**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C.  20549**

 

**FORM 10-K/A**

**Amendment No. 3**

 

**(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 whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý  No  o  .

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. ý

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in the Exchange Act Rule 12b-2).  Yes  ý  No  o

 

The aggregate market value of the voting stock held bynon-affiliates of the registrant as of June 30, 2003 was approximately **$**142,000,000.

 

The number of shares outstanding of each of theregistrant’s classes of common stock as of March 10, 2004 were 30,551,552shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

There is incorporated herein by reference theregistrant’s (i) portions of the Annual Report to Shareholders for the yearended December 3l, 2003, in Part II of this Report and (ii) portions of theDefinitive 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.

 

 

----

 

**Explanatory Note**

 

The purpose of this Amendment No. 3 onForm 10-K/A to the Annual Report on Form 10-K of Computer HorizonsCorp. (the “Company”) for the year ended December 31, 2003 as filed with theSecurities and Exchange Commission is to reflect the restatement of the Company’sconsolidated financial statements.

 

Subsequent to the issuance of its financial statementsfor the year ended December 31, 2003, and in connection with an internalreview of accounting processes and procedures conducted in the third quarter of2004, the Company discovered an error pertaining to the incorrectadjustment of consulting costs relating to intercompany transactions betweenthe Company and its Canadian subsidiary. This error caused an understatement of consolidated consultant costs(i.e. direct costs) in the Company’s consolidated income statement and accruedpayroll on the balance sheet.

 

The aggregate amount forall periods affected was an understatement of consultant costs totaling$5,555,000, with an after-tax impact of $3,462,000 or $(0.12) per share.  The pre-tax, after tax and EPS effect of thisnon-cash charge for each period affected are shown below (dollarsinthousands, except per share data):

 
| **Quarter  Ended**             | ** ** | **Gross  Amount** | ** ** | **Net  of Tax  Effect** | ** ** | **Effect  on  EPS** | ** ** | **Restated  Loss per  share** | ** ** |
|--------------------------------|------------|-------------------|------------|-------------------------|------------|---------------------|------------|-------------------------------|------------|
| June 30, 2003                  |       | $                 | 1,983      |                    | $          | 1,321               |       | ($ 0.05                  | )          | ($ 0.36 | ) |
| September 30, 2003             |       | 664               |       | 394                     |       | (0.01               | )          | (0.09                         | )          |
| December 31, 2003              |       | 749               |       | 492                     |       | (0.01               | )          | (0.07                         | )          |
| Year ended December 31, 2003   |       | 3,396             |       | 2,207                   |       | (0.07               | )          | (0.56                         | )          |
| March 31, 2004                 |       | 864               |       | 562                     |       | (0.02               | )          | (0.02                         | )          |
| June 30, 2004                  |       | 1,295             |       | 693                     |       | (0.03               | )          | (0.00                         | )          |
| Six months ended June 30, 2004 |       | 2,159             |       | 1,255                   |       | (0.05               | )          | (0.02                         | )          |
| Total Restatement Impact       |       | $                 | 5,555      |                    | $          | 3,462               |       | $                             | (0.12      | ) |   |   |
|                                |            |                   |            |                         |            |                     |            |                               |            |  |  |  |

 

As part of management’s investigation of this accountingerror, an extensive review of intercompany transactions was completed.  As a result, other adjustments, not affectingoperating results, were recorded.  Theseadjustments to the balance sheet corrected an overstatement of accrued expensesand an understatement of shareholders’ equity (specifically the overstatementof accumulated comprehensive loss).  Thecumulative balance sheet adjustments for the affected dates are as follows (inthousands):

 
| **Balance  Sheet Date**  | ** ** | **Cumulative  Reduction  in Accrued  Expenses** | ** ** | **Cumulative  Increase in  Shareholders’  Equity** | ** ** | **Quarterly  Net  Change** | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------|------------|
| As of June 30, 2003      |       | $                                               | 1,376      |                                                    | $          | 1,376                      |       | 1,376 | * |
| As of September 30, 2003 |       | 1,351                                           |       | 1,351                                                   |       | (25                        | )          |
| As of December 31, 2003  |       | 1,760                                           |       | 1,760                                                   |       | 409                        |       |
| As of March 31, 2004     |       | 2,195                                           |       | 2,195                                                   |       | 435                        |       |
| As of June 30, 2004      |       | 2,212                                           |       | 2,212                                                   |       | 17                         |       |
|                          |            |                                                 |            |                                                         |            |                            |            |  |  |

 

----

* Represents cumulative effect of all previous quarterlyperiods deemed not material on an individual quarter basis.

