**SECURITIESAND EXCHANGE COMMISSION**

 

**Washington,D.C.  20549**

 

**FORM 10-K/A**

**(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, 2003**                                                                                        |
|                                                                                                                                    |   |   |
| **o****     TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**        |
|                                                                                                                                    |   |   |
| **For  the transition period from          to        ** |

** **

**Commission filenumber 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 mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No  o.

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in the Exchange Act Rule12b-2).   Yes  ý   No  o

 

The aggregate market value of thevoting stock held by non-affiliates of the registrant as of June 30, 2003 wasapproximately**$**142,000,000.

 

The number of shares outstandingof each of the registrant’s classes of common stock as of March 10, 2004 were30,551,552 shares.

 

 

DOCUMENTS INCORPORATED BYREFERENCE

 

There is incorporated herein byreference the registrant’s (i) portions of the Annual Report to Shareholdersfor the year ended December 3l, 2003, in Part II of this Report and (ii)portions of the Definitive Proxy Statement for the 2004 Annual Meeting of Shareholders,expected to be filed with the Securities and Exchange Commission on or beforeApril 7, 2004, in Part III hereof.

 

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**Explanatory Note**

 

This Amendment No. 2 on Form10-K/A to our Annual report on Form 10-K for the year ended December 31, 2003is being filed for the purposes of responding to comments received by us fromthe Staff of the Securities and Exchange Commission and to reflect areclassification in Note No. 1 of the Notes to Consolidated FinancialStatements of certain amounts from Cash to Commercial Paper in 2003.  This Amendment speaks as of the originalfiling date of our Annual report on Form 10-K and has not been updated toreflect events occurring subsequent to the original filing date.  For the convenience of the reader, we haverefiled our Annual report on Form 10-K in its entirety with the applicablechanges.

 

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**PART I**

 

Item 1.  Business

 

General

 

Computer Horizons Corp., or CHC, or the Company, is a strategicsolutions and human capital management company with more than thirty-six yearsof experience, specifically in information technology.  The Company provides its services tomulti-national companies through its “bestshore” delivery centers locatedglobally, and enabling its Fortune 2000 customer base to maximize technology investments.  With the acquisition of RGII Technologies,Inc., in July 2003, CHC has expanded its government practice to include theFederal government sector, in addition to various other vertical markets itserves, such as healthcare, insurance and financial services.  CHC’s wholly owned subsidiary, Chimes, usesits proprietary technology to enable its Global 2000 (which, Forbes magazinedefines as the biggest and most important companies as measured by sales, profits,assets and market value), customer base to align and integrate businessplanning with human resource management across an enterprise’s businessfunctions.

The Companymarkets solutions to existing and potential clients with the objective ofbecoming a preferred provider of comprehensive information technology servicesand solutions for such clients.  TheCompany believes that the range of services and solutions that it offers,combined with its proprietary Chimes technology, provides it with competitiveadvantages in the information technology marketplace.

The Company’sclients are primarily Global 2000 companies with significant informationtechnology budgets and recurring staffing needs.  In 2003, the Company provided information****technology services to 967 clients.** **During2003, the Company’s largest client accounted****for7% of the Company’s consolidated revenues**. **The Company offers its clients abroad****range of business andtechnical services as an outsourcer and systems integrator capable of providingcomplex total solutions.  This totalsolutions approach comprises proprietary software and tools, proven processesand methodologies, tested project management practices and resource managementand procurement programs.

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

 

 

(1) Solutions:  CHC Solutions Group (including RGIITechnologies Inc., CHC Healthcare Solutions and CHC’s training/educationpractice) is an e-Business Solutions provider, enabling enterprises andFederal, State and Local government agencies to build business-critical andhighly scalable solutions.  TheSolutions Group, comprised of approximately 800 IT professionals, offers acomprehensive list of integrated solutions including e-business strategy andassessment; HIPAA compliance; on shore, near-shore and offshoreoutsourcing;  enterprise networkmanagement; web architecture design; hosting and integration; applicationdevelopment; customer relationship management (CRM); project management;systems integration; networking services and education/training.  In addition, in September 2003, the Companyacquired the XpressTM software suite which, along with related implementation services,enables manufacturers to become UCCnet compliant whereby product identificationdata is synchronized and standardized with retailers.  For projects in the Solutions’ division, CHC is responsible forthe project management and supervision. Generally, the gross margins in this division are higher than that ofthe IT Services division.  Revenues inthe Solutions Group are recognized as services are performed under eithertime-and-material or a fixed fee basis. However, adjustments are made if necessary to reflect progress againstmilestones or deliverables.

(1a) RGII Technologies, Inc. (RGII): In July 2003, the Company acquiredRGII, a solutions provider of high-end technology and program management toFederal, State and Local government agencies. RGII offers services and solutions in such areas as: enterprisemanagement, network infrastructure, information assurance and security, webdevelopment and integration, call management, engineering technology andtechnical services.

(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 strategic focus.  In response to this trend, the Company has

 

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created a group of outsourcing centers onshore, near-shore in Montrealand offshore in Chennai, India with 24 hour / 7 day a week support, which arefully equipped with the latest technology and communications, as well as acomplete staff that includes experienced project managers, technicians andoperators.  These professionalsfacilitate essential data functions including: applications development, systems maintenance, data network management,voice network administration and help desk operations.

(1c) CHC Healthcare Solutions, LLC*: *CHC Healthcare Solutions wasformed in 2002, as a consortium of Computer Horizons Corp. and a healthcareconsulting firm, ZA Consulting, LLC. CHC Healthcare Solutions, reported underCHC Solutions, offers operational, compliance and technology services andsolutions to the healthcare industry.

(1d) Education/Training*:*  The Company’s education division offers custom-designed and/orexisting training programs to enhance the competencies of client staff inspecific technologies, languages, methodologies and applications.  The prevailing focus of the Company is toassist clients through instructor-led, on-site training and consulting in thetransitioning IT organization of Global 2000 corporations nationwide.   To support these changing technologies, theCompany has developed extensive curriculum offerings in Web Technologies,Relational Databases, Programming Languages, Reporting Tools, ProcessImprovement, UNIX, Client/Server and Mainframe Technologies.

(1e) Software Products: Princeton Softech, Inc. a wholly-owned subsidiary of the Company whichwas sold March 25, 2002, was a software products company that deliveredleveraging technologies for enterprise-scale solutions.

 

(2) IT Services:  CHC’s IT Services Group provides highly skilled softwareprofessionals to augment the internal information management staffs of majorcorporations.  The Company offers itsclients a just-in-time solution to supply their staffing needs from among theCompany’s approximately 1,400 IT professionals.  Customers are serviced through the Company’s branch network ofoffices in the United States and Canada, and virtually through Chimes.  The customer is responsible for managing andsupervising our software professionals. As a result, gross margins in thisbusiness area are significantly less than Solutions services.  Revenue for the IT Services Group isrecognized as services are rendered on a time-and-material basis.  Hourly and daily rates are determined inadvance and agreed to with the customer. Time worked is documented in various forms using the applicabletimekeeping process (i.e. the client’s or the Company’s timekeeping systems).

 

 

(3) Chimes: Chimes, Inc., a wholly-owned subsidiary of CHC, providesworkforce procurement and management services to Global 2000 companies.   Through scalable, web-based software,Chimes administers the hiring cycle to identify, leverage and manage theenterprise-wide spend on human capital. Chimes’ portfolio of services addresses contingent hiring (CVM),full-time hiring (CAM), program management (RPM) and consolidated time sheetand expense processing (CTE).

 

### Personnel

As of December3l, 2003, the Company had a staff of 2,665, including approximately 2,200 ITprofessionals.   The Company devotessignificant resources to recruitment of qualified professionals and providescontinuing in-house training and education, and a career path managementdevelopment program within the Company.

 

### Competition

The Companycompetes in the commercial information technology services market which ishighly competitive and served by numerous firms, many of which serve only theirrespective local markets.  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 include companies such as AnalystsInternational Corp., CIBER, Inc., Computer Task Group Inc., iGATE Corp. andCovansys Corp.  Many participants in theinformation technology consulting and

 

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software solutions market havesignificantly greater financial, technical and marketing resources and generategreater revenues than the Company.  TheCompany believes that the principal competitive factors in the commercialinformation technology services industry include responsiveness to clientneeds, speed of application software development, quality of service, price,project management capability and technical expertise.  Pricing has its greatest importance as acompetitive factor in the area of professional service staffing.  The Company believes that its ability tocompete also depends in part on a number of competitive factors outside itscontrol, including the ability of its competitors to hire, retain and motivateskilled technical and management personnel, the ownership by competitors ofsoftware used by potential clients, the price at which others offer comparableservices and the extent of its competitors’ responsiveness to customer needs.

 

Available Information

The Company’sinternet website address is www.computerhorizons.com.  The Company’s annual reports on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the Exchange Act areavailable free of charge through our website as soon as reasonably practicableafter they are electronically filed with, or furnished to, the Securities andExchange Commission.

 

Risk Factors

 

*The Company’s revenues have declined and the operating loss hasincreased because demand for IT Services has weakened significantly, and maycontinue to weaken, in the industries and markets that CHC serves.*

* *

The Company’srevenues are affected by the level of business activity of its customers, andthe related demand for IT Services to support these customer activities.  As a result of weakened demand for theCompany’s IT Services, revenues and results of operations have been negativelyimpacted.  For the year ended December31, 2003 and 2002, IT Services revenue decreased to $133.1 million from $201.3million, respectively, a decrease of $68.2 million, or 33.9%.  For the years ended December 31, 2003 and2002, IT Services operating loss increased to $4.1 million from $2.2 million,respectively, an increase of $1.9 million, or 86.4%.  CHC cannot predict when customer demand will significantlyimprove, and to what extent demand for the Company’s IT Services will improve.

* *

*The current trend of companiesmoving technology jobs and projects offshore has caused and could continue tocause*revenues todecline.

* *

In the pastfew years, more companies are using or are considering using low cost offshoreoutsourcing centers, particularly in India, to perform technology related workand projects.  This trend hascontributed to the decline in domestic IT staff augmentation revenue as well ason-site solutions oriented projects. The Company now has its own outsourcing centers in India and Canada tocompete for this business, but this new business has not been sufficient tooffset the revenue decline. Additionally, the equivalent amount of work in low cost centers willgenerate substantially less revenue due to the lower billing rates that arecharged in these offshore outsourcing centers.

 

*The Company’s operating resultshave varied, and are likely to continue to vary significantly.  This may result in volatility in the marketprice of our common stock.*

 

The Company’srevenues and operating results have varied in the past and are likely to varysignificantly from year to year.  Thismay lead to volatility in the share price. Some other factors that may cause the market price of the common stockto fluctuate substantially, include:

• thefailure to be awarded a significant project on which the Company has bid;

 

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• thetermination by a client of a material project or the decision by a client notto proceed to the stage of a project anticipated by the Company;

•announcement of new services by CHC or the competitors;

•announcement of acquisitions or other significant transactions by CHC or thecompetitors;

• changesin or failure to meet earnings estimates by securities analysts;

• sales ofcommon stock by CHC or the existing stockholders or the perception that suchsales may occur;

• adversejudgments or settlements obligating CHC to pay liabilities;

• changes in management; and

• general economic conditions andoverall stock market volatility.

 

*The failure to be successful inretaining existing and future highly-skilled technical personnel and attractinga sufficient number of IT professionals and project managers could adverselyaffect the Company’s business.*

 

TheCompany’s business is labor intensive and depends to a large extent on itsability to attract, train, motivate and retain highly-skilledIT professionals and project managers. The Company’s ability to win and retain new business is significantlyaffected by client relationships and the quality of service rendered.  The loss of key IT professionals and projectmanagers may jeopardize existing client relationships with businesses thatcontinue to use the Company’s services based upon past relationships with keyIT professionals and project managers.

 

*The Company derives a significantportion of its revenues from a limited number of large clients and the loss ofany large client could have an adverse effect on its business.*

 

The Companyhas derived, and it believes will continue to derive, a significant portion ofits revenues from a limited number of large clients.  For the years ended December 31, 2003, 2002 and 2001, theCompany’s ten largest clients accounted for approximately 38%, 38% and 30% ofits revenues, respectively.  The loss ofany large client could have an adverse effect on the Company’s business,results of operations and financial condition. Prior to the acquisition of RGII by the Company, approximately 52% ofRGII’s revenues were derived from restricted contracts (minority basedcontracts, etc.)  These contracts may beterminated pursuant to the Federal government’s rights under the FederalAcquisition 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 are terminated or the Company is not able toenter new contracts on acceptable terms, the Company’s business could be adverselyaffected.

 

*Changes in federal governmentprograms and requirements, or budgetary changes affecting federal governmentspending in Company specific agencies, or changes in fiscal policies oravailable funding, may adversely affect the Company’s results of operations.*

* *

*The Companyacquired RGII Technologies, Inc. in July 2003. RGII receives substantially all its revenue from the Federalgovernment.  For the year ended December31, 2003, the Company received approximately 7% of its total revenue fromRGII.  Significant changes in RGII’srevenues may adversely affect the Company’s results of operations.*

 

*Projects performed by RGII aresubject to Defense Contract Audit Agency audits and compliance with governmentcost accounting standards.  The resultsof such audits may result in adjustments to RGII’s reported financial results.*

 

RGII has costreimbursable type contracts with the U.S. Government.  Consequently, RGII is reimbursed based upon direct expensesattributable to the contract plus a percentage based upon indirect expenses.  The indirect rates are estimated.  Accordingly, if the actual rates asdetermined by the Defense Contract Audit Agency (“DCAA”) are below theestimated rates, a refund for the difference will be due to the U.S.Government.  A significant refund due tothe U.S. Government may adversely affect the Company’s results

 

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ofoperations.  DCAA has completed theirincurred cost audits for all fiscal years through December 31, 2001.

 

*The Company faces competitionfrom a number of existing competitors, as well as potential new competitors,which could result in loss of market share and adversely affect business.*

 

The marketsfor CHC services are highly competitive. The Company competes with large providers of IT staffing servicesincluding Cap Gemini and MPS Group, Inc. In addition, it competes for staffing projects with the informationsystems groups of prospective clients. In the Solutions business, the Company competes with consulting andsystem integration firms, including Analysts International Corporation,Accenture, Bearingpoint, CIBER, Inc., Computer Sciences Corporation, ComputerTask Group, Electronic Data Systems Corp., IBM Corp. and Keane, Inc.  The Company also competes in the ITsolutions market with vendors of application software.  There are relatively low barriers to entryin the markets the Company competes in and it has faced and expects to continueto face, additional competition from other established and emerging companies.  Increased competition may result in greaterpricing pressure which could have an adverse effect on the Company’s business,results of operations and financial condition. Many of the Company’s current and potential competitors havesignificantly greater financial, technical, marketing and other resources thanCHC. As a result, they may be able to respond more quickly to new or emergingtechnologies and changes in clients’ requirements, or to devote greaterresources to the development, promotion, sale and support of their services andproducts.  In addition, current andpotential competitors may establish cooperative relationships among themselvesor with third parties to increase the ability of their services or products toaddress the staffing and solution needs of prospective clients.  Accordingly, it is possible that newcompetitors, alliances among competitors or alliances between competitors andthird parties may emerge and acquire significant market share.  If this were to occur, it could have anadverse effect on the Company’s business, results of operations and financialcondition.

 

*The introduction of competitive ITsolutions embodying new technologies and the emergence of new industrystandards may render the Company’s existing IT solutions or underlyingtechnologies obsolete or unmarketable which could have an adverse effect on itsbusiness.*

 

The ITsolutions industry is characterized by rapid technological change, changingclient requirements and new service and product introductions.  The introduction of competitive IT solutionsembodying new technologies and the emergence of new industry standards mayrender the Company’s existing IT solutions or underlying technologies obsoleteor unmarketable.  As a result, it isdependent in large part upon its ability to develop new IT solutions thataddress the increasingly sophisticated needs of its clients, keep pace with newcompetitive service and product offerings and emerging industry standards andachieve 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 servicesare offered on a fixed-price basis.  Thefailure to estimate accurately the resources and time required for a project orfailure to complete our contractual obligations within the time frame committedcould have an adverse effect on the Company’s business.*

* *

The Companyoffers some of its services on a fixed-price rather than on atime-and-materials or best efforts basis. Under the terms of these contracts the Company bears the risk of costoverruns and inflation in connection with these projects.  In the event the Company fails to estimateaccurately the resources and time required for a project or fails to completeits contractual obligations within the time frame committed, the Company’sbusiness, operating results and financial condition could be adverselyaffected.

 

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*The Company’s strategy includesthe pursuit of strategic acquisitions which present many risks and may have anadverse effect on its business in the event the financial and strategic goalsthat were contemplated at the time of the transaction are not realized.*

 

As part of itsstrategy, the Company pursues strategic acquisitions.  On July 8, 2003, CHC purchased all of the capital stock of RGIITechnologies, Inc., a federal IT services company.  Some of the risks faced in completing acquisitions similar to theRGII transaction are:

• difficulties integrating newoperations, technology and personnel into operations;

• loss of significant clients acquired;

• loss of key management and technicalpersonnel acquired;

• assumption of unanticipated legal orother financial liabilities;

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

• diversion of management attention fromother business concerns.

Thesedifficulties could disrupt ongoing business and increase expenses.  Any acquisition, depending on its size,could result in the use of a significant portion of cash, or if the acquisitionis made utilizing securities, could result in significant dilution toshareholders.  Furthermore, there can beno assurance that any acquired service capacity or technology will gainacceptance in the market.  Each of theseresults could adversely affect the Company’s business, results of operations,financial condition and the price of common stock.

 

*The Company’s international operationssubject it to additional risks that can adversely affect operating results.*

 

CHC’sinternational operations, which comprised 10.5% of consolidated revenues forthe year ended December 31, 2003, depend greatly upon business, immigration andtechnology transfer laws in those countries and upon the continued developmentof technology infrastructure.  As aresult, the Company’s business is subject to the risks generally associatedwith non-U.S. operations including:

• unexpected changes in regulatoryenvironments;

• the costs and difficulties relating togeographically diverse operations;

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

• fluctuations in currency exchangerates;

• restrictions on the movement of cash;

• longer accounts receivable paymentcycles and greater difficulties in collecting accounts receivable;

• potential foreign tax consequences, including theimpact of repatriation of earnings, tariffs and other trade barriers; and

• political unrest and changingconditions in countries in which our services are provided or facilities arelocated.

If any ofthese factors were to render the conduct of business in a particular countryundesirable or impracticable, there could be an adverse effect on the Company’sbusiness, operating results and financial condition.

 

*If CHC fails to protect itsintellectual property rights, competitors may be able to use its technology andthis could weaken its competitive position, reduce revenue and increase costs.*

 

CHC reliesprimarily upon a combination of copyright and trademark laws, trade secrets,confidentiality procedures and contractual arrangements to protect proprietaryrights.  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 orotherwise misappropriate CHC’s copyrighted materials, trademarks or otherproprietary rights without consent or approval, CHC’s competitive positioncould be harmed, or it could become involved in litigation to enforce itsrights.

 

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*Third parties could assert that the Company’s services infringe theirintellectual property rights, which if successful, could harm the Company’sbusiness.*

* *

Third partiesmay assert trademark, copyright, patent and other types of infringement orunfair competition claims against the Company. If CHC is forced to defend against any such claims, whether they arewith 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.  Asa result of such dispute, CHC may have to develop non-infringing technology orenter into royalty or licensing arrangements. Such royalty or licensing agreements, if required, may be unavailable onterms acceptable to CHC, or at all.  Ifthere is a successful claim of infringement against the Company and it isunable to develop non-infringing technology or license the infringed or similartechnology on a timely basis, it could harm CHC’s business.

 

*In the event of a failure in aclient’s computer system, a claim for substantial damages may be made againstthe Company regardless of its responsibility for the failure, which ifsuccessful, could adversely affect the Company’s business.*

 

Much of theCompany’s business involves projects that are critical to the operations of itsclients’ businesses and provide benefits that may be difficult toquantify.  Any failure in a client’ssystem could result in a claim for substantial damages against CHC, regardlessof its responsibility for such failure. Limitations of liability set forth in service contracts may not beenforceable in all instances and may not otherwise protect the Company fromliability for damages.  CHC maintainsgeneral liability insurance, including coverage for errors and omissions,however, CHC may not be able to avoid significant claims and attendantpublicity. Furthermore, there can be no assurance that the insurance coveragewill be adequate or that coverage will remain available at acceptable costs.  Successful claims brought against theCompany in excess of its insurance coverage could have an adverse effect onbusiness, operating results and financial condition.

 

*As a provider of staffingservices, there are risks associated with placing employees (and independentcontractors) at clients’ businesses, which could result in costly andtime-consuming litigation.*

 

CHC could besubject to liability if any of the following risks associated with placing itsemployees (and independent contractors) at clients’ businesses occurs:

• possible claims of discrimination andharassment;

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

• misuse of client proprietaryinformation or intellectual property;

• injury to client employees;

• misappropriation of client property;

• other criminal activity; and

• torts and other similar claims.

Anyclaims made against CHC could result in costly and time-consuminglitigation.  In addition, under somecircumstances, the Company may be held responsible for the actions of personsnot under its direct control.

 

*The Company has adopted anti-takeoverdefenses that could make it difficult for another company to acquire control ofthe Company or limit the price investors might be willing to pay for its stock.*

 

Certain provisionsof the Company’s Certificate of Incorporation and Bylaws could make a merger ortender offer involving CHC more difficult, even if such events would bebeneficial to the interests of the stockholders. These provisions includeadoption of a Preferred Shares Rights Agreement, commonly known as a “poisonpill” and giving the Board the ability to issue preferred stock and determinethe rights and designations of the preferred stock at any time withoutstockholder approval.  The rights of theholders of CHC’s common stock will be subject to, and may be adversely affectedby, the rights of the holders of any preferred stock that may be issued in thefuture.  The issuance of preferredstock, while providing flexibility in connection with possible acquisitions andother corporate purposes, could have the effect of making it

 

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more difficultfor a third party to acquire, or of discouraging a third party from acquiring,a majority of CHC’s outstanding voting stock. The above factors and certain provisions of the New York BusinessCorporation Law may have the effect of deterring hostile takeovers or otherwisedelaying or preventing changes in the control or management of the Company,including transactions in which the stockholders might otherwise receive apremium over the fair market value of CHC common stock.

 

Item 2.  Properties

The Company’s Corporate and Financial Headquarters, as well as itsEastern Regional Office, comprising approximately 63,000 square feet, arelocated at 49 Old Bloomfield Avenue, Mountain Lakes, New Jersey.  The Mountain Lakes lease is for a termexpiring December 31, 2005, at a current annual rental of approximately$1,400,000.  As of December 3l, 2003,the Company also maintained operating facilities, which are shared between theIT Services and Solutions Group business segments, in California, 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 281,000 square feet.** **Chimes maintains facilities inCalifornia, Illinois, Michigan, Minnesota and New Jersey.  The leases for all of these facilities areat a current annual aggregate rental of approximately $3,665,000.  These leases expire****at various times with no lease****commitment longer than April 30, 2008.

 

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Item 3. Legal Proceedings

 

OnApril 29, 2003, the Company filed an action in the United States District Courtfor the District of New Jersey against Aquent LLC, seeking (i) to enjoin Aquentfrom disseminating false and misleading proxy materials and press releases insupport of its two nominees for director positions in connection with theCompany’s May 14, 2003 Annual Meeting; (ii) to invalidate any proxies securedby Aquent through the use of unlawful proxy solicitation materials; and (iii)to require Aquent to disseminate corrective disclosure that not only amendedthe false and misleading proxy materials but also advised CHC shareholders howAquent’s solicitations had violated the securities laws.

 

On May 27, 2003, theCompany brought an action in the Supreme Court of the State of New York, NewYork County, seeking an order invalidating votes for directors Karl Meyer andRobert Trevisani cast at the Annual Meeting by stockholders of record who soldtheir shares between the record date and the date of the Annual Meeting.

 

Each of the legalproceedings described above were settled and dismissed as a result of asettlement agreement between the Company and Aquent LLC entered into onDecember 12, 2003.  As part of thesettlement, the Company agreed to modify its June 30, 2003 by-law amendmentregarding special meeting procedures by, among other things, reducing from 75to 50 the minimum number of days between the time a 10 percent or moreshareholder requests a special meeting of shareholders and the date of thatmeeting.  In addition, Aquent enteredinto a standstill agreement pursuant to which, for a period of one year, itagreed not to request a special meeting of Computer Horizons’ shareholders forany purpose, or nominate anyone to serve as a member of CHC’s Board ofDirectors, or engage in any proxy solicitation of Computer Horizons’shareholders.

