**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C.  20549**

 

**FORM 10-K**

 

**(Mark One)**

 
| **ý**                                                                             | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**     |
|----------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                                                                                   |                                                                                               |
| **For the fiscal year ended December 31, 2004**                                   |
|                                                                                   |                                                                                               |
| o                                                                                      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                   |                                                                                               |
| **For the transition period from          to** |

 

**Commission file number 0-7282**

 
| **COMPUTER HORIZONS CORP.**                            |
|--------------------------------------------------------|
| (Exact name of registrant as specified in its charter) |

 
| **New York**                                                      | ** ** | **13-2638902**                        |
|-------------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)   |       | (I.R.S. Employer  Identification No.) |
|                                                              |       |                                  |
| **49 Old Bloomfield Avenue  Mountain Lakes, New Jersey**          | ** ** | **07046-1495**                        |
| (Address of principal  executive offices)                         |       | (Zip Code)                            |
|                                                              |       |                                  |
| Registrant’s telephone number,                               |       |                                  |
| including area code:                                              | ** ** | **(973) 299-4000**                    |
|                                                              |       |                                  |
| Securities registered pursuant to Section 12(b) of the  Act: |       |                                  |

  
| **Title of each class** | ** ** | **Name of each exchange  on which registered** |
|-------------------------|------------|------------------------------------------------|
| ** **              | ** ** | ** **                                     |
| None                    |       | None                                           |

  
| Securities  registered pursuant to Section 12(g) of the Act: |
|-------------------------------------------------------------------|
|                                                              |
| **Common Stock (Par value $.10 per share)**                       |
| (Title of class)                                                  |
|                                                              |
| **Series A Preferred Stock Purchase Rights**                      |
| (Title of class)                                                  |

 

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 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 suchreports), and (2) has been subject to such filing requirements for the past 90days.  Yes ý   No  o

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in the ExchangeAct Rule 12b-2).    Yes   ý  No o

 

Theaggregate market value of the voting stock held by non-affiliates of theregistrant as of June 30, 2004 was approximately **$**100,000,000.

 

The numberof shares outstanding of each of the registrant’s classes of common stock as ofMarch 14, 2005 were 31,012,113 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

There is incorporated hereinby reference the registrant’s (i) portions of the Annual Report to Shareholdersfor the year ended December 3l, 2004, in Part II of this Report and (ii)portions of the Definitive Proxy Statement for the 2005 Annual Meeting ofShareholders, expected to be filed with the Securities and Exchange Commissionin Parts II and III.

 

 

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**COMPUTER HORIZONS CORP.**

**December 31, 2004**

**Form 10-K**

 

**Table of Contents**

 
| **PART I**     |                                                                                                                |   |
|----------------|---------------------------------------------------------------------------------------------------------------------|--------|
| Item  1.       | Business                                                                                                            |   |
| Item  2.       | Properties                                                                                                          |   |
| Item 3.        | Legal Proceedings                                                                                                   |   |
| Item  4.       | Submission  of Matters to a Vote of Security Holders                                                                |   |
|           |                                                                                                                |   |
| **PART II**    |                                                                                                                |   |
| Item  5.       | Market  for Registrant’s Common Equity, Related Shareholder Matters and Issuer  Purchases of Equity Securities |   |
| Item 6.        | Selected  Financial Data                                                                                            |   |
| Item  7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operation                          |   |
| Item  7A.      | Quantitative  and Qualitative Disclosures about Market Risk                                                         |   |
| Item  8.       | Financial  Statements and Supplementary Data                                                                        |   |
| Item  9.       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosures                              |   |
| Item 9A.       | Controls and  Procedures                                                                                            |   |
| Item 9B.       | Other Information                                                                                                   |   |
|           |                                                                                                                |   |
| **PART III**   |                                                                                                                |   |
| Item  10.      | Directors  and Executive Officers of the Registrant                                                                 |   |
| Item 11.       | Executive  Compensation                                                                                             |   |
| Item  12.      | Security  Ownership of Certain Beneficial Owners and Management                                                     |   |
| Item  13.      | Certain  Relationships and Related Transactions                                                                     |   |
| Item  14.      | Principal  Accountant Fees and Services                                                                             |   |
|           |                                                                                                                |   |
| **PART IV**    |                                                                                                                |   |
| Item  15.      | Exhibits  Financial Statement Schedules and Reports                                                                 |   |
|           |                                                                                                                |   |
| **SIGNATURES** |                                                                                                                |

 

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**Disclosure Regarding Forward Looking Statements**

 

Statements included in thisReport that do not relate to present or historical conditions are “forward-lookingstatements” within the meaning of that term in Section 27A of the SecuritiesAct of 1933, as amended, and in Section 21F of the Securities Exchange Actof 1934, as amended.  Additional oral or written forward-lookingstatements may be made by the Company from time to time, and such statementsmay be included in documents that are filed with the Securities and ExchangeCommission (“SEC”).  Such forward-looking statements involve risks anduncertainties that could cause results or outcomes to differ materially fromthose expressed in such forward-looking statements.  Forward-lookingstatements may include, without limitation, statements relating to the Company’splans, strategies, objectives, expectations and intentions and are intended tobe made pursuant to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995.  Words such as “believes,” “forecasts,” “intends,”“possible,” “expects,” “estimates,” “anticipates,” or “plans” and similarexpressions are intended to identify forward-looking statements.  Amongthe important factors on which such statements are based are assumptionsconcerning the anticipated growth of the information technology industry, thecontinued need of current and prospective clients for the Company’s services,the availability of qualified professional staff, and price and wage inflation.

 

**PART I**

 

Item 1.  Business

 

General 

 

ComputerHorizons Corp., or CHC, or the Company, is a strategic solutions and professionalservices company with more than thirty-seven years of experience, specificallyin information technology.  CHC was incorporated in 1969 under the laws ofthe State of New York.  The Companyprovides its services to multi-national companies through its “bestshore”delivery centers located globally, and enabling its Global 2000 (which, Forbesmagazine defines as the biggest and most important companies as measured bysales, profits, assets and market value), client base to maximize technologyinvestments.  With the acquisition of RGII Technologies, Inc (“RGII”)., inJuly 2003, and acquisition of Automated Information Management, Inc. (“AIM”)in April 2004, CHC expanded its government practice to include the Federalgovernment sector, in addition to various other vertical markets it serves,such as healthcare, insurance and financial services. The Company’s wholly-ownedsubsidiary, Chimes, Inc. uses its proprietary technology to enable its Global2000 client base to align and integrate business planning with human resourcemanagement across an enterprise’s business functions.

 

The Companymarkets solutions to existing and potential clients with the objective ofbecoming a preferred provider of comprehensive information technology servicesand solutions for such clients.  The Company believes that the range ofservices and solutions that it offers, combined with its proprietary Chimestechnology, provides it with competitive advantages in the informationtechnology marketplace.

 

The Company’sclients are generally very large, Global 2000 companies in many industries andwith wide geographic dispersion.  For the years ended December 31,2004, 2003 and 2002, the Company’s ten largest clients accounted forapproximately 24%, 38% and 38% of its revenues, respectively.  In 2004,the Company provided information technology services to 405 clients. ** **During 2004, the Company’s largestclient accounted for approximately 6% of the Company’s consolidated revenues **. **The Company offers its clients abroad range of business and technical services as an outsourcer and systemsintegrator capable of providing complex total solutions.  This total solutionsapproach comprises proprietary software and tools, proven processes andmethodologies, tested project management practices and resource management andprocurement programs.

 

3

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The Companyoffers global technology services and solutions, which are divided into threedivisions; (1) Solutions, (2) IT Services and (3) Chimes.  The following describes each of thesedivisions :

 

(1)Solutions:  CHC Solutions Group (including RGII Technologies Inc., AIM, CHCHealthcare Solutions and CHC’s training/education practice) is an e-BusinessSolutions provider, enabling enterprises and Federal, State and Localgovernment agencies to build business-critical and highly scalablesolutions.  The Solutions Group, comprised of approximately 1,000 ITprofessionals, offers a comprehensive list of integrated solutions includinge-business strategy and assessment; HIPAA compliance; on shore, near-shore andoffshore outsourcing;  enterprise network management; web architecturedesign; hosting and integration; application development; client relationshipmanagement (CRM); project management; systems integration; networking servicesand education/training.   For projects in the Solutions’ division,CHC is responsible for the project management and supervision.  Generally,the gross margins in this division are higher than that of the IT Servicesdivision.  Revenues in the Solutions Group are recognized as services areperformed under either time-and-material or a fixed fee basis.  However,adjustments are made if necessary to reflect progress against milestones ordeliverables.  The Solutions group containsthe following practices :

 

(1a) RGII Technologies, Inc.(RGII): In July 2003, the Company acquired RGII, a solutions provider ofhigh-end technology and program management to Federal, State and Localgovernment agencies.  RGII offers services and solutions in such areas as:enterprise management, network infrastructure, information assurance andsecurity, web development and integration, call management, engineeringtechnology and technical services.  On April 1,2004, RGII Technologies, Inc. acquired Automated Information Management, Inc. (“AIM”).The Company purchased AIM to further its commitment to driving the growthpotential that exists in the Federal government market and to expand RGII’sfootprint, providing an entrance into certain government agencies, as well asstrong relationships with large, prime contractors.

 

(1b) Outsourcing:  Spurred byglobal competition and rapid technological change, large companies, inparticular, are downsizing and outsourcing for reasons such as cost reduction,capital asset improvement, improved technology and better strategicfocus.  In response to this trend, the Company has created a group ofoutsourcing centers onshore, near-shore in Montreal, Canada and offshore inChennai, India with 24 hour / 7 day a week support, which are fully equippedwith the latest technology and communications, as well as a complete staff thatincludes experienced project managers, technicians and operators.  Theseprofessionals facilitate essential data functions including:  applicationsdevelopment, systems maintenance, data network management, voice networkadministration and help desk operations.

 

(1c) CHC Healthcare Solutions, LLC:* *CHC Healthcare Solutions was formedin 2002, as a consortium of Computer Horizons Corp. and a healthcare consultingfirm, ZA Consulting, LLC. CHC Healthcare Solutions, which is reported under CHCSolutions, offers operational, compliance and technology services and solutionsto the healthcare industry.  On December31, 2004, the Company acquired the 20% minority interest owned by ZAC, inexchange for the forgiveness of a ZAC note obligation to the Company approximating$630,000.

 

(1d) Education/Training:**  The Company’s education divisionoffers custom-designed and/or existing training programs to enhance thecompetencies of client staff in specific technologies, languages, methodologiesand applications.  The prevailing focus of the Company is to assistclients through instructor-led, on-site training and consulting in thetransitioning IT organization of Global 2000 corporationsnationwide.   To support these changing technologies, the Company hasdeveloped extensive curriculum offerings in Web Technologies, RelationalDatabases, Programming Languages, Reporting Tools, Process Improvement, UNIX,Client/Server and Mainframe Technologies.

 

(1e) Xpress TM : In September 2003,the Company acquired the Xpress TM   software suite which, alongwith related implementation services, enables manufacturers to become UCCnetcompliant whereby product identification data is synchronized and standardizedwith retailers.

 

4

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(1f) The Company has sold severalsubsidiaries within the past five years which were formerly practices withintheir Solutions Group. These practices include :

•                  PrincetonSoftech (Including the SELECT Software Tools division), a software productscompany that was sold by the Company in March 2002.

•                  EbNetworks,a storage networking company, sold in September 2001.

•                  CHC InternationalLimited (“Spargo”), the Company’s European Solutions company, sold in January 2001.

 

(2) ITServices:  CHC’s IT Services Group provides highly skilled softwareprofessionals to augment the internal information management staffs of majorcorporations.  The Company offers its clients a just-in-time solution tosupply their staffing needs from the Company’s approximately 1,600 IT Servicesdivision professionals.  Clients are serviced through the Company’s branchnetwork of offices in the United States and Canada, and virtually throughChimes.  The client is responsible for managing and supervising oursoftware professionals. As a result, gross margins in this business area aresignificantly less than Solutions services.  Revenue for the IT ServicesGroup is recognized as services are rendered on a time-and-materialbasis.  Hourly and daily rates are determined in advance and agreed towith the client.  Time worked is documented in various forms using theapplicable timekeeping process (i.e. the client’s or the Company’s timekeepingsystems).

 

(3) Chimes:Chimes, Inc., a wholly-owned subsidiary of CHC, provides workforce procurementand management services to Global 2000 companies.   Through scalable,web-based software, Chimes administers the hiring cycle to identify, leverageand manage the enterprise-wide spend on human capital.  Chimes’ portfolioof services addresses contingent hiring (CVM), full-time hiring (CAM), programmanagement (RPM) and consolidated time sheet and expense processing (CTE).  Research and Development costs for the yearsended December 31, 2004, 2003 and 2002 were approximately $3.3 million,$3.8 million and $3.7 million, respectively.

 

During the fourth quarter of2004, the Company completed a restructuring initiative whereby the Company’sbusiness model has been realigned, effective January 1, 2005, around itsthree distinct segments of clients : Federal Government, Commercial and VendorManagement services (Chimes), and will report accordingly to conform to the newpresentation of CHC business segments for the first quarter of 2005.   This realigned business model is designed todeliver improved operational performance for the Company and reduce annualoperating costs.

 

### **Financial Information aboutIndustry Segments**

 

### **The information required by thisitem is incorporated herein by reference to Note 9 of the Notes to ConsolidatedFinancial Statements included under Item 8 of this Report.**

 

### **Employees**

 

As of December 3l,2004, the Company had a staff of 3,137, including approximately 2,600 ITprofessionals.  None of the Company’s employees are subject to acollective bargaining arrangement.  TheCompany devotes significant resources to recruitment of qualified professionalsand provides continuing in-house training and education, and a career pathmanagement development program within the Company.

 

Intellectual Property

 

Certain aspects of our products and technology areproprietary. We rely on U.S. intellectual property laws, including patent,copyright, trademark, and trade secret laws to protect our proprietary rights.We also maintain contractual restrictions in our agreements with customers,employees, and others to protect our intellectual property rights. In addition,we license software and technology from third parties, and incorporate theminto our own software products as well as using them as tools in developing ourproducts or providing our services.  Thesource code for our products is protected both as a trade secret and as acopyrighted work.

 

5

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Seasonality

 

The Company experiences a moderate amount ofseasonality, primarily in the fourth quarter of the year, due to the largenumber of holidays and an increased amount of vacation time taken by ouremployees and clients.  As a result,revenues and profitability may be reduced in the fourth quarter.

 

Backlog

 

TheCompany’s backlog of services to be completed pertains primarily to the Solutions(Federal) Group.  Funded and unfundedbacklog approximated $20.2 million and $115.5 million, respectively, as of December 31,2004.  Funded and unfunded backlog wasapproximately $20.1 million and $112.3 million, respectively, as of December 31,2003.

 

### **Competition**

### ** **

The Companycompetes in the commercial information technology services market which ishighly competitive. Although there has been a significant amount ofconsolidation in this sector, the competitive landscape remains highlyfragmented and characterized by small local and regional firms and a few large,multi-national competitors.  The marketincludes participants in a variety of market segments, including systemsconsulting and integration firms, professional services companies, applicationsoftware firms, temporary employment agencies, the professional service groupsof computer equipment companies, facilities management and managementinformation systems or MIS outsourcing companies, certain accounting firms, andgeneral management consulting firms.  The Company’s competitors includecompanies such as Analysts International Corp., CIBER, Inc., Computer TaskGroup Inc., iGATE Corp. and Covansys Corp.  Many participants in theinformation technology consulting and software solutions market havesignificantly greater financial, technical and marketing resources and generategreater revenues than the Company.  Management believes that the principalcompetitive factors in the commercial information technology services industryinclude responsiveness to client needs, speed of application softwaredevelopment, quality of service, price, project management capability andtechnical expertise.  Pricing has its greatest importance as a competitivefactor in the area of professional service staffing.  Management believesthat its ability to compete also depends in part on a number of competitivefactors outside its control, including the ability of its competitors to hire,retain and motivate skilled technical and management personnel, the ownershipby competitors of software used by potential clients, the price at which othersoffer comparable services and the extent of its competitors’ responsiveness to clientneeds.

 

AvailableInformation 

 

The Company’sinternet website address is www.computerhorizons.com.  The Company’s AnnualReports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form8-K and amendments to those reports filed or furnished pursuant to Section 13(a)or 15(d) of the Exchange Act are available free of charge through our websiteas soon as reasonably practicable after they are electronically filed with, orfurnished to, the Securities and Exchange Commission.

 

6

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Item 2.   Properties 

 

The Company’sCorporate and Financial Headquarters, as well as its Eastern Regional Office,comprising approximately 63,000 square feet, are located at 49 Old BloomfieldAvenue, Mountain Lakes, New Jersey.  The Mountain Lakes lease is for aterm expiring December 31, 2005, at a current annual rental ofapproximately $1,800,000.  Upon lease expiration, the Company intends toenter a new lease for its Headquarters (for approximately 50,000 square feet)located in the general vicinity of its current leased property.  As of December 3l, 2004, the Companyalso maintained operating facilities, which are shared between the IT Servicesand Solutions Group business segments, in California, Colorado, Connecticut,Florida, Georgia, Illinois, Indiana,  Maryland,Michigan, Minnesota, New Jersey, New York, Ohio, Oklahoma, Tennessee, Texas,  Virginia and Washington as well asinternational operations located in India and Canada, with an aggregate ofapproximately 309,000 square feet. ** **Chimesmaintains facilities in California, Illinois, Michigan, Minnesota and NewJersey.  The leases for all of these facilities are at a current annualaggregate rental of approximately $4,066,000.  These leases expire atvarious times with no lease commitment longer than April 30, 2008.  The Company believes that the facilities areadequate for the current level of operations.

 

Item3.  Legal Proceedings

 

The Companyis involved in various and routine litigation matters, which arise through thenormal course of business. Although the outcome of such matters isunpredictable with assurance, management does not expect that the ultimateoutcome of any of these matters, individually or in the aggregate, will have amaterial adverse effect on the Company’s financial position or results ofoperations.  However, depending on theamount and timing of any unfavorable outcome of any such matters, such outcomecould possibly materially and adversely affect our future results of operationsor cash flows in any particular period.

 

Item 4.   Submissionof Matters to a Vote of Security Holders 

 

No matterswere submitted to a vote of our shareholders during the fourth quarter of 2004.

 

7

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ExecutiveOfficers of the Company

 

Thefollowing table sets forth certain information with respect to the executiveofficers of the Company.  All the positions listed are or were held bysuch officers with the Company as of the filing date of this Annual Report.

 
| **NAME**           | ** ** | **AGE** | ** ** | **TITLE**                    | ** ** | **PERIOD POSITION HELD** |
|--------------------|------------|---------|------------|------------------------------|------------|--------------------------|
|               |       |    |       |                         |       |                     |
| William J. Murphy  |       | 60      |       | President and CEO            |       | 2003 - Present           |
|               |       |    |       | Director                     |       | 1999 - Present           |
|               |       |    |       | Executive Vice President     |       |                     |
|               |       |    |       | and Chief Financial  Officer |       | 1997-2003                |
|               |       |    |       |                         |       |                     |
| Michael J. Shea    |       | 45      |       | Chief Financial Officer      |       | 2003 - Present           |
|               |       |    |       | Vice President               |       | 1996 - Present           |
|               |       |    |       | Controller                   |       | 1995 - 2003              |
|               |       |    |       |                         |       |                     |
| John E. Ferdinandi |       | 34      |       | Corporate Controller         |       | 2004 - Present           |

 

8

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**PART II**

 

Item 5.   Market forRegistrant’s Common Equity, Related Shareholder Matters and Issuer Purchases ofEquity Securities

 

The Company’scommon stock is quoted on the Nasdaq National Market, under the symbolCHRZ.  The range of high and low closing stock prices, as reported by theNasdaq National Market, for each of the quarters for the years ended December 31,2004 and 2003 is as follows:

 
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------|------------|----------|------------|----------|------------|
| ** ** | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| Quarter    |       |     |       |     |       |   |   |   |   |
| First      |       | $        | 4.50       |     | $          | 3.85 |   | $ | 3.93 |   | $ | 2.60 |   |
| Second     |       | 4.23     |       | 3.38     |       | 4.72 |   | 2.84 |   |
| Third      |       | 4.62     |       | 3.66     |       | 4.56 |   | 3.57 |   |
| Fourth     |       | 4.41     |       | 3.45     |       | 4.21 |   | 3.43 |   |
|            |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

The Companyplans to reinvest its earnings in future growth opportunities and, therefore,does not anticipate paying cash dividends in the near future and has not paidany to date.  During 2004, the Company did not issue or repurchase sharesof its common stock.  As of March 14,2005, there were approximately 852 registered holders of common stock, accordingto the Company’s transfer agent.

 

9

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Item 6.  Selected FinancialData 

 

Consolidated Statement ofOperations Data:

 
| ** **                                                                                                 | ** ** | **December 31,**                                      | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2004**                                                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                                                 | ** ** | **(dollars amounts in thousands,  except per share data)** | ** ** |
|                                                                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |
| Revenues                                                                                                   |       | $                                                          | 262,527    |   | $ | 245,210 |   | $ | 297,115 |   | $ | 400,784 |   | $ | 445,479 |   |
|                                                                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |
| Costs and  expenses:                                                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |
| Direct costs                                                                                               |       | 180,606                                                    |       | 173,198 |   | 216,181 |   | 281,576 |   | 312,815 |   |
| Selling,  general and administrative                                                                       |       | 85,141                                                     |       | 80,634 |   | 91,343 |   | 128,832 |   | 170,143 |   |
| Amortization  of intangibles                                                                               |       | 1,695                                                      |       | 1,084 |   | — |   | 2,695 |   | 7,434 |   |
| Restructuring  charges                                                                                     |       | 2,859                                                      |       | 3,278 |   | 2,515 |   | 1,048 |   | 1,166 |   |
| Write-down  of assets held for sale                                                                        |       | —                                                     |       | — |   | — |   | 5,473 |   | 40,362 |   |
| Special  charges / (credits)                                                                               |       | (939                                                       | )          | 10,113 |   | — |   | — |   | — |   |
|                                                                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |
| Goodwill  impairment                                                                                       |       | 20,306                                                     |       | — |   | — |   | — |   | — |   |
|                                                                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |
| Write-off of  assets                                                                                       |       | 910                                                        |       | — |   | — |   | — |   | — |   |
|                                                                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |
| Loss from  operations                                                                                      |       | (28,051                                                    | )          | (23,097 | ) | (12,924 | ) | (18,840 | ) | (86,441 | ) |
|                                                                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |
| Other income  / (expense):                                                                                 |       |                                                       |       |   |   |   |   |   |   |   |   |
| Gain/(loss)  on sale of assets                                                                             |       | —                                                     |       | (424 | ) | 5,890 |   | (3,197 | ) | — |   |
| Net (loss) /  gain on investments                                                                          |       | —                                                     |       | (432 | ) | (61 | ) | 90 |   | — |   |
| Interest  income                                                                                           |       | 337                                                        |       | 529 |   | 928 |   | 2,293 |   | 620 |   |
| Interest  expense                                                                                          |       | (103                                                       | )          | (51 | ) | (174 | ) | (1,944 | ) | (1,825 | ) |
|                                                                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |
| Loss before  income taxes and cumulative effect of a change in accounting principle and  minority interest |       | (27,817                                                    | )          | (23,475 | ) | (6,341 | ) | (21,598 | ) | (87,646 | ) |
|                                                                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |
| Income taxes  / (benefit)                                                                                  |       | (2,690                                                     | )          | (6,409 | ) | 1,869 |   | (7,148 | ) | (29,819 | ) |
|                                                                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |
| Loss before  cumulative effect of change in accounting principle and minority interest                     |       | (25,127                                                    | )          | (17,066 | ) | (8,210 | ) | (14,450 | ) | (57,827 | ) |
| Minority  interest                                                                                         |       | (45                                                        | )          | (89 | ) | 35 |   | — |   | — |   |
| Cumulative  effect of change in accounting principle                                                       |       | —                                                     |       | — |   | (29,861 | ) | — |   | — |   |
|                                                                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |
| Net loss                                                                                                   |       | $                                                          | (25,172    | ) | $ | (17,155 | ) | $ | (38,036 | ) | $ | (14,450 | ) | $ | (57,827 | ) |
|                                                                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |
| Loss per  share:                                                                                           |       |                                                       |       |   |   |   |   |   |   |   |   |
| Basic and  diluted                                                                                         |       | $                                                          | (0.82      | ) | $ | (0.56 | ) | $ | (1.22 | ) | $ | (0.45 | ) | $ | (1.83 | ) |
|                                                                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |
| Weighted  average number of shares outstanding:                                                            |       |                                                       |       |   |   |   |   |   |   |   |   |
| Basic and  diluted                                                                                         |       | 30,870,000                                                 |       | 30,455,000 |   | 31,243,000 |   | 31,911,000 |   | 31,656,000 |   |

 

10

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| ** **                                                                                                 | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                 | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Analysis (%)                                                                                               |       |                  |       |   |   |   |   |   |   |   |   |
| Revenues                                                                                                   |       | 100.0                 | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Gross margin                                                                                               |       | 31.2                  |       | 29.4 |   | 27.2 |   | 29.7 |   | 29.8 |   |
| Selling, general  and administrative                                                                       |       | 32.4                  |       | 32.9 |   | 30.8 |   | 32.1 |   | 38.2 |   |
| Amortization  of intangibles                                                                               |       | 0.6                   |       | 0.4 |   | — |   | 0.7 |   | 1.7 |   |
| Restructuring  charges                                                                                     |       | 1.1                   |       | 1.3 |   | 0.8 |   | 0.2 |   | 0.3 |   |
| Write-down  of assets held for sale                                                                        |       | —                |       | — |   | — |   | 1.4 |   | 9.0 |   |
| Special  charges / (credits)                                                                               |       | (0.3                  | )          | 4.1 |   | — |   | — |   | — |   |
|                                                                                                       |       |                  |       |   |   |   |   |   |   |   |   |
| Goodwill  impairment                                                                                       |       | 7.7                   |       | — |   | — |   | — |   | — |   |
|                                                                                                       |       |                  |       |   |   |   |   |   |   |   |   |
| Write-off of  assets                                                                                       |       | 0.3                   |       | — |   | — |   | — |   | — |   |
|                                                                                                       |       |                  |       |   |   |   |   |   |   |   |   |
| Loss from  operations                                                                                      |       | (10.7                 | )          | (9.4 | ) | (4.4 | ) | (4.7 | ) | (19.4 | ) |
| Gain /  (loss) on sale of assets                                                                           |       | —                |       | (0.2 | ) | 2.0 |   | (0.8 | ) | — |   |
| Net (loss) /  gain on investments                                                                          |       | —                |       | (0.2 | ) | — |   | — |   | — |   |
| Interest  income / (expense) – net                                                                    |       | 0.1                   |       | 0.2 |   | 0.3 |   | 0.1 |   | (0.3 | ) |
|                                                                                                       |       |                  |       |   |   |   |   |   |   |   |   |
| Loss before  income taxes and cumulative effect of a change in accounting principle and  minority interest |       | (10.6                 | )          | (9.6 | ) | (2.1 | ) | (5.4 | ) | (19.7 | ) |
| Income taxes  / (benefit)                                                                                  |       | (1.0                  | )          | (2.6 | ) | 0.6 |   | (1.8 | ) | (6.7 | ) |
|                                                                                                       |       |                  |       |   |   |   |   |   |   |   |   |
| Loss before  cumulative effect of change in accounting principle                                           |       | (9.6                  | )          | (7.0 | ) | (2.7 | ) | (3.6 | ) | (13.0 | ) |
|                                                                                                       |       |                  |       |   |   |   |   |   |   |   |   |
| Cumulative  effect of change in accounting principle                                                       |       | —                |       | — |   | (10.1 | ) | — |   | — |   |
|                                                                                                       |       |                  |       |   |   |   |   |   |   |   |   |
| Net loss                                                                                                   |       | (9.6                  | )          | (7.0 | ) | (12.8 | ) | (3.6 | ) | (13.0 | ) |
|                                                                                                       |       |                  |       |   |   |   |   |   |   |   |   |
| Revenue  growth / (decline) YOY                                                                            |       | 7.1                   |       | (17.5 | ) | (25.9 | ) | (10.0 | ) | (16.7 | ) |
| Net income  growth / (decline)YOY                                                                          |       | (46.7                 | )          | 54.9 |   | (163.2 | ) | 75.0 |   | (495.4 | ) |
| Return on  equity, average (1)                                                                             |       | (19.7                 | )          | (12.4 | ) | (22.7 | ) | (7.3 | ) | (24.6 | ) |
| Effective  tax rate                                                                                        |       | 9.7                   |       | 27.3 |   | 29.5 |   | 33.1 |   | 34.0 |   |
|                                                                                                       |       |                  |       |   |   |   |   |   |   |   |   |
| Consolidated  Balance Sheet Data:                                                                          |       |                  |       |   |   |   |   |   |   |   |   |
| At year-end                                                                                                |       |                  |       |   |   |   |   |   |   |   |   |
| Total assets                                                                                               |       | $                     | 159,084    |   | $ | 180,326 |   | $ | 193,731 |   | $ | 237,721 |   | $ | 269,396 |   |
| Working  capital                                                                                           |       | 68,882                |       | 64,824 |   | 105,579 |   | 115,747 |   | 134,472 |   |
| Long-term  debt                                                                                            |       | —                |       | — |   | — |   | — |   | — |   |
| Shareholders’  equity                                                                                 |       | 125,781               |       | 130,337 |   | 145,855 |   | 189,855 |   | 207,924 |   |
|                                                                                                       |       |                  |       |   |   |   |   |   |   |   |   |
| Other Data:                                                                                                |       |                  |       |   |   |   |   |   |   |   |   |
| Stock price                                                                                                |       | $                     | 3.81       |   | $ | 3.92 |   | $ | 3.27 |   | $ | 3.21 |   | $ | 2.44 |   |
| P/E multiple                                                                                               |       | N/A                   |       | N/A |   | N/A |   | N/A |   | N/A |   |
|                                                                                                       |       |                  |       |   |   |   |   |   |   |   |   |
| Employees                                                                                                  |       | 3,137                 |       | 2,665 |   | 2,800 |   | 3,313 |   | 4,186 |   |
| Clients  (during year)                                                                                     |       | 405                   |       | 967 |   | 905 |   | 879 |   | 800 |   |
| Offices  (worldwide)                                                                                       |       | 31                    |       | 31 |   | 36 |   | 52 |   | 43 |   |

 

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(1)                                  Return onequity, average is calculated by dividing Net Income / (loss) for the period bythe average shareholders’ equity for the same period.