 

In addition, in the secondquarter of 2003, the Company made a balance sheet correction resulting in anincrease in shareholders’ equity and a decrease in accrued payroll of $41,000.

 

As a result of the Company’s investigation into the causes ofthis accounting error, several remediating actions have been or are in theprocess of being implemented to prevent future reoccurrence and are included inPart II - Item 9A Control and Procedures on this Amendment No. 3 ofForm 10-K/A.

 

The effects of this restatement on the consolidated balancesheet of the Company as of December 31, 2003, and on the consolidatedstatements of operations and condensed consolidated statements of cash flowsfor the year ended December 31, 2003, are presented in Item 6 (SelectedRestated Financial Data), Item 7 (Restated Management’s Discussion andAnalysis of Financial Condition and Results of Operations), Item 8(Restated Financial Statements and Supplementary Data) of Part II and Item15 (Exhibits, Financial Statement Schedules and Reports on Form 8-k of Part IVof this Amendment No. 3. Certain internal accounting control issuesidentified by management and related to the restatement are disclosed inItem 9A of Part II of this Amendment No. 3. The Company’s ChiefExecutive Officer and Chief Financial Officer have also reissued theircertifications required by Sections 302 and 906 of the Sarbanes-Oxley Act.

 

The Company is concurrently filing amendments onForms 10-Q/A to its previously filed Forms 10-Q for each of theperiods ended June 30, 2003, September 30, 2003, March 31, 2004 andJune 30, 2004 to reflect the restatement of its financial statements forthose periods.

 

Additional detail regarding the restatement is included inNote 2 of the Notes to Consolidated Financial Statements included inPart II — Item 8 of this Amendment No. 3 on Form 10-K/A.

 

Exceptas required to reflect the effects of the restatement, no attempt has been madein this Amendment No. 3 to modify or update other disclosures presented inthe original report on Form 10-K/A for the period ended December 31, 2003.This Form 10-K/A does not reflect events occurring after the filing of theoriginal Form 10-K or modify or update those disclosures affected bysubsequent events.

 

1

----

 

**PART I**

 

Item 1.  Business 

 

General 

 

Computer Horizons Corp., or CHC, or the Company, is astrategic solutions and human capital management company with more thanthirty-six years of experience, specifically in information technology. The Company provides its services to multi-national companies through its “bestshore”delivery centers located globally, and enabling its Fortune 2000 customer baseto maximize technology investments.  With the acquisition of RGIITechnologies, Inc., in July 2003, CHC has expanded its government practice toinclude the Federal government sector, in addition to various other verticalmarkets it serves, such as healthcare, insurance and financial services. CHC’s wholly owned subsidiary, Chimes, uses its proprietary technology toenable its Global 2000 (which, Forbes magazine defines as the biggest and mostimportant companies as measured by sales, profits, assets and market value),customer base to align and integrate business planning with human resourcemanagement across an enterprise’s business functions.

The Company markets solutions to existing andpotential clients with the objective of becoming a preferred provider ofcomprehensive information technology services and solutions for suchclients.  The Company believes that the range of services and solutionsthat it offers, combined with its proprietary Chimes technology, provides itwith competitive advantages in the information technology marketplace.

The Company’s clients are primarily Global 2000companies with significant information technology budgets and recurringstaffing needs.  In 2003, the Company provided information technologyservices to 967 clients. ** **During2003, the Company’s largest client accounted for 7% of the Company’sconsolidated revenues **. **TheCompany offers its clients a broad range of business and technical services asan outsourcer and systems integrator capable of providing complex totalsolutions.  This total solutions approach comprises proprietary softwareand tools, proven processes and methodologies, tested project managementpractices and resource management and procurement programs.

The Company offers global technology services andsolutions, which are divided into three divisions; (1) Solutions, (2) ITServices and (3) Chimes.

 

(1) Solutions:  CHC Solutions Group (includingRGII Technologies 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.  The Solutions Group, comprised ofapproximately 800 IT professionals, offers a comprehensive list of integratedsolutions including e-business strategy and assessment; HIPAA compliance; onshore, near-shore and offshore outsourcing;  enterprise networkmanagement; web architecture design; hosting and integration; applicationdevelopment; customer relationship management (CRM); project management;systems integration; networking services and education/training.  Inaddition, in September 2003, the Company acquired the Xpress TM softwaresuite which, along with related implementation services, enables manufacturersto become UCCnet compliant whereby product identification data is synchronizedand standardized with retailers.  For projects in the Solutions’ division,CHC is responsible for the project management and supervision.  Generally,the gross margins in this division are higher than that of the IT Servicesdivision.  Revenues in the Solutions Group are recognized as services areperformed under either time-and-material or a fixed fee basis.  However,adjustments are made if necessary to reflect progress against milestones ordeliverables.