 

The Company is involvedin various and routine litigation matters, which arise through the normalcourse of business.  Management believesthat the resolution of these matters will not have a material adverse effect onthe Company’s financial position or results of operations.

 

Item 4.  Submission of Matters to a Vote of Security Holders

None.

 

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**Executive Officers ofthe Company**

 

The following table sets forth certain information with respect to theexecutive officers of the Company.  Allthe positions listed are or were held by such officers with the Company as ofthe filing date of this Annual Report.

 
| **NAME**          |   | **AGE** |   | **TITLE**                      |   | **PERIOD  POSITION HELD** |
|-------------------|--------|---------|--------|--------------------------------|--------|---------------------------|
|              |   |    |   |                           |   |                      |
| William J. Murphy |   | 59      |   | President and CEO              |   | 2003 - Present            |
|              |   |    |   | Director                       |   | 1999 - Present            |
|              |   |    |   | Executive Vice President       |   |                      |
|              |   |    |   | and Chief Financial Officer    |   | 1997-2003                 |
|              |   |    |   |                           |   |                      |
| Michael J. Shea   |   | 44      |   | Chief Financial Officer        |   | 2003 - Present            |
|              |   |    |   | Vice President                 |   | 1996 - Present            |
|              |   |    |   | Controller                     |   | 1995 - 2003               |
|              |   |    |   |                           |   |                      |
| Kristin Evins     |   | 36      |   | Controller                     |   | 2003 - Present            |
|              |   |    |   | Assistant Controller           |   | 2001 - 2003               |
|              |   |    |   | Manager of Financial Reporting |   | 2000 - 2001               |

 

11

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**PART II**

 

Item 5.   Market for Registrant’s Common Equity and Related StockholderMatters

 

The Company’scommon stock is quoted on the Nasdaq National Market, under the symbolCHRZ.  The range of high and low closingstock prices, as reported by the Nasdaq National Market, for each of thequarters for the years ended December 31, 2003 and 2002 is as follows: 

 
|    |   | **2003** |   | **2002** |   |
|---------|--------|----------|--------|----------|--------|
|    |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
| Quarter |   |     |   |     |   |   |   |   |   |
| First   |   | $        | 3.93   |     | $      | 2.60 |   | $ | 4.19 |   | $ | 3.11 |   |
| Second  |   | 4.72     |   | 2.84     |   | 4.87 |   | 3.65 |   |
| Third   |   | 4.56     |   | 3.57     |   | 4.65 |   | 3.40 |   |
| Fourth  |   | 4.21     |   | 3.43     |   | 4.00 |   | 2.95 |   |
|         |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

 

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.  As of March 10, 2004,there were approximately 1,024 registered holders of common stock, per theCompany’s transfer agent.

 

12

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Item 6.  Selected Financial Data

 

ConsolidatedStatement of Operations Data:

 
|                                                                                                                 |   | **December  31,**                                         |        |
|----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|-------------|
|                                                                                                                 |   | **2003**                                                  |        | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                                                                                 |   | **(dollar  amounts in thousands, except per share data)** |        |
|                                                                                                                 |   |                                                      |        |   |   |   |   |   |   |   |   |
| Revenues                                                                                                             |   | **$**                                                     | **245,210** | ** ** | $ | 297,115 |   | $ | 400,784 |   | $ | 445,479 |   | $ | 534,594 |   |
|                                                                                                                 |   |                                                      | ** **  |   |   |   |   |   |   |   |   |
| Costs and expenses:                                                                                                  |   |                                                      | ** **  |   |   |   |   |   |   |   |   |
| Direct costs                                                                                                         |   | **169,802**                                               | ** **  | 216,181 |   | 281,576 |   | 312,815 |   | 365,310 |   |
| Selling, general and administrative                                                                                  |   | **80,634**                                                | ** **  | 91,343 |   | 128,832 |   | 170,143 |   | 131,087 |   |
| Amortization of intangibles                                                                                          |   | **1,084**                                                 | ** **  | — |   | 2,695 |   | 7,434 |   | 6,202 |   |
| Restructuring charges                                                                                                |   | **3,278**                                                 | ** **  | 2,515 |   | 1,048 |   | 1,166 |   | 6,355 |   |
| Write-down of assets held for sale                                                                                   |   | **—**                                                | ** **  | — |   | 5,473 |   | 40,362 |   | — |   |
| Special charges                                                                                                      |   | **10,113**                                                | ** **  | — |   | — |   | — |   | — |   |
|                                                                                                                 |   |                                                      | ** **  |   |   |   |   |   |   |   |   |
| Income / (loss) from operations                                                                                      |   | **(19,701**                                               | **)**       | (12,924 | ) | (18,840 | ) | (86,441 | ) | 25,640 |   |
|                                                                                                                 |   |                                                      | ** **  |   |   |   |   |   |   |   |   |
| Other income / (expense):                                                                                            |   |                                                      | ** **  |   |   |   |   |   |   |   |   |
| Gain/(loss) on sale of assets                                                                                        |   | **(424**                                                  | **)**       | 5,890 |   | (3,197 | ) | — |   | — |   |
| Net (loss) / gain on investments                                                                                     |   | **(432**                                                  | **)**       | (61 | ) | 90 |   | — |   | — |   |
| Interest income                                                                                                      |   | **529**                                                   | ** **  | 928 |   | 2,293 |   | 620 |   | 1,353 |   |
| Interest expense                                                                                                     |   | **(51**                                                   | **)**       | (174 | ) | (1,944 | ) | (1,825 | ) | (1,355 | ) |
|                                                                                                                 |   |                                                      | ** **  |   |   |   |   |   |   |   |   |
| Income / (loss) before income taxes and  cumulative effect of a change in accounting principle and minority interest |   | **(20,079**                                               | **)**       | (6,341 | ) | (21,598 | ) | (87,646 | ) | 25,638 |   |
|                                                                                                                 |   |                                                      | ** **  |   |   |   |   |   |   |   |   |
| Income taxes / (benefit)                                                                                             |   | **(5,220**                                                | **)**       | 1,869 |   | (7,148 | ) | (29,819 | ) | 11,013 |   |
|                                                                                                                 |   |                                                      | ** **  |   |   |   |   |   |   |   |   |
| Income / (loss) before cumulative effect of  change in accounting principle and minority interest                    |   | **(14,859**                                               | **)**       | (8,210 | ) | (14,450 | ) | (57,827 | ) | 14,625 |   |
| Minority interest                                                                                                    |   | **(89**                                                   | **)**       | 35 |   | — |   | — |   | — |   |
| Cumulative effect of change in accounting  principle                                                                 |   | **—**                                                | ** **  | (29,861 | ) | — |   | — |   | — |   |
|                                                                                                                 |   |                                                      | ** **  |   |   |   |   |   |   |   |   |
| Net income / (loss)                                                                                                  |   | **$**                                                     | **(14,948** | **)** | $ | (38,036 | ) | $ | (14,450 | ) | $ | (57,827 | ) | $ | 14,625 |   |
|                                                                                                                 |   |                                                      | ** **  |   |   |   |   |   |   |   |   |
| Earnings / (loss) per share:                                                                                         |   |                                                      | ** **  |   |   |   |   |   |   |   |   |
| Basic                                                                                                                |   | **$**                                                     | **(0.49**   | **)** | $ | (1.22 | ) | $ | (0.45 | ) | $ | (1.83 | ) | $ | 0.47 |   |
|                                                                                                                 |   |                                                      | ** **  |   |   |   |   |   |   |   |   |
| Diluted                                                                                                              |   | **$**                                                     | **(0.49**   | **)** | $ | (1.22 | ) | $ | (0.45 | ) | $ | (1.83 | ) | $ | 0.46 |   |
|                                                                                                                 |   |                                                      | ** **  |   |   |   |   |   |   |   |   |
| Weighted average number of shares  outstanding:                                                                      |   |                                                      | ** **  |   |   |   |   |   |   |   |   |
| Basic                                                                                                                |   | **30,455,000**                                            |        | 31,243,000 |   | 31,911,000 |   | 31,656,000 |   | 30,940,000 |   |
|                                                                                                                 |   |                                                      |        |   |   |   |   |   |   |   |   |
| Diluted                                                                                                              |   | **30,455,000**                                            |        | 31,243,000 |   | 31,911,000 |   | 31,656,000 |   | 31,647,000 |   |

 

13

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|                                                                                                                 |   | **December  31,**                                         |        |
|----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|-------------|
|                                                                                                                 |   | **2003**                                                  |        | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                                                                                 |   | **(dollar  amounts in thousands, except per share data)** |        |
|                                                                                                                 |   |                                                      |        |
| Analysis (%)                                                                                                         |   |                                                      |        |   |   |   |   |   |   |   |   |
| Revenues                                                                                                             |   | **100.0**                                                 | %           | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Gross margin                                                                                                         |   | **30.7**                                                  |        | 27.2 |   | 29.7 |   | 29.8 |   | 31.7 |   |
| Selling, general and administrative                                                                                  |   | **32.9**                                                  |        | 30.8 |   | 32.1 |   | 38.2 |   | 24.5 |   |
| Amortization of intangibles                                                                                          |   | **0.4**                                                   |        | — |   | 0.7 |   | 1.7 |   | 1.2 |   |
| Restructuring charges                                                                                                |   | **1.3**                                                   |        | 0.8 |   | 0.2 |   | 0.3 |   | 1.2 |   |
| Write-down of assets held for sale                                                                                   |   | **—**                                                |        | — |   | 1.4 |   | 9.0 |   | — |   |
| Special charges                                                                                                      |   | **4.1**                                                   |        | — |   | — |   | — |   | — |   |
|                                                                                                                 |   |                                                      |        |   |   |   |   |   |   |   |   |
| Income / (loss) from operations                                                                                      |   | **(8.0**                                                  | **)**       | (4.4 | ) | (4.7 | ) | (19.4 | ) | 4.8 |   |
| Gain / (loss) on sale of assets                                                                                      |   | **(0.2**                                                  | **)**       | 2.0 |   | (0.8 | ) | — |   | — |   |
| Net (loss) / gain on investments                                                                                     |   | **(0.2**                                                  | **)**       | — |   | — |   | — |   | — |   |
| Interest income / (expense) – net                                                                               |   | **0.2**                                                   | ** **  | 0.3 |   | 0.1 |   | (0.3 | ) | — |   |
|                                                                                                                 |   |                                                      |        |   |   |   |   |   |   |   |   |
| Income / (loss) before income taxes and  cumulative effect of a change in accounting principle and minority interest |   | **(8.2**                                                  | **)**       | (2.1 | ) | (5.4 | ) | (19.7 | ) | 4.8 |   |
| Income taxes / (benefit)                                                                                             |   | **(2.1**                                                  | **)**       | 0.6 |   | (1.8 | ) | (6.7 | ) | 2.1 |   |
|                                                                                                                 |   |                                                      |        |   |   |   |   |   |   |   |   |
| Income / (loss) before cumulative effect of  change in accounting principle                                          |   | **(6.1**                                                  | **)**       | (2.7 | ) | (3.6 | ) | (13.0 | ) | 2.7 |   |
|                                                                                                                 |   |                                                      |        |   |   |   |   |   |   |   |   |
| Cumulative effect of change in accounting  principle                                                                 |   | **—**                                                |        | (10.1 | ) | — |   | — |   | — |   |
|                                                                                                                 |   |                                                      |        |   |   |   |   |   |   |   |   |
| Net income / (loss)                                                                                                  |   | **(6.1**                                                  | **)**       | (12.8 | ) | (3.6 | ) | (13.0 | ) | 2.7 |   |
|                                                                                                                 |   |                                                      |        |   |   |   |   |   |   |   |   |
| Revenue growth / (decline) YOY                                                                                       |   | **(17.5**                                                 | **)**       | (25.9 | ) | (10.0 | ) | (16.7 | ) | 3.8 |   |
| Net income growth / (decline)YOY                                                                                     |   | **60.7**                                                  |        | (163.2 | ) | 75.0 |   | (495.4 | ) | (66.4 | ) |
| Return on equity, average (1)                                                                                        |   | **(10.8**                                                 | **)**       | (22.7 | ) | (7.3 | ) | (24.6 | ) | 5.7 |   |
| Effective tax rate                                                                                                   |   | **26.0**                                                  |        | 29.5 |   | 33.1 |   | 34.0 |   | 43.0 |   |
|                                                                                                                 |   |                                                      |        |   |   |   |   |   |   |   |   |
| Consolidated Balance Sheet Data:                                                                                     |   |                                                      |        |   |   |   |   |   |   |   |   |
| At year-end                                                                                                          |   |                                                      |        |   |   |   |   |   |   |   |   |
| Total assets                                                                                                         |   | **$**                                                     | **179,137** |   | $ | 193,731 |   | $ | 237,721 |   | $ | 269,396 |   | $ | 347,994 |   |
| Working capital                                                                                                      |   | **66,420**                                                |        | 105,579 |   | 115,747 |   | 134,472 |   | 129,857 |   |
| Long-term debt                                                                                                       |   | **—**                                                |        | — |   | — |   | — |   | 4,100 |   |
| Shareholders’ equity                                                                                            |   | **130,744**                                               |        | 145,855 |   | 189,855 |   | 207,924 |   | 262,652 |   |
|                                                                                                                 |   |                                                      |        |   |   |   |   |   |   |   |   |
| Other Data:                                                                                                          |   |                                                      |        |   |   |   |   |   |   |   |   |
| Stock price                                                                                                          |   | **$**                                                     | **3.92**    |   | $ | 3.27 |   | $ | 3.21 |   | $ | 2.44 |   | $ | 16.19 |   |
| P/E multiple                                                                                                         |   | **N/A**                                                   |        | N/A |   | N/A |   | N/A |   | 34 |   |
|                                                                                                                 |   |                                                      |        |   |   |   |   |   |   |   |   |
| Employees                                                                                                            |   | **2,665**                                                 |        | 2,800 |   | 3,313 |   | 4,186 |   | 4,149 |   |
| Clients (during year)                                                                                                |   | **967**                                                   |        | 905 |   | 879 |   | 800 |   | 785 |   |
| Offices (worldwide)                                                                                                  |   | **31**                                                    |        | 36 |   | 52 |   | 43 |   | 50 |   |

 

----

(1)           Return on equity,average is calculated by dividing Net Income / (loss) for the period by theaverage shareholders' equity for the same period.

 

14

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Item 7.  Management’s Discussion and Analysis of Financial Conditionand Results of Operation

 

The following detailed discussion and analysis ofthe Company’s financial condition and results of operations should be read inconjunction with the December 31, 2003 financial statements and related notesincluded in separate sections of this Form 10-K.

 

**Overview**

 

Computer Horizons Corp., (“CHC”, “the Company”), isa strategic solutions and human capital management company with more thanthirty-six years of experience, specifically in information technology.  The Company’s clients are primarily Global2000 companies, serviced by over 30 offices in the United States, Canada andIndia.

 

Due to continued decreases in the demand fortemporary technology workers, the trend of companies to outsource technologyjobs offshore and declines in the overall IT markets in which the Companyoperates, 2003 revenue decreased 17.5% from 2002.  The majority of the Company’s revenues are derived fromconsultant billable hours for professional services rendered.  As a result of declining customer demand,consultant headcount declined to approximately 2,200 at December 31, 2003(including approximately 300 pertaining to RGII acquired in July 2003), fromapproximately 2,300 at December 31, 2002.

 

The loss from operations in 2003 totaled $19.7million, including special charges of $10.1 million, restructuring charges of$3.3 million and amortization of intangibles of $1.1 million.  The loss from operations in 2002 totaled$12.9 million and included $2.5 million of restructuring charges.  The decrease in the loss from operationsduring 2003, excluding these special items, was primarily a result of grossmargin improvement attributable to the change in the consolidated revenue mixto 46% Solutions revenue (including Chimes) for 2003, from 32% Solutionsrevenue (including Chimes) in 2002.  Inaddition, selling, general and administrative expenses were reduced due to officeclosures and staff headcount reductions.

 

Management continues to focus on maintaining astrong balance sheet, with $52.6 million of cash at December 31, 2003, alongwith $66.4 million in working capital and no debt outstanding.  Cash flow generated from operations exceeded$18 million for 2003, partially due to the receipt of a $20 million income taxrefund and a significant reduction in accounts receivable.

 

Although 2003 showed a significant improvement inthe Company’s operating results, the level of business activity in the ITmarket remains uncertain.  Thisuncertainty significantly reduced revenues (specifically revenues from ITServices) and results from operations in 2003. As long as this uncertainty remains, the Company believes that demand forIT Services will continue to be diminished. CHC cannot predict when the level of business activity in the IT marketwill improve, and if it does improve, CHC cannot predict whether and to whatextent demand for the Company’s IT Services will increase.

 

**Forward Looking Statements**

 

Statementsincluded in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations and elsewhere in this document that do not relate topresent or historical conditions are “forward-looking statements” within themeaning of that term in Section 27A of the Securities Act of 1933, as amended,and in Section 21F of the Securities Exchange Act of 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-lookingstatements involve risks and uncertainties that could cause results or outcomesto differ materially from those expressed in such forward-lookingstatements.  Forward-looking statementsmay include, without limitation, statements relating to the Company’s plans,strategies, objectives, expectations and intentions and are intended to be madepursuant to the safe harbor provisions of the Private Securities LitigationReform Act of 1995.  Words such as“believes,” “forecasts,” “intends,” “possible,” “expects,” “estimates,”“anticipates,” or “plans” and similar

 

15

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expressionsare intended to identify forward-looking statements.  Among the important factors on which such statements are basedare assumptions concerning the anticipated growth of the information technologyindustry, the continued need of current and prospective customers for theCompany’s services, the availability of qualified professional staff, and priceand wage inflation.

 

## **Revenue GeneratingActivities**

 

The majority of the Company’s revenues arederived from professional services rendered in the information technologysector. The Company also owned a stand-alone software products company,Princeton Softech Inc., (“Princeton”) which accounted for less than 1% ofconsolidated revenues in 2002.  On March25, 2002, the net assets of Princeton were sold for a cash payment ofapproximately $16 million.

 

The Company operates its business in threebasic segments, IT Services, the Solutions Group and Chimes, Inc.  The distinctions between the IT Services andSolutions Group segments primarily relate to the management and supervision ofservices performed and related gross margins. Chimes, Inc., a wholly-owned subsidiary of CHC, provides workforceprocurement and management services to Global 2000 companies.

 

The IT Services business consists ofproviding technology consultants to large organizations on a temporary hirebasis. The consultant work is supervised and managed by the customer. For themost recent year 2003, this segment represented approximately 54% of totalrevenues. The IT Services business tends to be a lower risk, lower gross marginbusiness with very competitive pricing.

 

The Solutions Group, tends to be a highermargin, higher risk business, due to the fact that the Company is responsiblefor project deliverables and other conditions contained in statements of workand/or contracts with customers. Virtually all projects performed by theSolutions Group are IT related and consist of practices such as applicationdevelopment, outsourcing arrangements, government services, Health InsurancePortability and Accountability Act, (“HIPAA”), services, technology trainingand managed services.   For the year2003, the Solutions Group (excluding Chimes) accounted for 38% of consolidatedrevenues.

 

The Company’s customer relationships arememorialized in a master agreement, which address the terms and conditionswhich define the client engagement. Depending on the service to be performed for the client, either a taskorder (in the case of a Staffing engagement) or a Statement of Work (“SOW”) (inthe case of a Solutions engagement) is generated. The SOW is signed by both theCompany and the customer.  In general,no Solutions work is done unless there is a SOW because the SOW provides thetechnical details of the work to be done. The SOW, although falling under the corresponding master agreement, is astand-alone binding contractual document, typically outlining the projectobjectives, describing the personnel who will work on the project, describingphases of the project, the timeframes for work performance, and the rate ofcompensation, on a time-and-material basis. In the event that the parameters of the project expand or otherwisechange, a Project Change Request is implemented, to memorialize whatever changehas occurred to the deliverables, personnel and/or time-and-material.  The master agreements, in conjunction withthe SOW’s, are written to define, with as much detail as possible, the clientrelationship and all aspects of the work to be performed for the client.  With regard to revenues expected in futureperiods, each SOW has a defined term or sets forth the anticipated length of aproject.  Where a client engagement ison-going, like certain “Help Desk” type services, the master agreements wouldstill have a term length, but would recite that the agreement wasrenewable.  Generally, Solutionsengagements are for a year or less. Staffing engagements can and do last for more than a year, withvariations in the number of consultants being provided at any given time.  Staffing engagements are generally cancelableby clients with a two to four week notice period.

 

Chimes, Inc. is a human capital managementsolution that, through the use of proprietary software and processes, managesthe temporary workforce of large organizations. During 2003, Chimes accountedfor approximately 8% of total revenues.

 

16

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## **CriticalAccounting Policies**

 

The most critical accounting policies used inthe preparation of the Company’s financial statements are related to revenuerecognition, the evaluation of the bad debt reserve, the valuation of goodwilland the valuation of the deferred tax asset.

 

Revenue Recognition

 

Approximately 94% and 93% of consolidatedrevenue in 2003 and 2002, respectively, was derived from time-and-materialcontracts.

 

For the IT Services division revenues arerecognized as services are performed under time-and material contracts.  Under a typical time-and-material billingarrangement, our customers are billed on a regularly scheduled basis, such asbiweekly or monthly.  At the end of eachaccounting period, revenue is estimated and accrued for services performedsince the last billing cycle.  Theseunbilled amounts are billed the following month.

 

The Solutions Group recognizes revenue eitheron a time-and-material basis or on a fixed fee basis, however, principally on atime-and-material basis. For fixed-fee contracts, revenue is recognized on thebasis of the estimated percentage of completion based on costs incurredrelative to total estimated costs.  Eachfixed 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 the end of each reporting period anassessment of revenue recognized on the percentage of completion and milestonesachieved criteria is made.  If itbecomes apparent that estimated cost will be exceeded or required milestones ordeliverables will not have been obtained, an adjustment will be made.  The cumulative effect of revisions inestimated revenues and costs are recognized in the period in which the factsthat give rise to the impact of any revisions become known.

 

Unbilled accounts receivable, in the ITServices and Solutions Group, represent amounts recognized as revenue based onservices performed in advance of customer billings principally on a time-and-material basis.  At the end of eachaccounting period, revenue is accrued for services performed since the lastbilling cycle.  These unbilled amountsare 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 at specific dates or at contract completion.

 

The Company’s Chimes subsidiary recognizesrevenue on a transaction fee basis.  TheChimes service offering aggregates the suppliers of temporary workers to thecustomer and renders one invoice to the customer.  Upon payment from the customer, Chimes deducts a transaction feeand remits the balance of the client payment to the applicable vendor.  Chimes recognizes only their fee for theservice, not the aggregate billing to the customer.  The gross amount of the customer invoicing is not consideredrevenue or receivable to Chimes because there is no earnings process for thegross amount and by contract terms, Chimes is not obligated to pay the vendoruntil paid by the customer.

 

Princeton Softech, Inc., which was sold in 2002, recognized revenue inaccordance with AICPA Statement of Position 97-2 (“SOP 97-2”), “SoftwareRevenue Recognition,” and AICPA Statement of Position 98-9 (“SOP 98-9”).  Under SOP 97-2, the Company recognizedsoftware license revenue when a noncancelable license agreement had been executed,fees were fixed and determinable, the software had been delivered andcollection was considered probable.

 

17

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Evaluation of Bad Debt Reserve

 

The Company determines its bad debt reserve by considering a number offactors, including the length of time trade accounts receivable are past due,the Company’s previous loss history, the customer’s current ability to pay itsobligation to the Company and the condition of the general economy and theindustry as a whole.  The Company writesoff accounts receivable when they become uncollectible, and paymentssubsequently received on such receivables are credited to the allowance fordoubtful accounts.

 

Goodwill 

 

In June 2001, the Financial AccountingStandards Board approved the issuance of SFAS No. 141, “Business Combinations”and in July 2001, SFAS No. 142, “Goodwill and Other Intangible Assets.”  The new standards require that all businesscombinations initiated after June 30, 2001 must be accounted for under thepurchase method.  In addition, all intangibleassets acquired that are obtained through contractual or legal right, or arecapable of being separately sold, transferred, licensed, rented or exchangedare recognized as an asset apart from goodwill.  Goodwill and intangibles with indefinite lives are no longersubject to amortization, but are subject to at least an annual assessment forimpairment by applying a fair value based test.  The Company adopted SFAS 142 as of January 1, 2002 and incompliance with this new regulation has discontinued the amortization ofgoodwill.