 

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Item 7.  Management’sDiscussion and Analysis of Financial Condition and Results of Operation 

 

The following detaileddiscussion and analysis of the Company’s financial condition and results ofoperations should be read in conjunction with the December 31, 2004financial statements and related notes included in separate sections of thisForm 10-K.

 

**Overview**

 

Computer Horizons Corp., (“CHC”,“the Company”), is a strategic solutions and professional services company withmore than thirty-seven years of experience, specifically in informationtechnology.  The Company’s clients are primarily Global 2000 companies,serviced by the Company’s 30+ offices in the United States, Canada and India.

 

The Company had revenues forthe full year 2004 of $262.5 million, compared to $245.2 million in thecomparable period of 2003.  The revenue increase of 7.1%  for the full year 2004 was primarilyattributable to growth in our Solutions (Federal) business due to the April 2004acquisition by RGII of AIM.  Also contributing to the 2004 revenueincrease was growth achieved by the Company’s Chimes subsidiary.  Revenuegrowth during the year of 2004 was partially offset by revenue declines in ourcommercial (non-Federal) Solutions business and declines in our IT Services(staff augmentation) due to a decrease in demand for temporary technologyworkers and the trend of companies to outsource technology jobs offshore.

 

The Company’s net loss forthe year 2004 totaled $25.2 million, or $(0.82) per share, compared with a netloss of $17.2 million, or $(0.56) per share, in the comparable period of2003.  The net loss for the current year includes amortization ofintangibles and special charges/credits which approximate :

 

•                  $20.3million (net of tax), or $(0.65) per share non-cash charge related to goodwillimpairment;

•                  $1.8million (net of tax), or $(0.06) per share, pertaining to restructuring andseverance costs;

•                  $583,000(net of tax), or $(0.02) per share, related to a write-off of assets;

•                  $378,000(net of tax), or $(0.01) per share, pertaining to professional fees for therestatement of financials associated with a previously announced accountingerror;

•                  $1.1million (net of tax), or $(0.03) per share, related to the amortization of intangibles,and

•                  $603,000(net of tax) credit or $0.02 per share, related to an insurance refund.

 

Management continues tofocus on maintaining a strong balance sheet, with approximately $33.6 millionin cash and cash equivalents at December 31, 2004, along with $68.9million in working capital and no debt outstanding.

 

On April 1, 2004, theCompany’s subsidiary RGII acquired AIM, a Federal government IT Servicescompany, for approximately $15.8 million in cash.  The acquisition of AIMis directly linked to the Company’s strategy of expanding its presence in the Federalgovernment IT market and pursuing bolt-on expansions to RGII.

 

During the fourth quarter of2004, the Company completed a restructuring initiative whereby the Company’sbusiness model has been realigned, effective January 1, 2005, around itsthree distinct segments of clients : Federal Government, Commercial and VendorManagement services (Chimes), and will report accordingly to conform to the newpresentation of CHC business segments for the first quarter of 2005.

 

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As a result of the realignedbusiness model, the Company has reduced its annual costs by approximately $5million, which will be predominately reflected in CHC’s Commercial division(reported in Solutions segment in 2004). Although this realigned business modelis designed to deliver improved operational performance for the Company, thelevel of business activity in the IT market remains uncertain.  Thisuncertainty reduced revenues in the Company’s IT Services and Commercial (non-Federal)Solutions businesses in 2004 as compared to the prior year.  The ITServices business accounted for approximately 50% of the Company’s totalrevenue in 2004, compared to 54% in 2003. Although IT Services revenue has shown signs of stabilization during2004, the Company cannot predict if this growth is sustainable and when theoverall level of business activity in the IT market will improve.

 

**Revenue Generating Activities**

 

The Company’s consolidated revenuesare primarily derived from professional services rendered in the informationtechnology sector.

 

The Company operates itsbusiness in three basic segments, IT Services, the Solutions Group and Chimes,Inc.  The distinctions between the IT Services and Solutions Groupsegments primarily relate to the management and supervision of servicesperformed and related gross margins.  Chimes, Inc., a wholly-ownedsubsidiary of CHC, provides workforce procurement and management services toGlobal 2000 companies.

 

The IT Services businessconsists of providing technology consultants to large organizations on atemporary hire basis (i.e. staff augmentation). The consultant work issupervised and managed by the client. For the most recent year 2004, thissegment represented approximately 50% of total revenues. The IT Servicesbusiness tends to be a lower risk, lower gross margin business with verycompetitive pricing.

 

The Solutions Group, tendsto be a higher margin, higher risk business, due to the fact that the Companyis responsible for project deliverables and other conditions contained instatements of work and/or contracts with clients. Virtually all projectsperformed by the Solutions Group are IT related and consist of practices suchas application development, outsourcing arrangements, government services,Health Insurance Portability and Accountability Act, (“HIPAA”), services,technology training and managed services.   For the year 2004, theSolutions Group (excluding Chimes) accounted for approximately 41% ofconsolidated revenues.

 

The Company’s clientrelationships are memorialized in a master agreement, which addresses the termsand conditions which define the engagement.  Depending on the service tobe performed for the client, either a task order (in the case of a Staffingengagement) or a Statement of Work (“SOW”) (in the case of a Solutionsengagement) is generated. The SOW is signed by both the Company and the client. In general, no Solutions work is done unless there is a SOW because the SOW providesthe technical details of the work to be done.  The SOW, although fallingunder the corresponding master agreement, is a stand-alone binding contractualdocument, typically outlining the project objectives, describing the personnelwho will work on the project, describing phases of the project, the timeframesfor work performance, and the rate of compensation, on a time-and-materialbasis.  In the event that the parameters of the project expand orotherwise change, a Project Change Request is implemented, to memorializewhatever change has occurred to the deliverables, personnel and/ortime-and-material.  The master agreements, in conjunction with the SOW’s,are written to define, with as much detail as possible, the client relationshipand all aspects of the work to be performed for the client.  With regardto revenues expected in future periods, each SOW has a defined term or setsforth the anticipated length of a project.  Where a client engagement ison-going, like certain “Help Desk” type services, the master agreement wouldstill have a term length, but would recite that the agreement wasrenewable.  Generally, Solutions engagements are for a year or less. Staffing engagements can and do last for more than a year, with variations inthe number of consultants being provided at any given time.  Staffingengagements are generally cancelable by clients with a two to four week noticeperiod.

 

Chimes, Inc. is a humancapital management solution company that, through the use of proprietarysoftware and processes, manages the temporary workforce of large organizations.During 2004, Chimes accounted for approximately 9% of total revenues.

 

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**CriticalAccounting Policies**

 

The most critical accountingpolicies used in the preparation of the Company’s financial statements arerelated to revenue recognition, the evaluation of the bad debt reserve, thevaluation of goodwill and the valuation of the deferred tax asset.

 

RevenueRecognition 

 

Approximately 94% of consolidatedrevenue in both 2004 and 2003 was derived from time-and-material contracts.

 

For the IT Services division,revenues are recognized as services are performed under time-and materialcontracts.  Under a typical time-and-material billing arrangement, our clientsare billed on a regularly scheduled basis, such as biweekly or monthly. At the end of each accounting period, revenue is estimated and accrued forservices performed since the last billing cycle.  These unbilled amountsare billed the following month.

 

The Solutions Grouprecognizes revenue either on a time-and-material basis or on a fixed fee basis,however, principally on a time-and-material basis. For fixed-fee contracts,revenue is recognized on the basis of the estimated percentage of completion.  Each fixed fee contract has different terms,milestones and deliverables.  The milestones and deliverables primarilyrelate to the work to be performed and the timing of the billing.  At theend of each reporting period an assessment of revenue recognized on thepercentage of completion and milestones achieved criteria is made.  If itbecomes apparent that estimated cost will be exceeded or required milestones ordeliverables will not have been obtained, an adjustment to revenue and/or costswill be made.  The cumulative effect of revisions in estimated revenuesand costs are recognized in the period in which the facts that give rise to theimpact of any revisions become known.

 

Unbilled accountsreceivable, in the IT Services and Solutions Group, represent amountsrecognized as revenue based on services performed in advance of client billingsprincipally on a time-and- material basis.  At the end of each accountingperiod, revenue is accrued for services performed since the last billingcycle.  These unbilled amounts are billed the following month.  Costsand estimated earnings in excess of billings on fixed fee contracts arise whenpercentage of completion accounting is used.  Such amounts are billed atspecific dates or at contract completion.

 

The Company’s Chimessubsidiary recognizes revenue primarily on a transaction fee basis.  TheChimes service offering aggregates the suppliers of temporary workers to the clientand renders one invoice to the client.  Upon payment from the client,Chimes deducts a transaction fee and remits the balance of the client paymentto the applicable vendor.  Chimes recognizes only their fee for theservice, not the aggregate billing to the client.  The gross amount of theclient invoicing is not considered revenue or a receivable to Chimes becausethere is no earnings process for the gross amount and by contract terms, Chimesis not obligated to pay the vendor until paid by the client.

 

Evaluationof Bad Debt Reserve 

 

The Company determines itsbad debt reserve by considering a number of factors, including the length oftime trade accounts receivable are past due, the Company’s previous losshistory, the client’s current ability to pay its obligation to the Company andthe condition of the general economy and the industry as a whole.  TheCompany writes off accounts receivable when they become uncollectible, andpayments subsequently received on such receivables are credited to theallowance for doubtful accounts.

 

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Goodwill 

 

As of December 31, 2004and 2003, the fair value of each of the reporting units was calculated usingthe following approaches (i) market approach and (ii) income approach. The reporting units are equal to, or one level below, reportable segments.  Under the market approach, value is estimatedby comparing the performance fundamentals relating to similar public companies’stock prices.  Multiples are then developed of the value of the publiclytraded stock to various measures and are then applied to each reporting unit toestimate the value of its equity.  Under the income approach, value wasdetermined using the present value of the projected future cash flows to begenerated by the reporting unit.

 

The fair value conclusion ofthe reporting units reflects an appropriately weighted value of the marketmultiple approach and the income approach discussed above.  An assetapproach was not used because the asset approach is most relevant forliquidation approaches, investment company valuations and asset rich companyvaluations (i.e. real estate entities) and was not deemed relevant formanufacturing and service company going-concern valuations.

 

For the yearended December 31, 2004, using an evaluation prepared by an independentappraisal firm, the Company reassessed the carrying value of goodwillassociated with its Solutions Group. Because of a reduction in projected future cash flows in the CommercialSolutions business unit, primarily resulting from significant revenue declinesin 2004, the Company determined that goodwill was impaired and recorded anon-cash charge of $20.3 million, related to the write-off of the CommercialSolutions goodwill.  There was no incometax effect on the impairment charge as the related goodwill was primarilyattributable to acquisitions which yielded no tax basis for the Company. Theremaining Solutions goodwill of $27.6 million, as of December 31, 2004, isassociated with the Company’s Federal government practice.  As of December 31, 2004, the indicated fairvalue of the Federal Government reporting unit exceeded the carrying value.  As a result, the Company concluded that thegoodwill of approximately $27.6 million is not impaired.

 

For the year ended December 31,2003, the Company completed valuations of the carrying value of the remaininggoodwill and as of December 31, 2003, it was determined that no impairmenthad occurred at that date.

 

Valuationof the Deferred Tax Asset 

 

The Company records deferredtax assets for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and theirrespective tax bases, and operating loss carryforwards.  Deferred taxassets are reduced by a valuation allowance if, based on available evidence, itis more likely than not that some portion or all of the deferred tax assetswill not be realized.  In assessing the realizability of deferred taxassets, management considers the scheduled reversal periods of the deferred taxassets as well as projected future taxable income and tax planning strategies.

 

TheCompany has significant deferred tax assets resulting from net operating losscarryforwards, capital loss carryforwards, and deductible temporary differencesthat may reduce taxable income in future periods.  The Company has provided full valuationallowances on the future tax benefits related to capital losses, foreign netoperating losses, and most state net operating losses.  The Company believes that the valuationallowance is appropriate because these deferred tax assets have relativelyshort carryforward periods or relate to taxing jurisdictions which do not allowthe filing of consolidated tax returns. The Company expects to continue to maintain a valuation allowance onthese deferred tax assets until an appropriate level of profitability issustained in the applicable taxing jurisdictions, or strategies are developedthat would enable the Company to conclude that it is more likely than not thata portion of these deferred tax assets will be realized.

 

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TheCompany believes that it is more likely than not that the net remainingdeferred tax assets of $19.6 million at December 31, 2004 will berealized, principally based upon forecasted taxable income.  Although the Company has experiencedoperating losses in the past, the Company anticipates improved operationalperformance in 2005 resulting from the Company’s realignment initiativescompleted in the fourth quarter of 2004, and continued improvement in theoperating results of its Chimes subsidiary. The realignment initiatives areexpected to reduce annual expenses by approximately $5 million, while Chimesoperating performance is expected to improve significantly in 2005. It shouldbe noted that Chimes reduced its operating loss in 2004 to approximately$700,000, from a loss of approximately $4.0 million in 2003. This operatingimprovement is expected to continue in 2005. The minimum average annual taxable income required to realize thedeferred tax assets over the 20-year net operating loss carryforwrd period isapproximately $2.8 million.

 

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RESULTS OF OPERATIONS ANDFINANCIAL CONDITION

 

**Year Ended December 31, 2004 Compared to Year Ended December 31,2003**

 

*Revenues*.  Consolidated revenue increased to $262.5million in the year ended December 31, 2004 from $245.2 million in theyear ended December 31, 2003, an increase of $17 million or 7%.

 

Solutions Group revenues increasedto $108.2 million in the year ended December 31, 2004 from $92.1 millionin the year ended December 31, 2003, an increase of $16.1 million or 17.5%. This increase in Solutions Group revenues is attributable to expansion in theCompany’s Federal government practice, including the July 2003 acquisitionof RGII and the April 2004 acquisition, by RGII, of AIM.  The revenue increase in the Solutions Federalgovernment practice of $30.1 million for 2004 was partially offset by revenuedeclines in the commercial Solutions business of approximately $14.0 million, or19%, as compared to 2003.

 

IT Services revenuesdecreased to $131.2 million in the year ended December 31, 2004 from $133.1million in the year ended December 31 2003, a decrease of $1.9 million or 1.4%. The slight decrease in IT Services revenue is the result of continued decreasesin the demand for temporary technology workers, the trend of companies tooutsource technology jobs offshore, and the impact of pricing decreases by clients.  For the year ended December 31, 2004, ITServices consultant average headcount decreased by 0.8%, accounting forapproximately $1.1 million of the revenue decrease.  The balance of thedecrease in revenue (approximately $0.8 million) is attributable to a reductionin average bill rates**.**  Asthe consultant average headcount decrease in 2004 is significantly less thanthe 23.9% headcount decrease sustained in 2003, the Company believes thatstabilization in the IT market is occurring.

 

Chimes revenue increased to$23.1 million in the year ended December 31, 2004, from $20.0 million inthe year ended December 31, 2003, an increase of $3.1 million or 15.4%. This increase was primarily due to an expansion of managed spend at existing clients,with less than 1% of the increase attributable to new clients started in 2004.

 

*Direct Costs*.  Direct costs increased to $180.6 million inthe year ended December 31, 2004 from  $173.2 million in the yearended December 31, 2003. Consolidated gross margin, revenue less directcosts, increased to 31.2% for the year ended December 31, 2004 from 29.4%in the same period of 2003.  In the Company’s Solutions Group, grossprofit increased to $35.6 million, or 32.9% as a result of the RGII and AIM acquisitions. IT Services gross margins for 2004 were $24.6 million, or 18.8%, compared to $26.7million, or 20.1% for 2003. This decrease is primarily attributable to anincrease in IT Services revenue being transacted through Vendor Managed Serviceproviders (18% in 2004 vs. 14% in 2003). Gross margin in the Company’s Chimes segmentstayed relatively flat at 94.0% for 2004.

 

The Company’s consolidatedgross margin improvement is primarily attributable to the increases in revenuefrom the Company’s higher margin Solutions Group and Chimes, partially offsetby gross margin declines in the IT Services segment.  For the year ended December 31,2004, Solutions Group (including RGII and AIM) and Chimes revenue totaled 50.0%of consolidated revenue, compared to 45.7% of consolidated revenue for thecomparable period in 2003.

 

*Selling, general and administrative expenses.* Selling, general and administrative (“SG&A”) expenses increased to $85.1million in the year ended December 31, 2004 from $80.6 million for thecomparable period of 2003.  As a percentage of revenue, the Company’sSG&A expenses decreased to 32.4% in the year ended December 31, 2004from 32.9% in the year ended December 31, 2003.  The expenses in 2003included a bad debt charge of $3.1 million related to the write-off of asub-contract with ATEB, a privately held company, which the Company voluntarilyterminated for financial reasons.  ATEB was the primary contractor todevelop a new pharmacy system for Royal Ahold.  The Company is continuingrecovery efforts for this receivable.

 

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Excluding the $3.1 millionATEB write-off in 2003, SG&A expenses would have increased by $7.6 millionin 2004 in comparison to the prior year. This increase is primarilyattributable to the July 2003 acquisition of RGII, and the April 2004acquisition, by RGII, of AIM (which yielded incremental SG&A expense ofapproximately $9.6 million); costs related to Sarbanes-Oxley activities ofapproximately $1.2 million, and approximately $590,000 pertaining toprofessional fees for the restatement of financials associated with apreviously announced accounting error.

 

*Amortization of Intangibles.*  During the year endedDecember 31, 2004, the Company recorded $1.7 million of amortizationexpense related to the 2003 acquisition of intangibles for RGII and XpressSoftware.  The increase in 2004 isattributable to intangibles for the AIM acquisition completed in April 2004by RGII.

 

*Restructuring charges / (credits)*.   For the yearended December 31, 2004, the Company recorded restructuring charges of $2.9million.  During the fourth quarter of2004, the Company completed its realignment initiatives whereby the Company’sbusiness model has been realigned, effective January 1, 2005, around itsthree distinct segments of clients : Federal Government, Commercial and Vendor ManagementServices (Chimes). In connection with the realignment, the Company recorded a$2.9 million restructuring charge, comprised of approximately $2.8 million inseverance costs and $0.1 million in lease obligation costs.  As a result of this restructuring, theCompany is expecting an approximate $5 million reduction in its annual costs,which will be predominantly reflected in the IT Services and Commercial Solutions(non-Federal) businesses, designed to deliver improved operational performance. During the year ended December 31,2003, the Company recorded restructuring charges of $3.3 million pertaining to terminatedleases ($1.4 million), severance ($1.6 million) and general office closureexpenses ($330,000) relating primarily to the closing of facilities in Canadaand the United Kingdom.   In 2003,the office closings were made to eliminate the infrastructure costs related tohaving offices in certain areas.  The Company did not eliminate marketingefforts or business in these areas, but rather turned these areas into virtualmarketplaces whereby sales personnel work from their homes.

 

*Special charges / (credits)*.  For the year ended December 31,2004, the Company recorded a special credit of $0.9 million related to aninsurance refund.   For the year ended December 31,2003, the Company incurred special charges of $10.1 million consisting of aseverance package for the Company’s former CEO and expenses related to theunilateral acquisition proposal and activities of Aquent LLC.  Theseparation package of the former CEO included a $3.5 million severance paymentand $200,000 in continued medical coverage.  The remaining $6.4 million ofthe expense pertained to the unilateral acquisition proposal and activities ofAquent LLC.  This expense is primarily attributable to approximately $3.4million of legal fees, $1.8 million in financial advisor fees and $1.2 millionof proxy solicitation and other fees.  As management considers thesespecial items to be infrequent and material in nature, the Company has reportedthe expenses on a separate line for full disclosure purposes, however, theamounts are reported within operating income.

 

*Goodwillimpairment.*  As of December 31,2004, based on a valuation completed by an independent appraisal firm, it wasdetermined that the indicated fair value for the Commercial Solutions businessunit was below the carrying value of the entity’s equity. Because of areduction in projected future cash flows, primarily resulting from significantrevenue declines in 2004, the Company determined that the Commercial Solutionsgoodwill was impaired and recorded a non-cash goodwill impairment charge of$20.3 million. There was no income tax effect on the impairment charge as therelated goodwill was primarily attributable to acquisitions which yielded notax basis for the Company.

 

*Write-off ofassets*.  For the year ended December 31,2004, the Company recorded a write-off of assets approximating $0.9 million.This charge pertained to the write-off of a security deposit in connection withan escrow agreement of a previously sold subsidiary and a write-off of fixedassets related to previously closed offices.

 

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*Loss from Operations*.   The Company’sloss from operations totaled $28.1 million in the year ended December 31,2004, an increased loss of $5.0 million, from a loss of $23.1 million in theyear ended December 31, 2003.  As discussed above, the loss fromoperations in 2004 included goodwill impairment of $20.3 million, or 7.7% ofrevenue, restructuring charges of $2.9 million, or 1.1% of revenue,amortization of intangibles of $1.7 million, or 0.6% of revenue, $0.9 million,or 0.3% of revenue, pertaining to the write-off of assets, and a special creditof $0.9 million, or 0.4% of revenue, related to an insurance refund.  The loss from operations in 2003 includedspecial charges of $10.1 million, or 4.1% of revenue, restructuring charges of$3.3 million, or 1.3% of revenue, amortization of intangibles of $1.1 million,or 0.4% of revenue and a special bad debt charge (recorded in SG&A expense)of $3.1 million, or 1.3% of revenue due to the write-off of a terminatedcontract with a client for financial reasons.   The 2004 loss beforeincome taxes, excluding the special items noted above and net interest income,totaled $3.2 million and was comprised of : a loss of $6.3 million in ITServices, profit of $3.7 million in the Solutions Group and a loss of $0.6million in Chimes.  This compares to the loss before income taxes of $5.6million, excluding the special items noted above and loss on sale of assets,net loss on investments and net interest income and was comprised of :  $4.1 million loss in IT Services, profit of $2.5million in the Solutions Group and a loss of $4.0 million in Chimes.  Theconsolidated loss before income taxes, excluding all special items, was a lossof 1.2% of revenue for the year ended December 31, 2004 as compared to aloss of 2.3% in the comparable period of 2003.

 

*Other Income/(Expense)*.   Other incomewas $234,000 in the year ended December 31, 2004, compared to other expenseof $378,000 in the comparable period of 2003.  This difference wasprimarily due to the loss on sale of assets and loss on investments in 2003.

 

*Provision for Income Taxes*.  The effective taxrate for Federal, state and local income taxes was a tax benefit of 9.7% forthe year ended December 31, 2004 compared with 27.3% benefit for the yearended December 31, 2003.  The primary reasons for the decrease in theeffective tax rate were goodwill impairment charges which did not give rise toa tax benefit and increases in the valuation allowance for certain Federal andstate deferred tax assets.  A review of all available positive andnegative evidence was conducted by the Company, including the Company’s past, currentand projected operating performance, the market environment in which thecompany operates, and the length of carryback and carryforward periods. (seeNote 7 of the Notes to Consolidated Financial Statements contained elsewhere inthis Form 10-K).

 

*Net Loss*.  For the year ended December 31, 2004, thenet loss was $25.2 million, or $0.82 loss per share, compared to a net loss of$17.2 million, or $0.56 loss per share for the year ended December 31, 2003. The effect of restructuring charges, goodwill impairment, amortization expense,write-off of assets, professional fees for the restatement of financialsassociated with a previously announced accounting error, and special credit foran insurance refund amounted to $0.75 loss per share, net of taxes, in 2004. The effect of restructuring charges, loss on sale of assets, loss oninvestments, amortization expense, write-off of terminated project and specialcharges amounted to $0.45 loss per share, net of taxes, in 2003.

 

**Year Ended December 31, 2003 Compared to Year Ended December 31,2002 Revenues**

 

*Revenues*.  Consolidated revenue decreased to $245.2million in the year ended December 31, 2003 from $297.1 million in theyear ended December 31, 2002, a decrease of $51.9 million or 17.5%.

 

Solutions Group revenues,which included revenue from assets held for sale of $2.9 million for Princetonin 2002, increased to $92.1 million in the year ended December 31, 2003from $79.3 million in the year ended December 31, 2002, an increase of$12.8 million or 16.1%.  The increase in Solutions Group revenues for theyear ended December 31, 2003 is attributable to the acquisition of RGII inJuly 2003.  Solutions Group revenue was $73.9 million for the yearended December 31, 2003 excluding RGII.  The Solutions Group revenueexcluding Princeton Softech, Inc. in 2002 was $76.4 million.  The $2.5million decrease in Solutions Group revenue, excluding RGII, was primarily dueto declining client demand in several Solution Group practices, primarily webdesign/integration and education/training.

 

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IT Services revenuesdecreased to $133.1 million in the year ended December 31, 2003 from$201.3 million in the year ended December 31 2002, a decrease of $68.2million or 33.9%.  The decrease in IT Services revenue of $68.2 million,is the result of continued decreases in the demand for temporary technologyworkers, the trend of companies to outsource technology jobs offshore, theimpact of pricing decreases by clients and the lagging economy.  For theyear ended December 31, 2003, IT Services consultant average headcountdecreased by 23.9%, accounting for approximately $48 million of the revenuedecrease.  The balance of the decrease in revenue (approximately $20million) is attributable to a reduction in average bill rates**.**  The reduction in average billrates was due to the competitive pricing pressures in the domestic staffaugmentation market.

 

Chimes revenue increased to$20.0 million in the year ended December 31, 2003, from $16.5 million inthe year ended December 31, 2002, an increase of $3.5 million or21.2%.  This increase was primarily due to an increase in revenue from newclients of approximately $2.8 million and an increase of approximately $700,000in revenue from existing clients in this segment.

 

*Direct Costs*.  Direct costs decreased to $173.2 million inthe year ended December 31, 2003 from  $216.2 million in the yearended December 31, 2002. Consolidated gross margin, revenue less directcosts, increased to 29.4% for the year ended December 31, 2003 from 27.2%in the same period of 2002.  In the Company’s Solutions Group, grossprofit increased to $26.6 million, or 28.9% as a result of the RGIIacquisition.  Without RGII, gross profit for the year ended December 31,2003 declined approximately $7.0 million from the year ended December 31,2002.  These declines were a result of continued softness in thehealthcare arena.  Gross margin in the Company’s IT Services segmentstayed relatively flat at 20.1% for the year ended December 31,2003.  Gross margin in the Company’s Chimes segment increased to 93.0%from 88.3% for the year ended December 31, 2003 and 2002, respectively,due to improved margins at existing clients.

 

Excluding the asset held forsale, Princeton Softech, Inc., in the year ended December 31, 2002, directcosts decreased to $173.2 million in the year ended December 31, 2003 from$215.7 million for the year ended December 31, 2002.  Gross marginfor the year of 2002 excluding Princeton Softech, Inc. was 26.7%.

 

The Company’s consolidatedgross margin improvement is primarily attributable to the change in the revenuemix among the Company’s business segments.  Chimes and the SolutionsGroup, including RGII, are higher gross margin businesses than the Company’s ITServices segment.  For the year ended December 31, 2003, Chimes andSolutions Group revenue totaled 45.7% of consolidated revenue, compared to32.3% of consolidated revenue for the comparable period in 2002.

 

*Selling, general and administrative expenses.* Selling, general and administrative expenses decreased to $80.6 million in theyear ended December 31, 2003 from $91.3 million for the comparable periodof 2002.  As a percentage of revenue, the Company’s SG&A expensesincreased to 32.9% in the year ended December 31, 2003 from 30.7% in theyear ended December 31, 2002.  The expenses in 2003 included a baddebt charge of $3.1 million related to the write-off of a sub-contract withATEB, a privately held company, which the Company voluntarily terminated forfinancial reasons.  ATEB was the primary contractor to develop a newpharmacy system for Royal Ahold.  The Company is continuing recoveryefforts for this receivable.  The expenses in 2002 included assets heldfor sale (Princeton Softech, Inc.) of $4.3 million.  Without these specialitems in 2003 and 2002, SG&A expenses would have decreased to $77.5 millionin the year ended December 31, 2003 from $87.0 million in the comparableperiods of 2002.  This decrease in SG&A expenses was primarily attributableto cost reductions in all segments, with approximately $544,000 from rentsavings (office closures) and the balance primarily related to staff reductionand personnel costs.

 

*Amortization of Intangibles.*  During the year endedDecember 31, 2003, the Company recorded $1.1 million of amortizationexpense related to the 2003 acquisition of intangibles for RGII and XpressSoftware.

