of
borrowings based on inventory). This facility will be used to finance working capital
requirements and other general corporate purposes, including the issuance of standby
letters of credit.
    
    Two term loans totaling $42.0 million.
    30




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##### Table of Contents



Critical Accounting Policies
  Accounting for Income Taxes
 31




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##### Table of Contents



Share-Based Payment Accounting for Stock-Based Compensation
 Accounting Changes and Error Corrections
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
  Interest Rate Risk.
    Foreign Currency Exchange Rate Risk.
  
 ITEM 4. CONTROLS AND PROCEDURES.
 Earnings Per
Share
  32




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 
 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
  33




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##### Table of Contents



SIGNATURES
  Allis-Chalmers Energy Inc.
(Registrant)/s/ MUNAWAR H. HIDAYATALLAHMunawar H. HidayatallahChief Executive Officer and
Chairman 34




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##### Table of Contents



EXHIBIT INDEX
 31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 35