 

During the quarter ended June 30, 2002, theCompany completed the initial valuation of the carrying value of goodwillexisting at January 1, 2002.  As aresult, a non-cash charge of $29.9 million, or $(0.96) per share was retroactivelyrecorded as the cumulative effect of an accounting change in the six monthsended June 30, 2002 statement of operations. For the years ended December 31, 2003 and 2002, the Company completedvaluations of the carrying value of the remaining goodwill and it wasdetermined that no impairment had occurred at either date.

 

The reporting units are equal to, or onelevel below, reportable segments.  TheCompany engaged independent valuation consultants to assist with thetransitional goodwill and annual impairment tests.

 

As of December 31, 2003 and 2002, the fairvalue of each of the reporting units was calculated using the followingapproaches (i) market approach and (ii) income approach.  Under the market approach, value is estimatedby comparing the performance fundamentals relating to similar public companies’stock prices.  Multiples are thendeveloped of the value of the publicly traded stock to various measures and arethen applied to each reporting unit to estimate 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 of the reporting unitsreflects an appropriately weighted value of the market multiple approach andthe income approach discussed above.  Anasset approach 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.  When either the income approach or themarket approach was used, each indicated value of the Solutions entity’s equityexceeded the carrying value of the Solutions entity by at least $12 million and$15 million as of December 31, 2003 and 2002, respectively.  Since each of the two approaches yieldedvalues in excess of carrying value, any weighting of the two approaches oreither approach used alone results in the same conclusion, that the goodwillwas not impaired.

 

When the other entities, of the Company, were tested(IT Services and Education), in the second quarter 2002 initial valuation, bothapproaches yielded an indicated value which was below the carrying value of thoseentity’s equity, in such an amount that the entire amount of goodwill waswritten off.  As a result, a loss of$29.9 million was

 

18

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recognized in June 2002 and recorded as a cumulativeeffect of change in accounting principle in the accompanying ConsolidatedStatements of Operations.  There was noincome tax effect on the impairment charge as approximately $19 million of thecharge related to goodwill in foreign tax jurisdictions where the Companybelieves it is more likely than not that future taxable income in thesejurisdictions will not be sufficient to realize the related income tax benefitsassociated with the charge.  Theremaining $11 million of the charge was related primarily to goodwill that wasacquired prior to the ability to deduct goodwill for tax purposes.

 

Valuation of theDeferred Tax Asset

 

The Company recordsdeferred tax assets for the future tax consequences attributable to differencesbetween the financial statement carrying amounts of existing assets and theirrespective tax bases, and to operating loss carryforwards.  Deferred tax assets are reduced by avaluation allowance if, based on available evidence, it is more likely than notthat some portion or all of the deferred tax assets will not be realized.  In assessing the realizability of deferredtax assets, management considers the scheduled reversal periods of the deferredtax assets as well as projected future taxable income and tax planningstrategies.

 

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RESULTSOF OPERATIONS AND FINANCIAL CONDITION

 

## **YearEnded 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 the yearended December 31, 2002, a decrease of $51.9 million or 17.5%.

 

SolutionsGroup revenues, which included revenue from assets held for sale of $2.9million for Princeton in 2002, increased to $92.1 million in the year endedDecember 31, 2003 from $79.3 million in the year ended December 31, 2002, anincrease of $12.8 million or 16.1%.  Theincrease in Solutions Group revenues for the year ended December 31, 2003 is****attributable to the acquisition of RGII inJuly 2003.  Solutions Group revenue was$73.9 million for the year ended December 31, 2003 excluding RGII.  The Solutions Group revenue excludingPrinceton Softech, Inc. in 2002 was $76.4 million.  The $2.5 million decrease in Solutions Group revenue, excludingRGII, was primarily due to declining customer demand in several Solution Grouppractices, primarily web design/integration and education/training.

 

 IT Services revenues decreased to $133.1million in the year ended December 31, 2003 from $201.3 million in the yearended December 31 2002, a decrease of $68.2 million or 33.9%.  The decrease in IT Services revenue of $68.2million, is the result of continued decreases in the demand for temporarytechnology workers, the trend of companies to outsource technology jobsoffshore, the impact of pricing decreases by customers and the laggingeconomy.  For the year ended December31, 2003, IT Services consultant average headcount decreased by****23.9%,****accountingfor approximately $48 million of the revenue decrease.  The balance of the decrease in revenue(approximately $20 million) is attributable to a reduction in average billrates**.**  The reduction in average bill rates was due to the competitivepricing pressures in the domestic staff augmentation market.  The Company does not anticipate growthduring 2004 in IT Services headcount levels unless IT spending increases at theCompany’s clients.

 

Chimesrevenue increased to $20.0 million in the year ended December 31, 2003, from$16.5 million in the year ended December 31, 2002, an increase of $3.5 millionor 21.2%.  This increase was primarilydue to an increase in revenue from new customers of approximately $2.8 millionand an increase of approximately $700,000 in revenue from existing customers inthis segment.

 

*Direct Costs*.  Direct costs decreased to $169.8 million inthe year ended December 31, 2003 from $216.2 million in the year ended December 31, 2002. Consolidated grossmargin, revenue less direct costs, increased to 30.8% for the year endedDecember 31, 2003 from 27.2% in the same period of 2002.  In the Company’s Solutions Group, grossprofit increased to $30.0 million, or 32.6% as a result of the RGIIacquisition.  Without RGII, gross profitfor the year ended December 31, 2003 declined approximately $3.6 million fromthe year ended December 31, 2002.  Thesedeclines were a result of continued softness in the healthcare arena.  Gross margin in the Company’s IT Servicessegment stayed relatively flat at 20.1% for the year ended December 31,2003.  Gross margin in the Company’s Chimessegment increased to 93.0% from 88.3% for the year ended December 31, 2003 and2002, respectively, due to improved margins at existing customers.

 

Excludingthe asset held for sale, Princeton Softech, Inc., in the year ended December31, 2002, direct costs decreased to $169.8 million in the year ended December31, 2003 from $215.7 million for the year ended December 31, 2002.  Gross margin for the year of 2002 excludingPrinceton Softech, Inc. was 26.7%.

 

TheCompany’s consolidated gross margin improvement is primarily attributable tothe change in the revenue mix among the Company’s business segments.  Chimes and the Solutions Group, includingRGII, are higher gross margin businesses than the Company’s IT Servicessegment.  For the year ended December 31,2003, Chimes and Solutions Group revenue totaled 45.7% of consolidated revenue,compared to 32.3% of consolidated revenue for the comparable period in 2002.

 

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*Selling, general and administrative expenses.*  Selling, general and administrative expensesdecreased to $80.6 million in the year ended December 31, 2003 from****$91.3 million for the comparable period of2002.  As a percentage of revenue, theCompany’s SG&A expenses increased to 32.9% in the year ended December 31,2003 from 30.7% in the year ended December 31, 2002.  The expenses in 2003 included a bad debt charge of $3.1 millionrelated to the write-off of a sub-contract with ATEB, a privately held company,which the Company voluntarily terminated for financial reasons.  ATEB was the primary contractor to develop anew pharmacy system for Royal Ahold. The Company is continuing recovery efforts 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 inSG&A expenses was primarily attributable to cost reductions in allsegments, with approximately $544,000 from rent savings (office closures) andthe balance primarily related to staff reduction and personnel costs.

 

*Amortization of Intangibles.*  During the year ended December 31, 2003, theCompany recorded $1.1 million of amortization expense related to the 2003acquisition of intangibles for RGII and Xpress Software.

 

*Restructuring charges / (credits)*.   During the year ended December 31, 2003,the Company recorded restructuring charges of $3.3 million for terminatedleases ($1.4 million), severance ($1.6 million) and general office closureexpense ($330,000) relating primarily to the closing of facilities in Canadaand the United Kingdom.  During the yearended December 31, 2002, the Company recorded a restructuring charge of $2.5million pertaining to 2002 office closings, including a reversal of $192,000 ofthe previously recorded restructure reserves pertaining to lease buyouts and$140,000 pertaining to severance adjustments. In both 2003 and 2002, the office closings were made to eliminate theinfrastructure costs related to having 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.  As a result of these office closings, inboth IT Services and the Solutions business areas, rent expense and the relatedreduction of SG&A headcount (salary and fringe benefits) were eliminatedfrom the current SG&A cost structure.

 

*Special charges*.  Forthe year ended December 31, 2003, the Company incurred special charges of $10.1million consisting of a severance package for the Company’s former CEO andexpenses related to the unilateral acquisition proposal and activities ofAquent LLC.  The separation package ofthe former CEO included a $3.5 million severance payment and $200,000 incontinued medical coverage.  Theremaining $6.4 million of the expense pertained to the unilateral acquisitionproposal and activities of Aquent LLC. This expense is primarily attributable to approximately $3.4 million oflegal fees, $1.8 million in financial advisor fees and $1.2 million of proxysolicitation and other fees.  Asmanagement considers these special items to be infrequent and material innature, the Company has reported the expenses on a separate line for fulldisclosure purposes, however, the amounts are reported within operating income.

 

*Loss from Operations*.   The Company’s loss from operations totaled$19.7 million in the year ended December 31, 2003, an increased loss of $6.8million, from a loss of $12.9 million in the year ended December 31, 2002.  As discussed above this increase in the lossfrom operations in 2003 included special charges of $10.1 million, or 4.1% ofrevenue, 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 customer for financial reasons.  The loss from operations in 2002 includedthe loss from operations of the asset held for sale, Princeton Softech, Inc.,of $1.9 million, or 0.6% of revenue and restructuring charges of $2.5 millionor 0.8% of revenue.  The 2003 lossbefore income tax benefit, excluding the special items noted above and loss onsale of assets, net loss on investments and net interest income totalingexpense of $378,000 totaled $2.2 million and was comprised of a loss of $4.1million in IT Services, profit of $5.9 million in the Solutions Group and aloss of $4.0 million in Chimes.  Thiscompares to the loss before income tax benefit of $10.4 million, excluding thespecial items noted above and gain on sale of assets, net loss on investmentsand net interest income totaling income of $6.6 million in the year endedDecember 31, 2002, consisting of a loss of $2.2 million in IT Services, incomeof $766,000 in the Solutions Group and a loss

 

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of$8.9 million in Chimes.  Loss beforeincome tax benefit, excluding all special items, was a loss of 0.9% for theyear ended December 31, 2003 as compared to a loss of 3.5% in the comparableperiod of 2002.

 

*OtherIncome/(Expense)*.  Other expense was $378,000 in the year ended December 31, 2003, comparedto other income of $6.6 million in the comparable period of 2002.  This difference was primarily due to thegain on the sale of Princeton and Spargo in 2002 totaling approximately $5.9million.

 

*Provision for Income Taxes*.  The effective tax rate for Federal, stateand local income taxes was a tax benefit of 26% for the year ended December 31,2003 compared with a tax expense of 29.5% for the year ended December 31, 2002.  The primary reason for the change in theeffective tax rate was the establishment of a valuation allowance of statedeferred tax assets in 2002.  A reviewof all available positive and negative evidence was conducted by the Company,including the Company’s current and past performance, market environment inwhich the company operates, and the length of carryback and carryforwardperiods.  In January 2003, the Companyreceived a federal income tax refund of $20 million, resulting from the EconomicStimulus Act of 2002 (see Note 7).

 

*Net Loss*.  For the year ended December 31, 2003, thenet loss was $14.9 million, or $0.49 loss per diluted share, compared to a netloss of $38.0 million, or $1.22 loss per diluted share for the year endedDecember 31, 2002.  The effect ofrestructuring charges, loss on sale of assets, loss on sale of investments,amortization expense, the write-off of the terminated project and specialcharges amounted to $0.45 loss per share, net of taxes in 2003.  The net loss in the year ended December 31,2002 includes a charge for the cumulative effect of change in accountingprinciple of $29.9 million, or $0.96 per share and differences in the effectivetax rate primarily relating to the recording of a valuation allowance in theCompany’s state deferred tax assets of approximately $4.0 million, or $0.13 pershare.  The effect of restructuringcharges, operations of assets held for sale, gain on sale of assets, cumulativeeffect of change in accounting principle and the valuation allowance ondeferred tax assets amounted to $1.06 loss per share, net of taxes, in 2002.

 

## **YearEnded December 31, 2002 Compared to Year Ended December 31, 2001 Revenues**

 

*Revenues*.  Consolidated revenues decreased to $297.1million in the year ended December 31, 2002 from $400.8 million in the yearended December 31, 2001, a decrease of $103.7 million, or 25.9%.

 

SolutionsGroup****revenues, which includedrevenue from assets held for sale of $2.9 million for Princeton in 2002, and$29.0 million for Princeton and $11.5 million for eB Networks, (“EBN”) in 2001,decreased to $79.3 million in the year ended December 31, 2002 from $116.9million in the year ended December 31, 2001, a decrease of $37.6 million or32.2 %.  The Solutions Group revenue,excluding the revenue of Princeton in 2002 and Princeton and EBN in 2001remained flat at $76.4 million in the year ended December 31, 2002 and December31, 2001, respectively.

 

ITServices revenues decreased to $201.3 million in the year ended December 31,2002 from $274.4 million in the year ended December 31, 2001, a decrease of$73.1 million or 26.6%.  The decrease inIT Services revenue of $73.1 million is the result of continued decreases inthe demand for temporary technology workers, the trend of companies to outsourcetechnology jobs offshore, the impact of pricing decreases by customers and thelagging economy.  For the year endedDecember 31, 2002, IT Services consultant average headcount decreased by 24%,accounting for approximately $66 million of the revenue decrease.  The balance of the decrease in revenue(approximately $7 million) is attributable to a reduction in average billrates.  The reduction in average billrates was due to the competitive pricing pressures in the domestic staffaugmentation market.

 

Chimesrevenue increased to $16.5 million in the year ended December 31, 2002, from$9.5 million in the year ended December 31, 2001, an increase of $7 million, or73.7%.  This increase was primarily dueto an increase in revenue from existing customers of approximately $2.2 millionand an increase of approximately $4.8 million in revenue from new customers inthis segment.

 

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*Direct Costs*.  Direct costs decreased to $216.2 million inthe year ended December 31, 2002 from $281.6 million in the year ended December31, 2001.  Gross margin decreased to27.2% in the year ended December 31, 2002 from 29.7% in the year ended December31, 2001.

 

Directcosts, excluding $494,000 of direct expense from Princeton in 2002 and $6.3million of direct expense from Princeton and $7.3 million from EBN in 2001,decreased to $215.7 million in the year ended December 31, 2002 from $268.0million in the year ended December 31, 2001. Gross margins excluding these expenses in both years increased to 26.7%in the year ended December 31, 2002 from 25.6% in the year ended December 31,2001.

 

Thisincrease in gross margins was primarily attributable to the increase in highermargin business, primarily Chimes.

 

*Selling, General and Administrative. *Selling,general and administrative expenses decreased to $91.3 million, or 30.7% ofrevenue, in the year ended December 31, 2002 from $128.8 million, or 32.1% ofrevenue, in the year ended December 31, 2001, a decrease of $37.5 million or29.1%.  These expenses included assets held for sale expense of $4.3 millionfor Princeton in 2002 and $28.4 million for Princeton and $5.3 million for EBNin 2001.

 

The decrease in selling, general and administrativeexpenses was primarily attributable to cost reductions in all segments, withapproximately $1.3 million from rent savings and the balance primarily relatedto staff reduction and personnel costs. The decreases were offset by a $3.5 million increase in Chimes as theCompany continues to invest in this subsidiary.  Chimes average headcount increased 21% from approximately 168 atDecember 31, 2001 to 204 at December 31, 2002 primarily from the hiring ofadditional program office personnel used in the implementation and delivery ofChimes services.

 

*Restructuring Charges /(Credits*).  During the year ended December 31, 2002,the Company recorded a restructuring charge of $2.5 million pertaining to 2002office closings, including a reversal of $192,000 of the previously recordedrestructure reserves pertaining to lease buyouts and $140,000 pertaining toseverance adjustments.  These officeclosings were made to eliminate the infrastructure costs related to havingoffices in certain areas.  The Companydid not eliminate marketing efforts or business in these areas, but ratherturned these areas into virtual marketplaces whereby sales personnel work fromtheir homes.  As a result of theseoffice closings, in both IT Services and the Solutions business areas, rentexpense and the related reduction of SG&A headcount (salary and fringebenefits) were eliminated from the current SG&A cost structure.

 

During the year endedDecember 31, 2001, the Companyrecorded a restructuring charge adjustment of $1.0 million primarily due to thetermination, by the sublessee, of the sublease contracts for closed officesincluded in the 1999 restructure charge. Since the sublessee defaulted on the rent payments, it was necessary torestore the Company’s liability for the remaining lease obligations.

 

*Write-down of Assets Held forSale*.  In the second quarter of 2001, the Company recorded $5.5 millionexpense for the write-down of assets held for sale to further reduce thecarrying amount of EBN to the estimated net realizable value.

 

*Income / (Loss) fromOperations*. The Company’s loss from operations excluding restructuring charges,write-down of assets held for sale and amortization expense in 2001, totaled$10.4 million for the year ended December 31, 2002, a decline of $0.8 millionor 8.3%, from a loss of $9.6 million in the year ended December 31, 2001.  The composition of the operating loss of$10.4 million included a loss of $2.2 million in IT Services, profit of$766,000 in the Solutions Group and a loss of $8.9 million in Chimes.  This compares to the operating loss of $9.6million in the year ended December 31, 2001, consisting of profit of $7.7million in IT Services, loss

 

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of$7.2 million in the Solutions Group and loss of $10.1 million in Chimes.** **Operatingmargins, excluding restructuring charges, write-down of assets held for saleand amortization expense in 2001, were a loss of 3.5% in the year endedDecember 31, 2002 as compared to a loss of 2.4% in the year ended December 31,2001.

 

TheCompany’s loss from operations, excluding the losses from the assets held forsale of $1.9 million loss in Princeton in 2002 and $5.7 million loss forPrinceton and $1.1 million loss for EBNin 2001, restructuring charges, amortization expense and the write-downof assets held for sale, totaled $8.5 million in the year ended December 31,2002, a decline of $5.6 million or 193.1%, from a loss of $2.9 million in theyear ended December 31, 2001.  Thecomposition of the operating loss of $8.5 million included a loss of $2.4million in IT Services, profit of $2.8 million in the Solutions Group and aloss of $8.9 million in Chimes.  Thiscompares to the operating loss of $2.9 million in the year ended December 31,2001, consisting of profit of $5.7 million in IT Services, profit of $1.5 millionin the Solutions Group and loss of $10.1 million in Chimes.  Operating margins, excluding restructuringcharges, write-down of assets held for sale and amortization expense in 2001,were a loss of 2.9% in the year ended December 31, 2002 as compared to a lossof 0.8% in the year ended December 31, 2001.

 

*Other Income/(Expense)*.  For the year ended December 31, 2002, otherincome increased to $6.6 million from other expense of $2.8 million in the yearended December 31, 2001.  This increasein other income was primarily attributable to a $3.2 million gain on the saleof Princeton and a $2.7 million gain on the sale of Spargo which resulted froma favorable purchase price adjustment after the final resolution of outstandingaccounts receivables and the termination of leases.  In 2001, a $4.0 million loss was recorded on the sale of EBN offset in part by a $332,000 gainon the sale of ICM Education and the original $438,000 gain recorded for thesale of Spargo in 2001.

 

*Provision for Income Taxes*.  The effective tax rate for Federal, state,and local income taxes was 29.5% for the year ended December 31, 2002, and atax benefit rate of 33.1% in the year ended December 31, 2001.  The primary reason for the change in theeffective tax rate in 2002 was the establishment of a valuation allowance of statedeferred tax assets.  A review of allavailable positive and negative evidence was conducted by the Company,including the Company’s current and past performance, the market environment inwhich the company operates, and the length of carry back and carry forwardperiods.  In January 2003, the Companyreceived a federal income tax refund of $20 million, resulting from theEconomic Stimulus Act of 2002 (see Note 7).

 

*Net Loss*.  The Company recorded a net loss of $38.0million in the year ended December 31, 2002, a decline of $23.5 million or162.1% from net loss of $14.5 million in the year ended December 31, 2001.  Net loss per share (diluted) totaled $1.22in the year ended December 31, 2002 from net loss per share (diluted) of $0.45in the year ended December 31, 2001. The net loss in 2002 includes the cumulative effect of change inaccounting principle of $29.9 million, or $0.96 per share and differences inthe effective tax rate primarily relating to the recording of a valuationallowance in the Company’s state deferred tax assets of approximately $4.0million, or $0.13 per share.  The effectof restructuring charges, operations of assets held for sale, gain on sale ofassets, cumulative effect of change in accounting principle and the valuationallowance on deferred tax assets amounted to $1.06 loss per share, net oftaxes, in 2002.  The effect ofrestructuring charges, loss on sale of assets, amortization expense and theoperations of the assets held for sale amounted to $0.40 loss per share, net oftaxes, in 2001.

 

#### ***Liquidity and Capital Resources***

 

Computer Horizons has historically financed its operations primarilythrough cash generated from operations, borrowings against bank lines of creditand the public sale of its common stock. At December 31, 2003, the Company had $66 million in working capital, ofwhich $52.6 million was cash and cash equivalents.  The Company’s working capital ratio at December 31, 2003 was 2.5to 1.  The Company has remained debtfree throughout 2003.   In January 2003,the Company received a federal income tax refund of $20 million, resulting fromthe Economic Stimulus Act of 2002.  Thisrefund pertains to deductions carried back to prior years and

 

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since the tax structure of thetransaction giving rise to the deduction is subject to determination by the taxauthorities, the Company has recorded a reserve for the tax benefit until IRSaudits for the applicable years are completed.

 

Net cash provided by operatingactivities for the years ended December 31, 2003, December 31, 2002 andDecember 31, 2001 totaled $18.7 million, $20.7 million, and $31.9 millionrespectively.  In 2003, this wasprimarily due to the federal income tax refund received and a reduction inaccounts receivable partially offset by the Company’s net loss.  In 2002, this was primarily attributable toa reduction in accounts receivable**. **In 2001**,** this was primarily attributable to income tax refunds, othernon-cash charges and a reduction in accounts receivable.

 

Net cash used by investingactivities was $23.5 million for the year ended December 31, 2003.  This was primarily attributable to thepurchase of RGII.  Net cash provided byinvesting activities was $13.0 million and $6.1 million for the years endedDecember 31, 2002 and 2001, respectively. In both years this was primarily attributable to cash received from thesale of assets.

 

For the years ended December 31, 2003, 2002 and 2001, respectively, netcash used in financing activities was $2.5 million, $14.6 million and $12.6million, resulting in 2003 from the pay off of the notes payable of $2.6million related to the acquisition of RGII and $1.2 million used in therepurchase of the Company’s common stock. The $14.6 million used in 2002 resulted from a $10.0 million reductionof debt and a $6.1 million use in the repurchase of the Company’s commonstock.  The $12.6 million used in 2001resulted from a $10.7 million reduction of debt and a $3.4 million use for therepurchase of the Company’s common stock.

 

On July 31, 2001, amended February 14, 2003, the Company entered into asecured asset-based lending facility that replaced its two unsecureddiscretionary lines of credit.  Thisasset-based lending facility is a three-year, $40 million facility withavailability based primarily on eligible customer receivables.  The interest rate for the first ninety daysfrom closing was Prime plus 0.5%, thereafter the rate was LIBOR plus 2.75%based on the unpaid principal.  Theborrowing base less outstanding loans must equal or exceed $17.5 million.  At the time of closing there was a $170,000commitment fee paid to the agent.  As ofDecember 31, 2003, the Company had no outstanding loan balance against thefacility.  Borrowings under thisfacility are collateralized by certain assets of the Company.  Based on the Company’s eligible customerreceivables and cash balances, $16.0 million and $24.7 million was availablefor borrowing as of December 31, 2003 and December 31, 2002, respectively.  The fee for the unused portion of the lineof credit is 0.375% per annum charged to the Company monthly.  This charge was approximately $109,000 and$143,000 for the year ended December 31, 2003 and 2002.  This line of credit includes covenantsrelating to the maintenance of cash balances and providing for limitations onincurring obligations and spending limits on capital expenditures.  One covenant pertains to minimum cashcollections over a three-month period. The Company did not satisfy this covenant for the period December 2003through February 2004.  A waiver wasreceived from the lending institution for the three month period endingFebruary 29, 2004. This facility is scheduled to expire in July 2004 and theCompany intends to enter into a new asset-based lending facility prior toexpiration.

