10-Q 1 joule-q.txt FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from_________________ to _________________ Commission File Number 1-9477 Joule Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 22-2735672 ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1245 Route 1 South, Edison, New Jersey 08837 -------------------------------------------- (Address of principal executive officers) (Zip Code) (732) 548-5444 --------------------------------------------------- (Registrant's telephone number including area code) Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b.2 of the Act). Yes [ ] No [X] As of August 16, 2004, 3,683,650 shares of the Registrant's common stock were outstanding. Part I - Financial Information Item 1. Financial Statements (unaudited) Joule Inc. And Subsidiaries Consolidated Balance Sheets (Unaudited)

See accompanying notes to consolidated financial statements. 2 Joule Inc. And Subsidiaries Consolidated Statements of Operations (Unaudited)

See accompanying notes to consolidated financial statements. 3 Joule Inc. And Subsidiaries Consolidated Statements of Cash Flows (Unaudited)

See accompanying notes to consolidated financial statements. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) The consolidated balance sheet at the end of the preceding fiscal year has been derived from the audited consolidated balance sheet contained in the Company's Form 10-K and is presented for comparative purposes. All consolidated financial statements are unaudited. Management believes all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and changes in cash flows for all interim periods presented, have been made. The results of operations for interim periods are not necessarily indicative of the operating results for the full year. Footnote disclosures normally included in the consolidated financial statements have been omitted in accordance with accounting principles generally accepted in the United States of America for interim financial statements and the published rules and regulations of the Securities and Exchange Commission. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the most recent fiscal year. (2) At June 30, 2004, the Company has two stock-based employee compensation plans, which are described more fully in Note 5 to the Company's consolidated financial statements included in Form 10-K for the fiscal year ended September 30, 2003. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee and director compensation cost is reflected in net income (loss) in the periods presented herein as all options granted under those plans had an exercise price equal to the fair value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and income (loss) per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation.

(3) Segment Disclosures The Company has determined that its reportable segments are those that are based on the Company's method of internal reporting, which disaggregates its business by segment. The Company's reportable segments are: (1) Commercial Staffing, (2) Industrial Staffing, and (3) Technical Staffing. 5 Information concerning operations by operating segment is as follows (in 000's):