(1a) RGII Technologies, Inc. (RGII): In July 2003, theCompany acquired RGII, a solutions provider of high-end technology and programmanagement to Federal, State and Local government agencies.  RGII offersservices and solutions in such areas as: enterprise management, network infrastructure,information assurance and security, web development and integration, callmanagement, engineering technology and technical services.

(1b) Outsourcing:  Spurred by global competitionand rapid technological change, large companies, in particular, are downsizingand outsourcing for reasons such as cost reduction, capital asset improvement,improved technology and better strategic focus.  In response to thistrend, the Company has

 

2

----

 

created a group of outsourcing centers onshore, near-shore inMontreal and offshore in Chennai, India with 24 hour / 7 day a week support,which are fully equipped with the latest technology and communications, as wellas a complete staff that includes experienced project managers, technicians andoperators.  These professionals facilitate essential data functionsincluding:  applications development, systems maintenance, data networkmanagement, 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 offerscustom-designed and/or existing training programs to enhance the competenciesof client staff in specific technologies, languages, methodologies andapplications.  The prevailing focus of the Company is to assist clientsthrough instructor-led, on-site training and consulting in the transitioning ITorganization of Global 2000 corporations nationwide.   To supportthese changing technologies, the Company has developed extensive curriculumofferings in Web Technologies, Relational Databases, Programming Languages,Reporting Tools, Process Improvement, UNIX, Client/Server and MainframeTechnologies.

(1e) Software Products:  Princeton Softech, Inc.a wholly-owned subsidiary of the Company which was sold March 25, 2002, was asoftware products company that delivered leveraging technologies forenterprise-scale solutions.

 

(2) IT Services:  CHC’s IT Services Groupprovides highly skilled software professionals to augment the internalinformation management staffs of major corporations.  The Company offersits clients a just-in-time solution to supply their staffing needs from amongthe Company’s approximately 1,400 IT professionals.  Customers are servicedthrough the Company’s branch network of offices in the United States andCanada, and virtually through Chimes.  The customer is responsible formanaging and supervising our software professionals. As a result, gross marginsin this business area are significantly less than Solutions services. Revenue for the IT Services Group is recognized as services are rendered on atime-and-material basis.  Hourly and daily rates are determined in advanceand agreed to with the customer.  Time worked is documented in variousforms using the applicable timekeeping process (i.e. the client’s or theCompany’s timekeeping systems).

 

(3) Chimes: Chimes, Inc., a wholly-owned subsidiary ofCHC, provides workforce procurement and management services to Global 2000companies.   Through scalable, web-based software, Chimes administersthe hiring cycle to identify, leverage and manage the enterprise-wide spend onhuman capital.  Chimes’ portfolio of services addresses contingent hiring(CVM), full-time hiring (CAM), program management (RPM) and consolidated timesheet and expense processing (CTE).

 

### **Personnel**

As of December 3l, 2003, the Company had a staff of2,665, including approximately 2,200 IT professionals.   The Companydevotes significant resources to recruitment of qualified professionals andprovides continuing in-house training and education, and a career pathmanagement development program within the Company.

 

### **Competition**

The Company competes in the commercial informationtechnology services market which is highly competitive and served by numerousfirms, many of which serve only their respective local markets.  Themarket includes participants in a variety of market segments, including systemsconsulting and integration firms, professional services companies, applicationsoftware firms, temporary employment agencies, the professional service groupsof computer equipment companies, facilities management and managementinformation systems or MIS outsourcing companies, certain accounting firms, andgeneral management consulting firms.  The Company’s competitors includecompanies such as Analysts International Corp., CIBER, Inc., Computer TaskGroup Inc., iGATE Corp. and Covansys Corp.  Many participants in theinformation technology consulting and

 

3

----

 

software solutions market have significantly greaterfinancial, technical and marketing resources and generate greater revenues thanthe Company.  The Company believes that the principal competitive factorsin the commercial information technology services industry includeresponsiveness to client needs, speed of application software development,quality of service, price, project management capability and technicalexpertise.  Pricing has its greatest importance as a competitive factor inthe area of professional service staffing.  The Company believes that itsability to compete also depends in part on a number of competitive factorsoutside its control, including the ability of its competitors to hire, retainand motivate skilled technical and management personnel, the ownership bycompetitors of software used by potential clients, the price at which othersoffer comparable services and the extent of its competitors’ responsiveness tocustomer needs.