 

As a result of the Company’s acquisition of RGII, the seller of RGIImay be entitled to contingent payments based on RGII’s performance againstprofitability objectives over the next three years.  The contingent payments are evidenced by a contingent note with aface value of $10 million that is payable over three years, only if certainfinancial performance objectives are met. 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 maximumpayment obligations under the terms of the contingent note. The contingentpayment will be reduced on a dollar for dollar basis for financial performancebelow EBIT targets and increased by 29 cents ($0.29) for each dollar exceedingEBIT targets.  The payments, if theapplicable EBIT targets are met, will be due as follows:  2003 payment of $1.7 million, 2004 paymentof $3.3 million, 2005 payment of $3.3 million, and 2006 payment of $1.7million.  These payments will be reducedor increased based on actual EBIT performance.

 

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On February 24, 2004 a paymentwas made for the first six-month installment of approximately $631,000, pertainingto this contingent note.

 

The Company believes that itscash and cash equivalents, asset-based lending facility, internally generatedfunds and tax refunds (received in 2003) will be sufficient to meet its workingcapital needs through 2004.

 

The Company’s billed accountsreceivable were $44.5 million and $49.4 million at December 31, 2003 andDecember 31, 2002, respectively. Including both billed and unbilled receivables, days sales outstandingwere 70 days at December 31, 2003 and 76 days at December 31, 2002, based onquarterly sales.

 

**ContractualObligations and Commercial Commitments**

 

The Company does not utilizeoff balance sheet financing other than operating lease arrangements for officepremises and related equipment. Leases are short term in nature andnon-capital. The following table summarizes all commitments under contractualobligations as of December 31, 2003:

 
|                         |   | **Total  Amount** |   | **1 year** |   | **2-3 years** |   | **4-5 years** |   | **Over 5  years** |   |
|------------------------------|--------|-------------------|--------|------------|--------|---------------|--------|---------------|--------|-------------------|--------|
|                         |   | **in  thousands** |   |
|                         |   |              |   |       |   |          |   |          |   |              |   |
| Operating Leases             |   | $                 | 14,093 |       | $      | 6,409         |   | $             | 6,533  |              | $      | 1,151 |   | $ | — |   |
| RGII Contingent Note*        |   | 10,000            |   | 631        |   | 9,369         |   | —        |   | —            |   |
| Deferred Compensation        |   | 2,103             |   | —     |   | —        |   | —        |   | 2,103             |   |
| Supplemental Retirement Plan |   | 11,318            |   | —     |   | —        |   | —        |   | 11,318            |   |
| Other long term              |   | 765               |   | 765        |   | —        |   | —        |   | —            |   |
|                         |   |              |   |       |   |          |   |          |   |              |   |
| Total Cash Obligations       |   | $                 | 38,279 |       | $      | 7,805         |   | $             | 15,902 |              | $      | 1,151 |   | $ | 13,421 |   |

* *

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**  Obligation if applicable EBIT targets aremet.*

*** ***

***Foreign Currency Exposure***

 

The Company’s internationaloperations expose it to translation risk when the local currency financialstatements are translated to U.S. dollars. As currency exchange rates fluctuate, translation of the financialstatements of international businesses into U.S. dollars will affect thecomparability of revenues and expenses between years.  None of the components of the Company’s consolidated statementsof income was materially affected by exchange rate fluctuations in 2003, 2002or 2001.  At December 31, 2003 theCompany had $1,945,000 in cash maintained in overseas financial institutions.

 

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***Recent Accounting Pronouncements***

* *

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.”  This Issue provides guidance on when and howto separate elements of an arrangement that may involve the delivery orperformance of multiple products, services and rights to use assets intoseparate units of accounting.  Theguidance in the consensus is effective for revenue arrangements entered into infiscal periods beginning after June 15, 2003. The transition provision allows either prospective application or acumulative effect adjustment upon adoption. The effect of the adoption of this statement was immaterial to theCompany.

 

InMay 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.”  It establishes classification andmeasurement standards for three types of freestanding financial instrumentsthat have characteristics of both liabilities and equity.  Instruments within the scope of SFAS 150must be classified as liabilities within the Company’s financialstatements.  The provisions of SFAS No.150 are effective for (1) instruments entered into or modified after May 31,2003 and (2) pre-existing instruments as of the first interim period after June15, 2003.  SFAS 150 did not have amaterial effect on the Company’s financial statements.

 

InJanuary 2003, the FASB issued Financial Interpretation No. 46, “Consolidationof Variable Interest Entities” (“FIN 46”), which addresses consolidation bybusiness enterprises of variable interest entities (“VIEs”).  The accounting provisions and disclosurerequirements of FIN 46 are effective immediately for VIEs created after January31, 2003, and are effective for the Company’s fiscal 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 guidance of FIN 46R, publiccompanies that have interests in VIE’s that are commonly referred to as specialpurpose entities are required to apply the provisions of FIN 46R for periodsending after December 15, 2003.  Apublic company that does not have any interests in special purpose entities butdoes have a variable interest in a VIE created before February 1, 2003, mustapply the provisions of FIN 46R by the end of the first interim or annualreporting period ending after March 14, 2004. Although the Company is still evaluating the impact of FIN 46R, it isnot expected to have a material effect on the Company’s financial statements.

 

Item 7A. Quantitativeand Qualitative Disclosures about Market Risk

 

***Market Risk Exposure***

 

The Company has financialinstruments that are subject to interest rate risk.  Historically, the Company has not experienced material gains orlosses due to interest rate changes. Based on the current holdings, the exposure to interest rate risk is notmaterial.  Additionally, at December 31,2003 the Company was debt free.

 

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Item8.  Financial Statements andSupplementary 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, 2003 and 2002, and the related consolidatedstatements of operations, shareholders’ equity and cash flows for each of thethree years in the period ended December 31, 2003.  These financial statements are the responsibility of the Company’smanagement.  Our responsibility is to expressan opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards of thePublic Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofComputer Horizons Corp. and Subsidiaries as of December 31, 2003 and 2002 andthe consolidated results of their operations and their consolidated cash flowsfor each of the three years in the period ended December 31, 2003, inconformity with accounting principles generally accepted in the United Statesof America.

 

 
| /s/ Grant Thornton LLP                                                                                 |   |
|--------------------------------------------------------------------------------------------------------|--------|
| GRANT THORNTON LLP                                                                                     |
|                                                                                                   |
|                                                                                                   |
| Edison, New Jersey                                                                                     |
| February 17, 2004 (except for the second paragraph of Note 4, as to  which the date is March 9, 2004). |

 

28

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Computer Horizons Corp. and Subsidiaries

 

CONSOLIDATED BALANCE SHEETS

 
|                               |   | **December  31,**                          |        |
|------------------------------------|--------|--------------------------------------------|-------------|
|                               |   | **2003**                                   |        | **2002** |   |
|                               |   | **(in thousands, except per share data )** |        |
| ASSETS                             |   |                                       |        |
|                               |   |                                       |        |
| *Current assets:*                  |   |                                       |        |   |   |
| Cash and cash equivalents (Note 1) |   | **$**                                      | **52,610**  | ** ** | $ | 59,769 |   |
| Accounts receivable (Note 2)       |   | **48,295**                                 | ** **  | 56,616 |   |
| Deferred income taxes (Note 7)     |   | **4,514**                                  | ** **  | 4,557 |   |
| Refundable income taxes (Note 7)   |   | **—**                                 | ** **  | 19,051 |   |
| Other                              |   | **4,759**                                  | ** **  | 7,219 |   |
|                               |   |                                       | ** **  |   |   |
| Total current assets               |   | **110,178**                                | ** **  | 147,212 |   |
|                               |   |                                       | ** **  |   |   |
| *Property and equipment:*          |   |                                       | ** **  |   |   |
| Furniture, equipment and other     |   | **42,252**                                 | ** **  | 37,664 |   |
| Less accumulated depreciation      |   | **32,929**                                 | ** **  | 26,647 |   |
|                               |   |                                       | ** **  |   |   |
|                               |   | **9,323**                                  |        | 11,017 |   |
|                               |   |                                       | ** **  |   |   |
| *Other assets – net:*         |   |                                       | ** **  |   |   |
| Goodwill (Note 1)                  |   | **34,218**                                 | ** **  | 19,203 |   |
| Intangibles (Note 1)               |   | **2,408**                                  | ** **  | — |   |
| Deferred income taxes (Note 7)     |   | **13,624**                                 | ** **  | 8,020 |   |
| Other                              |   | **9,386**                                  | ** **  | 8,279 |   |
|                               |   |                                       | ** **  |   |   |
|                               |   | **59,636**                                 |        | 35,502 |   |
|                               |   |                                       | ** **  |   |   |
| Total Assets                       |   | **$**                                      | **179,137** | ** ** | $ | 193,731 |   |

 

*The accompanyingnotes are an integral part of these statements.*

 

29

----

 
|                                                                                                                           |   | **December  31,**                          |        |
|--------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|-------------|
|                                                                                                                           |   | **2003**                                   |        | **2002** |   |
|                                                                                                                           |   | **(in thousands, except per share data )** |        |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                      |   |                                       |        |   |   |
|                                                                                                                           |   |                                       |        |   |   |
| *Current liabilities*:                                                                                                         |   |                                       | ** **  |   |   |
| Accrued payroll, payroll taxes and benefits                                                                                    |   | **$**                                      | **4,436**   | ** ** | $ | 4,529 |   |
| Accounts payable                                                                                                               |   | **8,287**                                  | ** **  | 10,830 |   |
| Restructuring reserve (Note 13)                                                                                                |   | **2,620**                                  | ** **  | 3,266 |   |
| Income taxes payable                                                                                                           |   | **1,243**                                  | ** **  | — |   |
| Tax benefit reserve (Note 7)                                                                                                   |   | **19,600**                                 | ** **  | 19,600 |   |
| Other accrued expenses                                                                                                         |   | **7,572**                                  | ** **  | 3,408 |   |
|                                                                                                                           |   |                                       | ** **  |   |   |
| Total current liabilities                                                                                                      |   | **43,758**                                 | ** **  | 41,633 |   |
|                                                                                                                           |   |                                       | ** **  |   |   |
| Other liabilities                                                                                                              |   | **4,635**                                  | ** **  | 6,243 |   |
|                                                                                                                           |   |                                       | ** **  |   |   |
| Commitments and Contingencies (Notes 4, 7,  11 and 20)                                                                         |   |                                       |        |   |   |
|                                                                                                                           |   |                                       |        |   |   |
| *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 33,153,107 shares at December 31, 2003 and 2002,  respectively |   | **3,315**                                  | ** **  | 3,315 |   |
| Additional paid-in capital                                                                                                     |   | **133,046**                                | ** **  | 133,518 |   |
| Accumulated other comprehensive loss                                                                                           |   | **(4,589**                                 | **)**       | (4,306 | ) |
| Retained earnings                                                                                                              |   | **13,307**                                 | ** **  | 28,255 |   |
|                                                                                                                           |   |                                       | ** **  |   |   |
|                                                                                                                           |   | **145,079**                                |        | 160,782 |   |
| Less shares held in treasury, at cost;  2,537,692 shares and 2,660,667 shares at December 31, 2003 and 2002,  respectively     |   | **(14,335**                                | **)**       | (14,927 | ) |
|                                                                                                                           |   |                                       | ** **  |   |   |
| Total shareholders’ equity                                                                                                |   | **130,744**                                | ** **  | 145,855 |   |
|                                                                                                                           |   |                                       | ** **  |   |   |
| Total Liabilities and Shareholders’ Equity                                                                                |   | **$**                                      | **179,137** | ** ** | $ | 193,731 |   |

 

30

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Computer Horizons Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

 
|                                                                                                      |   | **Year ended  December 31,**               |              |
|-----------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|-------------------|
|                                                                                                      |   | **2003**                                   |              | **2002** |   | **2001** |   |
|                                                                                                      |   | **(in  thousands, except per share data)** |              |
|                                                                                                      |   |                                       |              |   |   |   |   |
| Revenues                                                                                                  |   | **$**                                      | ** 245,210** | ** ** | $ |  297,115 |   | $ |  400,784 |   |
|                                                                                                      |   |                                       | ** **        |   |   |   |   |
| *Costs and expenses:*                                                                                     |   |                                       | ** **        |   |   |   |   |
| Direct costs                                                                                              |   | **169,802**                                | ** **        | 216,181 |   | 281,576 |   |
| Selling, general and administrative                                                                       |   | **80,634**                                 | ** **        | 91,343 |   | 128,832 |   |
| Amortization of intangibles                                                                               |   | **1,084**                                  | ** **        | — |   | 2,695 |   |
| Restructuring charges (Note 13)                                                                           |   | **3,278**                                  | ** **        | 2,515 |   | 1,048 |   |
| Special charges (Note 18)                                                                                 |   | **10,113**                                 | ** **        | — |   | — |   |
| Write-down of assets held for sale                                                                        |   | **—**                                 | ** **        | — |   | 5,473 |   |
|                                                                                                      |   |                                       | ** **        |   |   |   |   |
|                                                                                                      |   | **264,911**                                |              | 310,039 |   | 419,624 |   |
|                                                                                                      |   |                                       | ** **        |   |   |   |   |
| Loss from operations                                                                                      |   | **(19,701**                                | **)**             | (12,924 | ) | (18,840 | ) |
|                                                                                                      |   |                                       | ** **        |   |   |   |   |
| *Other income /(expense):*                                                                                |   |                                       | ** **        |   |   |   |   |
| Gain / (loss) on sale of assets (Note 17)                                                                 |   | **(424**                                   | **)**             | 5,890 |   | (3,197 | ) |
| Net gain /(loss) on investments                                                                           |   | **(432**                                   | **)**             | (61 | ) | 90 |   |
| Interest income                                                                                           |   | **529**                                    | ** **        | 928 |   | 2,293 |   |
| Interest expense                                                                                          |   | **(51**                                    | **)**             | (174 | ) | (1,944 | ) |
|                                                                                                      |   |                                       | ** **        |   |   |   |   |
|                                                                                                      |   | **(378**                                   | **)**             | 6,583 | ** ** | (2,758 | ) |
|                                                                                                      |   |                                       | ** **        |   |   |   |   |
| Loss before income taxes and cumulative  effect of a change in accounting principle and minority interest |   | **(20,079**                                | **)**             | (6,341 | ) | (21,598 | ) |
|                                                                                                      |   |                                       | ** **        |   |   |   |   |
| *Income taxes / (benefit) (Notes 1 and 7):*                                                               |   |                                       | ** **        |   |   |   |   |
| Current                                                                                                   |   | **341**                                    | ** **        | (4,292 | ) | (10,292 | ) |
| Deferred                                                                                                  |   | **(5,561**                                 | **)**             | 6,161 |   | 3,144 |   |
|                                                                                                      |   |                                       | ** **        |   |   |   |   |
|                                                                                                      |   | **(5,220**                                 | **)**             | 1,869 | ** ** | (7,148 | ) |
|                                                                                                      |   |                                       | ** **        |   |   |   |   |
| Loss before cumulative effect of change in  accounting principle and minority interest                    |   | **(14,859**                                | **)**             | (8,210 | ) | (14,450 | ) |
|                                                                                                      |   |                                       | ** **        |   |   |   |   |
| Cumulative effect of change in accounting  principle (Note 1)                                             |   | **—**                                 | ** **        | (29,861 | ) | — |   |
| Minority interest                                                                                         |   | **(89**                                    | **)**             | 35 |   | — |   |
|                                                                                                      |   |                                       | ** **        |   |   |   |   |
| Net Loss                                                                                                  |   | **$**                                      | **(14,948**       | **)** | $ | (38,036 | ) | $ | (14,450 | ) |
|                                                                                                      |   |                                       | ** **        |   |   |   |   |
| Loss per share – Basic and Diluted (Notes 1  and 8):                                                 |   |                                       | ** **        |   |   |   |   |
| Before cumulative effect of change in  accounting principle                                               |   | **$**                                      | **(0.49**         | **)** | $ | (0.26 | ) | $ | (0.45 | ) |
| Cumulative effect of change in accounting  principle                                                      |   | **$**                                      | —            | ** ** | $ | (0.96 | ) | $ | — |   |
| Net Loss                                                                                                  |   | **$**                                      | **(0.49**         | **)** | $ | (1.22 | ) | $ | (0.45 | ) |
|                                                                                                      |   |                                       | ** **        |   |   |   |   |
| Weighted average number of shares  outstanding:                                                           |   |                                       | ** **        |   |   |   |   |
| Basic and Diluted                                                                                         |   | **30,455,000**                             | ** **        | 31,243,000 |   | 31,911,000 |   |

 

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

 

31

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CONSOLIDATED STATEMENT OF SHAREHOLDERS’EQUITY

 

Years ended December 31, 2003, 2002 and 2001

 
|                                            |                |                       |       |   |       | **Additional  Paid-in Capital** |       | **Accumulated  other  Comprehensive  Income/(Loss)** |       | **Retained  Earnings** |       |         |       |       |       | **Total**     |       |
|-------------------------------------------------|---------------------|----------------------------|------------|--------|------------|---------------------------------|------------|------------------------------------------------------|------------|------------------------|------------|--------------|------------|------------|------------|---------------|------------|
| **Common  Stock**                               | **Treasury  Stock** |
| **Shares**                                      |                | **Amount**                 | **Shares** |   | **Amount** |
|                                            |                | **(dollars in thousands)** |       |
| *Balance, December 31,  2000*                   |                | 33,152,206                 |       | $      | 3,315      |                            | $          | 139,418                                              |       | $                      | (980       | )            | $          | 80,741     |       | 1,344,615     |       | $ | (14,570 | ) | $ | 207,924 |   |
|                                            |                |                       |       |   |       |                            |       |                                                 |       |                   |       |         |       |       |       |          |       |
| Net loss for the year                           |                |                       |       |   |       |                            |       |                                                 |       | (14,450                | )          |         |       |       |       | (14,450       | )          |
| Other comprehensive loss:                       |                |                       |       |   |       |                            |       |                                                 |       |                   |       |         |       |       |       |          |       |
| Foreign currency translation adjustments        |                |                       |       |   |       |                            |       | (1,952                                               | )          |                   |       |         |       |       |       | (1,952        | )          |
|                                            |                |                       |       |   |       |                            |       |                                                 |       |                   |       |         |       |       |       |          |       |
| Total comprehensive loss                        |                |                       |       |   |       |                            |       |                                                 |       |                   |       |         |       |       |       | (16,402       | )          |
|                                            |                |                       |       |   |       |                            |       |                                                 |       |                   |       |         |       |       |       |          |       |
| Stock options exercised                         |                |                       |       |   |       |                            |       |                                                 |       |                   |       | (15,000      | )          | 30         |       | 30            |       |
| Other issuances of common stock                 |                | 901                        |       |   |       |                            |       |                                                 |       |                   |       |         |       |       |       |          |       |
| Issuance of common stock for purchase of assets |                |                       |       |   |       | (360                            | )          |                                                 |       |                   |       | (77,144      | )          | 633        |       | 273           |       |
| Employee stock purchase program                 |                |                       |       |   |       | (3,828                          | )          |                                                 |       |                   |       | (643,280     | )          | 5,273      |       | 1,445         |       |
| Purchase of treasury shares                     |                |                       |       |   |       |                            |       |                                                 |       |                   |       | 1,111,000    |       | (3,415     | )          | (3,415        | )          |
|                                            |                |                       |       |   |       |                            |       |                                                 |       |                   |       |         |       |       |       |          |       |
| *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**                       |                |                       |       |   |       |                            | ** ** |                                                 | ** ** | **(14,948**            | **)**      |         | ** ** |       | ** ** | **(14,948**   | **)**      |
| **Other comprehensive loss:**                   |                |                       | ** ** |   | ** ** |                            | ** ** |                                                 | ** ** |                   | ** ** |         | ** ** |       | ** ** |          | ** ** |
| **Current year unrealized loss on investments** |                |                       |       |   |       |                            | ** ** | **(489**                                             | **)**      |                   | ** ** |         | ** ** |       | ** ** | **(489**      | **)**      |
| **Foreign currency translation adjustments**    |                |                       | ** ** |   | ** ** |                            | ** ** | **206**                                              | ** ** |                   | ** ** |         | ** ** |       | ** ** | **206**       | ** ** |
| **Total comprehensive loss**                    |                |                       |       |   | ** ** |                            | ** ** |                                                 | ** ** |                   | ** ** |         | ** ** |       | ** ** | **(15,231**   | **)**      |
|                                            |                |                       | ** ** |   | ** ** |                            | ** ** |                                                 | ** ** |                   | ** ** |         | ** ** |       | ** ** |          | ** ** |
| **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**                                          | ** ** | **$**                  | **(4,589** | **)**        | **$**      | **13,307** | ** ** | **2,537,692** | ** ** | **$** | **(14,335** | **)** | **$** | **130,744** | ** ** |
|                                                 |                     |                            |            |        |            |                                 |            |                                                      |            |                        |            |              |            |            |            |               |            |  |  |  |  |  |  |  |  |  |  |

 

*The accompanying notes are an integral partof this statement.*

 

32

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Computer Horizons Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
|                                                                                       |   | **Year ended  December 31,** |             |
|--------------------------------------------------------------------------------------------|--------|------------------------------|------------------|
|                                                                                       |   | **2003**                     |             | **2002** |   | **2001** |   |
|                                                                                       |   | **(in  thousands)**          |             |
| ***Cash flows from  operating activities***                                                |   |                         |             |   |   |   |   |
| Net loss                                                                                   |   | **$**                        | **(14,948**      | ) | $ | (38,036 | ) | $ | (14,450 | ) |
| Adjustments to reconcile net loss to net  cash provided by/(used in) operating activities: |   |                         |             |   |   |   |   |
| Deferred taxes                                                                             |   | **(5,561**                   | **)**            | 6,161 |   | 3,144 |   |
| Depreciation                                                                               |   | **5,336**                    |             | 4,634 |   | 5,301 |   |
| Amortization of intangibles                                                                |   | **1,084**                    |             | — |   | 2,695 |   |
| Provision for bad debts                                                                    |   | **4,644**                    |             | 4,996 |   | 3,397 |   |
| Write-down of assets held for sale                                                         |   | **—**                   |             | — |   | 5,473 |   |
| Loss / (gain) on sale of assets                                                            |   | **424**                      |             | (5,890 | ) | 3,197 |   |
| Loss on investments                                                                        |   | **432**                      |             | — |   | — |   |
| Write off of goodwill                                                                      |   | **—**                   |             | 29,861 |   | — |   |
| Changes in assets and liabilities, net of  acquisitions:                                   |   |                         |             |   |   |   |   |
| Accounts receivable                                                                        |   | **14,635**                   |             | 21,952 |   | 11,060 |   |
| Other current assets                                                                       |   | **2,388**                    |             | (1,981 | ) | (2,240 | ) |
| Assets held for sale                                                                       |   | **—**                   |             | 397 |   | 5,401 |   |
| Other assets                                                                               |   | **(3,612**                   | **)**            | 1,298 |   | (474 | ) |
| Refundable income taxes/benefit reserve                                                    |   | **19,051**                   |             | 8,541 |   | 13,333 |   |
| Accrued payroll, payroll taxes and benefits                                                |   | **(93**                      | **)**            | (4,648 | ) | (2,023 | ) |
| Accounts payable                                                                           |   | **(4,026**                   | **)**            | (4,366 | ) | (2,749 | ) |
| Income taxes payable                                                                       |   | **1,033**                    |             | — |   | — |   |
| Other accrued expenses                                                                     |   | **86**                       |             | (1,432 | ) | (560 | ) |
| Other liabilities                                                                          |   | **(2,200**                   | **)**            | (837 | ) | 1,426 |   |
| **Net cash provided by operating activities**                                              |   | **18,673**                   |             | 20,650 |   | 31,931 |   |
| ***Cash flows from  investing activities***                                                |   |                         |             |   |   |   |   |
| Purchases of furniture and equipment                                                       |   | **(2,387**                   | **)**            | (3,178 | ) | (3,732 | ) |
| Proceeds on sale of investments                                                            |   | **2,517**                    |             | — |   | — |   |
| Acquisitions, net of cash received                                                         |   | **(22,178**                  | **)**            | — |   | — |   |
| Proceeds received from the sale of assets                                                  |   | **149**                      |             | 16,467 |   | 10,027 |   |
| Acquisitions of intangibles                                                                |   | **(566**                     | **)**            | — |   | — |   |
| Acquisitions of goodwill                                                                   |   | **(1,057**                   | **)**            | (339 | ) | (156 | ) |
| **Net cash provided by/(used in) investing  activities**                                   |   | **(23,522**                  | **)**            | 12,950 |   | 6,139 |   |
| ***Cash flows from  financing activities***                                                |   |                         |             |   |   |   |   |
| Notes payable - banks, net                                                                 |   | —                       |             | (10,000 | ) | (10,704 | ) |
| Payment of notes payable                                                                   |   | **(2,636**                   | **)**            | — |   | — |   |
| Stock options exercised                                                                    |   | **959**                      |             | 449 |   | 30 |   |
| Purchase of treasury shares                                                                |   | **(1,230**                   | **)**            | (6,141 | ) | (3,415 | ) |
| Stock issued on employee stock purchase  plan                                              |   | **391**                      |             | 1,102 |   | 1,445 |   |
| **Net cash used in financing activities**                                                  |   | **(2,516**                   | **)**            | (14,590 | ) | (12,644 | ) |
| Effect of foreign currency gains/ (losses)                                                 |   | **206**                      |             | (274 | ) | (1,952 | ) |
| **Net increase/ (decrease) in cash and cash  equivalents**                                 |   | **(7,159**                   | **)**            | 18,736 |   | 23,474 |   |
| **Cash and cash equivalents at beginning of  year**                                        |   | **59,769**                   |             | 41,033 |   | 17,559 |   |
| **Cash and cash equivalents at end of year**                                               |   | **$**                        | ** 52,610** |   | $ |  59,769 |   | $ |  41,033 |   |
|                                                                                       |   |                         |             |   |   |   |   |
| Supplemental disclosures of cash flow information:                                         |   |                         |             |   |   |   |   |
| Cash paid/(received) during the year for:                                                  |   |                         |             |   |   |   |   |
| Interest                                                                                   |   | **$**                        | **(427**         | **)** | $ | (461 | ) | $ | (106 | ) |
| Income taxes                                                                               |   | **(20,339**                  | **)**            | (10,967 | ) | (24,097 | ) |
|                                                                                       |   |                         |             |   |   |   |   |
| Details of acquisition:                                                                    |   |                         |             |   |   |   |   |
| Tangible assets acquired (including cash of  $347)                                         |   | **$**                        | **13,083**       |   | $ | — |   | $ | — |   |
| Liabilities assumed                                                                        |   | **(7,442**                   | **)**            | — |   | — |   |
| Goodwill                                                                                   |   | **13,958**                   |             | — |   | — |   |
| Intangibles                                                                                |   | **2,926**                    |             | — |   | — |   |
| Cash paid                                                                                  |   | **22,525**                   |             | — |   | — |   |
| Less: cash received in acquisition                                                         |   | **(347**                     | **)**            | — |   | — |   |
| Net cash paid*                                                                             |   | **$**                        | **22,178**       |   | $ | — |   | $ | — |   |
|                                                                                       |   |                         |             |   |   |   |   |
| Book value of assets held for sale, net of cash                                            |   |                         |             |   |   | $ | 22,116 |   |
| Liabilities                                                                                |   |                         |             |   |   | 11,735 |   |
|                                                                                       |   |                         |             |   |   |   |   |
| Net assets held for sale before write-down, net of cash                                    |   |                         |             |   |   | $ | 10,381 |   |

 

----

*  Includesa $1.5 million note payment

 

 

***NonCash Activities:***

 

During 2002, the Company recorded arefundable income tax and tax benefit reserve of $19.6 million.