 

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*Restructuring charges / (credits)*.   During theyear ended December 31, 2003, the Company recorded restructuring chargesof $3.3 million for terminated leases ($1.4 million), severance ($1.6 million)and general office closure expense ($330,000) relating primarily to the closingof facilities in Canada and the United Kingdom.  During the year ended December 31,2002, the Company recorded a restructuring charge of $2.5 million pertaining to2002 office closings, including a reversal of $192,000 of the previouslyrecorded restructure reserves pertaining to lease buyouts and $140,000pertaining to severance adjustments.  In both 2003 and 2002, the officeclosings were made to eliminate the infrastructure costs related to havingoffices in certain areas.  The Company did not eliminate marketing effortsor business in these areas, but rather turned these areas into virtualmarketplaces whereby sales personnel work from their homes.  As a resultof these office closings, in both IT Services and the Solutions business areas,rent expense and the related reduction of SG&A headcount (salary and fringebenefits) were eliminated from the current SG&A cost structure.

 

*Special charges*.  For the year ended December 31,2003, the Company incurred special charges of $10.1 million consisting of aseverance package for the Company’s former CEO and expenses related to theunilateral acquisition proposal and activities of Aquent LLC.  Theseparation package of the former CEO included a $3.5 million severance paymentand $200,000 in continued medical coverage.  The remaining $6.4 million ofthe expense pertained to the unilateral acquisition proposal and activities ofAquent LLC.  This expense is primarily attributable to approximately $3.4million of legal fees, $1.8 million in financial advisor fees and $1.2 millionof proxy solicitation and other fees.  As management considers thesespecial items to be infrequent and material in nature, the Company has reportedthe expenses on a separate line for full disclosure purposes, however, theamounts are reported within operating income.

 

*Loss from Operations*.   The Company’sloss from operations totaled $23.1 million in the year ended December 31,2003, an increased loss of $10.2 million, from a loss of $12.9 million in theyear ended December 31, 2002.  As discussed above, this increase inthe loss from operations in 2003 included special charges of $10.1 million, or4.1% of revenue, restructuring charges of $3.3 million, or 1.3% of revenue,amortization of intangibles of $1.1 million, or 0.4% of revenue and a specialbad debt charge of $3.1 million, or 1.3% of revenue due to the write-off of aterminated contract with a client for financial reasons.  The loss fromoperations in 2002 included the loss from operations of the asset held forsale, Princeton Softech, Inc., of $1.9 million, or 0.6% of revenue and restructuringcharges of $2.5 million or 0.8% of revenue.  The 2003 loss before incometaxes, excluding the special items noted above and loss on sale of assets, netloss on investments and net interest income totaling expense of $378,000totaled $5.6 million and was comprised of a loss of $4.1 million in ITServices, profit of $2.5 million in the Solutions Group and a loss of $4.0million in Chimes.  This compares to the loss before income taxes of $10.4million, excluding the special items noted above and gain on sale of assets,net loss on investments and net interest income totaling income of $6.6 millionin the year ended December 31, 2002, consisting of a loss of $2.2 millionin IT Services, income of $766,000 in the Solutions Group and a loss of $8.9 millionin Chimes.  Loss before income taxes, excluding all special items, was aloss of 2.3% of revenue for the year ended December 31, 2003 as comparedto a loss of 3.5% in the comparable period of 2002.

 

*Other Income/(Expense)*.   Other expensewas $378,000 in the year ended December 31, 2003, compared to other incomeof $6.6 million in the comparable period of 2002.  This difference wasprimarily due to the gain on the sale of Princeton and Spargo in 2002 totalingapproximately $5.9 million.

 

*Provision for Income Taxe*.  The effective taxrate for Federal, state and local income taxes was a tax benefit of 27.3% forthe year ended December 31, 2003 compared with a tax expense of 29.5% forthe year ended December 31, 2002.  The primary reason for the changein the effective tax rate was the establishment of a valuation allowance ofstate deferred tax assets in 2002.  A review of all available positive andnegative evidence was conducted by the Company, including the Company’s currentand past performance, market environment in which the company operates, and thelength of carryback and carryforward periods.  In January 2003, theCompany received a Federal income tax refund of $20 million, resulting from theEconomic Stimulus Act of 2002 (see Note 7 of the Notes to ConsolidatedFinancial Statements contained elsewhere in this Form 10-K).

 

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*Net Loss*.  For the year ended December 31, 2003, thenet loss was $17.2 million, or $0.56 loss per diluted share, compared to a netloss of $38.0 million, or $1.22 loss per diluted share for the year ended December 31,2002.  The effect of restructuring charges, loss on sale of assets, losson sale of investments, amortization expense, the write-off of the terminatedproject and special charges amounted to $0.45 loss per share, net of taxes in2003.  The net loss in the year ended December 31, 2002 includes acharge for the cumulative effect of change in accounting principle of $29.9million, or $0.96 per share and differences in the effective tax rate primarilyrelating to the recording of a valuation allowance in the Company’s statedeferred tax assets of approximately $4.0 million, or $0.13 per share. The effect of restructuring charges, operations of assets held for sale, gainon sale of assets, cumulative effect of change in accounting principle and thevaluation allowance on deferred tax assets amounted to $1.06 loss per share,net of taxes, in 2002.

 

#### **Liquidityand Capital Resources**

 

TheCompany has historically financed its operations primarily through cashgenerated from operations, borrowings against bank lines of credit and thepublic sale of its common stock.  At December 31, 2004, the Companyhad $68.9 million in working capital, of which $33.6 million was cash and cashequivalents.  The Company’s working capital ratio at December 31, 2004was 3.5 to 1.  The Company has remained debt free throughout 2003 and 2004.  In January 2003, the Company received a Federal income tax refund of $20million, resulting from the Economic Stimulus Act of 2002. This refundpertained to deductions carried back to prior years and since the tax structureof the transaction giving rise to the deduction was subject to determination bythe tax authorities, the Company recorded a reserve for the tax benefit untilIRS audits for the applicable years were completed.  During the first quarter of 2004, theInternal Revenue Service and the Joint Committee on Taxation completed theirexamination of the Company’s Federal income tax returns and Federal refundclaims, and accepted them without change.  Accordingly, the tax benefitwas recorded as a decrease in tax benefit reserves of $19.6 million, a decreasein other tax reserves of $0.3 million, and an increase in additional paid-incapital of $19.9 million. There was no charge or credit to income.

 

Net cash (used in)/providedby operating activities for the years ended December 31, 2004, December 31,2003 and December 31, 2002 totaled $(1.4) million, $16.9 million, and$20.7 million respectively.  For the yearended December 31, 2004, the cash used in operating activities totaled$1.4 million and was primarily attributable to the net loss of $25.2 million,offset by non-cash charges of $27.4 million, and an increase in refundableincome taxes of $4.1 million.   In 2003, thecash provided by operating activities was primarily due to the Federal incometax refund received and a reduction in accounts receivable partially offset bythe Company’s net loss.  In 2002, cash provided by operating activities  was primarily attributable to a reduction inaccounts receivable**.**

 

Net cash used in investingactivities was $19.2 million for the year ended December 31, 2004. This was primarily attributable to the purchase of AIM by RGII in April 2004. Net cash used in investing activities was $23.5 million for the year ended December 31,2003 primarily due to the purchase of RGII. Net cash provided by investingactivities was $13.0 million for the year ended December 31, 2002,primarily from the sale of assets.

 

For the years ended December 31,2004, 2003 and 2002, respectively, net cash provided by / (used in) financingactivities was $1.4 million, $(2.5) million, and $(14.6) million, resulting in2004 from proceeds from stock options exercised of $0.8 million and $0.6 millionfrom stock issued through the employee stock purchase plan. The $2.5 millionused in 2003 resulted from the pay off of the notes payable of $2.6 millionrelated to the acquisition of RGII and $1.2 million used in the repurchase ofthe Company’s common stock.  The $14.6 million used in 2002 resulted froma $10.0 million reduction of debt and a $6.1 million use in the repurchase ofthe Company’s common stock.

 

Total accounts receivablesincreased $3.0 million to $51.3 million at December 31, 2004 (including$3.3 million of accounts receivable acquired from AIM), from $48.3 million at December 31,2003. Accounts

 

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receivable days salesoutstanding (“DSO”) were 68 days at December 31, 2004 compared to 70 daysat December 31, 2003, based on quarterly sales.  The decrease in DSO’s from December 31,2003 is primarily attributable to more timely collections from clients. Lookingforward, the Company expects an increase in DSO’s for the first quarter of 2005attributable to the seasonal slowdown of payments from clients, whichhistorically occurs in the first quarter of each year.  All client receivable collectibility andbilling issues identified by management have been adequately reserved.  For the year ended December 31, 2004,there were no significant changes in credit terms, credit policies orcollection efforts.

 

The Company has a $40million line of credit facility with availability based primarily on eligible clientreceivables.  The interest rate is LIBOR plus 2.75% based on unpaidprincipal.  The borrowing base less outstanding loans must equal or exceed$5.0 million.  As of December 31, 2004, the Company had nooutstanding loan balance against the facility.  Based on the Company’seligible client receivables and cash balances, $17.7 million was available forborrowing as of December 31, 2004.  The fee for the unused portion ofthe line of credit is 0.375% per annum charged to the Company monthly. This charge was approximately $99,000 and $109,000 for the years ended December 31,2004 and 2003, respectively.  This line of credit includes covenantsrelating to the maintenance of cash balances and providing for limitations on incurringobligations and spending limits on capital expenditures.  The Company didnot satisfy this covenant for the quarter ended March 31, 2004.  Awaiver was received from the lending institution for the quarter ended March 31,2004 along with an amendment to the loan agreement lowering the three-monthaverage minimum collections covenant to $10 million.  At December 31,2004, the Company was in compliance with the covenant.  The facility wasscheduled to expire in July 2004; however, on July 14, 2004, theCompany signed a one-year extension of the facility, which will remain in effectuntil July 2005.  In February 2005,the Company and the current lending institution agreed in principal to terms (non-binding)which would extend the credit facility for a three-year term. The line ofcredit would remain at $40 million, with all other terms, conditions and costssimilar to those which were in effect as of December 31, 2004.

 

During the first quarter of2004, the Company recorded a non-cash reduction in tax benefit reserves and anincrease in additional paid-in capital of $19.9 million.

 

Pursuant to the terms of theCompany’s acquisition of RGII, the seller of RGII may be entitled to contingentpayments based on RGII’s performance against profitability objectives overthree years.  The contingent payments are evidenced by a contingent notewith a face value of $10 million that is payable over three years only ifcertain financial performance objectives are met.  These financialperformance objectives are based on earnings before interest and taxes (“EBIT”)targets totaling $19.8 million over a three-year period.  There are nominimum or maximum payment obligations under the terms of the contingent note.The contingent payment will be reduced on a dollar for dollar basis forfinancial performance below EBIT targets and increased by 29 cents ($0.29) foreach dollar exceeding EBIT targets.  In February 2004, a payment wasmade for the first six-month installment of approximately $631,000, pertainingto this contingent note.  In February 2005,a payment of approximately $1.8 million was made representing the nextinstallment of the contingent note.  Future payments, if the applicableEBIT targets are met, will be due as follows: 2005 payment of $3.3 millionand 2006 payment of $4.3 million.  These payments will be reduced orincreased based on actual EBIT performance over the three-year period.

 

On April 1, 2004, theCompany’s subsidiary, RGII, closed on its acquisition of AIM, a Federalgovernment IT Services company with 2003 revenues of approximately $18.5million.  The all-cash transaction totaled approximately $15.8 million,including a working capital adjustment.  As a result of the integration ofAIM into RGII, the Company and the seller of RGII have agreed that theoperating results of AIM shall remain separate from and not be included in theRGII EBIT targets related to contingent payments.  RGII, however, shall bepermitted an intercompany charge to AIM for AIM’s share of combined operatingoverhead expenses.

 

The Company believes thatits cash and cash equivalents, available borrowings and internally generatedfunds will be sufficient to meet its working capital needs through the nextyear.

 

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**Contractual Obligations and Commercial Commitments / Off-Balance SheetArrangements**

 

The Company does not utilizeoff balance sheet financing other than operating lease arrangements for officepremises and related equipment. The following table summarizes all commitmentsunder contractual obligations as of December 31, 2004:

 
| ** **                     | ** ** | **Total  Amount** | ** ** | **1 year** | ** ** | **2-3 years** | ** ** | **4-5 years** | ** ** | **Over 5  years** | ** ** |
|--------------------------------|------------|-------------------|------------|------------|------------|---------------|------------|---------------|------------|-------------------|------------|
| ** **                     | ** ** | **in thousands**  | ** ** |
|                           |       |              |       |       |       |          |       |          |       |              |       |
| Operating  Leases              |       | $                 | 9,954      |       | $          | 5,287         |       | $             | 4,577      |              | $          | 90 |   | $ | — |   |
| RGII  Contingent Note*         |       | 7,596             |       | 3,300      |       | 4,296         |       | —        |       | —            |       |
| Deferred  Compensation         |       | 2,633             |       | 176        |       | 13            |       | 399           |       | 2,045             |       |
| Supplemental  Retirement Plans |       | 9,750             |       | —     |       | 250           |       | 1,000         |       | 8,500             |       |
| Other long  term               |       | 541               |       | 541        |       | —        |       | —        |       | —            |       |
|                           |       |              |       |       |       |          |       |          |       |              |       |
| Total Cash  Obligations        |       | $                 | 30,474     |       | $          | 9,304         |       | $             | 9,136      |              | $          | 1,489 |   | $ | 10,545 |   |
|                                |            |                   |            |            |            |               |            |               |            |                   |            |  |  |  |  |  |  |

 

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*  Obligation ifapplicable EBIT targets are met.

 

**Savings Plan and Other Retirement Plans**

 

TheCompany maintains a defined contribution savings plan covering eligibleemployees.  The Company makescontributions up to a specific percentage of the participants contributions.

 

TheCompany also maintains a Supplemental Executive Retirement Plan (SERP), wherebykey executives are entitled to receive payments upon reaching the age of 65 andbeing in the employment of the Company. The maximum payment commitment of the Company is approximately $9.8million if all members remain in the employment of the Company until age65.  Benefits accrue and vest based on aformula which includes total years with the Company and total years possibleuntil age 65.  In the event of a changeof control, as defined in the Plan, this event would result in an immediatevesting of the retirement benefit.  ThePlan is nonqualified and not formally funded. Life insurance policies on the members are purchased to assist infunding the cost.  The cumulative accruedliability for the SERP is determined based on the Unit Credit Method by using adiscount rate of 9% until age 65 for each participant.

 

Inaddition, the Company maintains a deferred compensation plan for key executivesthat permits the individuals to defer a portion of their salary/bonus.  There is no effect on the Company’s operatingresults since all amounts deferred under the plan are expensed in the periodincurred.

 

**Foreign Currency Exposure**

 

TheCompany’s international operations expose it to translation risk when the localcurrency financial statements are translated to U.S. dollars.  As currencyexchange rates fluctuate, translation of the financial statements ofinternational businesses into U.S. dollars will affect the comparability ofrevenues and expenses between years.  None of the components of theCompany’s consolidated statements of income was materially affected by exchangerate fluctuations in 2004, 2003 or 2002.  At December 31, 2004 theCompany had $2,254,000 in cash maintained in foreign financial institutions.

 

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**Recent Accounting Pronouncements**

 

In January 2003, the FinancialAccounting Standards Board (“FASB”) issued Financial Interpretation No. 46, “Consolidationof Variable Interest Entities” (“FIN 46”), which addresses consolidation bybusiness enterprises of variable interest entities (“VIEs”).  Theaccounting provisions and disclosure requirements of FIN 46 are effectiveimmediately for VIEs created after January 31, 2003, and are effective forthe Company’s fiscal period ending March 31, 2004, for VIEs created priorto February 1, 2003.  In December 2003, the FASB published arevision to FIN 46 (“FIN 46R”) to clarify some of the provisions of theinterpretation and to defer the effective date of implementation for certainentities.  Under the guidance of FIN 46R, public companies that haveinterests in VIE’s that are commonly referred to as special purpose entitiesare required to apply the provisions of FIN 46R for periods ending after December 15,2003.  A public company that does not have any interests in specialpurpose entities but does have a variable interest in a VIE created before February 1,2003, must apply the provisions of FIN 46R by the end of the first interim orannual reporting period ending after March 14, 2004.  Adoption of FIN46R did not have a material effect on the Company’s financial statements.

 

In March 2004,the FASB Emerging Issues Task Force (EITF) released Issue No. 03-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.” EITF 03-1 provides guidance for determining whether impairmentfor certain debt and equity investments is other-than-temporary and themeasurement of an impaired loss. The recognition and measurement requirementsof EITF 03-1 were initially effective for reporting periods beginning afterJune 15, 2004. In September 2004, the FASB Staff issued FASB Staff Position(“FSP”) EITF 03-1-1 that delayed the effective date for certain measurement andrecognition guidance contained in EITF 03-1. The FSP requires that entitiescontinue to apply previously existing “other-than-temporary” guidance until afinal consensus is reached. Management does not anticipate that issuance of afinal consensus will materially impact the Company’s financial condition orresults of operations.

 

In December 2004, theFASB issued Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-BasedPayment” (“FAS 123R”). The provisions of this statement are effective for the Company’sthird quarter ending September 30, 2005. FAS 123R requires compensationcost be recognized for new awards of equity instruments and unvested awards onthe adoption date.  We expect the adoptionof this statement will have a material effect on the Company’s financialstatements, but we cannot reasonably estimate the impact of the adoptionbecause certain assumptions used in the calculation of the value of share-basedpayments may change in 2005.

 

**Risk Factors**

 

*The Company’s IT Services and Solutions (Commercial) revenues have declinedand the operating loss has increased because demand for IT services hasweakened and may continue to weaken, in the industries and markets that CHCserves.*

 

The Company’s revenues are affected by the level ofbusiness activity of its clients, and the related demand for IT services tosupport these client activities.  As a result of weakened demand for theCompany’s IT services, revenues and results of operations have been negativelyimpacted.  For the year ended December 31, 2004 and 2003, IT Servicesrevenue decreased to $131.2 million from $133.1 million, respectively, adecrease of $1.9 million, or 1.4%.  Solutions (Commercial) decreasedapproximately $14 million in 2004.  Forthe years ended December 31, 2004 and 2003, IT Services operating loss increasedto $6.3 million from $4.1 million, respectively, an increase of $2.2 million,or 55%.  CHC cannot predict when client demand will improve, and to whatextent demand for the Company’s IT Services and Solutions (Commercial) willimprove.

 

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*The current trend of companies moving technology jobs and projectsoffshore has caused and could continue to cause revenues to decline.*

 

In the past few years, morecompanies are using or are considering using low cost offshore outsourcingcenters, particularly in India, to perform technology related work andprojects.  This trend has contributed to the decline in domestic IT staffaugmentation revenue as well as on-site solutions oriented projects.  TheCompany now has its own outsourcing centers in India and Canada to compete forthis business, but this new business has not been sufficient to offset therevenue decline.  Additionally, the equivalent amount of work in low costcenters will generate substantially less revenue due to the lower billing ratesthat are charged in these offshore outsourcing centers.

 

*The Company’s operating results have varied, and are likely to continueto vary significantly.  This may result in volatility in the market priceof our common stock.*

 

The Company’s revenues and operating results havevaried in the past and are likely to vary significantly from year toyear.  This may lead to volatility in the share price.  Some otherfactors that may cause the market price of the common stock to fluctuatesubstantially, include:

•      the failure to be awarded asignificant project on which the Company has bid;

•      the termination by a clientof a material project or the decision by a client not to proceed to the stageof a project anticipated by the Company;

•      announcement of new servicesby CHC or the competitors;

•      announcement of acquisitionsor other significant transactions by CHC or the competitors;

•      changes in or failure tomeet earnings estimates by the Company and/or securities analysts;

•      sales of common stock by CHCor the existing shareholders or the perception that such sales may occur;

•      adversejudgments or settlements obligating CHC to pay liabilities;

•      changes in management; and

•      generaleconomic conditions and overall stock market volatility.

 

*The failure to be successful in retaining existing and futurehighly-skilled technical personnel and attracting a sufficient number of ITprofessionals and project managers could adversely affect the Company’sbusiness.*

 

The Company’s business is labor intensive and dependsto a large extent on its ability to attract, train, motivate and retainhighly-skilled IT professionals and project managers.  The Company’sability to win and retain new business is significantly affected by clientrelationships and the quality of service rendered.  The loss of key ITprofessionals and project managers may jeopardize existing client relationshipswith businesses that continue to use the Company’s services based upon pastrelationships with key IT professionals and project managers.

 

*The Company derives a significant portion of its revenues from alimited number of large clients and the loss of any large client could have anadverse effect on its business.*

 

The Company has derived, and it believes will continueto derive, a significant portion of its revenues from a limited number of largeclients.  For the years ended December 31, 2004, 2003 and 2002, theCompany’s ten largest clients accounted for approximately 24%, 38% and 38% ofits revenues, respectively.  The loss of any large client could have anadverse effect on the Company’s business, results of operations and financialcondition.  As of December 31, 2004, approximately 10% of RGII’srevenues were derived from restricted contracts (minority based contracts,etc.)  These contracts may be terminated pursuant to the Federalgovernment’s rights under the Federal Acquisition Regulations (“FAR”).  Inaddition, as a result of RGII’s acquisition by the Company, RGII will not beeligible to compete for these types of contracts in the future and will have toreplace this revenue stream with new contracts.  If these contracts areterminated or the Company is not able to enter new contracts on acceptableterms, the Company’s business could be adversely affected.

 

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*Changes in Federal government programs and requirements, or budgetarychanges affecting Federal government spending in Company specific agencies, orchanges in fiscal policies or available funding, may adversely affect theCompany’s results of operations.*

 

The Company acquired RGII Technologies, Inc. in July 2003and RGII acquired AIM in April 2004. RGII receives substantially all itsrevenue from contracts with the Federal government.  For the year ended December 31,2004, the Company received approximately 18% of its total revenue fromRGII.  Significant changes in RGII’s revenues may adversely affect theCompany’s results of operations.

 

*Projects performed by RGII are subject to Defense Contract Audit Agencyaudits and compliance with government cost accounting standards.  Theresults of such audits may result in adjustments to RGII’s reported financialresults.*

 

RGII has cost reimbursable type contracts with theU.S. Government.  Consequently, RGII is reimbursed based upon directexpenses attributable to the contract plus a percentage based upon indirectexpenses.  The indirect rates are estimated.  Accordingly, if theactual rates as determined by the Defense Contract Audit Agency (“DCAA”) arebelow the estimated rates, a refund for the difference will be due to the U.S.Government.  A significant refund due to the U.S. Government may adverselyaffect the Company’s results of operations.  DCAA has completed itsincurred cost audits for all fiscal years through December 31, 2001.   Past audits have not resulted in significantadjustments.

 

*The Company faces competition from a number of existing competitors, aswell as potential new competitors, which could result in loss of market shareand adversely affect business.*

 

The markets for CHC services are highlycompetitive.  The Company competes with large providers of IT staffingservices including Comsys IT Partners Inc. and MPS Group, Inc.  Inaddition, it competes for staffing projects with the information systems groupsof prospective clients.  In the Solutions business, the Company competeswith consulting and system integration firms, including Analysts InternationalCorporation, iGATE Corp., Covansys Corp., Accenture, Bearingpoint, CIBER, Inc.,Computer Sciences Corporation, Computer Task Group, Electronic Data SystemsCorp., IBM Corp. and Keane, Inc.  The Company also competes in the ITsolutions market with vendors of application software.  There arerelatively low barriers to entry in the markets the Company competes in and ithas faced and expects to continue to face, additional competition from otherestablished and emerging companies.  Increased competition may result ingreater pricing pressure which could have an adverse effect on the Company’sbusiness, results of operations and financial condition.  Many of theCompany’s current and potential competitors have significantly greaterfinancial, technical, marketing and other resources and generate greaterrevenues than the Company. As a result, they may be able to respond morequickly to new or emerging technologies and changes in clients’ requirements,or to devote greater resources to the development, promotion, sale and supportof their services and products.  In addition, current and potentialcompetitors may establish cooperative relationships among themselves or withthird parties to increase the ability of their services or products to addressthe staffing and solution needs of prospective clients.  Accordingly, itis possible that new competitors, alliances among competitors or alliancesbetween competitors and third parties may emerge and acquire significant marketshare.  If this were to occur, it could have an adverse effect on theCompany’s business, results of operations and financial condition.

 

27

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*The introduction of competitive IT solutions embodying new technologiesand the emergence of new industry standards may render the Company’s existingIT solutions or underlying technologies obsolete or unmarketable which couldhave an adverse effect on its business.*

 

The IT solutions industry is characterized by rapidtechnological change, changing client requirements and new service and productintroductions.  The introduction of competitive IT solutions embodying newtechnologies and the emergence of new industry standards may render the Company’sexisting IT solutions or underlying technologies obsolete orunmarketable.  As a result, it is dependent in large part upon its abilityto develop new IT solutions that address the increasingly sophisticated needsof its clients, keep pace with new competitive service and product offeringsand emerging industry standards and achieve broad market acceptance.  Thebusiness will be adversely affected if CHC is not successful in developing andmarketing new IT solutions that respond to technological change, changingclient requirements or evolving industry standards.

 

*Some of the Company’s services are offered on a fixed-pricebasis.  The failure to estimate accurately the resources and time requiredfor a project or failure to complete our contractual obligations within thetime frame committed could have an adverse effect on the Company’s business.*

 

The Company offers some of its services on afixed-price rather than on a time-and-materials or best efforts basis. Under the terms of these contracts the Company bears the risk of cost overrunsand inflation in connection with these projects.  In the event that theCompany fails to estimate accurately the resources and time required for a projector fails to complete its contractual obligations within the time framecommitted, the Company’s business, operating results and financial conditioncould be adversely affected.

 

*The Company’s business strategy includes the pursuit of strategicacquisitions which present many risks and may have an adverse effect on itsbusiness in the event the financial and strategic goals that were contemplatedat the time of the transaction are not realized.*

 

As part of its strategy, the Company pursues strategicacquisitions.  On July 8, 2003, CHC purchased all of the capitalstock of RGII Technologies, Inc., a Federal IT services company.  On April 1,2004, RGII purchased AIM to further its commitment to driving the growthpotential that exists in the Federal government market and to expand RGII’sfootprint, providing an entrance into certain government agencies, as well asstrong relationships with large, prime contractors. Some of the risks faced incompleting acquisitions similar to the RGII and AIM transactions are:

•      difficulties integrating newoperations, technology and personnel into operations;

•      loss of significant clientsacquired;

•      loss of key management andtechnical personnel acquired;

•      assumption of unanticipatedlegal or other financial liabilities;

•      unanticipated operating,accounting or management difficulties in connection with the acquired entities;and

•      diversion of managementattention from other business concerns.

 

These difficulties could disrupt ongoing business andincrease expenses.  Any acquisition, depending on its size, could resultin the use of a significant portion of cash, or if the acquisition is madeutilizing securities, could result in significant dilution toshareholders.  Furthermore, there can be no assurance that any acquired servicecapacity or technology will gain acceptance in the market.  Each of theseresults could adversely affect the Company’s business, results of operations,financial condition and the price of common stock.

 

28

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*The Company’s international operations subject it to additional risksthat can adversely affect operating results.*

 

CHC’s international operations, which comprised 10.7%,10.5%, and 8.6%  of consolidated revenuesfor the years ended December 31, 2004, 2003, and 2002, respectively,depend greatly upon business, immigration and technology transfer laws in thosecountries in which it has international operations and upon the continueddevelopment of technology infrastructure.  As a result, the Company’sbusiness is subject to the risks generally associated with non-U.S. operationsincluding:

•      unexpected changes inregulatory environments;

•      the costs and difficultiesrelating to geographically diverse operations;

•      differences in, anduncertainties arising from changes in, foreign business culture and practices;

•      fluctuations in currencyexchange rates;

•      restrictions on the movementof cash;

•      longer accounts receivablepayment cycles and greater difficulties in collecting accounts receivable;

•      potential foreign taxconsequences, including the impact of repatriation of earnings, tariffs andother trade barriers; and

•      political unrest andchanging conditions in countries in which our services are provided orfacilities are located.

 

If any of these factors were to render the conduct ofbusiness in a particular country undesirable or impracticable, there could bean adverse effect on the Company’s business, operating results and financialcondition.

 

*If CHC fails to protect its intellectual property rights, competitorsmay be able to use its technology and this could weaken its competitiveposition, reduce revenue and increase costs.*

 

CHC relies primarily upon a combination of copyrightand trademark laws, trade secrets, confidentiality procedures and contractualarrangements to protect proprietary rights.  The steps taken to protectproprietary rights may not prevent misappropriation of CHC’s proprietaryrights, particularly in foreign countries where laws or law enforcementpractices may not protect proprietary rights as fully as in the UnitedStates.  If third parties were to use or otherwise misappropriate CHC’scopyrighted materials, trademarks or other proprietary rights without consentor approval, CHC’s competitive position could be harmed, or it could becomeinvolved in litigation to enforce its rights.

 

*Third parties could assert that the Company’s services infringe theirintellectual property rights, which if successful, could adversely affect theCompany’s business.*

 

Third parties may assert trademark, copyright, patentand other types of infringement or unfair competition claims against theCompany.  If CHC is forced to defend against any such claims, whether theyare with or without merit or are determined in its favor, the Company may facecostly litigation, loss of access to, and use of software and diversion oftechnical and management personnel.  As a result of such dispute, CHC mayhave to develop non-infringing technology or enter into royalty or licensingarrangements.  Such royalty or licensing agreements, if required, may beunavailable on terms acceptable to CHC, or at all.  If there is asuccessful claim of infringement against the Company and it is unable todevelop non-infringing technology or license the infringed or similar technologyon a timely basis, it could adversely affect CHC’s business.