 

Available Information 

The Company’s internet website address iswww.computerhorizons.com.  The Company’s annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K and amendments tothose reports filed or furnished pursuant to Section 13(a) or 15(d) of theExchange Act are available free of charge through our website as soon asreasonably practicable after they are electronically filed with, or furnishedto, the Securities and Exchange Commission.

 

Risk Factors 

 

*The Company’s revenues have declined andthe operating loss has increased because demand for IT Services has weakenedsignificantly, and may continue to weaken, in the industries and markets thatCHC 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 the Company’s IT Services, revenues andresults of operations have been negatively impacted.  For the year endedDecember 31, 2003 and 2002, IT Services revenue decreased to $133.1 millionfrom $201.3 million, respectively, a decrease of $68.2 million, or 33.9%. For the years ended December 31, 2003 and 2002, IT Services operating lossincreased to $4.1 million from $2.2 million, respectively, an increase of $1.9million, or 86.4%.  CHC cannot predict when customer demand willsignificantly improve, and to what extent demand for the Company’s IT Serviceswill improve.

 

*The current trend of companies movingtechnology jobs and projects offshore has caused and could continue to causerevenues to decline.*

 

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 has contributed to the decline in domestic ITstaff augmentation revenue as well as on-site solutions orientedprojects.  The Company now has its own outsourcing centers in India andCanada to compete for this business, but this new business has not beensufficient to offset the revenue decline.  Additionally, the equivalentamount of work in low cost centers will generate substantially less revenue dueto the lower billing rates that are charged in these offshore outsourcingcenters.

 

*The Company’s operating results havevaried, and are likely to continue to vary significantly.  This may resultin volatility in the market price of our common stock.*

 

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

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

 

4

----

 

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

•announcement of new servicesby CHC or the competitors;

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

•changes in or failure tomeet earnings estimates by securities analysts;

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

•adverse judgments orsettlements obligating CHC to pay liabilities;

•changes in management; and

•general economic conditions and overall stock market volatility.

 

*The failure to be successful in retainingexisting and future highly-skilled technical personnel and attracting asufficient number of IT professionals and project managers could adverselyaffect the Company’s business.*

 

The Company’sbusiness is labor intensive and depends to a large extent on its ability toattract, train, motivate and retain highly-skilled IT professionals and projectmanagers.  The Company’s ability to win and retain new business issignificantly affected by client relationships and the quality of servicerendered.  The loss of key IT professionals and project managers mayjeopardize existing client relationships with businesses that continue to usethe Company’s services based upon past relationships with key IT professionalsand project managers.

 

*The Company derives a significant portionof its revenues from a limited number of large clients and the loss of anylarge 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 endedDecember 31, 2003, 2002 and 2001, the Company’s ten largest clients accountedfor approximately 38%, 38% and 30% of its revenues, respectively.  Theloss of any large client could have an adverse effect on the Company’s business,results of operations and financial condition.  Prior to the acquisitionof RGII by the Company, approximately 52% of RGII’s revenues were derived fromrestricted contracts (minority based contracts, etc.)  These contracts maybe terminated pursuant to the Federal government’s rights under the FederalAcquisition Regulations (“FAR”).  In addition, as a result of RGII’sacquisition by the Company, RGII will not be eligible to compete for thesetypes of contracts in the future and will have to replace this revenue streamwith new contracts.  If these contracts are terminated or the Company isnot able to enter new contracts on acceptable terms, the Company’s businesscould be adversely affected.

 

*Changes in federal government programs andrequirements, or budgetary changes affecting federal government spending inCompany specific agencies, or changes in fiscal policies or available funding,may adversely affect the Company’s results of operations.*

 

The Companyacquired RGII Technologies, Inc. in July 2003.  RGII receivessubstantially all its revenue from the Federal government.  For the yearended December 31, 2003, the Company received approximately 7% of its totalrevenue from RGII.  Significant changes in RGII’s revenues may adverselyaffect the Company’s results of operations.

 

*Projects performed by RGII are subject toDefense Contract Audit Agency audits and compliance with government costaccounting standards.  The results of such audits may result inadjustments to RGII’s reported financial results.*

 

RGII hascost reimbursable type contracts with the U.S. Government.  Consequently,RGII is reimbursed based upon direct expenses attributable to the contract plusa percentage based upon indirect expenses.  The indirect rates areestimated.  Accordingly, if the actual rates as determined by the DefenseContract Audit Agency (“DCAA”) are below the estimated rates, a refund for thedifference will be due to the U.S. Government.  A significant refund dueto the U.S. Government may adversely affect the Company’s results

 

5

----

 

ofoperations.  DCAA has completed their incurred cost audits for all fiscalyears through December 31, 2001.