 

 

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

 

33

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Computer Horizons Corp. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2003, 2002 and 2001

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

*Description ofBusiness*

 

Computer Horizons Corp. is a strategic e-Business solutions andprofessional services company which does business principally in the UnitedStates.  The Company enables its Global2000 (which Forbes magazine defines as the biggest and most important companiesas measured by sales, profits, assets and market value) customer base torealize competitive advantages through three major divisions, IT Services,Solutions and Chimes, Inc.  The ITServices division provides highly skilledsoftware professionals to augment the internal information management staffs ofmajor corporations. The Solutions division, which includes RGIITechnologies Inc., (“RGII”), provides enterprise application services,e-business solutions, customized Web development and Web enablement ofstrategic applications, Customer Relationship Management (CRM), networkservices, strategic outsourcing and managed resourcing as well as software andrelational database products.  RGIIprovides innovative technology services and solutions to the federal, state andlocal government markets.  Chimes, Inc.,a wholly-owned subsidiary of CHC, provides workforce procurement and managementservices to Global 2000 companies.

 

*Principles ofConsolidation*

 

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

 

*Revenue Recognition*

 

Approximately 94% and 93% of consolidatedrevenue in 2003 and 2002, respectively, was derived from time-and-materialcontracts.

 

For the IT Services division revenues arerecognized as services are performed under time-and material contracts.  Under a typical time-and-material billingarrangement, our customers are billed on a regularly scheduled basis, such asbiweekly or monthly.  At the end of eachaccounting period, unbilled revenue is estimated and accrued for servicesperformed since the last billing cycle. These unbilled amounts are billed the following month.

 

The Solutions Group recognizes revenue eitheron a time-and-material basis as described above or on a fixed fee basis, however,principally with time-and-material contracts. For fixed-fee contracts, revenueis recognized on the basis of the estimated percentage of completion based oncosts incurred relative to total estimated costs.  Each fixed fee contract has different terms, milestones anddeliverables.  The milestones anddeliverables primarily relate to the work to be performed and the timing of thebilling.  At the end of each reportingperiod an assessment of revenue recognized on the percentage of completion andmilestones achieved criteria is made. If it becomes apparent that estimated cost will be exceeded or requiredmilestones or deliverables will not have been obtained, an adjustment will bemade.  The cumulative effect ofrevisions in estimated revenues and costs are recognized in the period in whichthe facts that give rise to the impact of any revisions become known.

 

34

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Unbilled accounts receivables representamounts recognized as revenue based on services performed in advance ofcustomer billings principally on a time-and-material basis.  At the end of each accounting period,revenue is accrued for services performed since the last billing cycle.  These unbilled amounts are billed thefollowing month.  Costs and estimatedearnings in excess of billing on fixed fee contracts arise when percentage ofcompletion accounting is used.  Suchamounts are billed at specific dates or at contract completion.

 

The Company’s Chimes subsidiary recognizesrevenue on a transaction fee basis.  TheChimes service offering aggregates the suppliers of temporary workers to thecustomer and renders one invoice to the customer.  Upon payment from the customer, Chimes deducts a transaction feeand remits the balance of the client payment to the applicable vendor.  Chimes recognizes only their fee for theservice, not the aggregate billing to the customer.  The gross amount of the customer invoicing is not consideredrevenue or receivable to Chimes because there is no earnings process for thegross amount and by contract terms, Chimes is not obligated to pay the vendoruntil paid by the customer.

 

The Company’s Princeton subsidiary recognized revenue in accordancewith AICPA Statement of Position 97-2 (“SOP 97-2”), “Software Revenue Recognition,”and AICPA Statement of Position 98-9 (“SOP 98-9”).  Under SOP 97-2, the Company recognized software license revenuewhen a noncancelable license agreement had been executed, fees were fixed anddeterminable, the software had been delivered, and collection was consideredprobable.  Princeton Softech was sold onMarch 25, 2002, (see Note 17).

 

*Recruitment Costs*

 

Recruitment costs are charged to operations as incurred.

 

*Advertising Costs*

 

The Company expenses all advertising costs as incurred and classifiesthese costs under selling, general and administrative expenses.  Advertising costs for the years endedDecember 31, 2003, 2002 and 2001 were $ 0.2 million, $0.3 million and $0.6million, respectively.

 

*Research and Development Costs*

 

The Company charges all costs incurred to establish the technologicalfeasibility of software products or product enhancements to research anddevelopment costs, which are included in selling, general and administrativeexpenses.  Research and Developmentcosts for the years ended December 31, 2003, 2002 and 2001 were approximately$98,000, $0.9 million and $5.4 million, respectively.

 

35

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*Cash and CashEquivalents*

 

Cash and cash equivalents include highly liquid instruments with anoriginal maturity of three months or less at the time of purchase and consistof the following at December 31:

 
|             |   | **2003**          |   | **2002** |   |
|------------------|--------|-------------------|--------|----------|--------|
|             |   | **in  thousands** |   |
|             |   |              |   |
| Cash             |   | $                 | 16,473 |     | $      | 21,208 |   |
| Commercial paper |   | 33,980            |   | 36,963   |   |
| Restricted cash  |   | 2,157             |   | 1,598    |   |
|             |   |              |   |     |   |
|             |   | $                 | 52,610 |     | $      | 59,769 |   |

 

Restricted cash represents funds received byChimes and held in client-specific bank accounts, to be used to make paymentsto vendors of the applicable client.

 

*Investments*

 

The Company’s marketable securities are categorized asavailable-for-sale securities, as defined by the Statement of FinancialAccounting Standards No. 115, “Accounting for Certain Investments in Debt andEquity Securities.”  Unrealized gainsand losses are reflected as a net amount under the caption of accumulated othercomprehensive loss within the statement of stockholders’ equity.  Realized gains and losses are recordedwithin the statement of income under the caption other income or expenses. Forthe purposes of computing realized gains and losses, cost is identified on aspecific identification basis.

 

*Concentrations ofCredit Risk*

 

Financial instruments, which potentially subject the Company toconcentrations of credit risk, regardless of the degree of such risk, consistprincipally of cash and cash equivalents and trade accounts receivable. TheCompany invests the majority of its excess cash in overnight commercial paperof high-credit, high quality short-term money market instruments, high-qualityfinancial institutions or companies, with certain limitations as to the amountthat can be invested in any one entity.

 

The Company maintains its cash balances principally in nine financialinstitutions located in the United States, Canada, India and the UnitedKingdom.  The balances in U.S. banks areinsured by the Federal Deposit Insurance Corporation up to $100,000 for eachentity at each institution. The balance in the Canadian bank is insured by theCanadian Deposit Insurance Corporation up to $60,000 Canadian (approximately$46,000 U.S.).  The balance in theIndian bank is insured by the Deposit Insurance and Credit GuaranteeCorporation up to 100,000 Rupees (approximately $2,000 U.S.).  There is no depository insurance in theUnited Kingdom.  At December 31, 2003,uninsured amounts held by the Company at these financial institutions totalapproximately $51,862,000.  At December31, 2003, the Company had approximately $1,945,000 in cash maintained inoverseas financial institutions.

 

The Company’s customers are generally very large, Global 2000 companiesin many industries and with wide geographic dispersion.  For the years ended December 31, 2003, 2002and 2001, the Company’s ten largest clients accounted for approximately 38%,38% and 30% of its revenues, respectively. The Company’s largest customers arethe Federal Government and the City of New York. The Federal Governmentaccounts for approximately 16.0% of consolidated billed accounts receivable atDecember 31, 2003 and the City of New York accounts for approximately 10.0 %,19.6% and 15.0% of billed accounts receivable at December 31, 2003, 2002 and2001, respectively.  Revenues from theFederal Government totaled approximately $18 million, or 7% of totalconsolidated revenues.  Revenues fromthe City of New York totaled approximately $12.5 million, or 5% of totalconsolidated revenues, $11.9 million, or 4% of total consolidated revenues and$9.1 million, or 2% of total consolidated revenues for the years ended December31, 2003, 2002 and 2001, respectively. Historically, there have been no collection issues with either customer;however, the payment cycle is significantly slower than the Company’scommercial customers.   The

 

36

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Company establishes an allowance for doubtful accounts based upon factorssurrounding the credit risk of specific customers, historical trends, and otherinformation.

 

*Fair Value ofFinancial Instruments*

 

The carrying value of financial instruments (principally consisting ofcash and cash equivalents, accounts receivable and payable) approximates fairvalue because of their short maturities.

 

*Property andEquipment and Depreciation*

 

Property and equipment are stated at cost.  Depreciation is computed using the straight-line method over theestimated useful lives of the assets which range from three to seven years.

 

*Impairment of Long-Lived Assets andLong-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.  Recoverabilityof assets to be held and used was measured by a comparison of the carryingamount of an asset to future net cash flows expected to be generated by theasset.  If such an asset was consideredto be impaired, the impairment to be recognized was measured by the amount bywhich the carrying amount of the asset exceeded the fair value of theassets.  Assets to be disposed of werereported at the lower of the carrying amount or fair value less costs to sell.

 

Effective on January 1, 2002, the Company adopted Financial AccountingStandard No. 144 “Accounting for the Impairment or Disposal of Long LivedAssets,” (“SFAS 144”).  This supersedesSFAS 121, while retaining many of the requirements of such statement. Theeffect of this statement was immaterial to the Company.

 

*Income Taxes*

 

The Company and its domestic subsidiaries file a consolidated Federalincome tax return.  The foreignsubsidiaries file in each of their local jurisdictions.

 

The Company follows the liability method of accounting for incometaxes.  Income taxes are provided forthe tax effects of transactions reported in the financial statements andconsist of taxes currently due plus deferred taxes.  Deferred income taxes are recognized for temporary differencesbetween the financial statement carrying amounts and the tax bases of certainassets and liabilities.  Temporarydifferences result primarily from net operating loss carryovers, amortizationof goodwill, allowance for doubtful accounts and certain accrued liabilitieswhich are deductible, for tax purposes, only when paid.  In assessing the realizability of deferredtax assets, management considers the scheduled reversal periods of the deferred tax assets as well as projectedfuture taxable income and tax planning strategies.  A valuation allowance is provided when it is more likely than notthat some portion or all of the deferred tax asset will not be realized.

 

Tax benefits from early disposition of the stock by optionees underincentive stock options and from exercise of non-qualified options are creditedto additional paid-in capital.

 

The Company provides United States income taxes on the earnings offoreign subsidiaries, unless they are considered permanently invested outsidethe United States.  As of December 31,2003, there is no cumulative amount of foreign earnings on which United Statesincome taxes have not been provided.

 

*Loss Per Share*

 

Basic loss per share is based on the weighted average number of commonshares outstanding without consideration of common stock equivalents.  Diluted loss per share is based on theweighted average

 

37

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number of common and common equivalent shares outstanding, except whenthe effect is anti-dilutive.  Thecalculation takes into account when dilutive, the shares that may be issuedupon exercise of stock options, reduced by the shares that may be repurchasedwith the funds received from the exercise, based on the average price duringthe year.  For all years presented allstock options (See Note 8) were excluded for diluted loss per share becausethey were antidilutive.

 

*Use of Estimates inFinancial Statements*

 

In preparing financial statements in conformity with accountingprinciples generally accepted in the United States of America, management makesestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements, as well as the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

 

*Foreign Currency Translation*

 

For operations outside the United States that prepare financialstatements in currencies other than the United States dollar (Canadian dollar,British pound, and Indian Rupee), results of operations and cash flows aretranslated at the average exchange rates during the period, and assets andliabilities are translated at end of period exchange rates.  Translation adjustments are included as aseparate component of comprehensive income/(loss) within the statement ofshareholders’ equity.

 

*Accounts Receivable*

 

Accounts receivable aregenerally due within 30 days and are stated at amounts due from customers netof an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms areconsidered past due.  The Companydetermines its allowance by considering a number of factors, including thelength of time trade accounts receivable are past due, the Company’s previousloss history, the customer’s current ability to pay its obligation to theCompany and the condition of the general economy and the industry as awhole.  The Company writes off accountsreceivable when they become uncollectible, and payments subsequently receivedon such receivables are credited to the allowance for doubtful accounts.

 

*Goodwill*

 

In June 2001, the FinancialAccounting Standards Board approved the issuance of SFAS No. 141, “BusinessCombinations” and in July 2001, SFAS 142, “Goodwill and Other IntangibleAssets.”  The new standards require thatall business combinations initiated after June 30, 2001 must be accounted forunder the purchase method.  In addition,all intangible 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 and intangibles with indefinitelives are no longer subject to amortization, but are subject to at least anannual assessment for impairment by applying a fair value based test.  The Company adopted SFAS 142 as of January1, 2002 and in compliance with this new regulation has discontinued theamortization of goodwill.

 

During the quarter ended June 30, 2002, the Company completed theinitial valuation of the carrying value of goodwill existing at January 1,2002.  As a result, a non-cash charge of$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, 2002statement of operations.  For the yearsended December 31, 2003 and 2002 the Company completed valuations of thecarrying value of the remaining goodwill and it was determined that noadditional impairment had occurred.

 

38

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The changes in the carrying amount of goodwill for the years endedDecember 31, 2003 and 2002, are as follows (in 000’s):

 
| **Reporting Units**                            |   | **December  31,  2003** |   | **December  31,  2002** |   |
|------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                           |   |                    |   |                    |   |
| Balance as of January 1,                       |   | $                       | 19,203 |                    | $      | 48,725 |   |
| Additions to goodwill* (Solutions)             |   | 15,015                  |   | 339                     |   |
| Impairment losses (IT Services and  Education) |   | —                  |   | (29,861                 | )      |
|                                           |   |                    |   |                    |   |
| Balance as of December 31,                     |   | $                       | 34,218 |                    | $      | 19,203 |   |

 

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* Reflects goodwill recorded as a result ofthe RGII ($14,588) and Global Business Technology Services, (“GBTS”) ($427)acquisitions.  See Note 15 of the notesto the consolidated financial statements.

 

The reporting units are equal to, or one level below, reportablesegments.  The Company engagedindependent valuation consultants to assist with the transitional goodwillimpairment tests.

 

As of December 31, 2003 and 2002, the fairvalue of each of the reporting units was calculated using the followingapproaches (i) market approach and (ii) income approach.  Under the market approach, value isestimated by comparing the performance fundamentals relating to similar publiccompanies’ stock prices.  Multiples arethen developed of the value of the publicly traded stock to various measuresand are then applied to each reporting unit to estimate the value of itsequity.  Under the income approach,value was determined using the present value of the projected future cash flowsto be generated by the reporting unit.

 

The fair value conclusion of the reporting unitsreflects an appropriately weighted value of the market multiple approach andthe income approach discussed above.  Anasset approach 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.  When either the income approach or themarket approach was used, each indicted value of the Solutions entity’s equityexceeded the carrying value of the Solutions entity by at least $12 million and$15 million as of December 31, 2003 and 2002, respectively.  Since each of the two approaches yieldedvalues in excess of carrying value, any weighting of the two approaches oreither approach used alone results in the same conclusion, that the goodwillwas not impaired.

 

When the other entities, of the Company, were tested(IT Services and Education), in the second quarter 2002 initial valuation, bothapproaches yielded an indicated value which was below the carrying value ofthose entity’s equity, in such an amount that the entire amount of goodwill waswritten off.  As a result, a loss of$29.9 million was recognized in June 2002 and recorded as a cumulative effectof change in accounting principle in the accompanying Consolidated Statementsof Operations.  There was no income taxeffect on the impairment charge as approximately $19 million of the chargerelated to goodwill in foreign tax jurisdictions where the Company believes itis more likely than not that future taxable income in these jurisdictions willnot be sufficient to realize the related income tax benefits associated withthe charge.  The remaining $11 millionof the charge was related primarily to goodwill that was acquired prior to theability to deduct goodwill for tax purposes.

 

39

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The following pro forma table shows the effect of amortization expenseand the cumulative effect of change in accounting principle on the Company’snet loss as follows:

 
|                                                                 |   | **December  31,  2003** |    | **December  31,  2002** |   | **December  31,  2001** |   |
|----------------------------------------------------------------------|--------|-------------------------|---------|-------------------------|--------|-------------------------|--------|
| Reported net loss                                                    |   | $                       | (14,948 | )                       | $      | (38,036                 | )      | $ | (14,450 | ) |
|                                                                 |   |                    |    |                    |   |                    |   |
| Cumulative effect of change in  accounting  principle           |   | —                  |    | 29,861                  |   | —                  |   |
|                                                                 |   |                    |    |                    |   |                    |   |
| Amortization of intangibles                                          |   | —                  |    | —                  |   | 2,695                   |   |
|                                                                 |   |                    |    |                    |   |                    |   |
| Adjusted net loss                                                    |   | $                       | (14,948 | )                       | $      | (8,175                  | )      | $ | (11,755 | ) |
|                                                                 |   |                    |    |                    |   |                    |   |
| Reported loss per share:                                             |   |                    |    |                    |   |                    |   |
| Basic & Diluted                                                  |   | $                       | (0.49   | )                       | $      | (1.22                   | )      | $ | (0.45 | ) |
|                                                                 |   |                    |    |                    |   |                    |   |
| Adjustment for cumulative effect of change  in accounting principle: |   |                    |    |                    |   |                    |   |
| Basic & Diluted                                                  |   | —                  |    | 0.96                    |   | —                  |   |
|                                                                 |   |                    |    |                    |   |                    |   |
| Adjustment for amortization of intangibles:                          |   |                    |    |                    |   |                    |   |
| Basic & Diluted                                                  |   | —                  |    | —                  |   | 0.08                    |   |
|                                                                 |   |                    |    |                    |   |                    |   |
| Adjusted loss per share:                                             |   |                    |    |                    |   |                    |   |
| Basic & Diluted                                                  |   | $                       | (0.49   | )                       | $      | (0.26                   | )      | $ | (0.37 | ) |

 

40

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*Intangible Assets*

 

Intangible assets are the result of theacquisition, in July 2003, of certain assets and operations of RGII and theacquisition of the Xpress software from Commerce One. During the third quarterof 2003, the Company completed a purchase price allocation review and accordingto SFAS No. 142, assessed the useful lives of its acquired intangible assets.

 

The following table summarizes the acquiredintangible assets, the remaining components and the accumulated amortization asof December 31, 2003 (in thousands):

 
|                         |   | **Gross  Carrying  Amount** |        | **Accumulated  Amortization** |   | **Net  Carrying  Amount** |   | **Weighted  Average  Amortization  Period** |   |
|------------------------------|--------|-----------------------------|-------------|-------------------------------|--------|---------------------------|--------|---------------------------------------------|--------|
| Amortized intangible assets: |   |                        |        |                          |   |                      |   |                                        |   |
| Non-compete agreements       |   | $                           | 250         |                          | $      | 18                        |   | $                                           | 232    |   | 7 yrs |   |
| RGII trademark               |   | 150                         |        | 75                            |   | 75                        |   | 1 yr                                        |   |
| RGII software                |   | 726                         |        | 74                            |   | 652                       |   | 4.9 yrs                                     |   |
| Customer contracts           |   | 1,800                       |        | 854                           |   | 946                       |   | 2.4 yrs                                     |   |
| Xpress software              |   | 566                         |        | 63                            |   | 503                       |   | 3 yrs                                       |   |
| Total                        |   | $                           |  3,492 |                          | $      |  1,084               |   | $                                           | 2,408  |   | 3.3 yrs |   |

 

Intangible assets are being amortized overperiods ranging from six months to seven years, based on the estimated usefullives. The amortization expense on these intangible assets for the year endedDecember 31, 2003 was $1,084,000.  Theestimated remaining amortization expense for each year ending December 31, isas follows (in thousands):

 

| 2004       |   | $   | 755    |   |
|------------|--------|-----|--------|--------|
| 2005       |   | 680 |   |
| 2006       |   | 613 |   |
| 2007       |   | 201 |   |
| 2008       |   | 106 |   |
| thereafter |   | 53  |   |
| Total      |   | $   | 2,408  |   |

 

*Recent Accounting Pronouncements*

 

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.”  This Issue provides guidance on when and howto separate elements of an arrangement that may involve the delivery orperformance of multiple products, services and rights to use assets intoseparate units of accounting.  Theguidance in the consensus is effective for revenue arrangements entered into infiscal periods beginning after June 15, 2003. The transition provision allows either prospective application or acumulative effect adjustment upon adoption. The effect of the adoption of this statement was immaterial to theCompany.

 

41

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InMay 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.”  It establishes classification and measurementstandards for three types of freestanding financial instruments that havecharacteristics of both liabilities and equity.  Instruments within the scope of SFAS 150 must be classified asliabilities within the Company’s financial statements.  The provisions of SFAS No. 150 are effectivefor (1) instruments entered into or modified after May 31, 2003 and (2)pre-existing instruments as of the first interim period after June 15,2003.  SFAS 150 did not have a materialeffect on the Company’s financial statements.

 

InJanuary 2003, the FASB issued Financial Interpretation No. 46, “Consolidationof Variable Interest Entities” (“FIN 46”), which addresses consolidation bybusiness enterprises of variable interest entities (“VIEs”).  The accounting provisions and disclosurerequirements of FIN 46 are effective immediately for VIEs created after January31, 2003, and are effective for reporting periods ending after December 15,2003, 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 guidance of FIN 46R, publiccompanies that have interests in VIE’s that are commonly referred to as specialpurpose entities are required to apply the provisions of FIN 46R for periodsending after December 15, 2003.  Apublic company that does not have any interests in special purpose entities butdoes have a variable interest in a VIE created before February 1, 2003, mustapply the provisions of FIN 46R by the end of the first interim or annualreporting period ending after March 14, 2004. Although the Company is still evaluating the impact of FIN 46R, it isnot expected to have a material effect on the Company’s financial statements.