(4) Litigation The Company is subject to various claims and legal proceedings that arise in the ordinary course of its business activities. Management believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company. (5) Going Private Proposal and Subsequent Events: On August 21, 2003, the Company announced that it had received a non-binding proposal from a purchaser group (the "JAC Group") consisting of Emanuel N. Logothetis, the founder, Chairman of the Board and Chief Executive Officer of the Company, members of his immediate family and John G. Wellman, Jr., President and Chief Operating Officer of the Company, to acquire all of the outstanding shares of the Company's common stock not already owned by the JAC Group. A Special Committee, comprised of the three independent members of the Company's Board of Directors, was formed to evaluate and negotiate the going private proposal. Following negotiations with the Special Committee, on November 21, 2003, JAC Acquisition Company, Inc. ("JAC"), a corporation formed by the JAC Group, commenced a tender offer (the "Tender Offer") for all of the outstanding common stock of the Company not owned by the JAC Group at $1.52 per share. The Tender Offer was scheduled to expire at 12:00, midnight, Eastern Standard Time, on December 19, 2003. On December 22, 2003, the JAC Group announced that it had extended the expiration of the Tender Offer to 5:00 p.m., Eastern Standard Time, on January 15, 2004, unless further extended. At December 19, 2003, approximately 350,000 shares of common stock of the Company had been tendered and not withdrawn. On January 16, 2004, the JAC Group announced that the number of shares tendered pursuant to its offer to purchase all of the outstanding common stock of the Company not owned by the JAC Group was not sufficient to satisfy the non-waivable minimum tender condition of the tender offer and that the tender offer had been withdrawn. The JAC Group also announced that it had made an alternative going private proposal to the Board of Directors of the Company for a merger of JAC with Joule pursuant to which stockholders of Joule (other than the JAC Group and stockholders who properly perfect appraisal rights under Delaware law) would receive $1.54, in cash, for each outstanding share of Joule 6 common stock owned by them. The Board of Directors of Joule reconstituted the Special Committee of its Board of Directors, consisting of the three independent directors, to evaluate the merger proposal. The Special Committee sought further advice from the independent financial advisor and independent legal counsel previously retained in connection with the original going private proposal. On March 19, 2004, Joule Inc. announced that it had entered into an Agreement and Plan of Merger with JAC and that the merger consideration had been increased to $1.70 per share following discussions between members of the special committee and the JAC group. In connection with both the Tender Offer and the merger plan, the Company incurred costs of approximately $224,000 through June 30, 2004, including $71,000 and $174,000 in the three and nine months ended June 30, 2004, related to fees incurred by the Special Committee to analyze the JAC Group's offers, which are included in selling, general and administrative expenses. The merger was approved by the Board of Directors, with the directors who are members of the JAC Group abstaining, and by the holders of a majority of the outstanding shares of Joule common stock, which was obtained by the written consent of the members of the JAC Group. On August 13, 2004 the merger was consummated. JAC was merged with and into Joule, with Joule as the surviving corporation. Each share of Joule common stock, other than shares of common stock held by the JAC Group, which were contributed to JAC immediately prior to the Merger in exchange for shares of JAC common stock, and shares of common stock held by stockholders who perfect appraisal rights under Delaware law, was converted into the right to receive the merger consideration of $1.70 per share in cash, without interest. As a result of the merger, Joule became a privately-held company owned solely by the members of the JAC Group. The common stock of Joule will cease to be listed on the American Stock Exchange and Joule will cease to file periodic reports with the Securities and Exchange Commission. 7 JOULE INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Executive Level Overview The Company's revenues are derived from providing staffing services to its customers. Such services include providing commercial (office and light industrial) workers, technical (engineering, scientific and graphic design/marketing) personnel, and industrial (skilled craft, industrial plant and facility maintenance) labor. Substantially all revenue is billed on a direct cost plus markup basis. The Company also recognizes revenues under fixed price contracts and for permanent placement services. The Company desegregates its operations into three segments for internal reporting and management purposes - Commercial, Industrial, and Technical. Results of Operations Revenue increased 4.7% to $18.6 million for the three months ended June 30, 2004 compared to $17.8 million for the year earlier period. Revenue for the nine months of fiscal 2004 increased 3.5% to $53.1 million from $51.3 million for the comparable nine-month period of 2003. Technical staffing revenue was $7.4 million for the three months ended June 30, 2004 and 2003; for the nine-month period ended June 30, 2004 revenue increased 4.5% to $21.7 million from $20.7 million for the comparable prior period. This increase, in the nine-month period, related primarily to the strength of its scientific business that places personnel with pharmaceutical, bio-tech, chemical, and consumer products clients, as well as the acquisition in January 2003 of a staffing firm, which places marketing and creative personnel. Commercial staffing revenue increased 9.3% to $5.4 million and 11.3% to $15.5 million for the respective three and nine-month periods ended June 30, 2004 as general demand for these services improved over prior year periods. Industrial staffing revenue increased 6.9% to $5.8 million for the three-month period ended June 30, 2004 compared to the 2003 similar