 

*The Company faces competition from a numberof existing competitors, as well as potential new competitors, which couldresult in loss of market share and adversely affect business.*

 

The marketsfor CHC services are highly competitive.  The Company competes with largeproviders of IT staffing services including Cap Gemini and MPS Group, Inc. In addition, it competes for staffing projects with the information systemsgroups of prospective clients.  In the Solutions business, the Companycompetes with consulting and system integration firms, including AnalystsInternational Corporation, Accenture, Bearingpoint, CIBER, Inc., ComputerSciences Corporation, Computer Task Group, Electronic Data Systems Corp., IBMCorp. and Keane, Inc.  The Company also competes in the IT solutionsmarket with vendors of application software.  There are relatively lowbarriers to entry in the markets the Company competes in and it has faced andexpects to continue to face, additional competition from other established andemerging companies.  Increased competition may result in greater pricingpressure which could have an adverse effect on the Company’s business, resultsof operations and financial condition.  Many of the Company’s current andpotential competitors have significantly greater financial, technical,marketing and other resources than CHC. As a result, they may be able torespond more quickly to new or emerging technologies and changes in clients’requirements, or to devote greater resources to the development, promotion,sale and support of their services and products.  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 new competitors, alliances among competitorsor alliances between competitors and third parties may emerge and acquiresignificant market share.  If this were to occur, it could have an adverseeffect 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.  Theintroduction of competitive IT solutions embodying new technologies and theemergence of new industry standards may render the Company’s existing ITsolutions or underlying technologies obsolete or unmarketable.  As aresult, it is dependent in large part upon its ability to develop new ITsolutions that address the increasingly sophisticated needs of its clients,keep pace with new competitive service and product offerings and emergingindustry standards and achieve broad market acceptance.  The business willbe adversely affected if CHC is not successful in developing and marketing newIT solutions that respond to technological change, changing client requirementsor evolving industry standards.

 

*Some of the Company’s services are offeredon a fixed-price basis.  The failure to estimate accurately the resourcesand time required for a project or failure to complete our contractualobligations within the time frame committed could have an adverse effect on theCompany’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 thesecontracts the Company bears the risk of cost overruns and inflation inconnection with these projects.  In the event the Company fails toestimate accurately the resources and time required for a project or fails tocomplete its contractual obligations within the time frame committed, theCompany’s business, operating results and financial condition could beadversely affected.

 

6

----

 

*The Company’s strategy includes the pursuitof strategic acquisitions which present many risks and may have an adverseeffect on its business in the event the financial and strategic goals that werecontemplated at the time of the transaction are not realized.*

 

As part ofits strategy, the Company pursues strategic acquisitions.  On July 8,2003, CHC purchased all of the capital stock of RGII Technologies, Inc., afederal IT services company.  Some of the risks faced in completingacquisitions similar to the RGII transaction are:

•difficulties integrating newoperations, technology and personnel into operations;

•loss of significant clientsacquired;

•loss of key management andtechnical personnel acquired;

•assumption of unanticipatedlegal or other financial liabilities;

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

•diversion of managementattention from other business concerns.

Thesedifficulties could disrupt ongoing business and increase expenses.  Anyacquisition, depending on its size, could result in the use of a significantportion of cash, or if the acquisition is made utilizing securities, couldresult in significant dilution to shareholders.  Furthermore, there can beno assurance that any acquired service capacity or technology will gainacceptance in the market.  Each of these results could adversely affectthe Company’s business, results of operations, financial condition and theprice 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 a result, the Company’s business issubject to the risks generally associated with non-U.S. operations including:

•unexpected changes inregulatory environments;

•the costs and difficultiesrelating to geographically diverse operations;

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

•fluctuations in currencyexchange rates;

•restrictions on the movementof cash;

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

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

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

If any 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 its intellectualproperty rights, competitors may be able to use its technology and this couldweaken 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 protect proprietary rights may not preventmisappropriation of CHC’s proprietary rights, particularly in foreign countrieswhere laws or law enforcement practices may not protect proprietary rights asfully as in the United States.  If third parties were to use or otherwisemisappropriate CHC’s copyrighted materials, trademarks or other proprietaryrights without consent or approval, CHC’s competitive position could be harmed,or it could become involved in litigation to enforce its rights.