 

42

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*Accounting for Stock Based Compensation*

 

InDecember 2002, the Financial Accounting Standards Board approved the issuanceof SFAS No. 148, “Accounting for Stock-Based Compensation – Translation andDisclosure.”  This statement amends FASBStatement No. 123, “Accounting for Stock-Based Compensation,” to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  In addition, this Statement amended thedisclosure requirements of Statement 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the methods used onreported results.  The Company adoptedthe disclosure provisions as of December 31, 2002.

 

The exercise price per share on all options granted may not be lessthan the fair value at the date of the option grant.  The Company applies Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” as modified by FIN 44, “Accountingfor Certain Transactions Involving Stock Compensation,” in accounting forstock-based employee compensation, whereby no compensation cost had beenrecognized for the plans.  The Companyexpects to continue following the guidance under APB 25 for stock basedcompensation to employees.  Hadcompensation cost for the plans been determined based on the fair value of theoptions at the grant dates and been consistent with the method of SFAS No. 123,the Company’s net loss and loss per share would have been reduced to the proforma amounts indicated below:

 
|               |   |                                                                                                                                          |   | **2003**   |        | **2002**   |   | **2001**    |   |
|--------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|-------------|------------|--------|-------------|--------|
|               |   |                                                                                                                                          |   |       |        |       |   |        |   |
| Net loss           |   | As reported                                                                                                                                   |   | $          | (14,948,000 | )          | $      | (38,036,000 | )      | $ | (14,450,000 | ) |
|               |   | Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects |   | (2,401,000 | )           | (3,334,000 | )      | (3,847,000  | )      |
|               |   |                                                                                                                                          |   |       |        |       |   |        |   |
|               |   | Pro forma                                                                                                                                     |   | $          | (17,349,000 | )          | $      | (41,370,000 | )      | $ | (18,297,000 | ) |
|               |   |                                                                                                                                          |   |       |        |       |   |        |   |
| Earnings per share |   |                                                                                                                                          |   |       |        |       |   |        |   |
| Basic              |   | As reported                                                                                                                                   |   | $          | (0.49       | )          | $      | (1.22       | )      | $ | (0.45 | ) |
|               |   | Pro forma                                                                                                                                     |   | (0.57      | )           | (1.32      | )      | (0.57       | )      |
|               |   |                                                                                                                                          |   |       |        |       |   |        |   |
| Diluted            |   | As reported                                                                                                                                   |   | $          | (0.49       | )          | $      | (1.22       | )      | $ | (0.45 | ) |
|               |   | Pro forma                                                                                                                                     |   | (0.57      | )           | (1.32      | )      | (0.57       | )      |

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes options-pricing model with the following weighted-averageassumptions used for grants in 2003, 2002 and 2001, respectively:  expected volatility of 62%, 64% and 84%;risk-free interest rates of 4.27%, 3.62% and 5.14%; and expected lives of 7.8,4.4 and 8.1 years.

 

*Reclassifications*

 

Certain reclassifications have been made to the 2002 and 2001comparative financial statements to conform to the 2003 presentation.

 

43

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**NOTE 2 - ACCOUNTS RECEIVABLE**

 

Accounts receivable consist of the following at December 31:

 
|                                 |   | **2003**            |   | **2002** |   |
|--------------------------------------|--------|---------------------|--------|----------|--------|
|                                 |   | **(in  thousands)** |   |
|                                 |   |                |   |
| Billed                               |   | $                   | 44,489 |     | $      | 49,453 |   |
| Unbilled                             |   | 9,238               |   | 14,859   |   |
|                                 |   |                |   |     |   |
|                                 |   | 53,727              |   | 64,312   |   |
| Less allowance for doubtful accounts |   | 5,432               |   | 7,696    |   |
|                                 |   |                |   |     |   |
|                                 |   | $                   | 48,295 |     | $      | 56,616 |   |

 

At December 31, 2003 and 2002, the allowance for doubtful accountsincludes $400,000 and $0 respectively, pertaining to unbilled receivables.  Included in unbilled accounts receivable atDecember 31, 2003 and 2002 are amounts not yet billable to customers ofapproximately $708,000 and $0, respectively.

 

**NOTE 3 – PROPERTY AND EQUIPMENT**

 

Property and equipment consist of the following:

 
|                              |   | **2003**            |   | **2002** |   |
|-----------------------------------|--------|---------------------|--------|----------|--------|
|                              |   | **(in  thousands)** |   |
|                              |   |                |   |
| Furniture, Fixtures and Equipment |   | $                   | 36,527 |     | $      | 32,530 |   |
| Software                          |   | 3,242               |   | 2,651    |   |
| Leasehold Improvements            |   | 2,483               |   | 2,483    |   |
|                              |   |                |   |     |   |
|                              |   | 42,252              |   | 37,664   |   |
| Less accumulated depreciation     |   | 32,929              |   | 26,647   |   |
|                              |   |                |   |     |   |
|                              |   | $                   | 9,323  |     | $      | 11,017 |   |

 

Property and equipment are stated at cost.  Depreciation is computed using the straight-line method over theestimated useful lives of the assets which range from three to seven years.  Depreciation expense was $5.3 million, $4.6million and $5.3 million for the years ended December 31, 2003, 2003 and 2001,respectively.

 

 

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

 

On July 31, 2001, amended February 14, 2003, the Company entered into asecured asset-based lending facility that replaced its two unsecureddiscretionary lines of credit.  This newline of credit is a three-year, $40 million facility with availability basedprimarily on eligible customer receivables and requires a separatelockbox.  The interest rate for thefirst ninety days from closing was Prime plus 0.5%, thereafter the rate wasLIBOR plus 2.75% based on the unpaid principal.  The borrowing base less outstanding loans must equal or exceed$17.5 million.  At the time of closingthere was a $170,000 commitment fee paid to the agent.

 

As of December 31, 2003, the Company had no outstanding loan balanceagainst this facility.  Borrowings underthis facility are collateralized by certain assets of the Company.  Based on the Company’s eligible customerreceivables and cash balances, $16.0 million, $24.7 million and $23.1 millionwas available for borrowing as of December 31, 2003, 2002 and 2001,respectively.  The fee for the unusedportion of the line of credit is 0.375% per annum charged to the Companymonthly.  This charge was approximately$109,000, $144,000 and $42,000 for the year ended December 31, 2003, 2002 and2001, respectively.  This line

 

44

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of credit includes covenants relating to the maintenance of cashbalances and providing for limitations on incurring obligations and spendinglimits on capital expenditures.  Onecovenant pertains to minimum cash collections over a three-month period.  The Company did not satisfy this covenantfor the period December 2003 through February 2004.  A waiver was received from the lending institution for the threemonth period ending February 29, 2004. This facility is scheduled to expire in July 2004 and the Companyintends to enter into a new asset-based lending facility prior to expiration.

 

**NOTE 5 - PURCHASE OF TREASURY STOCK**

 

In April of 2001, the Board of Directorsapproved the repurchase in the open market of up to 10% of its common sharesoutstanding, or approximately 3.2 million shares.  For the year ended December 31, 2003, the Company hadrepurchased, in the open market, 392,200 shares of its stock at an averageprice of $3.08 per share for an aggregate purchase amount of $1.2 million.  For the year ended December 31, 2002, theCompany had repurchased, in the open market, 1,611,700 shares of its stock atan average price of $3.81 per share for an aggregate purchase amount of $6.1million.  As of December 31, 2003 theremaining authorization for repurchase is approximately 93,000 shares.

 

**NOTE 6 - SHAREHOLDERS’ EQUITY**

 

*Stock Options*

 

In 1994, the Company adopted astock 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 as of December 31, 2003.  This plan, which replaces the Company’s 1985Plan, will terminate on June 15, 2004. There were 2,427,000, 2,036,000 and 1,930,000 shares available foroption at December 31, 2003, 2002 and 2001, respectively.

 

In 1998, the Company amended the non-qualified Directors’ Stock OptionPlan, 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 ofits common stock and (ii) shall receive annual grants to purchase 10,000 sharesof its common stock.  The plan originallywas to expire on March 4, 2001 and was extended by the Board of Directors andShareholders to March 6, 2007.  Therewere 264,000, 334,000 and 384,000 shares available for grant at December 31,2003, 2002 and 2001, respectively.

 

45

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A summary of the status of the Company’s stock option plans as ofDecember 31, 2003, 2002 and 2001, and changes during the years ending on thosedates is presented below:

 
|                                                            |   | **2003**                 |   | **2002**                               |   | **2001**                 |   |
|-----------------------------------------------------------------|--------|--------------------------|--------|----------------------------------------|--------|--------------------------|--------|
|                                                            |   | **Shares  (000’s)** |   | **Weighted  average  exercise  price** |   | **Shares  (000’s)** |   | **Weighted  average  exercise  price** |   | **Shares  (000’s)** |   | **Weighted  average  exercise  price** |   |
| Outstanding – January 1                                    |   | 4,527                    |   | $                                      | 7.93   |                     | 4,841  |   | $ | 10.11 |   | 4,216 |   | $ | 13.05 |   |
|                                                            |   |                     |   |                                   |   |                     |   |   |   |   |   |   |   |
| Granted                                                         |   | 1,527                    |   | 3.76                                   |   | 1,340                    |   | 3.68 |   | 1,535 |   | 2.17 |   |
| Exercised                                                       |   | (361                     | )      | 2.66                                   |   | (266                     | )      | 1.47 |   | (15 | ) | 2.02 |   |
| Canceled/forfeited/expired                                      |   | (1,848                   | )      | 13.27                                  |   | (1,388                   | )      | 12.45 |   | (895 | ) | 10.47 |   |
|                                                            |   |                     |   |                                   |   |                     |   |   |   |   |   |   |   |
| Outstanding – December 31                                  |   | 3,845                    |   | 4.08                                   |   | 4,527                    |   | 7.93 |   | 4,841 |   | 10.11 |   |
|                                                            |   |                     |   |                                   |   |                     |   |   |   |   |   |   |   |
| Options exercisable – December 31                          |   | 1,420                    |   | 4.98                                   |   | 2,573                    |   | 10.89 |   | 2,749 |   | 12.97 |   |
|                                                            |   |                     |   |                                   |   |                     |   |   |   |   |   |   |   |
| Weighted average fair value of options  granted during the year |   |                     |   | $                                      | 1.93   |                     |   |   | $ | 2.72 |   |   |   | $ | 1.85 |   |

 

The following information applies to options outstanding at December31, 2003:

 
| **Range of exercise prices** |   | **Outstanding  as  of December 31,  2003  (000’s)** |   | **Weighted  average  remaining  contractual life** |   | **Weighted  average  exercise price** |   | **Exercisable  as  of December  31, 2003  (000’s)** |   | **Weighted  average  exercise price** |   |
|------------------------------|--------|----------------------------------------------------------|--------|----------------------------------------------------|--------|---------------------------------------|--------|----------------------------------------------------------|--------|---------------------------------------|--------|
| $2.02 – $9.99           |   | 3,659                                                    |   | 8.5                                                |   | $                                     | 3.40   |                                                     | 1,234  |                                  | $      | 3.12 |   |
| 10.00 – 14.99           |   | 71                                                       |   | 1.8                                                |   | 11.93                                 |   | 71                                                       |   | 11.93                                 |   |
| 15.00 – 19.99           |   | 50                                                       |   | 5.0                                                |   | 16.37                                 |   | 50                                                       |   | 16.37                                 |   |
| 20.00 – 26.625          |   | 65                                                       |   | 4.0                                                |   | 24.06                                 |   | 65                                                       |   | 24.06                                 |   |
|                         |   |                                                     |   |                                               |   |                                  |   |                                                     |   |                                  |   |
|                         |   | 3,845                                                    |   | 8.2                                                |   | $                                     | 4.08   |                                                     | 1,420  |                                  | $      | 4.98 |   |

 

Prior to 2002, certain officers had the right to borrow from theCompany against the exercise price of options exercised.  As of December 31, 2003 and 2002, totaloutstanding borrowings, pertaining to one officer, amounted to $100,000 whichwas issued by the Company in 1999, prior to the adoption of FIN 44 and theSarbanes-Oxley Act of 2002.

 

In 2001, the Company adopted a stock option plan for its Princetonsubsidiary which provided for the granting, to Princeton key employees, ofoptions for the purchase of a maximum of 3,000,000 shares of Princeton commonstock.  These options expire ten yearsfrom the date of grant and become exercisable in two years.  As of the date of the sale of Princeton, thestock option plan was terminated.

 

The Company issued 150,001 warrants in 2003 to purchase shares of itscommon stock to one major shareholder. The exercise price is the fair value at the date of grant.  As of December 31, 2003, 152,134 warrantswere outstanding.  There were nowarrants exercised in 2003, 2002 or 2001.

 

46

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*Shareholder Rights Plan*

 

In July 1989, the Board of Directors declared a dividend distributionof .131 preferred stock purchase right on each outstanding share of commonstock of the Company.  The rights wereamended on February 13, 1990.  Eachright will, under certain circumstances, entitle the holder to buy oneone-thousandth (1/1000) of a share of Series A preferred stock at an exerciseprice of $90.00 per one one-thousandth (1/1000) share, subject toadjustment.  Each one one-thousandth(1/1000) of a share of Series A preferred stock has voting, dividend andliquidation rights and preferences substantively equivalent to one share ofcommon stock.

 

The rights will be exercisable and transferable separately from thecommon stock only if a person or group acquires 20% or more, subject to certainexceptions, of the Company’s outstanding common stock or announces a tenderoffer that would result in the ownership of 20% or more of the commonstock.  If a person becomes the owner ofat least 20% of the Company’s common shares (an “Acquiring Person”), eachholder of a right other than the Acquiring Person is entitled, upon payment ofthe then current exercise price per right (the “Exercise Price”), to receiveshares of common stock (or common stock equivalents) having a market valueequal to twice the Exercise Price.

 

Additionally, if the Company subsequently engages in a merger or otherbusiness combination with the Acquiring Person in which the Company is not thesurviving corporation, or in which the outstanding shares of the Company’scommon stock are changed or exchanged, or if more than 50% of the Company’sassets or earning power is sold or transferred, a right would entitle aComputer Horizon Corp. shareholder, other than the Acquiring Person and itsaffiliates, to purchase upon payment of the Exercise Price, shares of theAcquiring Person having a market value of twice the Exercise Price.  Prior to a person becoming an AcquiringPerson, the rights may be redeemed at a redemption price of one cent per right,subject to adjustment.  The rights aresubject to amendment by the Board.  Noshareholder rights have become exercisable. The rights originally would have expired on July 16, 1999, however, theBoard of Directors approved the adoption of a new Shareholder Rights Plan toreplace the existing plan.  The terms ofthe new Rights Plan are substantially the same as the original plan.  The new rights will expire on July 15, 2009.

 

*Stock Option Exchange Program*

 

On January 8, 2003, the Company commenced a tender offer to itsemployees to exchange stock options granted under the Company’s 1994 IncentiveStock Option and Appreciation Plan with an exercise price of $10.01 or greaterfor new stock options with a new exercise price.  The tender offer expired on February 10, 2003, and 1,635,526options were accepted for exchange.  OnAugust 13, 2003, 545,928 options were issued for the exchange at an exerciseprice of $3.89 per share.

 

47

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**NOTE 7 - INCOME TAXES**

 

The following is a geographical breakdown of the Company’s loss beforetaxes:

 
|     |   | **Year ended  December 31,** |    |
|----------|--------|------------------------------|---------|
|     |   | **2003**                     |    | **2002** |   | **2001** |   |
|     |   | **(in  thousands)**          |    |
|     |   |                         |    |
| Domestic |   | $                            | (16,964 | ) | $ | (6,005 | ) | $ | (20,679 | ) |
| Foreign  |   | (3,115                       | )       | (336 | ) | (919 | ) |
|     |   |                         |    |   |   |   |   |
|     |   | $                            | (20,079 | ) | $ | (6,341 | ) | $ | (21,598 | ) |

 

The provision for income taxes/(benefit) consistsof the following for the years ended

December 31:

 
|           |   | **2003**            |   | **2002** |   | **2001** |   |
|----------------|--------|---------------------|--------|----------|--------|----------|--------|
|           |   | **(in  thousands)** |   |
|           |   |                |   |
| Current        |   |                |   |     |   |     |   |
| Federal        |   | $                   | 30     |     | $      | (4,993   | )      | $ | (10,032 | ) |
| State          |   | 311                 |   | 701      |   | (280     | )      |
| Foreign        |   | —              |   | —   |   | 20       |   |
|           |   |                |   |     |   |     |   |
| Total current  |   | 341                 |   | (4,292   | )      | (10,292  | )      |
|           |   |                |   |     |   |     |   |
| Deferred       |   |                |   |     |   |     |   |
| Federal        |   | (5,561              | )      | 819      |   | 3,501    |   |
| State          |   | —              |   | 5,342    |   | (508     | )      |
| Foreign        |   | —              |   | —   |   | 151      |   |
|           |   |                |   |     |   |     |   |
| Total deferred |   | (5,561              | )      | 6,161    |   | 3,144    |   |
|           |   |                |   |     |   |     |   |
|           |   | $                   | (5,220 | )        | $      | 1,869    |   | $ | (7,148 | ) |

 

Refundable income taxes result primarily from net operating losscarrybacks.

 

48

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Deferred tax assets and liabilities consist of the following atDecember 31:

 
|                                   |   | **2003**            |         | **2002** |   |
|----------------------------------------|--------|---------------------|--------------|----------|--------|
|                                   |   | **(in  thousands)** |         |
|                                   |   |                |         |
| Deferred tax liabilities               |   |                |         |     |   |
| Depreciation                           |   | $                   | (498         | )        | $      | (1,086 | ) |
|                                   |   |                |         |     |   |
| Total deferred tax liabilities         |   | $                   | (498         | )        | $      | (1,086 | ) |
|                                   |   |                |         |     |   |
| Deferred tax assets                    |   |                |         |     |   |
| Federal and state net operating losses |   | 14,873              |         | 9,764    |   |
| Foreign net operating losses           |   | 4,742               |         | 3,767    |   |
| Amortization of intangibles            |   | 4,167               |         | 3,985    |   |
| Accrued payroll and benefits           |   | 1,709               |         | 2,007    |   |
| Allowance for doubtful accounts        |   | 2,324               |         | 1,150    |   |
| Restructuring charges                  |   | 837                 |         | 1,593    |   |
| Other                                  |   | 1,365               |         | 1,686    |   |
|                                   |   |                |         |     |   |
| Total deferred tax assets              |   | 30,017              |         | 23,952   |   |
|                                   |   |                |         |     |   |
| Valuation allowance                    |   | (11,381             | )            | (10,289  | )      |
|                                   |   |                |         |     |   |
| Net deferred tax assets                |   | $                   |  18,138 |     | $      |  12,577 |   |
|                                   |   |                |         |     |   |
| Current                                |   | $                   | 4,514        |     | $      | 4,557 |   |
| Non current                            |   | 13,624              |         | 8,020    |   |
| Total                                  |   | $                   | 18,138       |     | $      | 12,577 |   |

 

49

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A reconciliation of income taxes/(benefit), as reflected in theaccompanying statements, with the statutory Federal income tax rate of 35% forthe years ended December 31, 2003, 2002 and 2001 is as follows:

 
|                                                                |   | **2003**            |   | **2002** |   | **2001** |   |
|---------------------------------------------------------------------|--------|---------------------|--------|----------|--------|----------|--------|
|                                                                |   | **(in  thousands)** |   |
|                                                                |   |                |   |
| Statutory Federal income taxes                                      |   | $                   | (7,028 | )        | $      | (2,219   | )      | $ | (7,559 | ) |
| State and local income taxes/(benefit), net  of Federal tax benefit |   | 203                 |   | 91       |   | (757     | )      |
| Amortization of goodwill                                            |   | —              |   | —   |   | 452      |   |
| Change in valuation allowance, sale of  assets                      |   | —              |   | (1,855   | )      | —   |   |
| Change in valuation allowance, other                                |   | 1,092               |   | 5,095    |   | 613      |   |
| Other, net                                                          |   | 513                 |   | 757      |   | 103      |   |
|                                                                |   |                |   |     |   |     |   |
|                                                                |   | $                   | (5,220 | )        | $      | 1,869    |   | $ | (7,148 | ) |

 

At December 31, 2003 the Company had a federal net operating losscarryforward of approximately $34.3 million; $8.7 million expires in 2021,$11.4 million expires in 2022 and $14.2 million expires in 2023.

 

At December 31, 2003 the Company had state deferred tax assets, net offederal tax effect, of approximately $7.2 million relating primarily to statenet operating loss carryforwards.  Thesestate net operating loss carryforwards are subject to limitations which differfrom federal law.  Many states do notallow the carryback of net operating losses, have shorter carryforward periodsand do not allow the filing of consolidated returns.  Additionally, New Jersey and California temporarily suspended thededuction for net operating loss carryforwards.  These state limitations create uncertainties with respect to therealization of these state deferred tax assets.  Accordingly, the Company has recorded a valuation allowance ofapproximately $5.9 million with respect to these assets.

 

Certain foreign subsidiaries of the Company had net operating losscarryforwards at December 31, 2003, totaling approximately $14.7 million(including $5.3 million in Canada and $9.4 million in the United Kingdom); $1.5million expires in 2006, $1.0 million expires in 2007, $1.7 million expires in2008, $1.1 million expires in 2010 and the remainder has no expiration.  A full valuation allowance has been recordedon the foreign taxes due to the uncertainty of the realization of certain taxbenefit from these net operating loss carryforwards.

 

On March 9, 2002, the Job Creation and Worker Assistance Act of 2002(the”Act”) was enacted into law.  ThisAct contained many economic and tax incentives, including the extension of thecarryback period for losses arising in years ending during 2001 and 2002 tofive years from the previous two year carryback rule.  As a result, the Company’s tax refund claim of approximately $10million at December 31, 2001, which was received in April 2002, was increasedto approximately $30 million.  Theadditional refund amount of $20 million was received in January 2003.

 

During 1998, the Company completed a business combination which, forfinancial statement purposes, has been accounted for as apooling-of-interests.  For income taxpurposes the Company believes the transaction qualifies as a taxable purchasethat gives rise to future tax deductions. Upon the sale of the acquired business in 2001, these deductions wererecognized for tax purposes.  The taxbenefit of $19.6 million relating to the part of these deductions that wascarried back to prior years was included in refundable income taxes in2002.  Since the tax structure of thetransaction is subject to determination by the tax authorities, the Company hasrecorded a reserve for the tax benefits resulting from the carryback and hasnot recorded deferred tax assets for the tax benefits being carriedforward.   When resolved, the Companywill record a deferred tax asset for the part of the tax benefits being carriedforward and a tax benefit for the portion that was carried back, net of anappropriate valuation allowance. The tax benefit will be reflected as anincrease in additional paid-in capital. Any adjustments to the valuation allowance will be charged or creditedto income.

 

50

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The Internal Revenue Service is currently examining the Company’sfederal income tax returns for the years ended December 31, 2001 and 2000,along with its federal refund claims for the calendar years 1996 through1999.  As required by law, the JointCommittee on Taxation has also reviewed the Company’s refund claims.  The Company believes that the InternalRevenue Service and the Joint Committee on Taxation will not make anyadjustments to the tax returns or refund claims based upon the receipt ofcorrespondence from the Internal Revenue Service.  The Company anticipates that this examination will be formallyclosed in 2004.

 

**NOTE 8 - LOSS PER SHARE DISCLOSURES**

 

The computation of diluted loss per share excludes all options becausethey are antidilutive.  During 2003,there were 3,845,000 excluded options outstanding at December 31, 2003 with aweighted average exercise price of $4.08 per share.  During 2002, there were 4,527,000 excluded options outstanding atDecember 31, 2002 with a weighted average exercise price of $7.93 pershare.  During 2001, there were4,841,000 excluded options outstanding at December 31, 2001 with a weightedaverage exercise prices of $10.11 per share.

 

**NOTE 9 - SEGMENT INFORMATION**

 

The Company has identified three business segments: IT Services, theSolutions Group and Chimes, Inc.  The ITServices division provides highly skilled software professionals to augment theinternal information management staffs of major corporations.  IT Services is primarily staffingaugmentation.  The Solutions divisionprovides federal government, enterprise application services, e-businesssolutions, customized Web development and Web enablement of strategicapplications, Customer Relationship Management (CRM), network services,strategic outsourcing and managed resourcing as well as software and relationaldatabase products, up to the time of sale, March 25, 2002, of Princeton SoftechInc.