 

29

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*In the event of a failure in a client’s computer system, a claim forsubstantial damages may be made against the Company regardless of its responsibilityfor the failure, which if successful, could adversely affect the Company’sbusiness.*

 

Much of the Company’s business involves projects thatare critical to the operations of its clients’ businesses and provide benefitsthat may be difficult to quantify.  Any failure in a client’s system couldresult in a claim for substantial damages against CHC, regardless of itsresponsibility for such failure.  Limitations of liability set forth inservice contracts may not be enforceable in all instances and may not otherwiseprotect the Company from liability for damages.  CHC maintains generalliability insurance, including coverage for errors and omissions, however, CHCmay not be able to avoid significant claims and attendant publicity.Furthermore, there can be no assurance that the insurance coverage will beadequate or that coverage will remain available at acceptable costs. Successful claims brought against the Company in excess of its insurancecoverage could have an adverse effect on business, operating results andfinancial condition.

 

*As a provider of staffing services, there are risks associated withplacing employees (and independent contractors) at clients’ businesses, whichcould result in costly and time-consuming litigation.*

 

CHC could be subject to liability if any of thefollowing risks associated with placing its employees (and independentcontractors) at clients’ businesses occurs:

•      possible claims ofdiscrimination and harassment;

•      liabilities for errors andomissions by CHC’s employees (and independent contractors);

•      misuse of client proprietaryinformation or intellectual property;

•      injury to client employees;

•      misappropriation of clientproperty;

•      other criminal activity; and

•      torts and other similarclaims.

 

Any claims made against CHC could result in costly andtime-consuming litigation.  In addition, under some circumstances, theCompany may be held responsible for the actions of persons not under its directcontrol.

 

*The Company has adopted anti-takeover defenses that could make itdifficult for another company to acquire control of the Company or limit theprice investors might be willing to pay for its stock.*

 

Certain provisions of theCompany’s Certificate of Incorporation and Bylaws could make a merger or tenderoffer involving CHC more difficult, even if such events would be beneficial tothe interests of the shareholders. These provisions include adoption of aPreferred Shares Rights Agreement, commonly known as a “poison pill” and givingthe Board the ability to issue preferred stock and determine the rights anddesignations of the preferred stock at any time without shareholderapproval.  The rights of the holders of CHC’s common stock will be subjectto, and may be adversely affected by, the rights of the holders of any preferredstock that may be issued in the future.  The issuance of preferred stock,while providing flexibility in connection with possible acquisitions and othercorporate purposes, could have the effect of making it more difficult for athird party to acquire, or of discouraging a third party from acquiring, amajority of CHC’s outstanding voting stock.  The above factors and certainprovisions of the New York Business Corporation Law may have the effect ofdeterring hostile takeovers or otherwise delaying or preventing changes in thecontrol or management of the Company, including transactions in which theshareholders might otherwise receive a premium over the fair market value ofCHC common stock.

 

30

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Item 7A. Quantitative andQualitative Disclosures about Market Risk 

 

**Market Risk Exposure**

 

The Company has financialinstruments that are subject to interest rate risk.  Historically, theCompany has not experienced material gains or losses due to interest rate changes. Based on the current holdings, the exposure to interest rate risk is notmaterial.  Additionally, at December 31, 2004 the Company was debtfree.

 

Item 8.  FinancialStatements and Supplementary Data

 

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors andShareholders

Computer Horizons Corp.

 

We have audited theaccompanying consolidated balance sheets of Computer Horizons Corp. andSubsidiaries as of December 31, 2004 and 2003, and the relatedconsolidated statements of operations, shareholders’ equity and cash flows foreach of the three years in the period ended December 31, 2004. Thesefinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Computer Horizons Corp. andSubsidiaries as of December 31, 2004 and 2003 and the consolidated resultsof their operations and their consolidated cash flows for each of the threeyears in the period ended December 31, 2004, in conformity with accountingprinciples generally accepted in the United States of America.

 

We also have audited, inaccordance with the standards of the Public Company Oversight Board (UnitedStates), the effectiveness of Computer Horizons Corp. and Subsidiaries’ internalcontrol over financial reporting as of December 31, 2004, based oncriteria established in *Internal Control*-*Integrated Framework*issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), andour report dated March 14, 2005 expressed an unqualified opinion thereon.

 

 
| /s/ Grant Thornton LLP |   |
|------------------------|--------|
| Grant  Thornton LLP    |
|                   |
|                   |
| Edison, New Jersey     |
| March 14, 2005    |

 

31

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REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors andShareholders

Computer Horizons Corp.

 

We have audited management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that Computer Horizons Corp. and Subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in *Internal Control - Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment that Computer Horizons Corp. and Subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria.  Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity and cash flows, for each of the three years in the period ended December 31, 2004, and our report dated March 14, 2005 expressed an unqualified opinion thereon.

 

 
| /s/ Grant Thornton LLP |   |
|------------------------|--------|
| Grant Thornton LLP     |
|                   |
|                   |
| Edison, New Jersey     |
| March 14, 2005    |

 

32

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Computer Horizons Corp. andSubsidiaries

CONSOLIDATED BALANCE SHEETS

 
| ** **                          | ** ** | **December 31,**                      | ** **  |
|-------------------------------------|------------|--------------------------------------------|-------------|
| ** **                          | ** ** | **2004**                                   | ** **  | **2003** | ** ** |
| ** **                          | ** ** | **(in thousands, except per  share data)** | ** **  |
| ASSETS                              |       |                                       |        |   |   |
|                                |       |                                       |        |   |   |
| *Current  assets:*                  |       |                                       |        |   |   |
| Cash and cash  equivalents (Note 1) | ** ** | **$**                                      | **33,649**  | ** ** | **$** | **52,610** | ** ** |
| Accounts  receivable (Note 2)       | ** ** | **51,322**                                 | ** **  | **48,295** | ** ** |
| Deferred  income taxes (Note 7)     | ** ** | **1,868**                                  | ** **  | **4,514** | ** ** |
| Refundable  income taxes (Note 7)   | ** ** | **4,088**                                  | ** **  | **—** | ** ** |
| Other                               | ** ** | **5,550**                                  | ** **  | **4,759** | ** ** |
|                                |       |                                       |        |   |   |
| Total  current assets               | ** ** | **96,477**                                 | ** **  | **110,178** | ** ** |
|                                |       |                                       |        |   |   |
| *Property  and equipment:*          |       |                                       |        |   |   |
| Furniture,  equipment and other     | ** ** | **42,810**                                 | ** **  | **42,252** | ** ** |
| Less :  accumulated depreciation    | ** ** | **36,815**                                 | ** **  | **32,929** | ** ** |
|                                |       |                                       |        |   |   |
| ** **                          | ** ** | **5,995**                                  | ** **  | **9,323** |   |
|                                |       |                                       |        |   |   |
| *Other  assets – net:*         |       |                                       |        |   |   |
| Goodwill  (Note 1)                  | ** ** | **27,625**                                 | ** **  | **34,218** | ** ** |
| Intangibles  (Note 1)               | ** ** | **3,253**                                  | ** **  | **2,408** | ** ** |
| Deferred  income taxes (Note 7)     | ** ** | **17,698**                                 | ** **  | **14,813** | ** ** |
| Other                               | ** ** | **8,036**                                  | ** **  | **9,386** | ** ** |
|                                |       |                                       |        |   |   |
| ** **                          | ** ** | **56,612**                                 | ** **  | **60,825** |   |
|                                |       |                                       |        |   |   |
| Total Assets                        | ** ** | **$**                                      | **159,084** | ** ** | **$** | **180,326** | ** ** |

 

*The accompanying notes are an integral part of these statements.*

 

33

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| ** **                                                                                                                                         | ** ** | **December 31,**                      | ** **  |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                                                                                         | ** ** | **2004**                                   | ** **  | **2003** | ** ** |
| ** **                                                                                                                                         | ** ** | **(in thousands, except per share  data)** | ** **  |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                                                         |       |                                       |        |   |   |
|                                                                                                                                               |       |                                       |        |   |   |
| *Current  liabilities :*                                                                                                                           |       |                                       |        |   |   |
| Accrued  payroll, payroll taxes and benefits                                                                                                       | ** ** | **$**                                      | **8,489**   | ** ** | **$** | **7,791** | ** ** |
| Accounts  payable                                                                                                                                  | ** ** | **7,615**                                  | ** **  | **8,287** | ** ** |
| Restructuring  reserve (Note 13)                                                                                                                   | ** ** | **3,351**                                  | ** **  | **2,620** | ** ** |
| Income taxes  payable                                                                                                                              | ** ** | **1,377**                                  | ** **  | **1,243** | ** ** |
| Tax benefit  reserve (Note 7)                                                                                                                      | ** ** | **—**                                 | ** **  | **19,600** | ** ** |
| RGII contingency  payment (Note 15)                                                                                                                | ** ** | **1,851**                                  | ** **  | **630** | ** ** |
| Other  accrued expenses                                                                                                                            |       | **4,912**                                  | ** **  | **5,183** |   |
|                                                                                                                                               |       |                                       |        |   |   |
| Total  current liabilities                                                                                                                         | ** ** | **27,595**                                 | ** **  | **45,354** | ** ** |
| ** **                                                                                                                                         | ** ** | ** **                                 | ** **  | ** ** | ** ** |
| Deferred  compensation (Note 10)                                                                                                                   | ** ** | **2,633**                                  | ** **  | **2,103** | ** ** |
| Supplemental  executive retirement plan (Note 10)                                                                                                  | ** ** | **2,162**                                  | ** **  | **1,682** | ** ** |
| Other  liabilities                                                                                                                                 | ** ** | **913**                                    | ** **  | **850** | ** ** |
| ** **                                                                                                                                         | ** ** | ** **                                 | ** **  | ** ** | ** ** |
| Total liabilities                                                                                                                                  | ** ** | **33,303**                                 | ** **  | **49,989** | ** ** |
|                                                                                                                                               | ** ** | ** **                                 | ** **  | ** ** | ** ** |
| Commitments  and Contingencies (Notes 4, 7 and 11)                                                                                                 |       |                                       |        |   |   |
|                                                                                                                                               |       |                                       |        |   |   |
| *Shareholders’  equity:*                                                                                                                      |       |                                       |        |   |   |
| Preferred  stock, $.10 par; authorized and unissued, 200,000 shares, including 50,000 Series A                                                |       |                                       |        |   |   |
| Common  stock, $.10 par; authorized, 100,000,000 shares; issued 33,153,805 and  33,153,107 shares at December 31, 2004 and 2003, respectively | ** ** | **3,315**                                  | ** **  | **3,315** | ** ** |
| Additional  paid-in capital                                                                                                                        | ** ** | **151,281**                                | ** **  | **133,046** | ** ** |
| Accumulated  other comprehensive loss                                                                                                              | ** ** | **(2,200**                                 | **)**       | **(2,789** | **)** |
| Retained earnings  / (deficit)                                                                                                                     | ** ** | **(14,072**                                | **)**       | **11,100** | ** ** |
|                                                                                                                                               |       |                                       |        |   |   |
| ** **                                                                                                                                         | ** ** | **138,324**                                | ** **  | **144,672** |   |
| Less shares  held in treasury, at cost; 2,060,011 and 2,537,692 shares at December 31,  2004 and 2003, respectively                           | ** ** | **(12,543**                                | **)**       | **(14,335** | **)** |
|                                                                                                                                               |       |                                       |        |   |   |
| Total  shareholders’ equity                                                                                                                   | ** ** | **125,781**                                | ** **  | **130,337** | ** ** |
|                                                                                                                                               |       |                                       |        |   |   |
| Total  Liabilities and Shareholders’ Equity                                                                                                   | ** ** | **$**                                      | **159,084** | ** ** | **$** | **180,326** | ** ** |

 

34

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Computer Horizons Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

 
| ** **                                                                                                 | ** ** | **Year ended December 31,**           | ** **  |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                                                 | ** ** | **2004**                                   | ** **  | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                 | ** ** | **(in thousands, except per share  data)** | ** **  |
|                                                                                                       |       |                                       |        |   |   |   |   |
| Revenues                                                                                                   | ** ** | **$**                                      | **262,527** | ** ** | **$** | **245,210** | ** ** | **$** | **297,115** | ** ** |
| ** **                                                                                                 | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| *Costs and  expenses:*                                                                                     | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| Direct costs                                                                                               | ** ** | **180,606**                                | ** **  | **173,198** | ** ** | **216,181** | ** ** |
| Selling,  general and administrative                                                                       | ** ** | **85,141**                                 | ** **  | **80,634** | ** ** | **91,343** | ** ** |
| Amortization  of intangibles                                                                               | ** ** | **1,695**                                  | ** **  | **1,084** | ** ** | **—** | ** ** |
| Restructuring  charges (Note 13)                                                                           | ** ** | **2,859**                                  | ** **  | **3,278** | ** ** | **2,515** | ** ** |
| Special  charges/(credits) (Note 18)                                                                       | ** ** | **(939**                                   | **)**       | **10,113** | ** ** | **—** | ** ** |
| Goodwill  impairment                                                                                       | ** ** | **20,306**                                 | ** **  | **—** | ** ** | **—** | ** ** |
| Write-off of  assets                                                                                       | ** ** | **910**                                    | ** **  | **—** | ** ** | **—** | ** ** |
| ** **                                                                                                 | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                 | ** ** | **290,578**                                | ** **  | **268,307** | ** ** | **310,039** | ** ** |
| ** **                                                                                                 | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| Loss from  operations                                                                                      | ** ** | **(28,051**                                | **)**       | **(23,097** | **)** | **(12,924** | **)** |
| ** **                                                                                                 | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| *Other  income /(expense):*                                                                                | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| Gain /  (loss) on sale of assets (Note 17)                                                                 | ** ** | **—**                                 | ** **  | **(424** | **)** | **5,890** | ** ** |
| Net gain  /(loss) on investments                                                                           | ** ** | **—**                                 | ** **  | **(432** | **)** | **(61** | **)** |
| Interest  income                                                                                           | ** ** | **337**                                    | ** **  | **529** | ** ** | **928** | ** ** |
| Interest  expense                                                                                          | ** ** | **(103**                                   | **)**       | **(51** | **)** | **(174** | **)** |
| ** **                                                                                                 | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                 | ** ** | **234**                                    | ** **  | **(378** | **)** | **6,583** | ** ** |
| ** **                                                                                                 | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| Loss before  income taxes and cumulative effect of a change in accounting principle and  minority interest | ** ** | **(27,817**                                | **)**       | **(23,475** | **)** | **(6,341** | **)** |
| ** **                                                                                                 | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| *Income  taxes / (benefit) (Notes 1 and 7):*                                                               | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| Current                                                                                                    | ** ** | **(1,436**                                 | **)**       | **341** | ** ** | **(4,292** | **)** |
| Deferred                                                                                                   | ** ** | **(1,254**                                 | **)**       | **(6,750** | **)** | **6,161** | ** ** |
| ** **                                                                                                 | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                 | ** ** | **(2,690**                                 | **)**       | **(6,409** | **)** | **1,869** | ** ** |
| ** **                                                                                                 | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| Loss before  cumulative effect of change in accounting principle and minority interest                     | ** ** | **(25,127**                                | **)**       | **(17,066** | **)** | **(8,210** | **)** |
| ** **                                                                                                 | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| Cumulative  effect of change in accounting principle (Note 1)                                              | ** ** | **—**                                 | ** **  | **—** | ** ** | **(29,861** | **)** |
| Minority  interest                                                                                         | ** ** | **(45**                                    | **)**       | **(89** | **)** | **35** | ** ** |
| ** **                                                                                                 | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| Net Loss                                                                                                   | ** ** | **$**                                      | **(25,172** | **)** | **$** | **(17,155** | **)** | **$** | **(38,036** | **)** |
| ** **                                                                                                 | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| Loss per  share – Basic and Diluted (Notes 1 and 8):                                                  | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| Before  cumulative effect of change in accounting principle                                                | ** ** | **$**                                      | **(0.82**   | **)** | **$** | **(0.56** | **)** | **$** | **(0.26** | **)** |
| Cumulative  effect of change in accounting principle                                                       | ** ** | **$**                                      | **—**  | ** ** | **$** | **—** | ** ** | **$** | **(0.96** | **)** |
| Net Loss                                                                                                   | ** ** | **$**                                      | **(0.82**   | **)** | **$** | **(0.56** | **)** | **$** | **(1.22** | **)** |
|                                                                                                       |       |                                       |        |   |   |   |   |
| Weighted  average number of shares outstanding:                                                            |       |                                       |        |   |   |   |   |
| Basic and  Diluted                                                                                         | ** ** | **30,870,000**                             | ** **  | **30,455,000** | ** ** | **31,243,000** | ** ** |

 

 

*The accompanying notes are an integral part of these statements.*

 

35

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CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Years ended December 31, 2004, 2003 and 2002

 
| ** **                                       | ** ** | **Common Stock**           | ** ** | **Additional  Paid-in** | ** ** | **Accumulated  other  Comprehensive** | ** ** | **Retained  Earnings /** | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|---------------------------------------|------------|--------------------------|------------|--------------------|------------|------------|------------|
| ** **                                       | ** ** | **Shares**                 | ** ** | **Amount**              | ** ** | **Capital**                           | ** ** | **Income/(Loss)**        | ** ** | **(Deficit)**      | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Total** | ** ** |
| ** **                                       |       | **(dollars in thousands)** |       |
| Balance, December 31, 2001                  |       | 33,153,107                 |       | $                       | 3,315      |                                  | $          | 135,230                  |       | $                  | (2,932     | )          | $          | 66,291 |   | 1,720,191 |   | $ | (12,049 | ) | $ | 189,855 |   |
| Net loss for the year                            |       |                       |       |                    |       |                                  |       |                     |       | (38,036            | )          |       |       |   |   | (38,036 | ) |
| Other comprehensive loss:                        |       |                       |       |                    |       |                                  |       |                     |       |               |       |       |       |   |   |   |   |
| Current year unrealized loss on investments      |       |                       |       |                    |       |                                  |       | (1,100                   | )          |               |       |       |       |   |   | (1,100 | ) |
| Foreign currency translation adjustments         |       |                       |       |                    |       |                                  |       | (274                     | )          |               |       |       |       |   |   | (274 | ) |
| Total comprehensive loss                         |       |                       |       |                    |       |                                  |       |                     |       |               |       |       |       |   |   | (39,410 | ) |
| Stock options exercised                          |       |                       |       |                    |       |                                  |       |                     |       |               |       | (265,858   | )          | 449 |   | 449 |   |
| Employee stock purchase program                  |       |                       |       |                    |       | (1,712                                | )          |                     |       |               |       | (405,366   | )          | 2,814 |   | 1,102 |   |
| Purchase of treasury shares                      |       |                       |       |                    |       |                                  |       |                     |       |               |       | 1,611,700  |       | (6,141 | ) | (6,141 | ) |
| *Balance, December 31, 2002*                |       | 33,153,107                 |       | 3,315                   |       | 133,518                               |       | (4,306                   | )          | 28,255             |       | 2,660,667  |       | (14,927 | ) | 145,855 |   |
| Net loss for the year                            |       |                       |       |                    |       |                                  |       |                     |       | (17,155            | )          |       |       |   |   | (17,155 | ) |
| Other comprehensive loss:                        |       |                       |       |                    |       |                                  |       |                     |       |               |       |       |       |   |   |   |   |
| Current year unrealized loss on investments      |       |                       |       |                    |       |                                  |       | (489                     | )          |               |       |       |       |   |   | (489 | ) |
| Foreign currency translation adjustments         |       |                       |       |                    |       |                                  |       | 2,006                    |       |               |       |       |       |   |   | 2,006 |   |
| Total comprehensive loss                         |       |                       |       |                    |       |                                  |       |                     |       |               |       |       |       |   |   | (15,638 | ) |
| Stock options exercised                          |       |                       |       |                    |       |                                  |       |                     |       |               |       | (361,410   | )          | 959 |   | 959 |   |
| Employee stock purchase program                  |       |                       |       |                    |       | (472                                  | )          |                     |       |               |       | (153,765   | )          | 863 |   | 391 |   |
| Purchase of treasury shares                      |       |                       |       |                    |       |                                  |       |                     |       |               |       | 392,200    |       | (1,230 | ) | (1,230 | ) |
| Balance, December 31, 2003                  |       | 33,153,107                 |       | 3,315                   |       | 133,046                               |       | (2,789                   | )          | 11,100             |       | 2,537,692  |       | (14,335 | ) | 130,337 |   |
| Net Loss for the year                            |       |                       |       |                    |       |                                  |       |                     |       | (25,172            | )          |       |       |   |   | (25,172 | ) |
| Other comprehensive Loss:                        |       |                       |       |                    |       |                                  |       |                     |       |               |       |       |       |   |   |   |   |
| Current year unrealized gain on investments      |       |                       |       |                    |       |                                  |       | 325                      |       |               |       |       |       |   |   | 325 |   |
| Foreign currency translation adjustments         |       |                       |       |                    |       |                                  |       | 264                      |       |               |       |       |       |   |   | 264 |   |
| Total comprehensive loss                         |       |                       |       |                    |       |                                  |       |                     |       |               |       |       |       |   |   | (24,583 | ) |
| Other issuance of common stock                   |       | 698                        |       |                    |       |                                  |       |                     |       |               |       |       |       |   |   |   |   |
| Stock options exercised                          |       |                       |       |                    |       |                                  |       |                     |       |               |       | (306,460   | )          | 774 |   | 774 |   |
| Employee stock purchase program                  |       |                       |       |                    |       | (395                                  | )          |                     |       |               |       | (171,221   | )          | 1,018 |   | 623 |   |
| Tax benefits/other, net, related to acquisitions |       |                       |       |                    |       | 18,630                                |       |                     |       |               |       |       |       |   |   | 18,630 |   |
| Balance, December 31, 2004                  |       | 33,153,805                 |       | $                       | 3,315      |                                  | 151,281    |                     | (2,200     | )                  | (14,072    | )          | 2,060,011  |   | (12,543 | ) | 125,781 |   |
|                                                  |            |                            |            |                         |            |                                       |            |                          |            |                    |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

*The accompanying notes are an integral part of this statement.*

 

36

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Computer Horizons Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
| ** **                                                                                 | ** ** | **Year ended December 31,** | ** **  |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                                                 | ** ** | **2004**                         | ** **  | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                 | ** ** | **(in thousands)**               | ** **  |
| ***Cash flows from operating activities***                                                 |       |                             |        |   |   |   |   |
| Net loss                                                                                   | ** ** | **$**                            | **(25,172** | **)** | **$** | **(17,155** | **)** | **$** | **(38,036** | **)** |
| Adjustments  to reconcile net loss to net cash provided by/(used in) operating activities: |       |                             |        |   |   |   |   |
| Deferred  taxes                                                                            | ** ** | **(1,254**                       | **)**       | **(6,750** | **)** | **6,161** | ** ** |
| Depreciation                                                                               | ** ** | **4,821**                        | ** **  | **5,336** | ** ** | **4,634** | ** ** |
| Amortization  of intangibles                                                               | ** ** | **1,695**                        | ** **  | **1,084** | ** ** | **—** | ** ** |
| Provision  for bad debts                                                                   | ** ** | **969**                          | ** **  | **4,644** | ** ** | **4,996** | ** ** |
| Loss /  (gain) on sale of assets                                                           | ** ** | **—**                       | ** **  | **424** | ** ** | **(5,890** | **)** |
| Loss on  investments                                                                       | ** ** | **—**                       | ** **  | **432** | ** ** | **—** | ** ** |
| Goodwill  impairment                                                                       | ** ** | **20,306**                       | ** **  | **—** | ** ** | **29,861** | ** ** |
| Write-off of  assets                                                                       | ** ** | **910**                          | ** **  | **—** | ** ** | **—** | ** ** |
| Changes in  assets and liabilities, net of acquisitions:                                   |       |                             |        |   |   |   |   |
| Accounts  receivable                                                                       | ** ** | **(696**                         | **)**       | **14,635** | ** ** | **21,952** | ** ** |
| Other  current assets                                                                      | ** ** | **(786**                         | **)**       | **2,388** | ** ** | **(1,981** | **)** |
| Assets held  for sale                                                                      | ** ** | **—**                       | ** **  | **—** | ** ** | **397** | ** ** |
| Other assets                                                                               | ** ** | **(245**                         | **)**       | **(3,612** | **)** | **1,298** | ** ** |
| Refundable  income taxes/benefit reserve                                                   | ** ** | **(4,088**                       | **)**       | **19,051** | ** ** | **8,541** | ** ** |
| Accrued  payroll, payroll taxes and benefits                                               | ** ** | **(49**                          | **)**       | **3,262** | ** ** | **(4,648** | **)** |
| Accounts  payable                                                                          | ** ** | **(1,072**                       | **)**       | **(4,026** | **)** | **(4,366** | **)** |
| Income taxes  payable                                                                      | ** ** | **134**                          | ** **  | **1,033** | ** ** | **—** | ** ** |
| RGII  contingency payment                                                                  | ** ** | **1,221**                        | ** **  | **630** | ** ** | **—** | ** ** |
| Other  accrued expenses                                                                    | ** ** | **582**                          | ** **  | **(2,303** | **)** | **(1,432** | **)** |
| Deferred  compensation                                                                     | ** ** | **530**                          | ** **  | **747** | ** ** | **69** | ** ** |
| Supplemental  executive retirement plan                                                    | ** ** | **480**                          | ** **  | **117** | ** ** | **401** | ** ** |
| Other  liabilities                                                                         | ** ** | **317**                          | ** **  | **(3,064** | **)** | **(1,307** | **)** |
| **Net cash  provided by / (used in) operating activities**                                 | ** ** | **(1,397**                       | **)**       | **16,873** | ** ** | **20,650** | ** ** |
| ***Cash flows from investing activities***                                                 |       |                             |        |   |   |   |   |
| Purchases of  furniture and equipment                                                      | ** ** | **(2,050**                       | **)**       | **(2,387** | **)** | **(3,178** | **)** |
| Proceeds on  sale of investments                                                           | ** ** | **—**                       | ** **  | **2,517** | ** ** | **—** | ** ** |
| Acquisitions,  net of cash received                                                        | ** ** | **(14,714**                      | **)**       | **(22,178** | **)** | **—** | ** ** |
| Proceeds  received from the sale of assets                                                 | ** ** | **—**                       | ** **  | **149** | ** ** | **16,467** | ** ** |
| Acquisitions  of intangibles                                                               | ** ** | **—**                       | ** **  | **(566** | **)** | **—** | ** ** |
| Acquisitions  of goodwill                                                                  | ** ** | **(2,461**                       | **)**       | **(1,057** | **)** | **(339** | **)** |
| **Net cash  provided by / (used in) investing activities**                                 | ** ** | **(19,225**                      | **)**       | **(23,522** | **)** | **12,950** | ** ** |
| ***Cash flows from financing activities***                                                 |       |                             |        |   |   |   |   |
| Notes  payable — banks, net                                                           | ** ** | **—**                       |        | — | ** ** | **(10,000** | **)** |
| Payment of  notes payable                                                                  | ** ** | **—**                       | ** **  | **(2,636** | **)** | **—** | ** ** |
| Stock  options exercised                                                                   | ** ** | **774**                          | ** **  | **959** | ** ** | **449** | ** ** |
| Purchase of  treasury shares                                                               | ** ** | **—**                       | ** **  | **(1,230** | **)** | **(6,141** | **)** |
| Stock issued  on employee stock purchase plan                                              | ** ** | **623**                          | ** **  | **391** | ** ** | **1,102** | ** ** |
| **Net cash  provided by / (used in) financing activities**                                 | ** ** | **1,397**                        | ** **  | **(2,516** | **)** | **(14,590** | **)** |
| Effect of  foreign currency gains/ (losses)                                                | ** ** | **264**                          | ** **  | **2,006** | ** ** | **(274** | **)** |
| **Net  increase/ (decrease) in cash and cash equivalents**                                 | ** ** | **(18,961**                      | **)**       | **(7,159** | **)** | **18,736** | ** ** |
| **Cash and  cash equivalents at beginning of year**                                        | ** ** | **52,610**                       | ** **  | **59,769** | ** ** | **41,033** | ** ** |
| **Cash and  cash equivalents at end of year**                                              | ** ** | **$**                            | **33,649**  | ** ** | **$** | **52,610** | ** ** | **$** | **59,769** | ** ** |
|                                                                                       |       |                             |        |   |   |   |   |
| Supplemental  disclosures of cash flow information:                                        |       |                             |        |   |   |   |   |
| Cash  paid/(received) during the year for:                                                 |       |                             |        |   |   |   |   |
| Interest                                                                                   | ** ** | **$**                            | **(224**    | **)** | **$** | **(427** | **)** | **$** | **(461** | **)** |
| Income taxes                                                                               | ** ** | **461**                          | ** **  | **(20,339** | **)** | **(10,967** | **)** |
|                                                                                       |       |                             |        |   |   |   |   |
| Details of  acquisition:                                                                   |       |                             |        |   |   |   |   |
| Tangible  assets acquired **                                                               | ** ** | **$**                            | **4,613**   | ** ** | **$** | **13,083** | ** ** | **$** | **—** | ** ** |
| Liabilities  assumed                                                                       | ** ** | **(2,523**                       | **)**       | **(7,442** | **)** | **—** | ** ** |
| Goodwill                                                                                   | ** ** | **11,252**                       | ** **  | **13,958** | ** ** | **—** | ** ** |
| Intangibles                                                                                | ** ** | **2,540**                        | ** **  | **2,926** | ** ** | **—** | ** ** |
| Cash paid                                                                                  | ** ** | **15,882**                       | ** **  | **22,525** | ** ** | **—** | ** ** |
| Less: cash  received in acquisition                                                        | ** ** | **(1,168**                       | **)**       | **(347** | **)** | **—** | ** ** |
| Net cash  paid *                                                                           | ** ** | **$**                            | **14,714**  | ** ** | **$** | **22,178** | ** ** | **$** | **—** | ** ** |

 

----

* 2003 Included a $1.5 million note payment

** Excluding cash of $1,168 in 2004 for the AIM acquisition and $347 in2003 for the RGII acquisition

 

***  Non Cash Activities:***

 

During the first quarter of2004, the Company recorded a reduction in tax benefit reserves and an increasein additional paid-in capital of $19.9 million. During the third quarter of 2004, the Company recorded a reduction inother assets and a reduction in additional paid-in capital of $1.2 million.