 

7

----

 

*Third parties could assert that the Company’sservices infringe their intellectual property rights, which if successful,could harm the Company’s business.*

 

Thirdparties may assert trademark, copyright, patent and other types of infringementor unfair competition claims against the Company.  If CHC is forced todefend against any such claims, whether they are with or without merit or aredetermined in its favor, the Company may face costly litigation, loss of accessto, and use of software and diversion of technical and managementpersonnel.  As a result of such dispute, CHC may have to developnon-infringing technology or enter into royalty or licensingarrangements.  Such royalty or licensing agreements, if required, may beunavailable on terms acceptable to CHC, or at all.  If there is asuccessful claim of infringement against the Company and it is unable todevelop non-infringing technology or license the infringed or similartechnology on a timely basis, it could harm CHC’s business.

 

*In the event of a failure in a client’scomputer system, a claim for substantial damages may be made against theCompany regardless of its responsibility for the failure, which if successful,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’s system could result in a claim forsubstantial damages against CHC, regardless of its responsibility for suchfailure.  Limitations of liability set forth in service contracts may notbe enforceable in all instances and may not otherwise protect the Company fromliability for damages.  CHC maintains general liability insurance,including coverage for errors and omissions, however, CHC may not be able toavoid significant claims and attendant publicity. Furthermore, there can be noassurance that the insurance coverage will be adequate or that coverage willremain available at acceptable costs.  Successful claims brought againstthe Company in excess of its insurance coverage could have an adverse effect onbusiness, operating results and financial condition.

 

*As a provider of staffing services, thereare risks associated with placing employees (and independent contractors) atclients’ businesses, which could result in costly and time-consuminglitigation.*

 

CHC couldbe subject to liability if any of the following risks associated with placingits employees (and independent contractors) at clients’ businesses occurs:

•possible claims ofdiscrimination and harassment;

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

•misuse of client proprietaryinformation or intellectual property;

•injury to client employees;

•misappropriation of clientproperty;

•other criminal activity; and

•torts and other similarclaims.

Any claimsmade against CHC could result in costly and time-consuming litigation.  Inaddition, under some circumstances, the Company may be held responsible for theactions of persons not 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.*

 

Certainprovisions of the Company’s Certificate of Incorporation and Bylaws could makea merger or tender offer involving CHC more difficult, even if such eventswould be beneficial to the interests of the stockholders. These provisionsinclude adoption 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 the holders of CHC’s common stockwill be subject to, and may be adversely affected by, the rights of the holdersof any preferred stock that may be issued in the future.  The issuance ofpreferred stock, while providing flexibility in connection with possibleacquisitions and other corporate purposes, could have the effect of making it

 

8

----

 

moredifficult for a third party to acquire, or of discouraging a third party fromacquiring, a majority of CHC’s outstanding voting stock.  The abovefactors and certain provisions of the New York Business Corporation Law mayhave the effect of deterring hostile takeovers or otherwise delaying orpreventing changes in the control or management of the Company, includingtransactions in which the stockholders might otherwise receive a premium overthe fair market value of CHC common stock.

 

Item 2.   Properties 

The Company’s Corporate and Financial Headquarters, aswell as its Eastern Regional Office, comprising approximately 63,000 squarefeet, are located at 49 Old Bloomfield Avenue, Mountain Lakes, NewJersey.  The Mountain Lakes lease is for a term expiring December 31,2005, at a current annual rental of approximately $1,400,000.  As ofDecember 3l, 2003, the Company also maintained operating facilities, which areshared between the IT Services and Solutions Group business segments, inCalifornia, Connecticut, Florida, Georgia, Illinois, Indiana, Maryland,Michigan, Minnesota, New Jersey, New York, Ohio, Oklahoma, Tennessee, Texas,Virginia and Washington as well as international operations located in Indiaand Canada, with an aggregate of approximately 281,000 square feet. ** **Chimes maintains facilities inCalifornia, Illinois, Michigan, Minnesota and New Jersey.  The leases forall of these facilities are at a current annual aggregate rental ofapproximately $3,665,000.  These leases expire at various times with nolease commitment longer than April 30, 2008.

 

9

----

 

Item 3.  Legal Proceedings 

 

On April 29, 2003, the Company filed an action in the UnitedStates District Court for the District of New Jersey against Aquent LLC,seeking (i) to enjoin Aquent from disseminating false and misleading proxymaterials and press releases in support of its two nominees for directorpositions in connection with the Company’s May 14, 2003 Annual Meeting; (ii) toinvalidate any proxies secured by Aquent through the use of unlawful proxysolicitation materials; and (iii) to require Aquent to disseminate correctivedisclosure that not only amended the false and misleading proxy materials butalso advised CHC shareholders how Aquent’s solicitations had violated thesecurities laws.