 

During 2002, Princeton made up the following within the SolutionsGroup; $2.9 million of revenue, $2.4 million of gross margin, $1.9 million operatingloss and depreciation expense of $84,000. During 2001, Princeton made up the following within the Solutions Group;$29.0 million of revenue, $22.7 million of gross margin, $5.7 million ofoperating loss and depreciation expense of $582,000.

 

Chimes, Inc., a wholly-owned subsidiary of CHC, provides workforceprocurement and management services to Global 2000 companies, (which Forbesmagazine, defines as the biggest and most important companies as measured bysales, profits, assets and market value).

 

Income/(loss) before income tax benefit consists of income/(loss)before income taxes, excluding interest income, interest expense, gain/(loss)on the sale of assets, restructuring charges, special charges, the write-off ofa terminated project, amortization of intangibles, write-down of assets heldfor sale and net loss on investments. These exclusions total expense of $18.0 million, income of $4.1 millionand expense of $12.0 million at December 31, 2003, 2002 and 2001,respectively.   Long-term assets includegoodwill, intangibles and property, plant and equipment for 2003 and goodwilland property, plant and equipment for 2002 and 2001.  Corporate services, consisting of general and administrativeservices are provided to the segments from a centralized location.  Such costs are allocated to the segmentsbased on either revenue or headcount.

 

51

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| **BY LINE OF BUSINESS**                          |   | **2003**            |        | **2002** |   | **2001** |   |
|--------------------------------------------------|--------|---------------------|-------------|----------|--------|----------|--------|
|                                             |   | **(in  thousands)** |        |
|                                             |   |                |        |
| *Revenue:*                                       |   |                |        |     |   |     |   |
| IT Services                                      |   | **$**               | **133,070** |     | $      | 201,295  |   | $ | 274,379 |   |
| Solutions Group                                  |   | **92,122**          |        | 79,283   |   | 116,873  |   |
| Chimes                                           |   | **20,018**          |        | 16,537   |   | 9,532    |   |
|                                             |   |                |        |     |   |     |   |
| Total revenue                                    |   | **$**               | **245,210** |     | $      | 297,115  |   | $ | 400,784 |   |
|                                             |   |                |        |     |   |     |   |
| *Gross Margin:*                                  |   |                |        |     |   |     |   |
| IT Services                                      |   | **$**               | **26,740**  |     | $      | 40,626   |   | $ | 58,752 |   |
| Solutions Group                                  |   | **30,042**          |        | 25,712   |   | 51,419   |   |
| Chimes                                           |   | **18,626**          |        | 14,596   |   | 9,037    |   |
|                                             |   |                |        |     |   |     |   |
| Total gross margin                               |   | **$**               | **75,408**  |     | $      | 80,934   |   | $ | 119,208 |   |
|                                             |   |                |        |     |   |     |   |
| *Operating income /  (loss):*                    |   |                |        |     |   |     |   |
|                                             |   |                |        |     |   |     |   |
| IT Services                                      |   | **$**               | **8,053**   |     | $      | 15,044   |   | $ | 26,053 |   |
| Solutions Group                                  |   | **12,654**          |        | 7,621    |   | 710      |   |
| Chimes                                           |   | **(2,177**          | )           | (7,490   | )      | (9,516   | )      |
|                                             |   |                |        |     |   |     |   |
| Total operating income/(loss)                    |   | **$**               | **18,530**  |     | $      | 15,175   |   | $ | 17,247 |   |
|                                             |   |                |        |     |   |     |   |
| Corporate Allocation:                            |   |                |        |     |   |     |   |
|                                             |   |                |        |     |   |     |   |
| IT Services                                      |   | **$**               | **12,108**  |     | $      | 17,287   |   | $ | 18,318 |   |
| Solutions Group                                  |   | **6,743**           |        | 6,855    |   | 7,916    |   |
| Chimes                                           |   | **1,841**           |        | 1,442    |   | 637      |   |
|                                             |   |                |        |     |   |     |   |
| Total corporation allocation                     |   | **$**               | **20,692**  |     | $      | 25,584   |   | $ | 26,871 |   |
|                                             |   |                |        |     |   |     |   |
| *Income / (loss)  before income tax benefit:*    |   |                |        |     |   |     |   |
| IT Services                                      |   | **$**               | **(4,055**  | )        | $      | (2,243   | )      | $ | 7,735 |   |
| Solutions Group                                  |   | **5,911**           |        | 766      |   | (7,206   | )      |
| Chimes                                           |   | **(4,018**          | )           | (8,932   | )      | (10,153  | )      |
|                                             |   |                |        |     |   |     |   |
| Total income / (loss) before income tax  benefit |   | **$**               | **(2,162**  | )        | $      | (10,409  | )      | $ | (9,624 | ) |
|                                             |   |                |        |     |   |     |   |
| *Assets:*                                        |   |                |        |     |   |     |   |
| IT Services                                      |   | **$**               | **21,253**  |     | $      | 47,876   |   | $ | 93,920 |   |
| Solutions Group                                  |   | **69,133**          |        | 29,640   |   | 63,126   |   |
| Chimes                                           |   | **14,402**          |        | 26,762   |   | 8,354    |   |
| Corporate and other                              |   | **74,349**          |        | 89,453   |   | 72,321   |   |
|                                             |   |                |        |     |   |     |   |
| Total assets                                     |   | **$**               | **179,137** |     | $      | 193,731  |   | $ | 237,721 |   |
|                                             |   |                |        |     |   |     |   |
| *Depreciation  Expense:*                         |   |                |        |     |   |     |   |
| IT Services                                      |   | **$**               | **563**     |     | $      | 482      |   | $ | 762 |   |
| Solutions Group                                  |   | **1,433**           |        | 1,133    |   | 1,764    |   |
| Chimes                                           |   | **1,476**           |        | 1,044    |   | 524      |   |
| Corporate and other                              |   | **1,864**           |        | 1,975    |   | 2,251    |   |
|                                             |   |                |        |     |   |     |   |
| Total depreciation                               |   | **$**               | **5,336**   |     | $      | 4,634    |   | $ | 5,301 |   |

 

52

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| **BY GEOGRAPHIC AREA ***                                                                                               |   | **2003**            |        | **2002** |   | **2001** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-------------|----------|--------|----------|--------|
|                                                                                                                   |   | **(in  thousands)** |        |
| REVENUE                                                                                                                |   |                |        |     |   |     |   |
| United States                                                                                                          |   | **$**               | **219,453** |     | $      | 270,890  |   | $ | 361,884 |   |
| Canada                                                                                                                 |   | **24,709**          |        | 23,390   |   | 24,181   |   |
| Europe                                                                                                                 |   | **627**             |        | 2,775    |   | 12,617   |   |
| India                                                                                                                  |   | **421**             |        | —   |   | —   |   |
| Australia                                                                                                              |   | —              |        | 60       |   | 2,102    |   |
|                                                                                                                   |   |                |        |     |   |     |   |
| Total Revenue                                                                                                          |   | **$**               | **245,210** |     | $      | 297,115  |   | $ | 400,784 |   |
|                                                                                                                   |   |                |        |     |   |     |   |
|                                                                                                                        |
| *      Revenue is generated for each geographic  segment based on the locale of the customer. |
|                                                                                                                   |
| LONG-TERM ASSETS                                                                                                       |   |                |        |     |   |     |   |
| United States                                                                                                          |   | **$**               | **45,191**  |     | $      | 29,486   |   | $ | 41,716 |   |
| Canada                                                                                                                 |   | **705**             |        | 628      |   | 19,319   |   |
| Europe                                                                                                                 |   | **—**          |        | 106      |   | 163      |   |
| India                                                                                                                  |   | **53**              |        | —   |   | —   |   |
|                                                                                                                   |   |                |        |     |   |     |   |
| Total Long-Term Assets                                                                                                 |   | **$**               | **45,949**  |     | $      | 30,220   |   | $ | 61,198 |   |

 

 

*Reconciliation of Segments Lossbefore Income Tax Benefit to Consolidated Loss Before Income Tax Benefit:*

* *

* *
|                                           |   | **2003**            |    | **2002** |   | **2001** |   |
|------------------------------------------------|--------|---------------------|---------|----------|--------|----------|--------|
|                                           |   | **(in  thousands)** |    |
|                                           |   |                |    |
| Total segments loss before income tax  benefit |   | $                   | (2,162  | )        | $      | (10,409  | )      | $ | (9,624 | ) |
| Adjustments:                                   |   |                |    |     |   |     |   |
| Special charges                                |   | (10,113             | )       | —   |   | —   |   |
| Restructuring charges                          |   | (3,278              | )       | (2,515   | )      | (1,048   | )      |
| Write off of terminated project                |   | (3,064              | )       | —   |   | —   |   |
| Amortization of intangibles                    |   | (1,084              | )       | —   |   | (2,695   | )      |
| Net gain/(loss) on investments                 |   | (432                | )       | (61      | )      | 90       |   |
| Gain/(loss) on sale of assets                  |   | (424                | )       | 5,890    |   | (3,197   | )      |
| Interest income                                |   | 529                 |    | 928      |   | 2,293    |   |
| Interest expense                               |   | (51                 | )       | (174     | )      | (1,944   | )      |
| Write-down of assets held for sale             |   | —              |    | —   |   | (5,473   | )      |
|                                           |   |                |    |     |   |     |   |
| Total Adjustments                              |   | (17,917             | )       | 4,068    |   | (11,974  | )      |
| Consolidated loss before income taxes          |   | $                   | (20,079 | )        | $      | (6,341   | )      | $ | (21,598 | ) |

 

53

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**NOTE 10 - SAVINGS PLAN AND OTHER RETIREMENTPLANS**

 

The Company maintains a defined contribution savings plan coveringeligible employees.  The Company makescontributions up to a specific percentage of participants’ contributions.  The Company contributed approximately$821,000, $1,089,000 and $1,413,000 in 2003, 2002 and 2001, respectively.

 

In 1995, the Company instituted a Supplemental Executive RetirementPlan, or SERP, whereby key executives are entitled to receive lump-sum payments(or, if they elect, a ten-year payout) upon reaching the age of 65 and being inthe employment of the Company.  Themaximum commitment if all plan members remain in the employment of the Companyuntil age 65 is approximately $11.3 million. Benefits accrue and vest based on a formula which includes total yearswith the Company and total years possible until age 65.  The plan is nonqualified and not formallyfunded.  Life insurance policies on themembers are purchased to assist in funding the cost.  The SERP expense is charged to operations during the remainingservice lives of the members and was $480,000 in 2003, $407,000 in 2002 and$115,000 in 2001.  The cumulativeaccrued liability for the SERP was $1.7 million as of December 31, 2003based on the Unit Credit Method by using a discounting rate of 9% until age 65for each participant.  Contributions areexpected to be $203,075 in 2004 while distributions are scheduled to be nilfrom 2004 through 2007, $250,000 in 2008 and a total of 2.6 million from 2009through 2013.

 

During 1999 the Company adopted an Employee Stock Purchase Plan toprovide substantially all employees who have completed one year of service anopportunity to purchase shares of its common stock through payroll deductions,up to 10 percent of eligible compensation. Quarterly, participant account balances are used to purchase shares ofstock at 85 percent of its fair market value on either the first or lasttrading day of each calendar quarter.  Atotal of 4 million shares are available for purchase under the plan.  There were 153,765, 405,366 and 643,280shares purchased under the plan in 2003, 2002 and 2001, respectively.

 

In addition, the Company adopted a Deferred Compensation Plan for KeyExecutives that permits the individuals to defer a portion of their annualsalary or bonus for a period of at least five years.  There is no effect on the Company’s operating results since anyamounts deferred under the plan are expensed in the period incurred.  Amounts deferred have been included in otherliabilities and amounted to $2.1 million, $3.2 million and $3.3 million as ofDecember 31, 2003, 2002 and 2001, respectively.

 

In December 2003, John Cassese, the former CEO of Computer HorizonsCorp., received a lump-sum payment of $1.3 million, net of taxes from hisdeferred compensation plan account in accordance with his severanceagreement.  The Company redeemedinsurance policies to fund this payment and received approximately $2.5 millionfor the surrender values of the split dollar policies.  The Company recorded a realized loss ofapproximately $432,000 on investments for these insurance policies, which hadan original cost of approximately $2.9 million.

 

54

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**NOTE 11 - COMMITMENTS**

 

Leases

 

The Company leases office space under long-term operating leasesexpiring through 2008.  As of December31, 2003, approximate minimum rental commitments were as follows:

 
| **Year ending** |   | **(in  thousands)** |   |
|-----------------|--------|---------------------|--------|
| 2004            |   | $                   | 6,409  |   |
| 2005            |   | 4,783               |   |
| 2006            |   | 1,750               |   |
| 2007            |   | 1,075               |   |
| 2008            |   | 76                  |   |
|            |   |                |   |
|            |   | $                   | 14,093 |   |

 

Office rentals are subject to escalations based on increases in realestate taxes and operating expenses. Rent expense, net of sublease income of approximately $137,000, $480,000and $208,000 for December 31, 2003, 2002 and 2001, respectively, for operatingleases approximated $5.0 million, $5.3 million and $7.8 million in the yearsended December 31, 2003, 2002 and 2001, 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 payments totaling approximately $200,000.

 

55

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

 

For the years ended December 31, 2003 and 2002, selected quarterlyfinancial data is as follows:

 
|                                    |   | **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**                                 | ** ** | **41,511** | ** ** | **44,406** | ** ** | **41,112** |   |
| **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**                                 | **)**      | **(13,321** | **)** | **(2,943** | **)** | **(1,742** | ) |
| **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**                                 | **)**      | **(13,231** | **)** | **(2,865** | **)** | **(2,183** | ) |
| **Income taxes/(benefit)**              |   | **(540**                                   | **)**      | **(3,719** | **)** | **(394** | **)** | **(567** | ) |
| **Minority interest**                   |   | **(19**                                    | **)**      | **(18** | **)** | **21** | ** ** | **(73** | ) |
| **Net loss**                            |   | **$**                                      | **(1,279** | **)** | **$** | **(9,530** | **)** | **$** | **(2,450** | **)** | **$** | **(1,689** | ) |
|                                    |   |                                       | ** ** |   | ** ** |   | ** ** |   |   |
| **Loss per share (basic and diluted):** |   |                                       | ** ** |   | ** ** |   | ** ** |   |   |
| **Net loss**                            |   | **$**                                      | **(0.04**  | **)** | **$** | **(0.31** | **)** | **$** | **(0.08** | **)** | **$** | **(0.06** | ) |

 

56

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|                                                             |   | **Quarters**                               |    |
|------------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                             |   | **First**                                  |    | **Second** |   | **Third** |   | **Fourth** |   |
|                                                             |   | **(in  thousands, except per share data)** |    |
|                                                             |   |                                       |    |
| 2002                                                             |   |                                       |    |   |   |   |   |   |   |
| Revenues                                                         |   | $                                          | 79,219  |   | $ | 77,318 |   | $ | 73,574 |   | $ | 67,004 |   |
| Direct costs                                                     |   | 58,192                                     |    | 56,570 |   | 52,865 |   | 48,554 |   |
| Selling, general and administrative                              |   | 26,459                                     |    | 22,452 |   | 22,347 |   | 20,085 |   |
| Restructuring charges                                            |   | —                                     |    | — |   | — |   | 2,515 |   |
| Loss from operations                                             |   | (5,432                                     | )       | (1,704 | ) | (1,638 | ) | (4,150 | ) |
| Gain on sale of assets                                           |   | 3,570                                      |    | — |   | — |   | 2,320 |   |
| Net loss on investments                                          |   | (61                                        | )       | — |   | — |   | — |   |
| Interest income/(expense) - net                                  |   | 55                                         |    | 255 |   | 247 |   | 197 |   |
| Loss before income taxes                                         |   | (1,868                                     | )       | (1,449 | ) | (1,391 | ) | (1,633 | ) |
| Income taxes/(benefit)                                           |   | (635                                       | )       | (493 | ) | (473 | ) | 3,470 |   |
| Loss before cumulative effect of change in  accounting principle |   | (1,233                                     | )       | (956 | ) | (918 | ) | (5,103 | ) |
| Cumulative effect of change in accounting  principle             |   | (29,861                                    | )       | — |   | — |   | — |   |
| Minority interest                                                |   | —                                     |    | — |   | — |   | 35 |   |
| Net loss                                                         |   | $                                          | (31,094 | ) | $ | (956 | ) | $ | (918 | ) | $ | (5,068 | ) |
|                                                             |   |                                       |    |   |   |   |   |   |   |
| Loss per share (basic and diluted):                              |   |                                       |    |   |   |   |   |   |   |
| Before cumulative effect of change in  accounting principle      |   | $                                          | (0.04   | ) | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.16 | ) |
| Cumulative effect of change in accounting  principle             |   | $                                          | (0.95   | ) | $ | — |   | $ | — |   | $ | — |   |
| Net loss                                                         |   | $                                          | (0.99   | ) | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.16 | ) |

 

57

----

 

**NOTE 13 - RESTRUCTURING CHARGES**

 

Approximately 24% of the restructure charge in 2003 was related to theChimes segment with the balance related to the IT Services segment.

 

During the fourth quarter of 2003, the Companyrecorded a restructuring charge of approximately $329,000 relating to theclosing of one office in the United States and the related severance.  The Company decided to continue business inthis area through  virtual offices andtherefore recorded the charge after the building was closed.  The lease obligation of $90,000 wascalculated based on current rent commitments less a calculated sublease amountbased on current market conditions.  Theseverance expense of $239,000 was paid out as of December 31, 2003.

 

 
|               |   | **Recorded** |      | **Paid** |   | **Remaining  at  December 31,  2003** |   |
|--------------------|--------|--------------|-----------|----------|--------|---------------------------------------|--------|
| Severance:         |   |         |      |     |   |                                  |   |
| United States      |   | $            |  239 |     | $      |  (239                            | )      | $ |  — |   |
|               |   |         |      |     |   |                                  |   |
| Lease Obligations: |   |         |      |     |   |                                  |   |
| United States      |   | $            |  90  |     | $      |  —                          |   | $ |  90 |   |
|               |   |         |      |     |   |                                  |   |
| Total              |   | $            |  329 |     | $      |  (239                            | )      | $ |  90 |   |

 

During the third quarter of 2003, the Companyrecorded a restructuring charge of approximately $787,000 relating to theclosing of Chimes (UK) Ltd. and severance charges related to United Statesoperations.  The Company decided to continuebusiness in this geographic area through a third party and therefore recordedthe charge after the building was closed. The provision includes an accrual relating to the future costsassociated with continuing rent on this property in the United Kingdom.  The closing of this office resulted in aseverance charge of $305,000.  As ofDecember 31, 2003, $258,000 had been paid in severance to terminated employeesdue to the closing of the UK facility.

 
|                    |   | **Recorded** |      | **Paid** |   | **Remaining  at  December 31,  2003** |   |
|-------------------------|--------|--------------|-----------|----------|--------|---------------------------------------|--------|
| Severance:              |   |         |      |     |   |                                  |   |
| United Kingdom*         |   | $            |  305 |     | $      |  (258                            | )      | $ |  47 |   |
| United States           |   | 219          |      | (219     | )      | —                                |   |
| Total Severance         |   | $            |  524 |     | $      |  (477                            | )      | $ |  47 |   |
|                    |   |         |      |     |   |                                  |   |
| Lease Obligations:      |   |         |      |     |   |                                  |   |
| United Kingdom*         |   | $            |  183 |     | $      |  (33                             | )      | $ |  150 |   |
|                    |   |         |      |     |   |                                  |   |
| General Office Closure: |   |         |      |     |   |                                  |   |
| United Kingdom*         |   | $            |  211 |     | $      |  (162                            | )      | $ |  49 |   |
|                    |   |         |      |     |   |                                  |   |
| Total                   |   | $            |  918 |     | $      |  (672                            | )      | $ |  246 |   |

 

----

* Recorded balances change due to fluctuations inexchange rates

 

58

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During the second quarter of 2003, the Companyevaluated the geographic area in Canada and decided to close facilities and govirtual in the smaller Canadian markets. After the buildings were entirely closed, the Company recorded arestructuring charge of approximately $1.7 million relating to theconsolidating and closing of these facilities in the Canadian subsidiary.  The $1.3 million expense for leaseobligations was calculated based on current rent commitments less a calculatedsublease amount based on current market conditions.  The entire provision of $1.3 million included an accrual relatingto the future costs associated with continuing rent on six properties, five ofwhich are in Canada, with rents continuing through 2004, 2006 and 2007.  The closing of all of these offices resultedin the termination of 20 employees with a severance charge of $734,000.  As of December 31, 2003, $734,000 had beenpaid in severance to the terminated employees. In the fourth quarter of 2003, the Company adjusted the rent obligationin the United States due to the sublease of this facility.

 
|                    |   | **Recorded** |   | **Paid** |   | **Adjusted** |   | **Remaining  at  December 31,  2003** |   |
|-------------------------|--------|--------------|--------|----------|--------|--------------|--------|---------------------------------------|--------|
| Lease Obligations:      |   |         |   |     |   |         |   |                                  |   |
| Canada*                 |   | $            | 1,214  |     | $      | (475         | )      | $                                     | — |   | $ | 739 |   |
| United States           |   | 36           |   | (10      | )      | (26          | )      | —                                |   |
| Total Lease Obligations |   | $            | 1,250  |     | $      | (485         | )      | $                                     | (26    | ) | $ | 739 |   |
|                    |   |         |   |     |   |         |   |                                  |   |
| Severance:              |   |         |   |     |   |         |   |                                  |   |
| Canada*                 |   | $            | 395    |     | $      | (395         | )      | $                                     | — |   | $ | — |   |
| United States           |   | 197          |   | (197     | )      | —       |   | —                                |   |
| United Kingdom          |   | 142          |   | (142     | )      | —       |   | —                                |   |
| Total Severance         |   | $            | 734    |     | $      | (734         | )      | $                                     | — |   | $ | — |   |
|                    |   |         |   |     |   |         |   |                                  |   |
| General Office Closure: |   |         |   |     |   |         |   |                                  |   |
| Canada*                 |   | $            | 128    |     | $      | (249         | )      | $                                     | 121    |   | $ | — |   |
|                    |   |         |   |     |   |         |   |                                  |   |
| Total                   |   | $            | 2,112  |     | $      | (1,468       | )      | $                                     | 95     |   | $ | 739 |   |

 

----

*Recorded balances change due to currency fluctuations

 

During the fourth quarter of 2002, the Companyrecorded a restructuring charge of $2.8 million pertaining to 2002 officeclosings.  During the second quarter of2003, half of the rent for one office closing was reversed after the rent wasnegotiated at a lower rate for half the building.  During the fourth quarter of 2003, the Company made an additionaladjustment to the reserve for four of the properties due to sublease.

  
|               |   | **Remaining  at  December 31,  2002** |   | **Paid** |   | **Adjusted** |   | **Remaining  at  December 31,  2003** |   |
|--------------------|--------|---------------------------------------|--------|----------|--------|--------------|--------|---------------------------------------|--------|
| Lease Obligations: |   |                                  |   |     |   |         |   |                                  |   |
| United States      |   | $                                     | 2,483  |     | $      | (1,340       | )      | $                                     | 16     |   | $ | 1,159 |   |
|                    |        |                                       |        |          |        |              |        |                                       |        |  |  |  |  |

 

59

----

 

At the end of 2002, the Company had $295,000 of fivelease obligations remaining from the restructure expense recorded in 2001.  Of the five lease obligations, four remain andthe balance as of December 31, 2003 was $78,000.  During the fourth quarter of 2003, the Company made an adjustmentto the reserve for the sublease of two properties.