 

*The accompanying notes are an integral partof these statements.*

 

37

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Computer Horizons Corp. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004, 2003 and 2002

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Description of Business*

 

Computer Horizons Corp. is astrategic Information Technology solutions and professional services companywhich does business principally in the United States and Canada.  TheCompany enables its Global 2000 (which Forbes magazine defines as the biggestand most important companies as measured by sales, profits, assets and marketvalue) client base to realize competitive advantages through three majordivisions, IT Services, Solutions and Chimes, Inc.  The IT Servicesdivision provides highly skilled software professionals to augment the internalinformation management staffs of major corporations. The Solutions division,which includes RGII Technologies Inc. (“RGII”), provides enterprise applicationservices, e-business solutions, customized Web development and Web enablementof strategic applications, Client Relationship Management, network services,strategic outsourcing and managed resourcing as well as education and training. RGII provides innovative technology services and solutions to the Federal,state and local government markets.  Chimes, Inc., a wholly-ownedsubsidiary of CHC (“Chimes”), provides workforce procurement and managementservices to Global 2000 companies.

 

*Principles of Consolidation*

 

The consolidated financialstatements include the accounts of Computer Horizons Corp. and its wholly-ownedand majority-owned subsidiaries (the “Company”).  All subsidiaries of theCompany have been consolidated into these financial statements.  ISG -Canada reports their financials on a one-month lag. All materialintercompany accounts and transactions have been eliminated.

 

*Revenue Recognition*

 

Approximately 94% of consolidatedrevenue in both 2004 and 2003 was derived from time-and-material contracts.

 

For the IT Services divisionrevenues are recognized as services are performed under time-and-materialcontracts.  Under a typical time-and-material billing arrangement, our clientsare billed on a regularly scheduled basis, such as biweekly or monthly. At the end of each accounting period, unbilled revenue is estimated and accruedfor services performed since the last billing cycle.  These unbilledamounts are billed the following month.

 

The Solutions Grouprecognizes revenue either on a time-and-material basis as described above or ona fixed fee basis, though, principally on a time-and-material basis. For fixed feecontracts, revenue is recognized on the basis of the estimated percentage ofcompletion.  Each fixed fee contract has different terms, milestones anddeliverables.  The milestones and deliverables primarily relate to thework to be performed and the timing of the billing.  At the end of eachreporting period an assessment of revenue recognized on the percentage ofcompletion and milestones achieved criteria is made.  If it becomesapparent that estimated cost will be exceeded or required milestones ordeliverables will not have been obtained, an adjustment to revenue and/or costswill be made.  The cumulative effect of revisions in estimated revenuesand costs are recognized in the period in which the facts that give rise to theimpact of any revisions become known.

 

38

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Unbilled accountsreceivables represent amounts recognized as revenue based on services performedin advance of client billings principally on a time-and-material basis. At the end of each accounting period, revenue is accrued for services performedsince the last billing cycle.  These unbilled amounts are billed thefollowing month.  Costs and estimated earnings in excess of billing onfixed fee contracts arise when percentage of completion accounting is used. Such amounts are billed at specific dates or at contract completion.

 

The Company’s Chimessubsidiary recognizes revenue on a transaction fee basis.  The Chimesservice offering aggregates the suppliers of temporary workers to the clientand renders one invoice to the client.  Upon payment from the client,Chimes deducts a transaction fee and remits the balance of the client paymentto the applicable vendor.  Chimes recognizes only its fee for the service,not the aggregate billing to the client.  The gross amount of the clientinvoicing is not considered revenue or a receivable to Chimes because there isno earnings process for the gross amount and by contract terms, Chimes is notobligated to pay the vendor until paid by the client.

 

*Recruitment Costs*

 

Recruitment costs arecharged to operations as incurred.

 

*Advertising Costs*

 

The Company expenses alladvertising costs as incurred and classifies these costs under selling, generaland administrative expenses.  Advertising costs for the years ended December 31,2004, 2003 and 2002 were $0.2 million, $ 0.2 million and $0.3 million,respectively.

 

*Research and Development Costs*

 

The Company charges allcosts incurred to establish the technological feasibility of software productsor product enhancements to research and development costs, which are includedin selling, general and administrative expenses and are primarily attributableto the Company’s Chimes subsidiary.  Research and Development costs for theyears ended December 31, 2004, 2003 and 2002 were approximately $3.3million, $3.8 million and $3.7 million, respectively.

 

*Cash and Cash Equivalents*

 

Cash and cash equivalentsinclude highly liquid instruments with an original maturity of three months orless at the time of purchase and consist of the following at December 31:

 
| ** **        | ** ** | **2004**         | ** ** | **2003** | ** ** |
|-------------------|------------|------------------|------------|----------|------------|
| ** **        | ** ** | **in thousands** | ** ** |
| Cash              |       | $                | 25,456     |     | $          | 16,473 |   |
| Commercial  paper |       | 8,002            |       | 33,980   |       |
| Restricted  cash  |       | 191              |       | 2,157    |       |
|              |       |             |       |     |       |
|              |       | $                | 33,649     |     | $          | 52,610 |   |

 

Restricted cash representsfunds received by Chimes and held in client-specific bank accounts, to be usedto make payments to vendors of the applicable client.

 

39

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*Investments*

 

The Company’s marketablesecurities are categorized as available-for-sale securities, as defined by theStatement of Financial Accounting Standards No. 115, “Accounting for CertainInvestments in Debt and Equity Securities.”  Unrealized gains and lossesare reflected as a net amount under the caption of accumulated othercomprehensive loss within the statement of shareholders’ equity.  Realizedgains and losses are recorded within the statement of income under the captionother income or expenses. For the purposes of computing realized gains andlosses, cost is identified on a specific identification basis.

 

*Concentrations of Credit Risk*

 

Financial instruments, whichpotentially subject the Company to concentrations of credit risk, regardless ofthe degree of such risk, consist principally of cash and cash equivalents andtrade accounts receivable. The Company invests the majority of its excess cashin overnight commercial paper of high-credit, high quality short-term moneymarket instruments, high-quality financial institutions or companies, withcertain limitations as to the amount that can be invested in any one entity.

 

The Company maintains itscash balances principally in twelve financial institutions located in theUnited States, Canada, India and the United Kingdom.  The balances in U.S.banks are insured by the Federal Deposit Insurance Corporation up to $100,000for each entity at each institution. The balance in the Canadian bank isinsured by the Canadian Deposit Insurance Corporation up to $60,000 Canadian(approximately $49,000 U.S.).  The balance in the Indian bank is insuredby the Deposit Insurance and Credit Guarantee Corporation up to 100,000 Rupees(approximately $2,000 U.S.).  There is no depository insurance in theUnited Kingdom.  At December 31, 2004, uninsured amounts held by theCompany at these financial institutions total approximately $32,373,000. At December 31, 2004, the Company had approximately $2,254,000 in cashmaintained in overseas financial institutions.

 

The Company’s clients aregenerally very large, Global 2000 companies in many industries and with widegeographic dispersion.  For the years ended December 31, 2004, 2003and 2002, the Company’s ten largest clients accounted for approximately 24%,38% and 38% of its revenues, respectively, and no single client represents morethan 10% of annual revenues.

 

*Fair Value of Financial Instruments*

 

The carrying value offinancial instruments (principally consisting of cash and cash equivalents,accounts receivable and payable) approximates fair value because of their shortmaturities.

 

*Property and Equipment and Depreciation*

 

Property and equipment arestated at cost.  Depreciation is computed using the straight-line methodover the estimated useful lives of the assets which range from three to sevenyears.

 

*Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of*

 

Up to and including the yearended December 31, 2001, the Company evaluated its long-lived assets andcertain identifiable intangibles for impairment whenever events or changes incircumstances indicated that the carrying amount of such assets or intangiblesmay not be recoverable.  Recoverability of assets to be held and used wasmeasured by a comparison of the carrying amount of an asset to future net cashflows expected to be generated by the asset.  If such an asset wasconsidered to be impaired, the impairment to be recognized was measured by theamount by which the carrying amount of the asset exceeded the fair value of theassets.  Assets to be disposed of were reported at the lower of thecarrying amount or fair value less costs to sell.

 

40

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Effective on January 1,2002, the Company adopted Statement of Financial Accounting Standard No. 144 “Accountingfor the Impairment or Disposal of Long Lived Assets,” (“FAS 144”).  Thissupersedes Statement of Financial Accounting Standard No. 121 “Accounting forthe Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”(“FAS 121”), while retaining many of the requirements of such statement. Theeffect of the adoption of this statement was immaterial to the Company.

 

*Income Taxes*

 

The Company and its domesticsubsidiaries file a consolidated Federal income tax return.  The foreignsubsidiaries file in each of their local jurisdictions.

 

The Company follows theliability method of accounting for income taxes.  Income taxes areprovided for the tax effects of transactions reported in the financialstatements and consist of taxes currently due plus deferred taxes. Deferred income taxes are recognized for temporary differences between thefinancial statement carrying amounts and the tax bases of certain assets andliabilities.  Temporary differences result primarily from net operatingloss carryovers, amortization of goodwill, allowance for doubtful accounts andcertain accrued liabilities which are deductible, for tax purposes, only whenpaid.  In assessing the realizability of deferred tax assets, managementconsiders the scheduled reversal periods of the deferred tax assets as well asprojected future taxable income and tax planning strategies.  A valuationallowance is provided when it is more likely than not that some portion or allof the deferred tax asset will not be realized.

 

Tax benefits from earlydisposition of the stock by optionees under incentive stock options and fromexercise of non-qualified options are credited to additional paid-in capital.

 

The Company provides UnitedStates income taxes on the earnings of foreign subsidiaries, unless they areconsidered permanently invested outside the United States.  As of December 31,2004, there is no cumulative amount of foreign earnings on which United Statesincome taxes have not been provided.

 

*Loss Per Share*

 

Basic loss per share isbased on the weighted average number of common shares outstanding withoutconsideration of common stock equivalents.  Diluted loss per share isbased on the weighted average  number ofcommon and common equivalent shares outstanding, except when the effect isanti-dilutive.  The calculation takes into account when dilutive, theshares that may be issued upon exercise of stock options, reduced by the sharesthat may be repurchased with the funds received from the exercise, based on theaverage price during the year.  For all years presented all stock options(See Note 8) were excluded for diluted loss per share because they wereantidilutive.

 

*Use of Estimates in Financial Statements*

 

In preparing financialstatements in conformity with accounting principles generally accepted in theUnited States of America, management makes estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities at the date of the financial statements, aswell as the reported amounts of revenues and expenses during the reportingperiod.  Actual results could differ from those estimates.

 

*Foreign Currency Translation*

 

For operations outside theUnited States that prepare financial statements in currencies other than theUnited States dollar (Canadian dollar, British pound, and Indian Rupee),results of operations and cash flows are translated at the average exchangerates during the period, and assets and liabilities are translated at end ofperiod exchange rates.  Exchange amounts included in operations are incomeof $392,000 and $0 for December 31, 2004, and 2003, respectively.  Translation adjustments are included as aseparate component of comprehensive income/(loss) within the statement ofshareholders’ equity.

 

41

----

 

*Accounts Receivable*

 

Accounts receivable aregenerally due within 30 days and are stated at amounts due from clients net ofan allowance for doubtful accounts.  Accounts outstanding longer than thecontractual payment terms are considered past due.  The Company determinesits allowance by considering a number of factors, including the length of timetrade accounts receivable are past due, the Company’s previous loss history,the client’s current ability to pay its obligation to the Company and thecondition of the general economy and the industry as a whole.  The Companywrites off accounts receivable when they become uncollectible, and paymentssubsequently received on such receivables are credited to the allowance fordoubtful accounts.

 

*Goodwill*

 

In June 2001, the FASBapproved the issuance of Statement of Financial Accounting Standards No. 141 “BusinessCombinations” (“FAS 141”), and in July 2001, Financial AccountingStandards No. 142 “Goodwill and Other Intangible Assets” (“FAS 142”).  Thenew standards require that all business combinations initiated after June 30,2001 must be accounted for under the purchase method.  In addition, allintangible assets acquired that are obtained through contractual or legalright, or are capable of being separately sold, transferred, licensed, rentedor exchanged are recognized as an asset apart from goodwill.  Goodwill andintangibles with indefinite lives are no longer subject to amortization, butare subject to at least an annual assessment for impairment by applying a fairvalue based test.  The Company adopted FAS 142 as of January 1, 2002and in compliance with this new regulation has discontinued the amortization ofgoodwill.

 

During the quarter ended June 30,2002, the Company completed the initial valuation of the carrying value ofgoodwill existing at January 1, 2002.  As a result, a non-cash chargeof $29.9 million, or $(0.96) per share was retroactively recorded as thecumulative effect of an accounting change in the six months ended June 30,2002 statement of operations.  For the years ended December 31, 2003and 2002 the Company completed valuations of the carrying value of theremaining goodwill and it was determined that no additional impairment hadoccurred.

 

For the year ended December 31,2004, using an evaluation prepared by an independent appraisal firm, the Companyreassessed the carrying value of goodwill associated with its SolutionsGroup.  Because of a reduction inprojected future cash flows in the Commercial Solutions business unit,primarily resulting from significant revenue declines in 2004, the Company determinedthat goodwill was impaired and recorded a non-cash charge of $20.3 million,related to the write-off of the Commercial Solutions goodwill.  There was no income tax effect on theimpairment charge as the related goodwill was primarily attributable toacquisitions which yielded no tax basis for the Company. The remainingSolutions goodwill of $27.6 million, as of December 31, 2004, is associatedwith the Company’s Federal government practice. As of December 31, 2004, the indicated fair value of the FederalGovernment reporting unit exceeded the carrying value.  As a result, the Company concluded that thegoodwill of approximately $27.6 million is not impaired.

 

The changes in the carryingamount of goodwill for the years ended December 31, 2004 and 2003, are asfollows (in 000’s):

 
| **Reporting Units**                       | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                      |       |                        |       |                        |       |
| Balance as  of January 1,            |       | $                           | 34,218     |                        | $          | 19,203 |   |
| Additions to  goodwill*                   |       | 13,713                      |       | 15,015                      |       |
| Impairment  losses (Commercial Solutions) |       | (20,306                     | )          | —                      |       |
|                                      |       |                        |       |                        |       |
| Balance as  of December 31,          |       | $                           | 27,625     |                        | $          | 34,218 |   |

 

----

* Additions to goodwill in 2004 recorded principally asa result of the acquisition of AIM ($11.2 million) by RGII, and the ContingentNote paid on the EBIT target of RGII ($1.8 million).  Additions to goodwill in 2003 recorded as aresult of the RGII ($14.6 million) and Global Technology Services ($0.4 million)acquisitions.  See Note 15 of the notes to the consolidated financialstatements.

 

42

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As of December 31, 2004and 2003, the fair value of each of the reporting units was calculated usingthe following approaches (i) market approach and (ii) income approach.  Thereporting units are equal to, or one level below, reportable segments. Underthe market approach, value is estimated by comparing the performancefundamentals relating to similar public companies’ stock prices. Multiples are then developed of the value of the publicly traded stock tovarious measures and are then applied to each reporting unit to estimate thevalue of its equity.  Under the income approach, value was determinedusing the present value of the projected future cash flows to be generated bythe reporting unit.

 

The fair value conclusion ofthe reporting units reflects an appropriately weighted value of the marketmultiple approach and the income approach discussed above.  An assetapproach was not used because the asset approach is most relevant forliquidation approaches, investment company valuations and asset rich company valuations(i.e. real estate entities) and was not deemed relevant for manufacturing andservice company going-concern valuations.

 

As of December 31,2004, based on a valuation completed by an independent appraisal firm, bothapproaches noted above yielded an indicated value for the Commercial Solutionsbusiness unit which was below the carrying value of the entity’s equity. As aresult, the Company determined that the commercial Solutions goodwill wasimpaired and recorded a non-cash goodwill impairment charge of $20.3 million.There was no income tax effect on the impairment charge as the related goodwillwas primarily attributable to acquisitions which yielded no tax basis for theCompany.

 

As of December 31,2004, the indicated fair value of the Federal government reporting unitexceeded the carrying value by approximately $5 million. As a result, thecompany concluded that the goodwill of approximately $27.6 million was notimpaired as of December 31, 2004.

 

The following pro formatable shows the effect of amortization expense and the cumulative effect ofchange in accounting principle on the Company’s net loss as follows:

 
| ** **                                                           | ** ** | **December 31,  2002** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|
| Reported net  loss                                                   |       | $                           | (38,036    | ) |
|                                                                 |       |                        |       |
| Cumulative  effect of change in accounting  principle           |       | 29,861                      |       |
|                                                                 |       |                        |       |
| Goodwill  impairment                                                 |       | —                      |       |
|                                                                 |       |                        |       |
| Amortization  of intangibles                                         |       | —                      |       |
|                                                                 |       |                        |       |
| Adjusted net  loss                                                   |       | $                           | (8,175     | ) |
|                                                                 |       |                        |       |
| Reported  loss per share:                                            |       |                        |       |
| Basic &  Diluted                                                 |       | $                           | (1.22      | ) |
|                                                                 |       |                        |       |
| Adjustment  for cumulative effect of change in accounting principle: |       |                        |       |
| Basic &  Diluted                                                 |       | 0.96                        |       |
|                                                                 |       |                        |       |
| Adjustments  for goodwill impairment:                                |       |                        |       |
| Basic &  Diluted                                                 |       | —                      |       |
|                                                                 |       |                        |       |
| Adjustment  for amortization of intangibles:                         |       |                        |       |
| Basic &  Diluted                                                 |       | —                      |       |
|                                                                 |       |                        |       |
| Adjusted  loss per share:                                            |       |                        |       |
| Basic &  Diluted                                                 |       | $                           | (0.26      | ) |

 

43

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*Intangible Assets*

 

Intangible assets are theresult of the acquisition, in July 2003, of certain assets and operationsof RGII, the acquisition of the Xpress software from Commerce One and theacquisition of AIM, by RGII, in April 2004.  Accordingly, the Company completed purchaseprice allocation reviews and according to FAS 142, assessed the useful lives ofits acquired intangible assets.

 

The following tablesummarizes the acquired intangible assets, the remaining components and the accumulatedamortization as of December 31, 2004 (in thousands):

 
| ** **                    | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Weighted  Average  Amortization  Period** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-------------------------------|------------|---------------------------|------------|---------------------------------------------|------------|
| Amortized  intangible assets: |       |                        |       |                          |       |                      |       |                                        |       |
| Non-compete  agreements       |       | 410                         |       | 78                            |       | 332                       |       | 6.2 yrs                                     |       |
| RGII  trademark               |       | 430                         |       | 360                           |       | 70                        |       | 1 yr                                        |       |
| RGII  software                |       | 726                         |       | 222                           |       | 504                       |       | 4.9 yrs                                     |       |
| Client  contracts             |       | 3,900                       |       | 1,867                         |       | 2,033                     |       | 3.0 yrs                                     |       |
| Xpress  software              |       | 566                         |       | 252                           |       | 314                       |       | 3 yrs                                       |       |
| Total                         |       | $                           | 6,032      |                          | $          | 2,779                     |       | $                                           | 3,253      |   | 3.3 yrs |   |
|                               |            |                             |            |                               |            |                           |            |                                             |            |  |  |  |

 

Intangible assets are beingamortized over periods ranging from six months to seven years, based on theestimated useful lives. The amortization expense on these intangible assets forthe year ended December 31, 2004 was $1,695,000.  The estimatedremaining amortization expense for each year ending December 31, is asfollows (in thousands):

 

| 2005       |   | $     | 1,190  |   |
|------------|--------|-------|--------|--------|
| 2006       |   | 1,053 |   |
| 2007       |   | 641   |   |
| 2008       |   | 308   |   |
| 2009       |   | 44    |   |
| Thereafter |   | 17    |   |
| Total      |   | $     | 3,253  |   |
|            |        |       |        |        |  |

 

*Recent Accounting Pronouncements*

 

In January 2003, theFASB issued Financial Interpretation No. 46, “Consolidation of VariableInterest Entities” (“FIN 46”), which addresses consolidation by businessenterprises of variable interest entities (“VIEs”).  The accountingprovisions and disclosure requirements of FIN 46 are effective immediately forVIEs created after January 31, 2003, and are effective for the Company’sfiscal period ending March 31, 2004, for VIEs created prior to February 1,2003.  In December 2003, the FASB published a revision to FIN 46 (“FIN46R”) to clarify some of the provisions of the interpretation and to defer theeffective date of implementation for certain entities.  Under the guidanceof FIN 46R, public companies that have interests in VIEs that are commonlyreferred to as special purpose entities are required to apply the provisions ofFIN 46R for periods ending after December 15, 2003.  A public companythat does not have any interests in special purpose entities but does have avariable interest in a VIE created before February 1, 2003, must apply theprovisions of FIN 46R by the end of the first interim or annual reportingperiod ending after March 14, 2004.  Adoption of FIN 46R did not havea material effect on the Company’s financial statements.

 

44

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In March 2004,the FASB Emerging Issues Task Force (EITF) released Issue No. 03-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.” EITF 03-1 provides guidance for determining whether impairmentfor certain debt and equity investments is other-than-temporary and themeasurement of an impaired loss. The recognition and measurement requirementsof EITF 03-1 were initially effective for reporting periods beginning afterJune 15, 2004. In September 2004, the FASB Staff issued FASB Staff Position(“FSP”) EITF 03-1-1 that delayed the effective date for certain measurement andrecognition guidance contained in EITF 03-1. The FSP requires that entitiescontinue to apply previously existing “other-than-temporary” guidance until afinal consensus is reached. Management does not anticipate that issuance of afinal consensus will materially impact the Company’s financial condition orresults of operations.

 

In December 2004, theFASB issued FAS 123R, “Share-Based Payment”. The provisions of this statementare effective for the Company’s third quarter ending September 30, 2005.Statement 123R requires compensation cost be recognized for new awards ofequity instruments and unvested awards on the adoption date.   We expect the adoption of this statementwill have a material effect on the Company’s financial statements, but wecannot reasonably estimate the impact of the adoption because certainassumptions used in the calculation of the value of share-based payments maychange in 2005.

 

*Accounting for Stock Based Compensation*

 

In December 2002, the FASBapproved the issuance of Statement of Financial Accounting Standards No. 148, “Accountingfor Stock-Based Compensation – Translation and Disclosure” (“FAS 148”). This statement amends FAS 123, “Accounting for Stock-Based Compensation”, toprovide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. In addition, this statement amended the disclosure requirements of FAS 123 torequire prominent disclosures in both annual and interim financial statementsabout the method of accounting for stock-based employee compensation and theeffect of the methods used on reported results.  The Company adopted thedisclosure provisions as of December 31, 2002.

 

The exercise price per shareon all options granted may not be less than the fair value at the date of theoption grant.  The Company applies Accounting Principles Board Opinion No.25, “Accounting for Stock Issued to Employees” (“APB 25”) as modified by FinancialInterpretation No. 44 “Accounting for Certain Transactions Involving StockCompensation” (“FIN 44”) in accounting for stock-based employee compensation,whereby no compensation cost had been recognized for the plans.  TheCompany expects to continue following the guidance under APB 25 for stock-basedcompensation to employees.  Had compensation cost for the plans beendetermined based on the fair value of the options at the grant dates and beenconsistent with the method of FAS 123, the Company’s net loss and loss pershare would have been reduced to the pro forma amounts indicated below:

 
| ** **      | ** ** | ** **                                                                                                                                    | ** ** | **2004**   | ** **  | **2003**   | ** ** | **2002**    | ** ** |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|-------------|------------|
|            |       |                                                                                                                                          |       |       |        |       |       |        |       |
| Net loss        |       | As reported                                                                                                                                   |       | $          | (25,172,000 | )          | $          | (17,155,000 | )          | $ | (38,036,000 | ) |
|            |       | Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (1,754,000 | )           | (2,401,000 | )          | (3,334,000  | )          |
|            |       |                                                                                                                                          |       |       |        |       |       |        |       |
|            |       | Pro forma                                                                                                                                     |       | $          | (26,926,000 | )          | $          | (19,556,000 | )          | $ | (41,370,000 | ) |
|            |       |                                                                                                                                          |       |       |        |       |       |        |       |
| Loss per  share |       |                                                                                                                                          |       |       |        |       |       |        |       |
| Basic           |       | As reported                                                                                                                                   |       | $          | (0.82       | )          | $          | (0.56       | )          | $ | (1.22 | ) |
|            |       | Pro forma                                                                                                                                     |       | (0.87      | )           | (0.64      | )          | (1.32       | )          |
|            |       |                                                                                                                                          |       |       |        |       |       |        |       |
| Diluted         |       | As reported                                                                                                                                   |       | $          | (0.82       | )          | $          | (0.56       | )          | $ | (1.22 | ) |
|            |       | Pro forma                                                                                                                                     |       | (0.87      | )           | (0.64      | )          | (1.32       | )          |

 

45

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The fair value of eachoption grant is estimated on the date of grant using the Black-Scholes options pricingmodel with the following weighted-average assumptions used for grants in 2004,2003 and 2002, respectively:  expected volatility of 36%, 62% and 64%;  risk-free interest rates of 4.24%, 4.27% and3.62%; and expected lives of 6.1, 7.8 and 4.4 years.

 

*Reclassifications*

 

Certain reclassificationshave been made to the 2003 and 2002 comparative financial statements to conformto the 2004 presentation.

 

**NOTE 2 - ACCOUNTS RECEIVABLE**

 

Accounts receivable consistof the following at December 31:

 
| ** **                            | ** ** | **2004**           | ** ** | **2003** | ** ** |
|---------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                            | ** ** | **(in thousands)** | ** ** |
|                                  |       |               |       |     |       |
| Billed                                |       | $                  | 50,925     |     | $          | 44,489 |   |
| Unbilled                              |       | 6,311              |       | 9,238    |       |
|                                  |       | 57,236             |       | 53,727   |       |
| Less  allowance for doubtful accounts |       | 5,914              |       | 5,432    |       |
|                                  |       | $                  | 51,322     |     | $          | 48,295 |   |
|                                       |            |                    |            |          |            |  |  |  |  |

 

At December 31, 2004 and 2003, the allowance fordoubtful accounts includes $0 and $400,000 respectively, pertaining to unbilledreceivables.  Included in unbilled accounts receivable at December 31,2004 and 2003 are amounts not yet billable to clients of approximately $0 and $708,000,respectively.

 

**NOTE 3 – PROPERTY AND EQUIPMENT**

 

Property and equipmentconsist of the following:

 
| ** **                         | ** ** | **2004**           | ** ** | **2003** | ** ** |
|------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                         | ** ** | **(in thousands)** | ** ** |
|                               |       |               |       |     |       |
| Furniture,  Fixtures and Equipment |       | $                  | 36,669     |     | $          | 36,527 |   |
| Software                           |       | 3,406              |       | 3,242    |       |
| Leasehold  Improvements            |       | 2,735              |       | 2,483    |       |
|                               |       | 42,810             |       | 42,252   |       |
| Less :  accumulated depreciation   |       | 36,815             |       | 32,929   |       |
|                               |       | $                  | 5,995      |     | $          | 9,323 |   |

 

Property and equipment arestated at cost.  Depreciation is computed using the straight-line methodover the estimated useful lives of the assets which range from three to sevenyears.  Depreciation expense was $4.8 million, $5.3 million and $4.6million for the years ended December 31, 2004, 2003 and 2002,respectively.

 

46

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**NOTE 4 – ASSET-BASED LENDING FACILITY**

 

The Company has a $40million line of credit facility with availability based primarily on eligible clientreceivables.  The interest rate is LIBOR plus 2.75% based on unpaidprincipal.  The borrowing base less outstanding loans must equal or exceed$5.0 million.  As of December 31, 2004, the Company had nooutstanding loan balance against the facility.  Based on the Company’seligible client receivables and cash balances, $17.7 million was available forborrowing as of December 31, 2004.  The fee for the unused portion ofthe line of credit is 0.375% per annum charged to the Company monthly. This charge was approximately $99,000 and $109,000 for the years ended December 31,2004 and 2003, respectively.  This line of credit includes covenantsrelating to the maintenance of cash balances and providing for limitations on incurringobligations and spending limits on capital expenditures.  The Company didnot satisfy this covenant for the quarter ended incurring March 31,2004.  A waiver was received from the lending institution for the quarterended March 31, 2004 along with an amendment to the loan agreementlowering the three-month average minimum collections covenant to $10million.  At December 31, 2004, the Company is in compliance with thecovenant.  The facility was scheduled to expire in July 2004. However,on July 14, 2004, the Company signed a one-year extension of the facility,which will remain in effect until July 2005.  In February 2005, the Company and its currentlending institution agreed in principal to terms (non-binding) which wouldextend the credit facility for a three-year term. The line of credit wouldremain at $40 million, with all other terms, conditions and costs similar tothose which were in effect as of December 31, 2004.