 

On May 27, 2003, the Company brought an action in the SupremeCourt of the State of New York, New York County, seeking an order invalidatingvotes for directors Karl Meyer and Robert Trevisani cast at the Annual Meetingby stockholders of record who sold their shares between the record date and thedate of the Annual Meeting.

 

Each of the legal proceedings described above were settledand dismissed as a result of a settlement agreement between the Company andAquent LLC entered into on December 12, 2003.  As part of the settlement,the Company agreed to modify its June 30, 2003 by-law amendment regardingspecial meeting procedures by, among other things, reducing from 75 to 50 theminimum number of days between the time a 10 percent or more shareholderrequests a special meeting of shareholders and the date of that meeting. In addition, Aquent entered into a standstill agreement pursuant to which, fora period of one year, it agreed not to request a special meeting of ComputerHorizons’ shareholders for any purpose, or nominate anyone to serve as a memberof CHC’s Board of Directors, or engage in any proxy solicitation of ComputerHorizons’ shareholders.

 

The Company is involved in various and routine litigationmatters, which arise through the normal course of business.  Managementbelieves that the resolution of these matters will not have a material adverseeffect on the Company’s financial position or results of operations.

 

Item 4.   Submission of Matters to a Vote ofSecurity Holders 

None.

 

10

----

 

**Executive Officers of the Company**

 

The following table sets forth certain informationwith respect to the executive officers of the Company.  All the positionslisted are or were held by such officers with the Company as of the filing dateof 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

----

 

**PART II**

 

Item 5.   Market for Registrant’s Common Equityand Related Stockholder Matters 

 

The Company’s common stock is quoted on the NasdaqNational Market, under the symbol CHRZ.  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 Company plans to reinvest its earnings in futuregrowth opportunities and, therefore, does not anticipate paying cash dividendsin the near future and has not paid any to date.  As of March 10, 2004,there were approximately 1,024 registered holders of common stock, per theCompany’s transfer agent.

 

12

----

 

Item 6.  Selected Financial Data 

 

Consolidated Statement of Operations Data:

 
| ** **                                                                                                           | ** ** | **December 31,**                                          | ** **  |
|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|-------------|
| ** **                                                                                                           | ** ** | **2003**                                                  | ** **  | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| ** **                                                                                                           | ** ** | **(As restated,  Note 2)**                                | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                                 |       | **(dollar  amounts in thousands, except per share data)** |        |
|                                                                                                                 |       |                                                      |        |   |   |   |   |   |   |   |   |
| Revenues                                                                                                             |       | **$**                                                     | **245,210** | ** ** | $ | 297,115 |   | $ | 400,784 |   | $ | 445,479 |   | $ | 534,594 |   |
|                                                                                                                 |       | ** **                                                | ** **  |   |   |   |   |   |   |   |   |
| Costs and expenses:                                                                                                  |       | ** **                                                | ** **  |   |   |   |   |   |   |   |   |
| Direct costs                                                                                                         |       | **173,198**                                               | ** **  | 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                                                                                      |       | **(23,097**                                               | **)**       | (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 |       | **(23,475**                                               | **)**       | (6,341 | ) | (21,598 | ) | (87,646 | ) | 25,638 |   |
|                                                                                                                 |       | ** **                                                | ** **  |   |   |   |   |   |   |   |   |
| Income taxes / (benefit)                                                                                             |       | **(6,409**                                                | **)**       | 1,869 |   | (7,148 | ) | (29,819 | ) | 11,013 |   |
|                                                                                                                 |       | ** **                                                | ** **  |   |   |   |   |   |   |   |   |
| Income / (loss) before cumulative effect of change in accounting  principle and minority interest                    |       | **(17,066**                                               | **)**       | (8,210 | ) | (14,450 | ) | (57,827 | ) | 14,625 |   |
| Minority interest                                                                                                    |       | **(89**                                                   | **)**       | 35 |   | — |   | — |   | — |   |
| Cumulative effect of change in accounting principle                                                                  |       | **—**                                                | ** **  | (29,861 | ) | — |   | — |   | — |   |
|                                                                                                                 |       | ** **                                                | ** **  |   |   |   |   |   |   |   |   |
| Net income / (loss)                                                                                                  |       | **$**                                                     | **(17,155** | **)** | $ | (38,036 | ) | $ | (14,450 | ) | $ | (57,827 | ) | $ | 14,625 |   |
|                                                                                                                 |       | ** **                                                | ** **  |   |   |   |   |   |   |   |   |
| Earnings / (loss) per share:                                                                                         |       | ** **                                                | ** **  |   |   |   |   |   |   |   |   |
| Basic                                                                                                                |       | **$**                                                     | **(0.56**   | **)** | $ | (1.22 | ) | $ | (0.45 | ) | $ | (1.83 | ) | $ | 0.47 |   |
|                                                                                                                 |       | ** **                                                | ** **  |   |   |   |   |   |   |   |   |
| Diluted                                                                                                              |       | **$**                                                     | **(0.56**   | **)** | $ | (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