** **
|               |   | **Remaining  at  Dec.31,  2002** |   | **Paid** |   | **Adjusted** |   | **Remaining  at  December 31,  2003** |   |
|--------------------|--------|----------------------------------|--------|----------|--------|--------------|--------|---------------------------------------|--------|
| Severance:         |   |                             |   |     |   |         |   |                                  |   |
| United States      |   | $                                | 1      |     | $      | (1           | )      | $                                     | — |   | $ | — |   |
|               |   |                             |   |     |   |         |   |                                  |   |
| Lease Obligations: |   |                             |   |     |   |         |   |                                  |   |
| United States      |   | $                                | 294    |     | $      | (191         | )      | $                                     | (25    | ) | $ | 78 |   |
|               |   |                             |   |     |   |         |   |                                  |   |
| Total              |   | $                                | 295    |     | $      | (192         | )      | $                                     | (25    | ) | $ | 78 |   |

 

Atthe end of 2002 the Company had $488,000 of one lease obligation remaining onthe restructure expense recorded in 2000 with the lease terminating in2005.  The balance remaining at December31, 2003 was $308,000.

 
|               |   | **Remaining  at  Dec.31,  2002** |   | **Paid** |   | **Remaining  at  December 31,  2003** |   |
|--------------------|--------|----------------------------------|--------|----------|--------|---------------------------------------|--------|
| Lease Obligations: |   |                             |   |     |   |                                  |   |
| United States      |   | $                                | 488    |     | $      | (180                                  | )      | $ | 308 |   |
|                    |        |                                  |        |          |        |                                       |        |  |  |  |

 

60

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**NOTE 14 – MAJORITY-OWNED SUBSIDIARY**

 

On September 30, 2002, the Company announced that it had joined itsexisting HIPAA compliance, healthcare information technology and othercompliance business practices with ZA Consulting LLC (ZAC) to form CHCHealthcare Solutions, LLC.  Under theterms of the agreement, CHC has an 80% interest in the newly formed company.

 

 

**NOTE 15 - ACQUISITIONS**

 

*OnSeptember 12, 2003, the Company acquired, from Commerce One, the Xpresssolution, a suite of software and services designed to rapidly facilitateproduct data synchronization between trading partners.  The purchase price of the software was$566,000, recorded as intangible assets, and is being amortized over a threeyear period.*

 

*On July 8,2003, the Company acquired all of the stock of privately-held RGIITechnologies, Inc. (“RGII”).    TheCompany purchased RGII because acquiring a platform company in the Federal governmentIT Services marketplace has been a long-term priority for the Company.  The purchase price was approximately $22.1million including an up-front cash payment, acquisition expenses, workingcapital adjustment and the payoff of a note payable of $1.5 million.  In addition the Company paid off a RGII$665,000 note and a line of credit of approximately $2 million.  In addition, the seller may be entitled tocontingent payments based on RGII’s performance against profitabilityobjectives over the next three years. The contingent payments are evidenced by a contingent note with a facevalue of $10 million that is payable over three years, only if certainfinancial performance objectives are met. 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 maximumpayment obligations under the terms of the contingent note. The contingentpayment will be reduced on a dollar for dollar basis for financial performancebelow EBIT targets, and increased by 29 cents ($0.29) for each dollar exceedingEBIT targets.  At December 31, 2003 theseller was entitled to additional payments of $631,000 for the first installment.  The Company also entered into employmentagreements with the former shareholder and key employees of RGII and haveagreed to issue an aggregate of 600,000 options to purchase shares of ComputerHorizons stock over a three-year period.*

 

The Company completed the allocation of the purchase price to assetsand liabilities acquired utilizing outside valuation consultants to assist inthis process.  Audited historicalfinancial statements of RGII together with applicable pro forma financialinformation were filed with the SEC on September 19, 2003.

 

61

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

 
|                   |   | **Allocation  of  Purchase Price** |   |
|------------------------|--------|------------------------------------|--------|
|                   |   |                               |   |
| Accounts receivable    |   | $                                  | 10,958 |   |
| Other current assets   |   | 79                                 |   |
| Property and equipment |   | 1,255                              |   |
| Goodwill               |   | 13,958                             |   |
| Intangibles            |   | 2,926                              |   |
| Other assets           |   | 444                                |   |
| Total assets           |   | 29,620                             |   |
|                   |   |                               |   |
| Accounts payable       |   | 1,483                              |   |
| Taxes payable          |   | 210                                |   |
| Accrued expenses       |   | 2,520                              |   |
| Notes payable          |   | 2,636                              |   |
| Long-term liabilities  |   | 593                                |   |
| Total liabilities      |   | 7,442                              |   |
|                   |   |                               |   |
| Net assets             |   | $                                  | 22,178 |   |

 

Purchased intangibles totaling $2.9 million included unfunded backlog,funded backlog, software and non compete agreements.  Approximately $14.0 million was recorded as goodwill.

 

Theacquisition will be treated as a purchase of assets for tax purposes.  Accordingly, goodwill will be subject toamortization for tax purposes over fifteen years.

 

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Pro Forma Results

 

*Effective July 1, 2003, the resultsof RGII’s operations have been included in the consolidated financialstatements of the Company.  Thefollowing unaudited pro forma financial information presents the combinedresults of operations of the Company and RGII as if the acquisition hadoccurred as of the beginning of the periods presented.  The revenues and results of operationsincluded in the following unaudited pro forma consolidated financialinformation is not considered necessarily indicative of the results of operationsfor the periods specified had the transaction actually been completed at thebeginning of the period.*

** **
|                                                                      |   | **Unaudited  Pro Forma (in thousands)** |    |
|---------------------------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                                      |   | **Year Ended  December 31,**            |    |
|                                                                      |   | **2003**                                |    | **2002** |   |
| Revenues:                                                                 |   |                                    |    |   |   |
| IT Services                                                               |   | $                                       | 133,070 |   | $ | 201,295 |   |
| Solutions Group                                                           |   | 110,987                                 |    | 112,456 |   |
| Chimes                                                                    |   | 20,018                                  |    | 16,537 |   |
| Total                                                                     |   | 264,075                                 |    | 330,288 |   |
| Loss before minority interest and change in  accounting principle         |   | (14,573                                 | )       | (7,462 | ) |
| Minority interest                                                         |   | (89                                     | )       | 35 |   |
| Cumulative effect of change in accounting  principle                      |   | —                                  |    | (29,861 | ) |
| Net loss                                                                  |   | $                                       | (14,662 | ) | $ | (37,288 | ) |
| Loss per share – (basic & diluted):                              |   |                                    |    |   |   |
| Net loss                                                                  |   | $                                       | (0.48   | ) | $ | (1.19 | ) |
| Weighted average number of shares  outstanding – basis & diluted |   | 30,455,000                              |    | 31,243,000 |   |

 

The unaudited pro forma financial information above reflects thefollowing adjustments to the historical consolidated financial statements forthe year ended December 31, 2003:  $1.0million amortization expense on purchased intangible assets, $55,000 reductionof interest income for cash consideration paid less interest expense reductionpertaining to RGII debt and $66,000 adjustment to taxes to record income taxesfor RGII as if it was a C-Corporation and record income tax effect of pro formaadjustments.

* *

*On January 31, 2003, the Companyacquired the IT Solutions operations of Global Business Technology Solutions(“GBTS”), from Alea (Bermuda) Limited, a member of the Alea Group of companiesand Westfield Services, Inc., a subsidiary of Westfield Financial Corporationfor $400,000 in order to augment the Company’s outsourcing solution to includeIndia.  The outsourcing facility and itsIT professionals are located in Chenni (Madras), India.  This transaction was accounted for as apurchase and the entire purchase price was allocated to goodwill.  Pro forma information has not been presentedas the amounts are not material.*

* *

*On February 27,1998, the Companyacquired all of the common stock of Princeton Softech, Inc. (“Princeton”) inexchange for 954,213 shares of Computer Horizons stock.  Princeton specializes in relational  databases, data synchronization, intelligentdata migration and data management tools, and is based in Princeton, NewJersey.  This transaction was accountedfor as an immaterial pooling of interests and the results of Princeton havebeen included since January 1, 1998.  OnMarch 25, 2002 the Company sold Princeton to Apax Partners, Inc. and LLRPartners (see Note 17).*

 

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

 

The Company decided in 2000 to offer three of its subsidiaries(Princeton Softech “Princeton”, including the SELECT Software Tools division“Select”, CHC International Limited “Spargo”, and eB Networks “EBN”) for saleor disposition and accordingly classified these entities as “assets held forsale.”

 

During 2001, two of the subsidiaries and Select were sold (See Note17).  During 2002, the last remainingasset held for sale, Princeton, was sold (See Note 17).  During the years ended December 31, 2002 and2001 these respective entities generated net losses of $1.3 million and $4.4million, respectively.  At December 31,2001, the assets and liabilities of the remaining subsidiary Princeton, wereclassified in the consolidated balance sheet as net assets held for sale andwere included in the Solutions segment (see Note 8).  Such net assets consisted of the following:

 

 
|                           |   | **December  31,  2001  (in thousands)Princeton** |   |
|--------------------------------|--------|--------------------------------------------------|--------|
|                           |   |                                             |   |
| Current assets                 |   | $                                                | 19,607 |   |
| Property and equipment         |   | 1,370                                            |   |
| Other assets                   |   | 1,139                                            |   |
|                           |   |                                             |   |
| Total assets                   |   | 22,116                                           |   |
| Total liabilities              |   | (11,735                                          | )      |
|                           |   |                                             |   |
| Total net assets held for sale |   | $                                                | 10,381 |   |

 

For the year endedDecember 31, 2002, Princeton’s revenue was $2.9 million and its loss, net of taxes, was $1.3 million.

 

**NOTE 17 - SALE OF SUBSIDIARIES**

 

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

 

On March 25, 2002, the Company sold the netassets of Princeton Softech to Apax Partners, Inc. and LLR Partners, for cashof $16 million, including amounts held in escrow of $1.5 million. The gain fromthe transaction was initially estimated as $3.6 million and was adjusted in thefourth quarter of 2002 to $3.2 million due to a purchase price adjustment.  During the second quarter of 2003, theCompany received approximately $748,000 of the escrow.  The results of operations are included inthe consolidated financial statements through February 28, 2002 within theSolutions group.

 

On September 10, 2001, the Company sold the assets of EBN to InrangeTechnologies, a storage networking company, for cash of $5.4 million, includingamounts held in escrow of $540,000.  Theloss from the transaction was initially estimated as $3.2 million, whichincluded the final write-down of related goodwill of $2.1 million.  A purchase price adjustment was recorded inthe fourth quarter of 2002 resulting in an increase to

 

64

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the loss of $144,000.  Theresults of operations are included in the consolidated financial statementsthrough September 10, 2001 within the Solutions group.

 

On August 30, 2001, the Company sold the ICMEducation name to AlphaNet Solutions, Inc., an IT professional services firm,for $0.5 million.  The gain from thetransaction was $332,000.  The resultsof operations are included in the consolidated financial statements throughAugust 30, 2001 within the Solutions group. In November 2002, the Company received an additional $100,253 fromAlphaNet Solutions, Inc. relating to an earnout.

 

On April 17, 2001, the Company sold theSELECT Software Tools division “Select” of Princeton Softech to Aonix, a memberof the Gores Technology Group, for approximately $895,000 including $545,000 ofcash received and a note receivable of $350,000, subsequently written off withthe sale of Princeton Softech on March 25, 2002.  This sale included all the software assets and intellectualproperty rights of Select and was sold at book value.  The results of operations are included in the consolidatedfinancial statements through April 17, 2001 within the Solutions group.

 

On January 31, 2001, the Company sold the stock of CHC InternationalLimited, (“Spargo”), to an information technology consultancy services providerfor cash of $3.2 million.  The gain fromthe transaction was initially estimated as $438,000.  A purchase price adjustment of $2.7 million was recorded, in thefourth quarter of 2002, to increase the gain after the final resolution ofoutstanding accounts receivables and the termination of leases.  The results of operations for January 2001were not material to the consolidated financial statements.

 

 

**NOTE 18 – SPECIAL ITEMS**

 

*During theyear ended December 31, 2003, the Company incurred special charges of $10.1million consisting of a severance package for the Company’s former CEO andexpenses related to the unilateral acquisition proposal and activities ofAquent LLC.  The separation package ofthe Company’s former CEO, included a $3.5 million severance payment and$200,000 in continued medical coverage. In addition, $6.4 million of the special charges pertained to theunilateral acquisition proposal and activities of Aquent LLC.  This expense is primarily attributable toapproximately $3.4 million of legal fees, $1.8 million in financial advisorfees and $1.2 million of proxy solicitation and other fees.  As management considers these special itemsto be infrequent, yet material in nature, the Company has reported the expenseson a separate line for full disclosure purposes, however, the amounts arereported within operating income.  TheCompany also incurred a restructuring expense of $3.3 million for the yearended December 31, 2003 relating primarily to the closing of facilities inCanada and the United Kingdom.  Inaddition, the Company voluntarily terminated a sub-contract with ATEB, aprivately held company, for financial reasons and recorded a write-off ofapproximately $3.1 million due to the uncertainty of the realization of thereceivable.  ATEB was the primarycontractor to develop a new pharmacy system for Royal Ahold.  The Company is continuing recovery effortsfor this receivable.*

* *

*65*

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* *

***NOTE 19 –RESCISSION OFFER***

From April 2001 through January 2003, thesale of shares of the Company’s common stock pursuant to the Employee StockPurchase Plan were not exempt from registration or qualification under federalsecurities laws.  As a result, theCompany may have failed to comply with the registration or qualificationrequirements of federal and applicable state securities laws because theCompany did not register or qualify these stock issuances under either federalor applicable state securities laws.

 

As a result the Company intends to make arescission offer to all those persons who purchased shares of common stockpursuant to the Employee Stock Purchase Plan during the affected periods.  The rescission offer will be made pursuantto a registration statement filed under the Securities Act and pursuant toapplicable state securities laws.  Inthis rescission offer, the Company is offering to repurchase the shares subjectto our rescission offer for the price paid per share plus interest from thedate of purchase until the rescission offer expires, at the current statutoryrate per year mandated by the state in which the shares were purchased.  The rescission offer will expire approximately30 days after the effective date of the registration statement.  Assuming all of the shares subject to therescission offer (approximately 659,000) are tendered in the rescission offer,the aggregate purchase price, excluding interest is estimated to beapproximately $1.8 million.  Thiscontingency payment is considered remote by the Company as the current price ofthe stock is above the price at which the shares would be repurchased.

 

**NOTE 20 – AQUENT/LEGAL MATTERS**

 

OnApril 29, 2003, the Company filed an action in the United States District Courtfor the District of New Jersey against Aquent LLC, seeking (i) to enjoin Aquentfrom disseminating false and misleading proxy materials and press releases insupport of its two nominees for director positions in connection with theCompany’s May 14, 2003 Annual Meeting; (ii) to invalidate any proxies securedby Aquent through the use of unlawful proxy solicitation materials; and (iii)to require Aquent to disseminate corrective disclosure that not only amendedthe false and misleading proxy materials but also advised CHC shareholders howAquent’s solicitations had violated the securities laws.

 

OnMay 27, 2003, the Company brought an action in the Supreme Court of the Stateof New York, New York County, seeking an order invalidating votes for directorsKarl Meyer and Robert Trevisani cast at the Annual Meeting by stockholders ofrecord who sold their shares between the record date and the date of the AnnualMeeting.

 

Each of the legal proceedings described above were settled anddismissed as a result of a settlement agreement between the Company and AquentLLC entered into on December 12, 2003. As part of the settlement, the Company agreed to modify itsJune 30, 2003 by-law amendment regarding special meeting procedures by,among other things, reducing from 75 to 50 minimum number of days between thetime a 10 percent or more shareholder requests a special meeting ofshareholders and the date of that meeting. In addition, Aquent entered into a standstill agreement pursuant towhich, for a period of one year, it agreed not to request a special meeting ofComputer Horizons’ shareholders for any purpose, or nominate anyone to serve asa member of CHC’s Board of Directors, or engage in any proxy solicitation ofComputer Horizons’ shareholders.

 

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

 

66

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Item9.  Changes in and disagreements withaccountants on accounting and financial disclosures

 

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

 

 

Item 9A.  Controlsand Procedures

 

Disclosure Controls and Procedures

 

The Company’s CEO and CFO have evaluated the effectiveness of theCompany’s disclosure controls and procedures (as such term is defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)as of the end of the period covered by this Annual Report.  Based on such evaluation, the Company’sChief Executive Officer and Chief Financial Officer have concluded that, as ofthe end of such period, the Company’s disclosure controls and procedures areeffective in recording, processing, summarizing and reporting, on a timelybasis, information required to be disclosed by the Company in the reports thatit files or submits under the Securities Exchange Act of 1934, as amended.

 

Internal Controls over Financial Reporting

 

There have not been any changes in the Company’s internal controls overfinancial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)under the Securities Exchange Act of 1934, as amended) during the fourthquarter of 2003 that materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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## **PART III**

 

Item 10.  Directors andExecutive Officers of the Registrant

(a)    The information called for by Item 10 withrespect to identification of directors of the Company is incorporated herein byreference to the material under the caption “Election of Directors” in theCompany’s Proxy Statement for its 2004 Annual Meeting of Shareholders which isexpected to be filed with the Securities and Exchange Commission on or beforeApril 7, 2004 (the “2004 Proxy Statement”).

(b)    The information called for by Item 10 withrespect to executive officers of the Company is included in Part I herein underthe caption “Executive Officers of the Company.”

(c)    The information called for by Item 10 withrespect to compliance with Section 16(a) of the Securities Exchange Act of 1939is incorporated herein by reference to the material under the caption“Compliance with Section 16(a) of the Exchange Act” in the 2004 ProxyStatement.

 

**Code of Ethics**

Our executive officers are subject to a code of ethics that complies withstandards mandated by the Sarbanes-Oxley Act of 2002.  The complete code of ethics is available on our website atwww.computerhorizons.com.  At any timeit is not available on our website, we will provide a copy upon written requestmade to our Investor Relations Department, at 49 Old Bloomfield Avenue,Mountain Lakes, New Jersey 07046-1495. Information on our website is not part of this Annual Report.  If we amend or grant any waiver from aprovision of our code of ethics that applies to our executive officers, we willpublicly disclose such amendment or waiver as required by applicable law,including by posting such amendment or waiver on our website atwww.computerhorizons.com or by filing a Current Report on Form 8-K.

 

Item 11.  ExecutiveCompensation

The information called for by Item 11 with respect to managementremuneration and transactions is incorporated herein by reference to thematerial under the caption “Executive Compensation” in the 2004 ProxyStatement.

 

Item 12. Security Ownership of Certain Beneficial Owners andManagement

The information called for by Item 12 with respect to securityownership of certain beneficial owners and management and the equitycompensation plan information is incorporated herein by reference to thematerial under the caption “Certain Holders of Voting Securities” in the 2004Proxy Statement.

 

Item 13. Certain Relationships and Related Transactions

In December 2003, John Cassese, the former CEO of Computer HorizonsCorp., received a lump-sum payment of $1.3 million, net of taxes from hisdeferred compensation plan account in accordance with his severanceagreement.  The Company redeemedinsurance policies to fund this payment and received approximately $2.5 millionfor the surrender values of the split dollar policies.  The Company recorded a realized loss ofapproximately $432,000 on investments for these insurance policies, which hadan original cost of approximately $2.9 million.

 

Item 14. Principal Accountant Fees and Services

The information called for by Item 14 with respect to PrincipalAccountant Fees and Services is incorporated herein by reference to thematerial under the caption “Audit Fees” in the 2004 Proxy Statement.

## ** **

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## **PART IV**

 

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

 

(a) Financial Statements and Financial Statement Schedules

 

1.  Consolidated financialstatements

•  Report of independent registered publicaccounting firm on the consolidated financial statements

•  Consolidated balance sheets as of December3l, 2003 and 2002

•  Consolidated statements of operations foreach of the three years in the period ended December 31, 2003

•  Consolidated statement of shareholders’equity for each of the three years in the period ended December 31, 2003

•  Consolidated statements of cash flows foreach of the three years in the period ended December 31, 2003

•  Notes to consolidated financial statements

 

69

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2.  Schedule II - Valuation andqualifying accounts for the years ended December 31, 2003, 2002 and 2001.

 
|                            |   | **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, 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 |                               | 1,092,000 |                         | —     |                           | $      | 11,381,000 |   |
| 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    |                           | $      | 78,000 |   |
| 1999 Restructure Reserve        |   | $                                     | 488,000    |                               | —    |                         | 180,000    |                           | $      | 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  |                           | $      | 295,000 |   |
| 1999 Restructure Reserve        |   | $                                     | 626,000    |                               | —    |                         | 138,000    |                           | $      | 488,000 |   |
|                            |   |                                  |       |                               |      |                         |       |                           |   |
| Year ended December 31, 2001    |   |                                  |       |                               |      |                         |       |                           |   |
| Allowance for doubtful accounts |   | $                                     | 2,702,000  |                               | 3,397,000 |                         | (1,443,000 | )(1)                           | $      | 7,542,000 |   |
| Deferred tax asset valuation    |   | $                                     | 2,727,000  |                               | 613,000   |                         | —     |                           | $      | 3,340,000 |   |
| 2000 Restructure Reserve        |   | $                                     | 2,620,000  |                               | 410,000   |                         | (1,566,000 | )                              | $      | 1,464,000 |   |
| 1999 Restructure Reserve        |   | $                                     | 385,000    |                               | 638,000   |                         | 397,000    |                           | $      | 626,000 |   |

 

 

Notes

----

(1)           Uncollectibleaccounts written off, net of recoveries.

(2)           Includes charge foroffice closings

 

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**Report of Independent Registered PublicAccounting Firm on Schedule II**

 

 

Board of Directors and Shareholders

Computer Horizons Corp.

 

In connection with our audit of the consolidated financial statementsof Computer Horizons Corp. and Subsidiaries referred to in our report datedFebruary 17 2004 (except for the second paragraph of Note 4, as to which thedate is March 9, 2004), which is included in the 2003 Annual Report on Form10-K/A, we have also audited Schedule II for each of the three years endedDecember 31, 2003.  In our opinion, thisschedule, when considered in relation to the basic financial statements takenas a whole, presents fairly, in all material respects, the information setforth therein.

 

 
| /s/ Grant Thornton LLP |   |
|------------------------|--------|
| Grant Thornton LLP     |
|                   |
| Edison, New Jersey     |
| February 17, 2004      |

 

71

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Report of independentregistered public accounting firm on the financial 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. |

 

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| 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. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|
|   |   |                                                                                                                         |   |                                                                        |
| 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. |
|   |   |                                                                                                                         |   |                                                                        |
| 21     |   | List of Subsidiaries.                                                                                                        |   | Exhibit 21 to Form 10-K for the fiscal year ended December 31, 2003.        |
|   |   |                                                                                                                         |   |                                                                        |
| 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   |   | CEO 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   |   | 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                                                              |

 

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4.  Reports on form 8-K duringthe fourth quarter of fiscal 2003.

 

A report onForm 8-K was filed on December 15, 2003 reporting the appointment of Eric P.Edelstein to the Computer Horizons Corp.’s Board of Directors and to report amutual resolution of all pending litigation between the Company and Aquent LLC.

 

A report onForm 8-K was filed on October 29, 2003 to update information reported inComputer Horizons Corp. conference call that was not included in the initialpress release.

 

A report onForm 8-K was filed on October 1, 2003 reporting the issuance of a press releasereporting the financial results of Computer Horizons Corp. for its third fiscalquarter.

 

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## **SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                            | COMPUTER HORIZONS CORP. |
|---------------------------------|-------------------------|
|                            |                    |
| Date:   June 14, 2004 |                    | By: /s/ William J. Murphy |   |
|                            |                    | William J. Murphy, President, CEO |
|                            |                    | (Principal Executive Officer) and Director |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
|   | COMPUTER HORIZONS CORP. |
|--------|-------------------------|
|   |                    |
| Date:  | June 14, 2004           |   | By: /s/ William J. Murphy |   |
|   |                    | William J. Murphy, President, CEO  (Principal Executive Officer) and Director |
|   |                    |
| Date:  | June 14, 2004           |   | By: /s/ Michael J. Shea |   |
|   |                    | Michael J. Shea, |
|   |                    | Vice President and CFO |
|   |                    | (Principal Financial Officer) |
|   |                    |
| Date:  | June 14, 2004           |   | By: /s/ Nicholas Orichio |   |
|   |                    | Nicholas Orichio,  Acting Controller |
|   |                    |
| Date:  | June 14, 2004           |   | By: /s/ Earl Mason |   |
|   |                    | Earl Mason, Chairman of the Board and Director |
|   |                    |
| Date:  | June 14, 2004           |   | By: /s/ William M. Duncan |   |
|   |                    | William M. Duncan, Director |
|   |                    |
| Date:  | June 14, 2004           |   | By:  /s/ Eric P. Edelstein |   |
|   |                    | Eric P. Edelstein, Director |
|   |                    |
| Date:  | June 14, 2004           |   | By: /s/ William J. Marino |   |
|   |                    | William J. Marino, Director |
|   |                    |
| Date:  | June 14, 2004           |   | By:  /s/ L. White Matthews III |   |
|   |                    | L. White Matthews III, Director |
|   |                    |
| Date:  | June 14, 2004           |   | By:  /s/ Edward J. Obuchowski |   |
|   |                    | Edward J. Obuchowski, Director |
|        |                         |  |  |  |  |  |  |  |  |  |  |

 

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