 

**NOTE 5 - PURCHASE OF TREASURY STOCK**

 

In April of 2001, theBoard of Directors approved the repurchase in the open market of up to 10% ofits common stock outstanding, or approximately 3.2 million shares.  TheCompany did not repurchase shares of its common stock during the year ended December 31,2004.  For the year ended December 31,2003, the Company had repurchased, in the open market, 392,200 shares of its commonstock at an average price of $3.08 per share for an aggregate purchase amountof $1.2 million.  For the year ended December 31, 2002, the Companyhad repurchased, in the open market, 1,611,700 shares of its common stock at anaverage price of $3.81 per share for an aggregate purchase amount of $6.1million.  As of December 31, 2004authorization for repurchase relates to approximately 93,000 shares of commonstock.

 

**NOTE 6 - SHAREHOLDERS’ EQUITY**

 

*Stock Options*

 

In 1994, the Company adopteda stock option plan which provides for the granting of options, to officers andkey employees, for the purchase of a maximum of 7,594,000 shares of commonstock and stock appreciation rights (“SARs”). Options and SARs generally expireten years from the date of grant and become exercisable in specified amountsduring the life of the respective options.  No SARs have been granted asof December 31, 2004.  There were 2,427,000 and 2,036,000 sharesavailable for option grants at December 31, 2003 and 2002, respectively,and no shares available as of December 31, 2004 for the 1994 stock optionplan.

 

In May 2004, the Companyreceived shareholder approval and adopted the 2004 Omnibus IncentiveCompensation Plan (the “Omnibus Plan”). This plan replaced the 1994 StockOption and Appreciation Plan and provides for a maximum number of 3,500,000shares of common stock issuable under the plan. These awards may be stockoptions, stock appreciation rights, restricted stock or performance shareawards.  This Plan is scheduled to expireon May 19, 2014. As of December 31, 2004, there were 3,294,000 sharesavailable for awards under the Omnibus Plan.

 

47

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The Company also has anon-qualified Directors’ stock option plan (the “Directors’ Plan”).  In 1998, the Company amended the Directors’Plan, providing that each new director of the Company who is not an employee ofthe Company (i) shall immediately receive options to purchase 10,000 shares ofthe Company’s common stock and (ii) shall receive annual grants to purchase anadditional 10,000 shares of its common stock.  The Directors’ Planoriginally was to expire on March 4, 2001 and was extended by the Board ofDirectors and Shareholders through March 6, 2007.  There were 184,000,264,000 and 334,000 shares of common stock available for grant at December 31,2004, 2003 and 2002, respectively, under the Directors’ Plan.

 

A summary of the status of allthe Company’s stock option plans as of December 31, 2004, 2003 and 2002,and changes during the years ending on those dates is presented below:

 
| ** **                                                      | ** ** | **2004**                 | ** ** | **2003**                               | ** ** | **2002**                 | ** ** |
|-----------------------------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|--------------------------|------------|
| ** **                                                      | ** ** | **Shares  (000’s)** | ** ** | **Weighted  average  exercise  price** | ** ** | **Shares  (000’s)** | ** ** | **Weighted  average  exercise  price** | ** ** | **Shares  (000’s)** | ** ** | **Weighted  average  exercise  price** | ** ** |
| Outstanding  – January 1                              |       | 3,845                    |       | $                                      | 4.08       |                     | 4,527      |   | $ | 7.93 |   | 4,841 |   | $ | 10.11 |   |
|                                                            |       |                     |       |                                   |       |                     |       |   |   |   |   |   |   |
| Granted                                                         |       | 276                      |       | 3.88                                   |       | 1,527                    |       | 3.76 |   | 1,340 |   | 3.68 |   |
| Exercised                                                       |       | (321                     | )          | 2.40                                   |       | (361                     | )          | 2.66 |   | (266 | ) | 1.47 |   |
| Canceled/forfeited/expired                                      |       | (144                     | )          | 3.68                                   |       | (1,848                   | )          | 13.27 |   | (1,388 | ) | 12.45 |   |
|                                                            |       |                     |       |                                   |       |                     |       |   |   |   |   |   |   |
| Outstanding  – December 31                            |       | 3,656                    |       | 4.23                                   |       | 3,845                    |       | 4.08 |   | 4,527 |   | 7.93 |   |
|                                                            |       |                     |       |                                   |       |                     |       |   |   |   |   |   |   |
| Options  exercisable – December 31                    |       | 2,326                    |       | 4.49                                   |       | 1,420                    |       | 4.98 |   | 2,573 |   | 10.89 |   |
|                                                            |       |                     |       |                                   |       |                     |       |   |   |   |   |   |   |
| Weighted  average fair value of options granted during the year |       |                     |       | $                                      | 1.68       |                     |       |   | $ | 1.93 |   |   |   | $ | 2.72 |   |

 

 

The following informationapplies to options outstanding at December 31, 2004:

 
| **Range of exercise prices** | ** ** | **Outstanding as of  December 31,  2004  (000’s)** | ** ** | **Weighted  average  remaining  contractual life** | ** ** | **Weighted  average  exercise price** | ** ** | **Exercisable as  of December  31, 2004  (000’s)** | ** ** | **Weighted  average  exercise price** | ** ** |
|------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------|------------|
| 0.00 – 4.55             |       | 3,397                                                        |       | 7.4                                                |       | $                                     | 3.44       |                                                    | 2,079      |                                  | $          | 3.23 |   |
| 4.55 – 9.10             |       | 73                                                           |       | 2.7                                                |       | 7.70                                  |       | 61                                                      |       | 8.30                                  |       |
| 9.10 – 13.65            |       | 61                                                           |       | 0.2                                                |       | 11.59                                 |       | 61                                                      |       | 11.59                                 |       |
| 13.65 –  18.20          |       | 60                                                           |       | 4.2                                                |       | 15.97                                 |       | 60                                                      |       | 15.97                                 |       |
| 18.20 –  22.75          |       | 24                                                           |       | 3.1                                                |       | 20.63                                 |       | 24                                                      |       | 20.63                                 |       |
| 22.75 –  27.30          |       | 41                                                           |       | 3                                                  |       | 26.13                                 |       | 41                                                      |       | 26.13                                 |       |
|                         |       |                                                         |       |                                               |       |                                  |       |                                                    |       |                                  |       |
|                         |       | 3,656                                                        |       | 7.1                                                |       | $                                     | 4.23       |                                                    | 2,326      |                                  | $          | 4.49 |   |

 

Prior to the adoption of FIN44 and the Sarbanes-Oxley Act of 2002, certain officers had the right to borrowfrom the Company against the exercise price of options exercised.  As of December 31,2004 and 2003, total outstanding borrowings, pertaining to one officer,amounted to $100,000 which borrowings occurred in 1999.

 

48

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The Company issued 150,001warrants in 2003 to purchase shares of its common stock to one majorshareholder.  The exercise price of such warrants is $3.89, representingthe fair value of the Company’s common stock at the date of grant.  As of December 31,2003, 152,134 warrants were outstanding.  There were no warrants exercisedin 2004, 2003 or 2002.

 

*Shareholder Rights Plan*

 

In July 1989, the Boardof Directors declared a dividend distribution of .131 preferred stock purchaseright on each outstanding share of common stock of the Company.  Therights were amended on February 13, 1990.  Each right will, undercertain circumstances, entitle the holder to buy one one-thousandth (1/1000) ofa share of Series A preferred stock at an exercise price of $90.00 per oneone-thousandth (1/1000) share, subject to adjustment.  Each oneone-thousandth (1/1000) of a share of Series A preferred stock has voting,dividend and liquidation rights and preferences substantively equivalent to oneshare of common stock.

 

The rights will beexercisable and transferable separately from the common stock only if a personor group acquires 20% or more, subject to certain exceptions, of the Company’soutstanding common stock or announces a tender offer that would result in theownership of 20% or more of the common stock.  If a person becomes theowner of at least 20% of the Company’s common shares (an “Acquiring Person”),each holder of a right other than the Acquiring Person is entitled, uponpayment of the then current exercise price per right (the “Exercise Price”), toreceive shares of common stock (or common stock equivalents) having a marketvalue equal to twice the Exercise Price.

 

Additionally, if the Companysubsequently engages in a merger or other business combination with theAcquiring Person in which the Company is not the surviving corporation, or inwhich the outstanding shares of the Company’s common stock are changed orexchanged, or if more than 50% of the Company’s assets or earning power is soldor transferred, a right would entitle a Computer Horizon Corp. shareholder,other than the Acquiring Person and its affiliates, to purchase upon payment ofthe Exercise Price, shares of the Acquiring Person having a market value oftwice the Exercise Price.  Prior to a person becoming an Acquiring Person,the rights may be redeemed at a redemption price of one cent per right, subjectto adjustment.  The rights are subject to amendment by the Board.  Noshareholder rights have become exercisable.  The rights originally wouldhave expired on July 16, 1999, however, the Board of Directors approvedthe adoption of a new Shareholder Rights Plan to replace the existingplan.  The terms of the new Rights Plan are substantially the same as theoriginal plan.  The new rights will expire on July 15, 2009.

 

*Stock Option Exchange Program*

 

On January 8, 2003, theCompany commenced a tender offer to its employees to exchange stock optionsgranted under the Company’s 1994 Incentive Stock Option and Appreciation Planwith an exercise price of $10.01 or greater for new stock options with a newexercise price.  The tender offer expired on February 10, 2003, and1,635,526 options were accepted for exchange.  On August 13, 2003,545,928 options were issued for the exchange at an exercise price of $3.89 pershare.

 

**NOTE 7 - INCOME TAXES**

 

The following is ageographical breakdown of the Company’s loss before taxes:

 
| ** ** | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** ** | ** ** | **(in thousands)**               | ** ** |
| Domestic   |       | $                                | (26,929    | ) | $ | (20,360 | ) | $ | (6,005 | ) |
| Foreign    |       | (888                             | )          | (3,115 | ) | (336 | ) |
|       |       | $                                | (27,817    | ) | $ | (23,475 | ) | $ | (6,341 | ) |

 

49

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The provision for incometaxes/(benefit) consists of the following for the years ended December 31:

 
| ** **      | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **      | ** ** | **(in thousands)** | ** ** |
| Current         |       |               |       |     |       |     |       |
| Federal         |       | $                  | (1,181     | )        | $          | 30       |       | $ | (4,993 | ) |
| State           |       | (255               | )          | 311      |       | 701      |       |
| Foreign         |       | —             |       | —   |       | —   |       |
|            |       |               |       |     |       |     |       |
| Total  current  |       | (1,436             | )          | 341      |       | (4,292   | )          |
|            |       |               |       |     |       |     |       |
| Deferred        |       |               |       |     |       |     |       |
| Federal         |       | (2,320             | )          | (6,750   | )          | 819      |       |
| State           |       | 1,066              |       | —   |       | 5,342    |       |
| Foreign         |       | —             |       | —   |       | —   |       |
|            |       |               |       |     |       |     |       |
| Total  deferred |       | (1,254             | )          | (6,750   | )          | 6,161    |       |
|            |       |               |       |     |       |     |       |
|            |       | $                  | (2,690     | )        | $          | (6,409   | )          | $ | 1,869 |   |

 

Deferred tax assets andliabilities consist of the following at December 31:

 
| ** **                              | ** ** | **2004**           | ** ** | **2003** | ** ** |
|-----------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                              | ** ** | **(in thousands)** | ** ** |
| Deferred tax  liabilities               |       |               |       |     |       |
| Depreciation                            |       | $                  | —     |     | $          | (498 | ) |
| Amortization  of intangibles            |       | (276               | )          | —   |       |
| Prepaid  insurance                      |       | (372               | )          | —   |       |
| Total  deferred tax liabilities         |       | $                  | (648       | )        | $          | (498 | ) |
|                                    |       |               |       |     |       |
| Deferred tax  assets                    |       |               |       |     |       |
| Federal and  state net operating losses |       | 24,336             |       | 16,260   |       |
| Foreign net  operating losses           |       | 2,654              |       | 4,742    |       |
| Capital  losses                         |       | 1,222              |       | —   |       |
| Amortization  of intangibles            |       | —             |       | 4,167    |       |
| Accrued  payroll and benefits           |       | 2,431              |       | 1,709    |       |
| Allowance  for doubtful accounts        |       | 2,077              |       | 2,324    |       |
| Restructuring  charges                  |       | 277                |       | 837      |       |
| Other                                   |       | 1,010              |       | 1,398    |       |
|                                    |       |               |       |     |       |
| Total  deferred tax assets              |       | 34,007             |       | 31,437   |       |
|                                    |       |               |       |     |       |
| Valuation  allowance                    |       | (13,793            | )          | (11,612  | )          |
|                                    |       |               |       |     |       |
| Net deferred  tax assets                |       | $                  | 19,566     |     | $          | 19,327 |   |
|                                    |       |               |       |     |       |
| Current                                 |       | $                  | 1,868      |     | $          | 4,514 |   |
| Non current                             |       | 17,698             |       | 14,813   |       |
| Total                                   |       | $                  | 19,566     |     | $          | 19,327 |   |

 

50

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A reconciliation of incometaxes/(benefit), as reflected in the accompanying statements, with the statutoryFederal income tax rate of 35% for the years ended December 31, 2004, 2003and 2002 is as follows:

 
| ** **                                                         | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                                         | ** ** | **(in thousands)** | ** ** |
|                                                               |       |               |       |     |       |     |       |
| Statutory  Federal income taxes                                    |       | $                  | (9,736     | )        | $          | (8,217   | )          | $ | (2,219 | ) |
| State and  local income taxes/(benefit), net of Federal tax effect |       | 527                |       | 203      |       | 91       |       |
| Goodwill  impairment                                               |       | 5,391              |       | —   |       | —   |       |
| Change in  valuation allowance, sale of assets                     |       | —             |       | —   |       | (1,855   | )          |
| Change in  valuation allowance, other                              |       | 2,181              |       | 1,092    |       | 5,095    |       |
| Other, net                                                         |       | (1,053             | )          | 513      |       | 757      |       |
|                                                               |       |               |       |     |       |     |       |
|                                                               |       | $                  | (2,690     | )        | $          | (6,409   | )          | $ | 1,869 |   |

 

At December 31, 2004 the Company had a Federal net operating losscarryforward of approximately $48.7 million; $11.4 million expires in 2022, $18.3million expires in 2023 and $19.0 million expires in 2024.

 

At December 31, 2004 the Company had state deferred tax assets,net of Federal tax effect, of approximately $8.1 million relating primarily tostate net operating loss carryforwards.  These state net operating losscarryforwards are subject to limitations which differ from Federal law. Many states do not allow the carryback of net operating losses, have shortercarryforward periods and do not allow the filing of consolidated returns. These state limitations create uncertainties with respect to the realization ofthese state deferred tax assets.  Accordingly, the Company has recorded avaluation allowance of approximately $7.6 million with respect to these assets.

 

Certain foreign subsidiariesof the Company had net operating loss carryforwards at December 31, 2004,totaling approximately $7.5 million (including $5.8 million in Canada and $1.7million in the United Kingdom); $1.6 million expires in 2006, $1.1 millionexpires in 2007, $1.8 million expires in 2008, $1.3 million expires in 2011 andthe remainder has no expiration.  A full valuation allowance has beenrecorded on the foreign taxes due to the uncertainty of the realization ofcertain tax benefit from these net operating loss carryforwards.

 

At December 31, 2004refundable income taxes consisted primarily of refundable payroll creditsclaimed on the Company’s Canadian income tax returns.

 

On March 9, 2002, theJob Creation and Worker Assistance Act of 2002 (the”Act”) was enacted intolaw.  This Act contained many economic and tax incentives, including the extensionof the carryback period for losses arising in years ending during 2001 and 2002to five years from the previous two year carryback rule.  As a result, theCompany’s tax refund claim of approximately $10 million at December 31,2001, which was received in April 2002, was increased to approximately $30million.  The additional refund amount of $20 million was received in January 2003.

 

During 1998, the Companycompleted a business combination which, for financial statement purposes, wasaccounted for as a pooling-of-interests.  For income tax purposes, thetransaction was treated as a taxable purchase that gave rise to future taxdeductions.  Upon the sale of the acquired business in 2001, thesedeductions were recognized for tax purposes.  The tax benefit of $19.6million relating to the part of these deductions that was carried back to prioryears was included in refundable income taxes in 2002.  Since the taxstructure of the transaction was subject to review by the tax authorities, theCompany recorded a reserve for the tax benefits resulting from the carrybackand did not record deferred tax assets for the tax benefits being carriedforward.

 

51

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InDecember 2003, the Internal Revenue Service examined the Company’s Federalincome tax returns for the years ended December 31, 2001 and 2000, alongwith its Federal refund claims for the calendar years 1996 through 1999. The additional refund amount received in January 2003 was shown as aliability until the audit was completed.  During the first quarter of2004, the Internal Revenue Service and the Joint Committee on Taxationcompleted their examination of the Company’s Federal income tax returns and Federalrefund claims, and accepted them without change.  Accordingly, the taxbenefit was recorded as a decrease in tax benefit reserves of $19.6 million, adecrease in other tax reserves of $0.3 million, and an increase in additionalpaid-in capital of $19.9 million. There was no charge or credit to income.  The Company did not record deferred taxassets for the tax benefits being carried forward due to remaininguncertainties.  It is anticipated that adeferred tax asset, net of an appropriate valuation allowance, will be recordedwhen it is probable that the tax benefit will be realized.  The tax benefit will be reflected as anincrease in additional paid-in capital.

 

The Company assesses thelikelihood of the ultimate determination of various contingent tax liabilitiesthat arise in many different tax jurisdictions. These tax matters can be complex in nature and uncertain as to theultimate outcome.  The Companyestablishes reserves for tax contingencies when it believes that an unfavorableoutcome is likely to occur and the liability can be reasonably estimated.  Although the Company believes these positionsare fully supportable, the likelihood of potential challenges andsustainability of such challenges upon examination are considered.  The Company had reserves for taxcontingencies at December 31, 2004 and December 31, 2003 ofapproximately $1.3 million and $2.8 million, respectively. Changes in theCompany’s tax reserves have occurred and are likely to continue to occur aschanges occur in the current facts and circumstances.  The net impact of the reassessments of suchchanges resulted in the recognition of income tax benefits of $1.5 million forthe year ended December 31, 2004, and income tax expense of  $0.2 million for the year ended December 31,2003.  In addition, the Company’s Federalnet operating loss carryforward at December 31, 2004 of $48.7 millionexcludes deductions of approximately $17.8 million for uncertain tax positionsrelating to transactions occurring in the ordinary course of business.

 

**NOTE 8 - LOSS PER SHARE DISCLOSURES**

 

The computation of dilutedloss per share excludes all options because they are antidilutive.  During2004, there were 3,656,000 excluded options outstanding at December 31,2004 with a weighted average exercise price of $4.23 per share.   During 2003, there were 3,854,000 excludedoptions outstanding at December 31, 2003 with a weighted average exerciseprice of $4.08 per share.  During 2002, there were 4,527,000 excludedoptions outstanding at December 31, 2002 with a weighted average exerciseprice of $7.93 per share.

 

**NOTE 9 - SEGMENT INFORMATION**

 

Through December 31,2004, the Company identified three business segments: IT Services, theSolutions Group and Chimes, Inc.  The IT Services division provides highlyskilled software professionals to augment the internal information managementstaffs of major corporations.  IT Services is primarily staffingaugmentation.  The Solutions division provides Federal government,enterprise application services, e-business solutions, customized Webdevelopment and Web enablement of strategic applications, Client RelationshipManagement (CRM), network services, strategic outsourcing and managedresourcing to major corporations, along with Federal, state and localgovernments.  Chimes,Inc., a wholly-owned subsidiary of CHC, provides workforce procurement andmanagement services to Global 2000 companies, which, according to Forbesmagazine, represents the biggest and most important companies as measured bysales, profits, assets and market value.

 

During the fourth quarter of2004, the Company completed a restructuring initiative whereby the Company’sbusiness model has been realigned, effective January 1, 2005, around itsthree distinct segments of clients : Federal Government, Commercial and VendorManagement services (Chimes), and will report accordingly to conform to the newpresentation of CHC business segments for the first quarter of 2005.   This realigned business model is designed todeliver improved operational performance for the Company and reduce annualoperating costs.

 

52

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Income/(loss) before incometax benefit consists of income/(loss) before income taxes, excluding interestincome, interest expense, gain/(loss) on the sale of assets/investments,restructuring charges, special charges/(credits), the write-off of  assets and a terminated project, amortizationof intangibles and goodwill impairment.  Theseexclusions total expense of $24.6 million, $18.0 million and income of $4.1million December 31, 2004, 2003 and 2002, respectively.  Long-term assets include goodwill, intangibles and property, plant andequipment for 2004 and 2003, and goodwill and property, plant and equipment for2002.  Corporate services, consisting of general and administrativeservices are provided to the segments from a centralized location.  Suchcosts are allocated to the applicable segments receiving Corporate servicesbased on revenue.

 

53

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| **BY LINE OF BUSINESS**                          | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| *Revenue:*                                       |       |               |       |     |       |     |       |
| IT Services                                      |       | $                  | 131,204    |     | $          | 133,070  |       | $ | 201,295 |   |
| Solutions  Group                                 |       | 108,231            |       | 92,122   |       | 79,283   |       |
| Chimes                                           |       | 23,092             |       | 20,018   |       | 16,537   |       |
|                                             |       |               |       |     |       |     |       |
| Total  revenue                                   |       | $                  | 262,527    |     | $          | 245,210  |       | $ | 297,115 |   |
|                                             |       |               |       |     |       |     |       |
| *Gross  Margin:*                                 |       |               |       |     |       |     |       |
| IT Services                                      |       | $                  | 24,613     |     | $          | 26,740   |       | $ | 40,626 |   |
| Solutions  Group                                 |       | 35,612             |       | 26,646   |       | 25,712   |       |
| Chimes                                           |       | 21,696             |       | 18,626   |       | 14,596   |       |
|                                             |       |               |       |     |       |     |       |
| Total gross  margin                              |       | $                  | 81,921     |     | $          | 72,012   |       | $ | 80,934 |   |
|                                             |       |               |       |     |       |     |       |
| *Operating  income / (loss):*                    |       |               |       |     |       |     |       |
|                                             |       |               |       |     |       |     |       |
| IT Services                                      |       | $                  | 5,631      |     | $          | 8,053    |       | $ | 15,044 |   |
| Solutions  Group                                 |       | 9,187              |       | 9,258    |       | 7,621    |       |
| Chimes                                           |       | 1,420              |       | (2,177   | )          | (7,490   | )          |
|                                             |       |               |       |     |       |     |       |
| Total  operating income/(loss)                   |       | $                  | 16,238     |     | $          | 15,134   |       | $ | 15,175 |   |
|                                             |       |               |       |     |       |     |       |
| Corporate  Allocation:                           |       |               |       |     |       |     |       |
|                                             |       |               |       |     |       |     |       |
| IT Services                                      |       | $                  | 11,915     |     | $          | 12,108   |       | $ | 17,287 |   |
| Solutions  Group                                 |       | 5,438              |       | 6,743    |       | 6,855    |       |
| Chimes                                           |       | 2,105              |       | 1,841    |       | 1,442    |       |
|                                             |       |               |       |     |       |     |       |
| Total  corporation allocation                    |       | $                  | 19,458     |     | $          | 20,692   |       | $ | 25,584 |   |
|                                             |       |               |       |     |       |     |       |
| *Income /  (loss) before income tax benefit:*    |       |               |       |     |       |     |       |
| IT Services                                      |       | $                  | (6,284     | )        | $          | (4,055   | )          | $ | (2,243 | ) |
| Solutions  Group                                 |       | 3,749              |       | 2,515    |       | 766      |       |
| Chimes                                           |       | (685               | )          | (4,018   | )          | (8,932   | )          |
|                                             |       |               |       |     |       |     |       |
| Total income  / (loss) before income tax benefit |       | $                  | (3,220     | )        | $          | (5,558   | )          | $ | (10,409 | ) |
|                                             |       |               |       |     |       |     |       |
| *Assets:*                                        |       |               |       |     |       |     |       |
| IT Services                                      |       | $                  | 27,353     |     | $          | 21,253   |       | $ | 47,876 |   |
| Solutions  Group                                 |       | 76,659             |       | 70,322   |       | 29,640   |       |
| Chimes                                           |       | 12,313             |       | 14,402   |       | 26,762   |       |
| Corporate  and other                             |       | 42,759             |       | 74,349   |       | 89,453   |       |
|                                             |       |               |       |     |       |     |       |
| Total assets                                     |       | $                  | 159,084    |     | $          | 180,326  |       | $ | 193,731 |   |
|                                             |       |               |       |     |       |     |       |
| *Depreciation  Expense:*                         |       |               |       |     |       |     |       |
| IT Services                                      |       | $                  | 300        |     | $          | 563      |       | $ | 482 |   |
| Solutions  Group                                 |       | 1,142              |       | 1,433    |       | 1,133    |       |
| Chimes                                           |       | 1,532              |       | 1,476    |       | 1,044    |       |
| Corporate  and other                             |       | 1,847              |       | 1,864    |       | 1,975    |       |
|                                             |       |               |       |     |       |     |       |
| Total  depreciation                              |       | $                  | 4,821      |     | $          | 5,336    |       | $ | 4,634 |   |

 

54

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| **BY GEOGRAPHIC AREA *** | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **               | ** ** | **(in thousands)** | ** ** |
| REVENUE                  |       |               |       |     |       |     |       |
| United  States           |       | $                  | 234,525    |     | $          | 219,453  |       | $ | 270,890 |   |
| Canada                   |       | 27,592             |       | 24,709   |       | 23,390   |       |
| Europe                   |       | 272                |       | 627      |       | 2,775    |       |
| India                    |       | 138                |       | 421      |       | —   |       |
| Australia                |       | —             |       | —   |       | 60       |       |
| Total  Revenue           |       | $                  | 262,527    |     | $          | 245,210  |       | $ | 297,115 |   |
|                          |            |                    |            |          |            |          |            |  |  |  |  |  |

 

----

* Revenue is generated for each geographic segment based on the localeof the client.

 
| LONG-TERM  ASSETS       |   |   |   |   |   |   |   |
|-------------------------|--------|--------|--------|--------|--------|--------|--------|
| United  States          |   | $      | 35,621 |   | $      | 45,191 |   | $ | 29,486 |   |
| Canada                  |   | 1,211  |   | 705    |   | 628    |   |
| Europe                  |   | — |   | — |   | 106    |   |
| India                   |   | 41     |   | 53     |   | — |   |
| Total  Long-Term Assets |   | $      | 36,873 |   | $      | 45,949 |   | $ | 30,220 |   |

 

*Reconciliation of Segments Loss before Income Tax Benefit to ConsolidatedLoss Before Income Tax Benefit:*

 
| ** **                                     | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                     | ** ** | **(in thousands)** | ** ** |
|                                           |       |               |       |     |       |     |       |
| Total  segments loss before income tax benefit |       | $                  | (3,220     | )        | $          | (5,558   | )          | $ | (10,409 | ) |
| Adjustments:                                   |       |               |       |     |       |     |       |
| Special  credits / (charges)                   |       | 939                |       | (10,113  | )          | —   |       |
| Restructuring  charges                         |       | (2,859             | )          | (3,278   | )          | (2,515   | )          |
| Write off of  terminated project               |       | —             |       | (3,064   | )          | —   |       |
| Amortization  of intangibles                   |       | (1,695             | )          | (1,084   | )          | —   |       |
| Net  gain/(loss) on investments                |       | —             |       | (432     | )          | (61      | )          |
| Gain/(loss)  on sale of assets                 |       | —             |       | (424     | )          | 5,890    |       |
| Interest  income                               |       | 337                |       | 529      |       | 928      |       |
| Interest  expense                              |       | (103               | )          | (51      | )          | (174     | )          |
| Goodwill  impairment                           |       | (20,306            | )          | —   |       | —   |       |
| Write-off of  assets                           |       | (910               | )          | —   |       | —   |       |
| Total  Adjustments                             |       | (24,597            | )          | (17,917  | )          | 4,068    |       |
| Consolidated  loss before income taxes         |       | $                  | (27,817    | )        | $          | (23,475  | )          | $ | (6,341 | ) |
|                                                |            |                    |            |          |            |          |            |  |  |  |  |  |  |

 

**NOTE 10 - SAVINGS PLAN AND OTHER RETIREMENT PLANS**

 

The Company maintains adefined contribution savings plan covering eligible employees.  TheCompany makes contributions up to a specific percentage of participants’contributions.  The Company contributed approximately $661,000, $821,000and $1,089,000 in 2004, 2003 and 2002, respectively.

 

55

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In 1995, the Companyinstituted a Supplemental Executive Retirement Plan, or SERP, whereby keyexecutives are entitled to receive lump-sum payments (or, if they elect, aten-year payout) upon reaching the age of 65 and being in the employment of theCompany.  The maximum commitment if all plan members remain in theemployment of the Company until age 65 is approximately $9.8 million. Benefits accrue and vest based on a formula which includes total years with theCompany and total years possible until age 65.   In the event of a change of control, asdefined in the Plan, this event would result in an immediate vesting of theretirement benefit. The plan is nonqualified and not formally funded. Life insurance policies on the members are purchased to assist in funding thecost.  The SERP expense is charged to operations during the remainingservice lives of the members and was $480,000 in 2004, $480,000 in 2003 and$407,000 in 2002.  The cumulative accrued liability for the SERP was $2.2million as of December 31, 2004 and $1.7 million at December 31, 2003based on the Unit Credit Method by using a discounting rate of 9% until age 65for each participant.   Benefitdistributions (assuming all participants remain in employment until age 65) arescheduled to be nil for 2005, $250,000 for 2006 through 2007, $1.0 million for2008 through 2009, and $8.5 million for 2010 through 2025.