period. For the nine-month period ended June 30, 2004, industrial staffing revenue declined 4.4% to $15.9 million compared to the year earlier period. This nine-month decline was due to the uneven economic recovery, which negatively impacted demand for the Company's industrial personnel earlier in the year. It is too early to conclude that the improvement in results in the current quarter represents a trend since it was based on short-term projects. Cost of services was 80.0% of revenue in the current quarter compared to 80.8% for the prior year three-month period. For the nine-month period cost of services were 80.2% of revenues in 2004 compared to 81.3% in the same prior year period. These expenses consist primarily of compensation to employees on assignment to clients and related costs, including social security, unemployment taxes, general liability and workers' compensation insurance, and other costs of services, including travel expenses and a van transportation service which transports some commercial staffing workers to job sites. The improvements in cost of services as a percentage of revenue related to modest reductions in various costs of services in 2004 compared to the prior periods. Selling, general and administrative expenses were $3.4 million and $9.8 million for the three and nine months ended June 30, 2004, respectively, compared to $3.2 million and $10.0 million for the year earlier periods, and represented 18.3% and 18.5% of revenue in the 2004 respective periods, compared to the respective 2003 periods of 17.8% and 19.6% of revenue. Selling, general and administrative expenses include staff payroll and related expenses in addition to advertising, professional fees, depreciation and amortization, provision for the allowance for doubtful accounts, rent and other costs related to maintaining the Company's branch offices. The Company has reduced selling, 8 general and administrative expenses as a percentage of sales in the nine months of 2004 through a decrease in staff payroll and related expenses, some branch closures, and decreases in other costs related to the Company's branch offices. The Company continues to monitor these expenses and expects that such cost controls will further benefit future periods. Partially offsetting this trend, the Company incurred fees of approximately $71,000 and $174,000 in the 2004 current quarter and nine-month periods, respectively, for services performed by the Special Committee and its advisors relating to the going private proposal. The percentage increase in the current quarter can be attributed to this $71,000. Interest expense increased $1,000 and $21,000 for the 2004 three and nine-month periods, respectively, compared to the respective prior year periods, reflecting higher interest rates associated with the new three-year loan agreement, offset partially by lower levels of borrowing. After giving effect to non-deductible costs associated with the going private proposal, partially offset by the utilization of certain tax credits, the effective tax rates for the three and nine month periods ended June 30, 2004 were 49% and 48%, respectively; for 2003 the effective tax rate was 39% for the three-month period ended June 30, 2003; the effective tax rate benefit was 39% for the nine months ended June 30, 2003. As a result of the above, the net income for the 2004 three-month period was $142,000 or $0.04 per share, basic and diluted, compared with net income of $126,000 or $0.03 per share, basic and diluted, for the 2003 period; for the 2004 nine-month period, the net income was $288,000 or $0.08 per share, basic and diluted, compared with the net loss of $314,000 or $0.09 per share, basic and diluted, for the 2003 period. Liquidity and Capital Resources Current assets at June 30, 2004 were $9,736,000 compared to current assets of $9,937,000 at September 30, 2003 and current liabilities at June 30, 2004 were $5,533,000 compared to $6,374,000 as of September 30, 2003. The decrease in current assets relates to a $312,000 increase in gross accounts receivable, offset by a $584,000 decrease in prepaid insurance related to the timing of insurance renewals as well as lower premium deposits and a $90,000 decrease in prepaid expense and other current assets. The decrease in current liabilities is principally the result of an $817,000 decrease in bank borrowings, partially offset by a $246,000 increase in accounts payable and accrued expenses principally related to accounts payable fluctuations and a $270,000 decrease in accrued payroll and related taxes due to extra days payroll accrual at September 30, 2003. Due to the nature of its business, the Company's capital expenditures are relatively modest and amounted to $164,000 for the nine months ended June 30, 2004. Employees typically are paid on a weekly basis. Clients generally are billed on a weekly basis. The Company has generally utilized bank borrowings to meet its working capital needs. The Company has a three-year loan agreement in the form of a line of credit of $7,500,000 that bears interest at LIBOR plus two and one-half percent with a prime rate plus one-half percent option. The Company used its bank line of credit to obtain a $1,000,000 letter of credit in favor of its worker compensation insurance carrier as a part of its insurance renewal in 2003. Borrowings are collateralized principally by accounts receivable. In addition to the letter of credit, $2,333,000 was outstanding under this line as of June 30, 2004. In August 2004, the Company also obtained a long-term loan from its lender for $1,492,000 secured by mortgages on real estate it owns. The proceeds are being used to partially pay the merger consideration and fees and expenses related to the going private transaction, as described in Note 5. The loan bears interest at the prime rate plus one percent and matures August 22, 2006. The loan is to be paid down monthly using a seven (7) year amortization schedule with a balloon payment of approximately $1,083,000 due at maturity. The Company believes that internally generated funds and available borrowings will provide sufficient cash flow to meet its requirements for at least the next 12 months. 9 The following is a table that presents the Company's contractual obligations and commercial commitments as of June 30, 2004:

*Represents contractual cash obligations for the three months ended September 30, 2004. Critical Accounting Policies During December 2001, the Securities and Exchange Commission ("SEC") published a Commission Statement in the form of Financial Reporting Release No. 60 which encouraged that all registrants discuss their most "critical accounting policies" in management's discussion and analysis of financial condition and results of operations. The SEC has defined critical accounting policies as those that are both important to the portrayal of a company's financial condition and results, and that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While the Company's significant accounting policies are summarized in Note 2 to the consolidated financial statements included in the Company's Form 10-K for the fiscal year ended September 30, 2003, the Company believes the following accounting policies to be critical: Revenue Recognition - The Company's revenues are derived from providing staffing services to its customers. Such services include providing commercial (office and light industrial) workers, technical (engineering, scientific and graphic design/marketing) personnel, and industrial (skilled craft, industrial plant and facility maintenance) labor. Substantially all revenue is billed on a direct cost plus markup basis. In addition, the Company recognizes revenues under fixed price contracts and permanent placement services. Revenues are recorded when services are rendered. Long-Lived Assets -The Company reviews amortizable long-lived assets for impairment whenever events or changes in business circumstances occur that indicate the carrying amount of the assets may not be recovered. The Company assesses the recoverability of long-lived assets held and to be used based on undiscounted cash flows. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, goodwill is not amortized but is tested at the segment level at least annually for impairment. If impairment is indicated, the impairment is measured as the difference between the carrying value and the fair value of the asset. Stock Options - The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the Company's stock options granted under its two stock-based employee compensation plans. Accordingly, compensation expense is recorded on the date of grant of an option to an employee or member of the Board of Directors only if the fair market value of the underlying stock at the time of grant exceeds the exercise price. No options have been granted with an exercise price less than the fair market value of the Company's common stock at the date of grant. Had the Company elected to account for its stock options using SFAS No. 123, compensation expense would have been recognized on options granted based on their fair value. Estimating the fair value of stock options involves a number of judgments and variables that are subject to significant change. A change in the fair value estimate could have a significant effect on the amount of compensation expense disclosed. 10 Management Estimates - Management of the Company is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. These estimates and assumptions impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported revenues and expenses during the reporting period. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Some of the more significant estimates made by management include the allowance for doubtful accounts and various other operating allowances and accruals. Related Party Transactions The Company paid certain major stockholders Board of Director's fees of approximately $6,000 and $10,000 for the nine months ended June 30, 2004 and 2003, respectively. For the nine months ended June 30, 2004, the Company provided temporary office services to Symphony Suites, a company owned by Nick M. Logothetis, a director and significant shareholder. Billing rates are comparable to those used for other customers; amounts charged for the three and nine months ended June 30, 2004 were $127,000 and $307,000, respectively; such charges for the three and nine months ended June 30, 2003 were $90,000 and $287,000; $64,000 and $85,000 was outstanding at June 30, 2004 and September 30, 2003, respectively. The Company rented a facility from E.N. Logothetis, Chairman and Chief Executive Officer and a significant stockholder for approximately $12,000 for the nine months ended June 30, 2004 and June 30, 2003. The Company's rental agreement with the stockholder is on a month-to-month basis. The Company's Board of Directors has approved the transactions outlined above. Any substantial change in the terms of any such transactions and any additional transactions with affiliates of the Company will be submitted to the Board for approval. Item 3 - Quantitative and Qualitative Disclosures About Market Risk In the normal course of business, the Company is exposed to fluctuations in interest rates as it seeks debt financing to meet its working capital needs. The Company does not employ specific strategies, such as the use of derivative instruments or hedging, to manage its interest rate exposures. The fair value of the loans payable to bank as of June 30, 2004 approximates its carrying value. There has been no change with respect to the Company's interest rate exposures or its approach toward those exposures since September 30, 2003. The Company does not expect its interest rate exposures on its borrowings to change significantly in the near term. A 100 basis point (1.0%) increase in interest rates on the Company's loan payable to bank would have an immaterial impact on the Company's financial position or results of operations. The Company is also exposed to market risks with respect to the unvested portion of its deferred compensation program. Participants in the program may direct the investment of deferred compensation amounts into various debt and equity investments. Such investments are classified as trading securities and as such are carried on the Company's consolidated balance sheet at fair value with changes in their fair values recognized each period in the Company's consolidated statement of operations. Therefore, the Company is exposed to changes in interest rates and the volatility of the stock and bond markets. 11 Item 4. - Controls and Procedures Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information that we are required to disclose in the reports that we file or submit under the Exchange Act. Internal Control Over Financial Reporting There has been no change in our internal control over financial reporting during the nine months ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Forward-Looking Information Certain parts of this document include forward-looking statements within the meaning of the federal securities laws that are subject to risks and uncertainties. Factors that could cause the Company's actual results and financial condition to differ from the Company's expectations include, but are not limited to, a change in economic conditions that adversely affects the level of demand for the Company's services, competitive market and pricing pressures, the availability of qualified temporary workers, the ability of the Company to manage growth through improved information systems and the training and retention of new staff, and government regulation. 12 JOULE INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (Section 302 Certification), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (Section 302 Certification), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Principal Executive Officer Exhibit 32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Principal Financial Officer (b) Reports on Form 8-K Form 8-K dated May 5, 2004 with respect to the issuance of the press release for the second quarter and six months ended March 31, 2004 (Item 12). 13 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. JOULE INC. (Registrant) August 16, 2004 /s/ E.N. LOGOTHETIS -------------------------------------- E. N. Logothetis, Chairman and Chief Executive Officer (Principal Executive Officer) August 16, 2004 /s/ BERNARD G. CLARKIN -------------------------------------- Bernard G. Clarkin, Vice President and Chief Financial Officer (Principal Financial Officer) 14 EXHIBIT INDEX 31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (Section 302 Certification), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (Section 302 Certification), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Principal Executive Officer 32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Principal Financial Officer

JOULE INC 10-Q