 

The following represents thefair value (included in Other Non-current Assets) and unrealized gain/(loss)for the deferred compensation and SERP plans as of December 31, 2004 and2003 (amounts in thousands):

 
| ** **                                 | ** ** | **As of**                   | ** ** | **For the years ended**                              | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|------------------------------------------------------|------------|
| ** **                                 | ** ** | **December 31,  2004** | ** ** | **December 31,  2003**                          | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
| ** **                                 | ** ** | **Fair Value**              |       | **Unrealized gain / (loss**)**on  SERP investments** |       |
| Money market  funds                        |       | $                           | 395        |                                                 | $          | 386 |   | $ | 96 |   | $ | (7 | ) |
| Debt  securities issued by the US Treasury |       | 367                         |       | 327                                                  |       | (32 | ) | (7 | ) |
| Corporate  debt securities                 |       | 148                         |       | 282                                                  |       | (17 | ) | (5 | ) |
| Mortgage-backed  securities                |       | 227                         |       | —                                               |       | (16 | ) | — |   |
| Equity  securities                         |       | 4,903                       |       | 4,166                                                |       | 294 |   | (470 | ) |
| Total                                      |       | $                           | 6,040      |                                                 | $          | 5,161 |   | $ | 325 |   | $ | (489 | ) |

 

During 1999, the Companyadopted an Employee Stock Purchase Plan to provide substantially all employeeswho have completed six months of service an opportunity to purchase shares ofits common stock through payroll deductions, up to 10 percent of eligiblecompensation.  Quarterly, participant account balances are used topurchase shares of stock at 85 percent of its fair market value on either thefirst or last trading day of each calendar quarter.  A total of 4 millionshares were approved, with approximately 2.3 million available for purchaseunder the plan at December 31, 2004.  There were 171,222, 153,765 and405,366 shares purchased under the plan in 2004, 2003 and 2002, respectively.

 

In addition, the Companyadopted a Deferred Compensation Plan for key executives that permits theindividuals to defer a portion of their annual salary or bonus for a period ofat least five years.  There is no effect on the Company’s operatingresults since any amounts deferred under the plan are expensed in the periodincurred.  Amounts deferred amounted to $2.6 million and $2.1 million asof December 31, 2004 and 2003, respectively.

 

In December 2003, JohnCassese, the former CEO of Computer Horizons Corp., received a lump-sum paymentof $1.3 million, net of taxes from his deferred compensation plan account inaccordance with his severance agreement.  The Company redeemed insurancepolicies to fund this payment and received approximately $2.5 million for thesurrender values of the split dollar policies.  The Company recorded arealized loss of approximately $432,000 on investments for these insurancepolicies, which had an original cost of approximately $2.9 million.

 

56

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**NOTE 11 - COMMITMENTS**

 

Leases

 

The Company leases officespace and equipment under long-term operating leases expiring through2008.  As of December 31, 2004, approximate minimum rentalcommitments were as follows:

 

| **Year ending** | ** ** | **(in thousands)** | ** ** |
|-----------------|------------|--------------------|------------|
| 2005            |       | $                  | 5,287      |   |
| 2006            |       | 2,599              |       |
| 2007            |       | 1,978              |       |
| 2008            |       | 90                 |       |
| Thereafter      |       | —             |       |
|            |       | $                  | 9,954      |   |

 

Office rentals are subjectto escalations based on increases in real estate taxes and operatingexpenses.  Rent expense, net of sublease income of approximately $ 131,000,$137,000 and $480,000 for December 31, 2004, 2003 and 2002, respectively,for operating leases approximated $5.7 million, $5.0 million and $5.3 millionin the years ended December 31, 2004, 2003 and 2002, respectively.

 

Other

 

In 2003, the Company enteredinto a separation package with the Company’s former CEO which contained acommitment for the Company to provide continued medical coverage until age 75,with remaining payments totaling approximately $102,000 at December 31,2004.

 

**NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)**

 

For the years ended December 31,2004 and 2003, selected quarterly financial data is as follows:

 
| ** **                               | ** ** | **Quarters**                               | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **First**                                  | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| ** **                               | ** ** | **(in thousands, except per share  data)** | ** ** |
|                                     |       |                                       |       |   |   |   |   |   |   |
| **2004**                                 |       |                                       |       |   |   |   |   |   |   |
| **Revenues**                             | ** ** | $                                          | 59,706     |   | $ | 65,790 |   | $ | 69,397 |   | $ | 67,634 |   |
| **Direct  costs**                        |       | 40,806                                     |       | 44,507 |   | 47,880 |   | 47,413 |   |
| **Gross  profit**                        |       | 18,900                                     |       | 21,283 |   | 21,517 |   | 20,221 |   |
| **Selling,  general and administrative** |       | 19,587                                     |       | 21,554 |   | 21,851 |   | 22,149 |   |
| **Restructuring  charges**               | ** ** | —                                     |       | — |   | — |   | 2,859 |   |
| **Goodwill  impairment**                 | ** ** | —                                     |       | — |   | — |   | 20,306 |   |
| **Write-off  of assets**                 | ** ** | —                                     |       | — |   | — |   | 910 |   |
| **Special  (credits)**                   | ** ** | —                                     |       | (939 | ) | — |   | — |   |
| **Amortization  of intangibles**         |       | 208                                        |       | 520 |   | 484 |   | 483 |   |
| **(Loss)/profit  from operations**       |       | (895                                       | )          | 148 |   | (818 | ) | (26,486 | ) |
| **Interest  income/(expense) - net**     |       | 83                                         |       | 29 |   | 93 |   | 29 |   |
| **(Loss)/profits  before income taxes**  |       | (812                                       | )          | 177 |   | (725 | ) | (26,457 | ) |
| **Income  taxes/(benefit)**              |       | (254                                       | )          | 97 |   | (323 | ) | (2,210 | ) |
| **Minority  interest**                   |       | (9                                         | )          | 45 |   | (58 | ) | (23 | ) |
| **Net(loss)/profit**                     | ** ** | $                                          | (567       | ) | $ | 125 |   | $ | (460 | ) | $ | (24,270 | ) |
|                                     |       |                                       |       |   |   |   |   |   |   |
| **Loss per  share (basic and diluted):** |       |                                       |       |   |   |   |   |   |   |
| **Net loss**                             | ** ** | $                                          | (0.02      | ) | $ | 0.00 |   | $ | (0.01 | ) | $ | (0.78 | ) |
|                                          |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

57

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| ** **                               | ** ** | **Quarters**                               | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **First**                                  | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| ** **                               | ** ** | **(in thousands, except per share  data)** | ** ** |
|                                     |       |                                       |       |   |   |   |   |   |   |
| **2003**                                 |       |                                       |       |   |   |   |   |   |   |
| **Revenues**                             |       | $                                          | 60,253     |   | $ | 58,833 |   | $ | 64,459 |   | $ | 61,665 |   |
| **Direct  costs**                        |       | 42,773                                     |       | 43,494 |   | 45,069 |   | 41,862 |   |
| **Gross  profit**                        |       | 17,480                                     |       | 15,339 |   | 19,390 |   | 19,803 |   |
| **Selling,  general and administrative** |       | 18,926                                     |       | 20,716 |   | 20,883 |   | 20,109 |   |
| **Restructuring  charges**               |       | 249                                        |       | 1,949 |   | 787 |   | 293 |   |
| **Special  charges**                     |       | —                                     |       | 7,978 |   | 800 |   | 1,335 |   |
| **Amortization  of intangibles**         |       | —                                     |       | — |   | 526 |   | 558 |   |
| **Loss  from operations**                |       | (1,695                                     | )          | (15,304 | ) | (3,606 | ) | (2,491 | ) |
| **Loss on  sale of assets**              |       | (273                                       | )          | — |   | — |   | (151 | ) |
| **Loss on  investments**                 |       | —                                     |       | — |   | — |   | (432 | ) |
| **Interest  income/(expense) - net**     |       | 168                                        |       | 90 |   | 78 |   | 142 |   |
| **Loss  before income taxes**            |       | (1,800                                     | )          | (15,214 | ) | (3,528 | ) | (2,933 | ) |
| **Income  taxes/(benefit)**              |       | (540                                       | )          | (4,381 | ) | (664 | ) | (824 | ) |
| **Minority  interest**                   |       | (19                                        | )          | (18 | ) | 21 |   | (73 | ) |
| **Net loss**                             |       | $                                          | (1,279     | ) | $ | (10,851 | ) | $ | (2,843 | ) | $ | (2,182 | ) |
|                                     |       |                                       |       |   |   |   |   |   |   |
| **Loss per  share (basic and diluted):** |       |                                       |       |   |   |   |   |   |   |
| **Net loss**                             |       | $                                          | (0.04      | ) | $ | (0.36 | ) | $ | (0.09 | ) | $ | (0.07 | ) |

 

**NOTE 13 - RESTRUCTURING CHARGES**

 

During the fourth quarter of2004, in connection with the Company’s business model realignment, the Company recordeda restructuring charge of approximately $2.9 million comprised of approximately$2.8 million in severance costs and $0.1 million in lease obligation costs. The lease obligation of $110,000 is calculated based on current rentcommitments less a calculated sublease amount based on current marketconditions.  As a result of thisrestructuring, the Company is expecting an approximate $5 million reduction inits annual costs, which will be predominantly reflected in the IT Services andCommercial Solutions (non-Federal) businesses, designed to deliver improvedoperational performances.

 
| ** **           | ** ** | **Recorded** | ** ** | **Paid** | ** ** | **Adjusted** | ** ** | **Remaining at  December 31, 2004** | ** ** |
|----------------------|------------|--------------|------------|----------|------------|--------------|------------|------------------------------------------|------------|
| Severance :          |       |         |       |     |       |         |       |                                     |       |
| Canada               |       | $            | 494        |     | $          | —       |       | $                                        | 41         |   | $ | 535 |   |
| United  States       |       | 2,255        |       | (353     | )          | —       |       | 1,902                                    |       |
| Total  Severance     |       | $            | 2,749      |     | $          | (353         | )          | $                                        | 41         |   | $ | 2,437 |   |
|                 |       |         |       |     |       |         |       |                                     |       |
| Lease  Obligations : |       |         |       |     |       |         |       |                                     |       |
| United  States       |       | $            | 110        |     | $          | —       |       | $                                        | —     |   | $ | 110 |   |
|                 |       |         |       |     |       |         |       |                                     |       |
| Total                |       | $            | 2,859      |     | $          | (353         | )          | $                                        | 41         |   | $ | 2,547 |   |

 

58

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During 2003, the Companyrecorded restructuring charges of approximately $3.3 million relating to theclosing of several offices in the United States, Canada and the United Kingdom,including the related severance costs. The severance costs approximated $1.5 million and the future lease obligationcosts (less a calculated sublease amount), including office closure expenses,approximated $1.8 million.

 
| ** **               | ** ** | **Remaining at  December 31,  2003** | ** ** | **Paid** | ** ** | **Currency  Translation *** | ** ** | **Remaining at  December 31,  2004** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|----------|------------|-----------------------------|------------|-------------------------------------------|------------|
| Severance:               |       |                                      |       |     |       |                        |       |                                      |       |
| United  Kingdom*         |       | $                                         | 47         |     | $          | —                      |       | $                                         | 3          |   | $ | 50 |   |
| Total  Severance         |       | $                                         | 47         |     | $          | —                      |       | $                                         | 3          |   | $ | 50 |   |
|                     |       |                                      |       |     |       |                        |       |                                      |       |
| Lease  Obligations:      |       |                                      |       |     |       |                        |       |                                      |       |
| United  States           |       | $                                         | 90         |     | (90        | )                           | $          | —                                    |       | $ | — |   |
| United  Kingdom*         |       | 150                                       |       | (35      | )          | 8                           |       | 123                                       |       |
| Canada                   |       | 739                                       |       | (420     | )          | —                      |       | 319                                       |       |
| Total Lease  Obligations |       | $                                         | 979        |     | $          | (545                        | )          | $                                         | 8          |   | $ | 442 |   |
|                     |       |                                      |       |     |       |                        |       |                                      |       |
| General Office Closure:  |       |                                      |       |     |       |                        |       |                                      |       |
| United  Kingdom*         |       | $                                         | 49         |     | $          | (7                          | )          | $                                         | 3          |   | $ | 45 |   |
|                     |       |                                      |       |     |       |                        |       |                                      |       |
| Total                    |       | $                                         | 1,075      |     | $          | (552                        | )          | $                                         | 14         |   | $ | 537 |   |

 

----

* Recorded balances changedue to fluctuations in exchange rates

 

During 2002, the Companyrecorded restructuring charges approximating $2.8 million, primarily pertainingto office closings. Amounts remaining from this restructuring, and previousrestructurings, pertain to future lease obligation costs.

 
| ** **          | ** ** | **Remaining  at  December 31,  2003** | ** ** | **Paid** | ** ** | **Adjusted** | ** ** | **Remaining  at  December 31,  2004** | ** ** |
|---------------------|------------|--------------------------------------------|------------|----------|------------|--------------|------------|--------------------------------------------|------------|
| Lease  Obligations: |       |                                       |       |     |       |         |       |                                       |       |
| United  States      |       | $                                          | 1,545      |     | $          | (1,244       | )          | $                                          | (34        | ) | $ | 267 |   |
|                     |            |                                            |            |          |            |              |            |                                            |            |  |  |  |  |

 

**NOTE 14 – MAJORITY-OWNED SUBSIDIARY**

 

On September 30, 2002,the Company announced that it had joined its existing HIPAA compliance,healthcare information technology and other compliance business practices withZA Consulting LLC (ZAC) to form CHC Healthcare Solutions, LLC.  Under theterms of the agreement, CHC had an 80% interest in the newly formed company.

 

On December 31, 2004,the Company acquired the 20% minority interest owned by ZAC, in exchange forthe forgiveness of a ZAC note obligation to the Company approximating $630,000.

 

59

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**NOTE 15 - ACQUISITIONS**

 

On April 1, 2004, RGIIacquired Automated Information Management, Inc. (“AIM”). The cash transactionis valued at approximately $13.8 million plus an adjustment to purchase pricefor excess working capital of approximately $2.0 million.

 

The Company purchased AIM tofurther its commitment to driving the growth potential that exists in the Federalgovernment market and to expand RGII’s footprint, providing an entrance intocertain government agencies, as well as strong relationships with large, primecontractors.

 

The allocation of thepurchase price to assets acquired and liabilities assumed was as follows (inthousands):

 
| ** **                | ** ** | **Allocation of  Purchase Price** | ** ** |
|---------------------------|------------|-----------------------------------|------------|
|                      |       |                              |       |
| Cash                      |       | $                                 | 1,168      |   |
| Accounts  receivable      |       | 3,300                             |       |
| Other  current assets     |       | 18                                |       |
| Property and  equipment   |       | 127                               |       |
| Goodwill                  |       | 11,252                            |       |
| Intangibles               |       | 2,540                             |       |
|                      |       |                              |       |
| Total assets              |       | 18,405                            |       |
|                      |       |                              |       |
| Accounts  payable         |       | 400                               |       |
| Accrued payroll           |       | 747                               |       |
| Other  accrued expenses   |       | 361                               |       |
| Deferred tax  liabilities |       | 1,015                             |       |
|                      |       |                              |       |
| Total  liabilities        |       | 2,523                             |       |
|                      |       |                              |       |
| Net assets                |       | $                                 | 15,882     |   |

 

Purchased intangiblestotaling $2.5 million included unfunded backlog, funded backlog, AIM trademarkand non compete agreements.  Approximately $11.2 million was recorded asgoodwill.

 

The acquisition wasstructured as a purchase of common stock; and accordingly, the goodwill willnot be subject to amortization for tax purposes.

 

Pro Forma Results

 

Effective April 1,2004, the results of AIM’s operations have been included in the consolidatedfinancial statements of the Company.  The following unaudited pro formafinancial information presents the combined results of operations of theCompany and AIM as if the acquisition had occurred as of the beginning of theperiods presented.  The revenues and results of operations included in thefollowing pro forma unaudited consolidated condensed statement of operations isnot considered necessarily indicative of the results of operations for theperiods specified had the transaction actually been completed at the beginningof the period.

 

60

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| ** **                                                                | ** ** | **Unaudited Pro Forma (in  thousands)** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                | ** ** | **Year Ended December 31,**        | ** ** |
| ** **                                                                | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| Revenues:                                                                 |       |                                    |       |   |   |
| IT Services                                                               |       | $                                       | 131,204    |   | $ | 133,070 |   |
| Solutions  Group                                                          |       | 112,669                                 |       | 110,578 |   |
| Chimes                                                                    |       | 23,092                                  |       | 20,018 |   |
| Total                                                                     |       | 266,965                                 |       | 263,666 |   |
| Loss before  minority interest                                            |       | (25,214                                 | )          | (16,675 | ) |
| Minority  interest                                                        |       | (45                                     | )          | (89 | ) |
| Net loss                                                                  |       | $                                       | (25,259    | ) | $ | (16,764 | ) |
| Loss per  share – (basic & diluted):                             |       |                                    |       |   |   |
| Net loss                                                                  |       | $                                       | (0.82      | ) | $ | (0.55 | ) |
| Weighted  average number of shares outstanding – basis & diluted |       | 30,870,000                              |       | 30,455,000 |   |

 

The unaudited pro forma financial information above reflects thefollowing adjustments to the historical consolidated financial statements forthe year ended December 31, 2004: $313,000 amortization expense on purchasedintangible assets, elimination of Acquisition related bonuses of $2.3 million,$43,500 reduction of interest income for cash consideration paid and $40,000adjustment to record income tax benefit for AIM as if it was a C-Corporationand to record income tax effect of pro forma adjustments.

 

The unaudited pro forma financial information above reflects thefollowing adjustments to the historical consolidated financial statements forthe year ended December 31, 2003:  $1.3 million amortization expense onpurchased intangible assets, $174,000 reduction of interest income for cashconsideration paid and $146,000 adjustment to record income taxes for AIM as ifit was a C-Corporation and to record income tax effect of pro formaadjustments.

 

As a result of the integration of AIM into RGII, the Company and theseller of RGII have agreed that the operating results of AIM shall remainseparate from and not be included in the RGII EBIT targets related tocontingent payments.   RGII, howevershall be permitted an intercompany charge to AIM for AIM’s share of combinedoperating overhead expenses.

 

On July 8, 2003, the Company acquired all of the stock ofprivately-held RGII Technologies, Inc. (“RGII”).  The Companypurchased RGII because acquiring a platform company in the Federal governmentIT Services marketplace has been a priority for the Company.  The purchaseprice was approximately $22.1 million including an up-front cash payment,acquisition expenses, working capital adjustment and the payoff of a note payableof $1.5 million.  In addition the Company paid off a RGII $665,000 noteand a line of credit of approximately $2 million.  In addition, the sellermay be entitled to contingent payments based on RGII’s performance againstprofitability objectives over three years.  The contingent payments areevidenced by a contingent note with a face value of $10 million that is payableover three years, only if certain financial performance objectives aremet.  These financial performance objectives are based on earnings beforeinterest and taxes (“EBIT”) targets totaling $19.8 million over a three-yearperiod.  There are no minimum or maximum payment obligations under theterms of the contingent note. The contingent payment will be reduced on adollar for dollar basis for financial performance below EBIT targets, andincreased by 29 cents ($0.29) for each dollar exceeding EBIT targets.  Atthe years ended December 31, 2003 and 2004, the seller received paymentsof $631,000 and $1.8 million, respectively. The Company also entered into employment agreements with the formershareholder and key employees of RGII and has agreed to issue an aggregate of600,000 options to purchase shares of Computer Horizons stock over a three-yearperiod.

 

61

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  The Companycompleted the allocation of the purchase price to assets and liabilitiesacquired utilizing outside valuation consultants to assist in thisprocess.  Audited historical financial statements of RGII together withapplicable pro forma financial information were filed with the SEC on September 19,2003.

 

The acquisition was treatedas a purchase of assets for tax purposes.  Accordingly, goodwill issubject to amortization for tax purposes over fifteen years.

 

On September 12, 2003,the Company acquired, from Commerce One, the Xpress solution, a suite ofsoftware and services designed to rapidly facilitate product datasynchronization between trading partners.  The purchase price of thesoftware was $566,000, recorded as intangible assets, and is being amortizedover a three year period.

 

On January 31, 2003,the Company acquired the IT Solutions operations of Global Business TechnologySolutions (GBTS), from Alea (Bermuda) Limited, a member of the Alea Group ofcompanies and Westfield Services, Inc., a subsidiary of Westfield FinancialCorporation for $400,000.  Theoutsourcing facility and its IT professionals are located in Chennai (Madras),India.  This transaction was accountedfor as a purchase and the entire purchase price was allocated to goodwill.

 

**NOTE 16 - NET ASSETS HELD FOR SALE**

 

The Company decided in 2000to offer three of its subsidiaries (Princeton Softech “Princeton”, includingthe SELECT Software Tools division “Select”, CHC International Limited “Spargo”,and eB Networks “EBN”) for sale or disposition and accordingly classified theseentities as “assets held for sale.”

 

During 2001, two of thesubsidiaries and Select were sold (See Note 17).  During 2002, the lastremaining asset held for sale, Princeton, was sold (See Note 17).  Duringthe year ended December 31, 2002 Princeton’s revenue was $2.9 million andits loss, net of taxes, was $1.3 million.

 

**NOTE 17 - SALE OF SUBSIDIARIES**

 

On February 14, 2003,the Company sold the business and net assets of Computer Horizons e-Solutions(Europe) Limited, (“Solutions UK”) to Systems Associates Limited for 92,822British Pounds Sterling (approximately US$ 145,500).  The loss from thetransaction was $272,000.

 

On March 25, 2002, theCompany sold the net assets of Princeton Softech to Apax Partners, Inc. and LLRPartners, for cash of $16 million, including amounts held in escrow of $1.5million. The gain from the transaction was initially estimated as $3.6 millionand was adjusted in the fourth quarter of 2002 to $3.2 million due to apurchase price adjustment.  During the second quarter of 2003, the Companyreceived approximately $748,000 of the escrow.  The results of operationsare included in the consolidated financial statements through February 28,2002 within the Solutions group.

 

On September 10, 2001,the Company sold the assets of EBN to Inrange Technologies, a storagenetworking company, for cash of $5.4 million, including amounts held in escrowof $540,000.  The loss from the transaction was initially estimated as $3.2million, which included the final write-down of related goodwill of $2.1million.  A purchase price adjustment was recorded in the fourth quarterof 2002 resulting in an increase to the loss of $144,000.

 

On August 30, 2001, theCompany sold the ICM Education name to AlphaNet Solutions, Inc., an ITprofessional services firm, for $0.5 million.  The gain from thetransaction was $332,000.  In November 2002, the Company received anadditional $100,253 from AlphaNet Solutions, Inc. relating to an earnout.

 

On April 17, 2001, the Company sold the SELECT Software Toolsdivision “Select” of Princeton Softech to Aonix, a member of the GoresTechnology Group, for approximately $895,000 including $545,000 of cashreceived and a note receivable of $350,000, 

subsequently written off with the sale of Princeton Softech on March 25,2002.

 

62

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On January 31, 2001,the Company sold the stock of CHC International Limited, (“Spargo”), to aninformation technology consultancy services provider for cash of $3.2million.  The gain from the transaction was initially estimated as$438,000.  A purchase price adjustment of $2.7 million was recorded, inthe fourth quarter of 2002, to increase the gain after the final resolution ofoutstanding accounts receivables and the termination of leases.

 

**NOTE 18 – SPECIAL ITEMS**

 

For the year ended December 31,2004, the Company recorded a special credit of $939,000 consisting of aninsurance refund.  The Company alsoincurred restructuring charges of $2.9 million ($2.8 million in severance costsand $0.1 million in lease obligation costs) as a result of realigning theCompany’s business model effective January 1, 2005.   In addition, as of December 31, 2004,the Company determined that goodwill pertaining to Commercial Solutionsbusiness unit was impaired and recorded a non-cash impairment charge of $20.3million.   The Company also recorded awrite-off of assets in 2004 approximating $0.9 million relating to thewrite-off of a security deposit in connection with an escrow agreement of apreviously sold subsidiary and the write-off of fixed assets related topreviously closed offices.

 

During the year ended December 31,2003, the Company incurred special charges of $10.1 million consisting of a severancepackage for the Company’s former CEO and expenses related to the unilateralacquisition proposal and activities of Aquent LLC.  The separation packageof the Company’s former CEO, included a $3.5 million severance payment and$200,000 in continued medical coverage.  In addition, $6.4 million of thespecial charges pertained to the unilateral acquisition proposal and activitiesof Aquent LLC.  This expense is primarily attributable to approximately$3.4 million of legal fees, $1.8 million in financial advisor fees and $1.2million of proxy solicitation and other fees.  As management considersthese special items to be infrequent, yet material in nature, the Company hasreported the expenses on a separate line for full disclosure purposes, however,the amounts are reported within operating income.  The Company alsoincurred a restructuring expense of $3.3 million for the year ended December 31,2003 relating primarily to the closing of facilities in Canada and the UnitedKingdom.  In addition, the Company voluntarily terminated a sub-contractwith ATEB, a privately held company, for financial reasons and recorded awrite-off of approximately $3.1 million due to the uncertainty of therealization of the receivable.  ATEB was the primary contractor to developa new pharmacy system for Royal Ahold.  The Company is continuing recoveryefforts for this receivable.

 

**NOTE 19- COMPREHENSIVE INCOME/(LOSS)**

 

Statementof Financial Accounting Standards No. 130, Reporting Comprehensive Income (“FAS130”), requires that items defined as other comprehensive income/(loss), suchas foreign currency translation adjustments and unrealized gains and losses, beseparately classified in the financial statements and that the accumulatedbalance of other comprehensive income/(loss) be reported separately fromretained earnings and additional paid-in capital in the equity section ofthe balance sheet.  The components ofcomprehensive loss for the years ended December 31, 2004 and 2003 are asfollows :

 

63

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| ** **                                                             | ** ** | **Year Ended**              | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                             | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
| ** **                                                             | ** ** | **(dollars in thousands)**  | ** ** |
| Comprehensive  Income/(Loss) :                                         |       |                        |       |   |   |
|                                                                   |       |                        |       |   |   |
| Net  Income/(Loss)                                                     |       | $                           | (25,172    | ) | $ | (17,155 | ) |
| Other  comprehensive income/ (loss) – foreign currency adjustment |       | 264                         |       | 2,006 |   |
| Unrealized  gain / (loss) on SERP investments                          |       | 325                         |       | (489 | ) |
| Comprehensive  Income/(Loss)                                           |       | $                           | (24,583    | ) | $ | (15,638 | ) |

 

 

The accumulated balances related to each component of othercomprehensive income (loss) were as follows:

 
| ** **                        | ** ** | **Foreign  Currency  Translation** | ** ** | **Unrealized  gain/(loss) on  Investments** | ** ** | **Accumulated  Other  Comprehensive  Income/Loss)** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **(dollars in thousands)**         | ** ** |
| ** **                        | ** ** | ** **                         | ** ** |
| Balance at December 31, 2002      |       | (3,206                             | )          | (1,100                                      | )          | (4,306                                              | )          |
|                              |       |                               |       |                                        |       |                                                |       |
| Other comprehensive income (loss) |       | 2,006                              |       | (489                                        | )          | 1,517                                               |       |
|                              |       |                               |       |                                        |       |                                                |       |
| Balance at December 31, 2003      |       | (1,200                             | )          | (1,589                                      | )          | (2,789                                              | )          |
|                              |       |                               |       |                                        |       |                                                |       |
| Other comprehensive income (loss) |       | 264                                |       | 325                                         |       | 589                                                 |       |
|                              |       |                               |       |                                        |       |                                                |       |
| Balance at December 31, 2004      |       | (936                               | )          | (1,264                                      | )          | (2,200                                              | )          |

 

**NOTE 20 – RESCISSION OFFER**

 

From April 2001 throughJanuary 2003, the sale of shares of the Company’s common stock pursuant tothe Employee Stock Purchase Plan were not exempt from registration orqualification under Federal securities laws.  As a result, the Company mayhave failed to comply with the registration or qualification requirements of Federaland applicable state securities laws because the Company did not register orqualify these stock issuances under either Federal or applicable statesecurities laws.

 

As a result, the Companymade a rescission offer, effective July 27, 2004, to all those persons whopurchased shares of common stock pursuant to the Employee Stock Purchase Planduring the affected periods.  The rescission offer was made pursuant to aregistration statement filed under the Securities Act and pursuant toapplicable state securities laws.  In this rescission offer, the Company offeredto repurchase the shares, subject to our rescission offer, for the price paidper share plus interest from the date of purchase until the rescission offerexpires, at the current statutory rate per year mandated by the state in whichthe shares were purchased.  The rescission offer expired on August 27,2004, with no individuals accepting the rescission offer.

 

**NOTE 21 – LEGAL MATTERS**

 

The Company is involved invarious and routine litigation matters, which arise through the normal courseof business.  Management believes that the resolution of these matterswill not have a material adverse effect on the Company’s financial position orresults of operations.

 

64

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Item 9.  Changes in and Disagreementswith Accountants on Accounting and Financial Disclosures 

 

There have been no disagreements with the Company’sindependent accountants involving accounting and financial disclosure matters.

 

Item 9A.  Controls andProcedures 

 

Disclosure Controls andProcedures

 

The Company’s CEO and CFOhave evaluated the effectiveness of the Company’s disclosure controls andprocedures (as such term is defined in Rules 13a-15(e) under the SecuritiesExchange Act of 1934, as amended) as of the end of the period covered by thisreport.  Based upon such evaluation, the Company’s Chief Executive Officerand Chief Financial Officer have concluded that, as of the end of the period,the Company’s disclosure controls and procedures are effective in recording,processing, summarizing and reporting, on a timely basis, information requiredto be disclosed by the Company in the reports that it files or submits underthe Securities Exchange Act of 1934, as amended.

 

Internal Controls overFinancial Reporting

 

Except asdescribed below, there have not been any changes in the Company’s internalcontrols over financial reporting (as such term is defined in Rules 13a-15(f)under the Securities Exchange Act of 1934, as amended) during the fiscal yearto which this report relates that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.  However, in October 2004,the audit committee was advised by management that, based on an internal reviewof accounting processes and procedures, management had discoveredan accounting error pertaining to the incorrect adjustment of consulting costsrelating to intercompany transactions between the Company and its Canadiansubsidiary.  This error caused anunderstatement of consolidated consultant costs (i.e. direct costs) in theCompany’s consolidated income statement and an under accrual of consolidatedaccrued payroll on the balance sheet. The aggregate amount for all periodsaffected was an understatement of consultant costs totaling $5,555,000, with anafter-tax impact of $3,462,000 or $(0.12) per share.

 

As part of management’sinvestigation of this accounting error, an extensive review of intercompanytransactions was completed.  As a result,other adjustments, not affecting operating results, were recorded.  These adjustments to the balance sheet correctedan overstatement of accrued expenses and an understatement of shareholders’equity (specifically the overstatement of accumulated comprehensive loss).

 

As a result of thediscovery of this error, on October 26, 2004, management and the AuditCommittee were informed by the Company’s independent accountants of certainmatters involving internal controls that the Company’s auditors consider amaterial weakness.  This materialweakness principally focused on the Company’s quarterly consolidation process,including intercompany transactions relating to the Company’s Canadian subsidiary,which were incorrectly recorded over the five fiscal quarters ending June 30,2004.  This resulted in an understatementof consolidated consultant costs (direct cost) and an under accrual ofconsolidated accrued payroll in each period and for the year ended December 31,2003.  In addition, certain accounts werenot properly reconciled, resulting in adjustments to accrued expenses andshareholders’ equity (not effecting operating results), to be recorded on theconsolidated balance sheet.

 

During management’sevaluation of internal controls related to the previously noted accountingerror, certain deficiencies were identified, including a complicated design ofintercompany accounts which increased the potential for error, staff turnoverin the accounting department, the incorrect recording of intercompanytransactions by an accounting clerk and the failure to detect these incorrecttransactions during management’s review and approval process.

 

65

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As a result of these deficiencies, the following actions were taken, orwill be taken, to prevent future reoccurrence:

 

•                  Managementimplemented an improved intercompany transaction process, including foreigncurrency translation and financial reporting/consolidation procedures, which weredocumented, with all key controls identified.

•                  Allintercompany elimination entries require two levels of approval (AccountingManager and Controller), as opposed to the previous one level of approval.

•                  Monthly,the Corporate Controller reviews and approves all intercompany eliminationentries to ensure amounts are properly recorded.

•                  Canadianintercompany accounts, which previously recorded all receivable and payableactivity in the same balance sheet account, were divided into two intercompanyaccounts – one to record only intercompany invoicing transactions, one torecord other (funding) transactions. This allows better tracking of intercompany transactions and would moreeasily highlights incorrect entries, if any.

•                  A moredetailed review of gross margins by line of business is completed by theController (and reviewed by the CFO) on a quarterly basis.

•                  Additionaltraining (internal and external) has been and will be provided to all GeneralAccounting personnel with an emphasis on Consolidation accounting.

•                  InternalAudit will conduct a review of intercompany transactions and the consolidationprocess to ensure that newly designed controls are functioning properly.

 

Management and the AuditCommittee have closely monitored the implementation of the remediation actionsnoted above and are prepared to take additional measures where necessary tostrengthen internal controls and procedures to meet the internal controlreporting requirements of Section 404 of the Sarbanes-Oxley Act and therules adopted there under.  Other thanthe foregoing initiatives, since the date of management’s evaluation, therehave been no material changes in our disclosure controls and procedures,including our internal controls over financial reporting, which have materiallyaffected, or are reasonably likely to materially affect, our disclosurecontrols and procedures, including our internal controls over financialreporting.

 

As of December 31,2004, management has implemented substantially all of the above notedprocedures and believes that the previously noted material weakness has beenremediated.

 

 

 

Management’s Annual Reporton Internal Control Over Financial Reporting

 

The management of theCompany is responsible for establishing and maintaining adequate internalcontrol over financial reporting. Internal control over financial reporting is defined in Rule 13a-15 (f)and 15d-15 (f) promulgated under the Securities Exchange Act of 1934 as aprocess designed by, or under the supervision of, the Company’s PrincipalExecutive Officer and Principal Financial Officer and effected by the Company’sboard of directors, management and other personnel, to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles and includes those policies and procedures that:

 

1.               Pertain tothe maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of assets of the Company;

2.               Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directorsof the Company; and

3.               Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the financial statements.

 

66

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The Company’s managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2004. In making this assessment, the Company’s management used the criteria establishedin Internal Control-Integrated Framework issued by the Committee of SponsoringOrganization of the Treadway Commission.

 

Under the supervision andwith the participation of our management, including our Principal ExecutiveOfficer and Principal Financial Officer, we conducted an evaluation of ourinternal control over financial reporting as prescribed above for the periodscovered by this report.  Based on ourevaluation, our Principal Executive Officer and Principal Financial Officerconcluded that the Company’s internal control over financial reporting iseffective.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Projections of anyevaluation of effectiveness to future periods are subject to the risk that controlsmay become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

The Company’s independentauditors have attested to, and reported on, management’s evaluation of ourinternal control over financial reporting. This report is contained in this Annual Report on Form 10-K.

 

Item 9B. OtherInformation

 

The Company has no informationrequired to be disclosed in a current report on a Form 8-K during thefourth quarter 2004 and not otherwise disclosed in a current report on a Form 8-K.

 

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**PART III**

 

Item 10.  Directors andExecutive Officers of the Registrant

 

(a)            Theinformation called for by Item 10 with respect to identification of directorsof the Company is incorporated herein by reference to the material under thecaption “Election of Directors” in the Company’s Proxy Statement for its 2005Annual Meeting of Shareholders which will be filed with the Securities andExchange Commission (the “2005 Proxy Statement”).

(b)           Theinformation called for by Item 10 with respect to executive officers of theCompany is included in Part I herein under the caption “Executive Officers ofthe Company.”

(c)            Theinformation called for by Item 10 with respect to compliance with Section 16(a)of the Securities Exchange Act of 1939 is incorporated herein by reference tothe material under the caption “Compliance with Section 16(a) of theExchange Act” in the 2005 Proxy Statement.

 

**Code of Ethics**

 

Our executive officers are subject to a code of ethicsthat complies with standards mandated by the Sarbanes-Oxley Act of 2002. The complete code of ethics is available on our website atwww.computerhorizons.com.  At any time it is not available on our website,we will provide a copy upon written request made to our Investor RelationsDepartment, at 49 Old Bloomfield Avenue, Mountain Lakes, New Jersey07046-1495.  Information on our website is not part of this AnnualReport.  If we amend or grant any waiver from a provision of our code ofethics that applies to our executive officers, we will publicly disclose suchamendment or waiver as required by applicable law, including by posting suchamendment or waiver on our website at www.computerhorizons.com or by filing aCurrent Report on Form 8-K.

 

Item 11. ExecutiveCompensation 

 

The information called for by Item 11 with respect tomanagement remuneration and transactions is incorporated herein by reference tothe material under the caption “Executive Compensation” in the 2005 ProxyStatement.

 

Item 12. Security Ownership ofCertain Beneficial Owners and Management 

 

The information called for by Item 12 with respect tosecurity ownership of certain beneficial owners and management and the equitycompensation plan information is incorporated herein by reference to thematerial under the caption “Security Ownership of Certain Beneficial Owners” inthe 2005 Proxy Statement.

 

Item 13. Certain Relationshipsand Related Transactions 

 

In December 2003, John Cassese, the former CEO ofComputer Horizons Corp., received a lump-sum payment of $1.3 million, net oftaxes from his deferred compensation plan account in accordance with hisseverance agreement.  The Company redeemed insurance policies to fund thispayment and received approximately $2.5 million for the surrender values of thesplit dollar policies.  The Company recorded a realized loss of approximately$432,000 on investments for these insurance policies, which had an originalcost of approximately $2.9 million.

 

Item 14. Principal AccountantFees and Services 

 

The information called for by Item 14 with respect toPrincipal Accountant Fees and Services is incorporated herein by reference tothe material under the caption “Audit Fees” in the 2005 Proxy Statement.

 

68

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# **PARTIV**

# ** **

Item 15.  Exhibits,Financial Statement Schedules and Reports 

 

(a)Financial Statements and Financial Statement Schedules

 

1. Consolidated financial statements

•                  Report ofindependent registered public accounting firm on the consolidated financialstatements

•                  Report ofindependent registered public accounting firm on internal controls

•                  Consolidatedbalance sheets as of December 3l, 2004 and 2003

•                  Consolidatedstatements of operations for each of the three years in the period ended December 31,2004

•                  Consolidatedstatement of shareholders’ equity for each of the three years in the periodended December 31, 2004

•                  Consolidatedstatements of cash flows for each of the three years in the period ended December 31,2004

•                  Notes toconsolidated financial statements

 

69

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2.  Schedule II - Valuation and qualifyingaccounts for the years ended December 31, 2004, 2003 and 2002.

 
| ** **                         | ** ** | **Column B**                         | ** ** | **Column C**                       | ** ** | **Column D**               | ** ** | **Column E**                  | ** ** |
|------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| **Column A**                       | ** ** | **Balance at  beginning  of period** | ** ** | **Charged to  cost  and expenses** | ** ** | **Deductions -  describe** | ** ** | **Balance at end  of period** | ** ** |
| Description                        |       |                                 |       |                               |       |                       |       |                          |       |
|                               |       |                                 |       |                               |       |                       |       |                          |       |
| Year ended December 31,  2004 |       |                                 |       |                               |       |                       |       |                          |       |
| Allowance  for doubtful accounts   |       | $                                    | 5,432,000  |                               | 969,000    |                       | 487,000    | (1)                           | $          | 5,914,000 |   |
| Deferred tax  asset valuation      |       | $                                    | 11,612,000 |                               | 2,181,000  |                       | —     |                          | $          | 13,793,000 |   |
| 2004  Restructure Reserve          |       | —                               |       | 2,859,000                          |       | 312,000                    | (2)        | $                             | 2,547,000  |   |
| 2003  Restructure Reserve          |       | $                                    | 1,075,000  |                               | —     |                       | 538,000    | (2)                           | $          | 537,000 |   |
| 2002  Restructure Reserve          |       | $                                    | 1,159,000  |                               | —     |                       | 1,018,000  | (2)                           | $          | 141,000 |   |
| 2000  Restructure Reserve          |       | $                                    | 78,000     |                               | —     |                       | 78,000     | (2)                           | $          | — |   |
| 1999 Restructure  Reserve          |       | $                                    | 308,000    |                               | —     |                       | 182,000    | (2)                           | $          | 126,000 |   |
|                               |       |                                 |       |                               |       |                       |       |                          |       |
| Year ended December 31,  2003 |       |                                 |       |                               |       |                       |       |                          |       |
| Allowance  for doubtful accounts   |       | $                                    | 7,696,000  |                               | 4,644,000  |                       | 6,908,000  | (1)                           | $          | 5,432,000 |   |
| Deferred tax  asset valuation      |       | $                                    | 10,289,000 |                               | 1,323,000  |                       | —     |                          | $          | 11,612,000 |   |
| 2003  Restructure Reserve          |       | $                                    | —     |                               | 3,278,000  |                       | 2,203,000  | (2)                           | $          | 1,075,000 |   |
| 2002  Restructure Reserve          |       | $                                    | 2,483,000  |                               | —     |                       | 1,324,000  | (2)                           | $          | 1,159,000 |   |
| 2000  Restructure Reserve          |       | $                                    | 295,000    |                               | —     |                       | 217,000    | (2)                           | $          | 78,000 |   |
| 1999  Restructure Reserve          |       | $                                    | 488,000    |                               | —     |                       | 180,000    | (2)                           | $          | 308,000 |   |
|                               |       |                                 |       |                               |       |                       |       |                          |       |
| Year ended December 31,  2002 |       |                                 |       |                               |       |                       |       |                          |       |
| Allowance  for doubtful accounts   |       | $                                    | 7,542,000  |                               | 4,996,000  |                       | 4,842,000  | (1)                           | $          | 7,696,000 |   |
| Deferred tax  asset valuation      |       | $                                    | 3,340,000  |                               | 6,949,000  |                       | —     |                          | $          | 10,289,000 |   |
| 2002  Restructure Reserve          |       | $                                    | —     |                               | 2,847,000  |                       | 364,000    | (2)                           | $          | 2,483,000 |   |
| 2000  Restructure Reserve          |       | $                                    | 1,464,000  |                               | —     |                       | 1,169,000  | (2)                           | $          | 295,000 |   |
| 1999  Restructure Reserve          |       | $                                    | 626,000    |                               | —     |                       | 138,000    | (2)                           | $          | 488,000 |   |

----

Notes

(1)                                  Uncollectibleaccounts written off, net of recoveries.

(2)                                  Includes paymentsfor severance (in 2004) and lease obligation payments for closed offices.

 

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**Report of Independent Registered Public Accounting Firm on Schedule II**

 

Board of Directors andShareholders

Computer Horizons Corp.

 

We have audited inaccordance with the standards of the Public Company Accounting Oversight Board(United States) the consolidated financial statements of Computer HorizonsCorp. and Subsidiaries referred to in our report dated March 14, 2005,which is included in the 2004 Annual Report on Form 10-K.  Our audit was conducted for the purpose offorming an opinion on the basic financial statements taken as a whole.  Schedule II is presented for purposes ofadditional analysis and is not a required part of the basic financialstatements.  This schedule has beensubjected to the auditing procedures applied in the audit of the basicfinancial statements and, in our opinion, is fairly stated in all materialrespects in relation to the basic financial statement taken as a whole.

 

 
| /s/ Grant Thornton LLP |   |
|------------------------|--------|
| Grant Thornton LLP     |
|                   |
| Edison, New Jersey     |
| March 14, 2005    |

 

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Report of independent registered public accounting firm on thefinancial statements schedule.

 

All other schedules are omitted because they are not applicable or therequired information is shown in the consolidated financial statements or notesthereto.

 

3.  List of Exhibits

 
| **Exhibit** | ** ** | **Description**                                                                                             | ** ** | **Incorporated by Reference to**                                              |
|-------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|
|        |       |                                                                                                        |       |                                                                          |
| 2.1         |       | Stock purchase agreement  dated as of July 8, 2003 between the Company, RGII and Kathryn B.  Freeland. |       | Exhibit 2.1 to Form 8-K  dated July 8, 2003.                             |
|        |       |                                                                                                        |       |                                                                          |
| 3(a-1)      |       | Certificate of  Incorporation as amended through 1971.                                                      |       | Exhibit 3(a) to  Registration Statement on Form S-1 (File No. 2-42259)        |
|        |       |                                                                                                        |       |                                                                          |
| 3(a-2)      |       | Certificate of Amendment  dated May 16, 1983 to Certificate of Incorporation.                               |       | Exhibit 3(a-2) to Form 10K  for the fiscal year ended February 28, 1983. |
|        |       |                                                                                                        |       |                                                                          |
| 3(a-3)      |       | Certificate of Amendment  dated June 15, 1988 to Certificate of Incorporation.                         |       | Exhibit 3(a-3) to Form 10K  for the fiscal year ended December 31, 1988. |
|        |       |                                                                                                        |       |                                                                          |
| 3(a-4)      |       | Certificate of Amendment  dated July 6, 1989 to Certificate of Incorporation.                          |       | Exhibit 3(a-4) to Form 10K  for the fiscal year ended December 31, 1994. |
|        |       |                                                                                                        |       |                                                                          |
| 3(a-5)      |       | Certificate of Amendment  dated February 14, 1990 to Certificate of Incorporation.                     |       | Exhibit 3(a-5) to Form 10K  for the fiscal year ended December 31, 1989. |
|        |       |                                                                                                        |       |                                                                          |
| 3(a-6)      |       | Certificate of Amendment  dated May 1, 1991 to Certificate of Incorporation.                                |       | Exhibit 3(a-6) to Form 10K  for the fiscal year ended December 31, 1994. |
|        |       |                                                                                                        |       |                                                                          |
| 3(a-7)      |       | Certificate of Amendment  dated July 12, 1994 to Certificate of Incorporation.                         |       | Exhibit 3(a-7) to Form 10K  for the fiscal year ended December 31, 1994. |
|        |       |                                                                                                        |       |                                                                          |
| 3.2         |       | Bylaws, as amended and  presently in effect.                                                                |       | Exhibit 3.2 to Form 10K  for the fiscal year ended December 31, 2003.    |

 

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| 4(a)   |   | Rights Agreement dated as  of July 6, 1989 between the Company and Chemical Bank, as Rights Agent (“Rights  Agreement”) which includes the form of Rights Certificate as Exhibit B. |   | Exhibit 1 to Registration  Statement on Form 8-A dated July 7, 1989.                                    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                               |   |                                                                                                         |
| 4(b)   |   | Amendment No. 1 dated as  of February 13, 1990 to Rights Agreement.                                                                                                                           |   | Exhibit 1 to Amendment No.  1 on Form 8 dated February 13, 1990 to Registration Statement on Form  8-A. |
|   |   |                                                                                                                                                                                               |   |                                                                                                         |
| 4(c)   |   | Amendment No. 2 dated as  of August 10, 1994 to Rights Agreement.                                                                                                                             |   | Exhibit 4(c) to Form 10K  for the fiscal year ended December 31, 1994.                                  |
|   |   |                                                                                                                                                                                               |   |                                                                                                         |
| 4(d)   |   | Employee’s Savings Plan  and Amendment Number One.                                                                                                                                            |   | Exhibit 4.4 to  Registration Statement on Form S-8 dated December 5, 1995.                              |
|   |   |                                                                                                                                                                                               |   |                                                                                                         |
| 4(e)   |   | Employee’s Savings Plan  Trust Agreement as Amended and Restated Effective January 1, 1996.                                                                                              |   | Exhibit 4.5 to  Registration Statement on Form S-3 dated December 5, 1995.                              |
|   |   |                                                                                                                                                                                               |   |                                                                                                         |
| 4(f)   |   | Amendment No. 3 dated as  of July 13, 1999 to Rights Agreement.                                                                                                                               |   | Exhibit 4.1 to Form 8-K  dated July 13, 1999.                                                           |
|   |   |                                                                                                                                                                                               |   |                                                                                                         |
| 10(a)  |   | Employment Agreement dated  as of February 16, 1990 between the Company and John J. Cassese.                                                                                                  |   | Exhibit 10(a) to Form 10K  for the year ended December 31, 1989.                                        |
|   |   |                                                                                                                                                                                               |   |                                                                                                         |
| 10(b)  |   | Employment Agreement dated  as of January 1, 1997 between the Company and William J. Murphy.                                                                                                  |   | Exhibit 10(g) to Form S-3  dated August 14, 1997.                                                       |
|   |   |                                                                                                                                                                                               |   |                                                                                                         |
| 10(c)  |   | Employment Agreement dated  as of March 6, 1997 between the Company and Michael J. Shea.                                                                                                      |   | Exhibit 10(c) to Form 10K  for the year ended December 31, 1996.                                        |
|   |   |                                                                                                                                                                                               |   |                                                                                                         |
| 10(d)  |   | 1991 Directors’ Stock  Option Plan, as amended.                                                                                                                                               |   | Exhibit 10(g) to Form 10-K  for the year ended December 31, 1994.                                       |
|   |   |                                                                                                                                                                                               |   |                                                                                                         |
| 10(e)  |   | 1994 Incentive Stock  Option and Appreciation Plan.                                                                                                                                                |   | Exhibit 10(h) to Form 10K  for the fiscal year ended December 31, 1994.                                 |

 

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| 10(f)  |   | $15,000,000 Discretionary  Line of Credit payable to Chase Manhattan Bank dated as of June 30,  1998.                                                               |   | Exhibit 10(h) to Form S-3  dated August 14, 1997.                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                     |   |                                                                             |
| 10(g)  |   | $10,000,000 Discretionary  Line of Credit from PNC Bank dated as of June 5, 1998.                                                                                   |   | Exhibit 10(h) to Form 10K  for the fiscal year ended December 31, 1996.     |
|   |   |                                                                                                                                                                     |   |                                                                             |
| 10(h)  |   | 1999 Employee Stock  Purchase Plan.                                                                                                                                      |   | Exhibit 99.1 to Form S8  dated March 17, 1999.                              |
|   |   |                                                                                                                                                                     |   |                                                                             |
| 10 (i) |   | Amendment to the  employment agreement dated as of March 24, 2000 between the Company and  William J. Murphy.                                                       |   | Exhibit 10(i) to Form 10K  for the fiscal year ended December 31, 1999.     |
|   |   |                                                                                                                                                                     |   |                                                                             |
| 10 (j) |   | $15,000,000 Discretionary  Line of Credit payable to Chase Manhattan Bank dated as of June 30,  1998, as amended on March 15, 2000 (increased to $30,000,000). |   | Exhibit 10(j) to Form 10K  for the fiscal year ended December 31, 1999.     |
|   |   |                                                                                                                                                                     |   |                                                                             |
| 10 (k) |   | $20,000,000 Discretionary  Line of Credit payable to Chase Manhattan Bank  dated as of March 20,  2001.                                                        |   | Exhibit 10(k) to Form 10K  for the fiscal year ended December 31, 2000.     |
|   |   |                                                                                                                                                                     |   |                                                                             |
| 10 (l) |   | $40,000,000 Asset-Based  Lending Agreement payable to CIT dated as of July 31, 2001.                                                                                |   | Exhibit 10(l) to Form 10K  for the fiscal year ended December 31, 2001      |
|   |   |                                                                                                                                                                     |   |                                                                             |
| 10(n)  |   | Amendment to the  $40,000,000 Asset-Based Lending Agreement payable to CIT dated as of February 14,  2003.                                                          |   | Exhibit 10 (n) to Form  10-K for the fiscal year ended December 31, 2002.   |
|   |   |                                                                                                                                                                     |   |                                                                             |
| 10(o)  |   | Non-qualified supplemental  retirement benefit agreement for William J. Murphy.                                                                                          |   | Exhibit 10 (o) to Form  10-K/A for the fiscal year ended December 31, 2003. |
|   |   |                                                                                                                                                                     |   |                                                                             |
| 10 (p) |   | Non-qualified supplemental  retirement benefit agreement for Michael J. Shea.                                                                                            |   | Exhibit 10 (p) to Form  10-K/A for the fiscal year ended December 31, 2003. |
|   |   |                                                                                                                                                                     |   |                                                                             |
| 10(q)  |   | First Amendment to the  non-qualified supplemental retirement benefit agreement for William J.  Murphy.                                                                  |   | Exhibit 10 (q) to Form  10-K/A for the fiscal year ended December 31, 2003. |
|   |   |                                                                                                                                                                     |   |                                                                             |
| 10(r)  |   | First Amendment to the  non-qualified supplemental retirement benefit agreement for Michael J. Shea.                                                                     |   | Exhibit 10 (r) to Form  10-K/A for the fiscal year ended December 31, 2003. |
|   |   |                                                                                                                                                                     |   |                                                                             |
| 10(s)  |   | Summary of Executive  Compensation Exchange Program with John J. Cassese.                                                                                                |   | Exhibit 10 (s) to Form  10-K/A for the fiscal year ended December 31, 2002. |
|   |   |                                                                                                                                                                     |   |                                                                             |

 

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| 10(t)  |   | Severance Agreement dated  as of April 28, 2003 between the Company and John J. Cassese.                                           |   | Exhibit 10.1 to Form 10-Q  for the fiscal quarter ended March 31, 2003.     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|
|   |   |                                                                                                                                    |   |                                                                             |
| 10(u)  |   | Amendment to the  Employment Agreement dated as of March 31, 2003 between the Company and  William J. Murphy.                      |   | Exhibit 10.2 to Form 10-Q  for the fiscal quarter ended March 31, 2003.     |
|   |   |                                                                                                                                    |   |                                                                             |
| 10(v)  |   | Amendment to the  Employment Agreement dated as of April 3, 2003 between the Company and  Michael J. Shea.                         |   | Exhibit 10.3 to Form 10-Q  for the fiscal quarter ended March 31, 2003.     |
|   |   |                                                                                                                                    |   |                                                                             |
| 10(w)  |   | Employment agreement dated  as of July 8, 2003 between RGII and Kathryn B. Freeland.                                               |   | Exhibit 10.1 to Form 8-K  dated July 8, 2003.                               |
|   |   |                                                                                                                                    |   |                                                                             |
| 10(x)  |   | Employment agreement dated  as of August 19, 2003 between the Company and Kristin R. Evins.                                        |   | Exhibit 10.1 to Form 10-Q  for the fiscal quarter ended September 30, 2003. |
|   |   |                                                                                                                                    |   |                                                                             |
| 10(y)  |   | 2004 Omnibus Incentive  Compensation Plan dated May 19, 2004.                                                                           |   | Filed herewith                                                                   |
|   |   |                                                                                                                                    |   |                                                                             |
| 10(z)  |   | Stock Purchase Agreement  between RGII Technologies, Inc. and Automated Information Management, Inc.  dated April 1, 2004          |   | Filed herewith                                                                   |
|   |   |                                                                                                                                    |   |                                                                             |
| 21     |   | List of Subsidiaries.                                                                                                                   |   | Filed herewith                                                                   |
|   |   |                                                                                                                                    |   |                                                                             |
| 23     |   | Consent of Grant Thornton  LLP, Independent Registered Public Accounting Firm.                                                          |   | Filed herewith                                                                   |
|   |   |                                                                                                                                    |   |                                                                             |
| 31.1   |   | CEO Certification required  by Rule 13a– 14(a)/ 15d – 14 (a) under the Securities Exchange Act of 1934.                       |   | Filed herewith                                                                   |
|   |   |                                                                                                                                    |   |                                                                             |
| 31.2   |   | CFO Certification required  by Rule 13a– 14(a)/ 15d – 14 (a) under the Securities Exchange Act of 1934.                       |   | Filed herewith                                                                   |
|   |   |                                                                                                                                    |   |                                                                             |
| 32.1   |   | CEO Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |   | Filed herewith                                                                   |
|   |   |                                                                                                                                    |   |                                                                             |
| 32.2   |   | CFO Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |   | Filed herewith                                                                   |

 

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4.  Reports on Form 8-K during the fourth quarterof fiscal 2004.

 

A report on Form 8-K was filed on December 22,2004 reporting that the Board of Directors of Computer Horizons Corp. had approveda restructuring plan resulting from the realignment of the Company’s businessmodel into three distinct segments: Commercial, Federal and Chimes.

 

A report on Form 8-K was filed on November 10,2004 reporting the issuance of a press release reporting the Company’sfinancial results for its fiscal quarter ended September 30, 2004.

 

A report on Form 8-K was filed on October 8, 2004reporting the issuance of a press release regarding the discovery of anaccounting error in the Company’s financial statements.

 

76

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|                                   | COMPUTER HORIZONS CORP.                     |
|----------------------------------------|---------------------------------------------|
|                                   |                                        |
| Date:   March 16,  2005 | By:                                         | /s/ William J. Murphy |   |
|                                   | William J. Murphy,  President, CEO          |
|                                   | (Principal Executive  Officer) and Director |
|                                        |                                             |  |  |  |

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
|   |                | COMPUTER HORIZONS CORP.                                                        |
|--------|---------------------|--------------------------------------------------------------------------------|
|   |                |                                                                           |
| Date:  | March 16, 2005 | By:                                                                            | /s/ William J. Murphy |   |
|   |                | William J. Murphy,  President, CEO  (Principal Executive Officer) and Director |
|   |                |                                                                           |
| Date:  | March 16, 2005 | By:                                                                            | /s/ Michael J. Shea |   |
|   |                | Michael J. Shea,                                                               |
|   |                | Vice President and CFO                                                         |
|   |                | (Principal Financial  Officer)                                                 |
|   |                |                                                                           |
| Date:  | March 16, 2005 | By:                                                                            | /s/ John Ferdinandi |   |
|   |                | John Ferdinandi,  Corporate Controller (Principal Accounting Officer)          |
|   |                |                                                                           |
| Date:  | March 16, 2005 | By:                                                                            | /s/ Earl Mason |   |
|   |                | Earl Mason, Chairman of  the Board and Director                                |
|   |                |                                                                           |
| Date:  | March 16, 2005 | By:                                                                            | /s/ William M. Duncan |   |
|   |                | William M. Duncan,  Director                                                   |
|   |                |                                                                           |
| Date:  | March 16, 2005 | By:                                                                            | /s/ Eric P. Edelstein |   |
|   |                | Eric P. Edelstein,  Director                                                   |
|   |                |                                                                           |
| Date:  | March 16, 2005 | By:                                                                            | /s/ William J. Marino |   |
|   |                | William J. Marino,  Director                                                   |
|   |                |                                                                           |
| Date:  | March 16, 2005 | By:                                                                            | /s/ L. White Matthews III |   |
|   |                | L. White Matthews III,  Director                                               |
|   |                |                                                                           |
| Date:  | March 16, 2005 | By:                                                                            | /s/ Edward J. Obuchowski |   |
|   |                | Edward J. Obuchowski,  Director                                                |
|        |                     |                                                                                |  |  |  |

 

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