----

 
|                                                                                                                 |       | **December 31,**                                         |        |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|-------------|
| ** **                                                                                                           | ** ** | **2003**                                                 | ** **  | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| ** **                                                                                                           | ** ** | **(As restated,  Note 2)**                               | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                                 |       | **(dollar amounts in thousands, except per share data)** |        |
| Analysis (%)                                                                                                         |       |                                                     |        |   |   |   |   |   |   |   |   |
| Revenues                                                                                                             |       | **100.0**                                                | **%**       | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Gross margin                                                                                                         |       | **29.4**                                                 | ** **  | 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                                                                                      |       | **(9.4**                                                 | **)**       | (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 |       | **(9.6**                                                 | **)**       | (2.1 | ) | (5.4 | ) | (19.7 | ) | 4.8 |   |
| Income taxes / (benefit)                                                                                             |       | **(2.6**                                                 | **)**       | 0.6 |   | (1.8 | ) | (6.7 | ) | 2.1 |   |
|                                                                                                                 |       | ** **                                               | ** **  |   |   |   |   |   |   |   |   |
| Income / (loss) before cumulative effect of change in accounting  principle                                          |       | **(7.0**                                                 | **)**       | (2.7 | ) | (3.6 | ) | (13.0 | ) | 2.7 |   |
|                                                                                                                 |       | ** **                                               | ** **  |   |   |   |   |   |   |   |   |
| Cumulative effect of change in accounting principle                                                                  |       | **—**                                               | ** **  | (10.1 | ) | — |   | — |   | — |   |
|                                                                                                                 |       | ** **                                               | ** **  |   |   |   |   |   |   |   |   |
| Net income / (loss)                                                                                                  |       | **(7.0**                                                 | **)**       | (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                                                                                     |       | **54.9**                                                 | ** **  | (163.2 | ) | 75.0 |   | (495.4 | ) | (66.4 | ) |
| Return on equity, average (1)                                                                                        |       | **(12.4**                                                | **)**       | (22.7 | ) | (7.3 | ) | (24.6 | ) | 5.7 |   |
| Effective tax rate                                                                                                   |       | **27.3**                                                 | ** **  | 29.5 |   | 33.1 |   | 34.0 |   | 43.0 |   |
|                                                                                                                 |       | ** **                                               | ** **  |   |   |   |   |   |   |   |   |
| Consolidated Balance Sheet Data:                                                                                     |       | ** **                                               | ** **  |   |   |   |   |   |   |   |   |
| At year-end                                                                                                          |       | ** **                                               | ** **  |   |   |   |   |   |   |   |   |
| Total assets                                                                                                         |       | **$**                                                    | **180,326** | ** ** | $ | 193,731 |   | $ | 237,721 |   | $ | 269,396 |   | $ | 347,994 |   |
| Working capital                                                                                                      |       | **64,824**                                               | ** **  | 105,579 |   | 115,747 |   | 134,472 |   | 129,857 |   |
| Long-term debt                                                                                                       |       | **—**                                               | ** **  | — |   | — |   | — |   | 4,100 |   |
| Shareholders’ equity                                                                                            |       | **130,337**                                              | ** **  | 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 onequity, average is calculated by dividing Net Income / (loss) for the period bythe average shareholders’ equity for the same period.

 

14

----

 

Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operation 

 

The following detailed discussion and analysis of the Company’sfinancial condition and results of operations should be read in conjunctionwith the December 31, 2003 financial statements and related notes included inseparate sections of this Form 10-K.

 

**Overview**

 

Computer Horizons Corp., (“CHC”, “the Company”), is astrategic solutions and human capital management company with more thanthirty-six years of experience, specifically in information technology. The Company’s clients are primarily Global 2000 companies, serviced by over 30offices in the United States, Canada and India.

 

Due to continued decreases in the demand for temporarytechnology workers, the trend of companies to outsource technology jobsoffshore and declines in the overall IT markets in which the Company operates,2003 revenue decreased 17.5% from 2002.  The majority of the Company’srevenues are derived from consultant billable hours for professional servicesrendered.  As a result of declining customer demand, consultant headcountdeclined to approximately 2,200 at December 31, 2003 (including approximately300 pertaining to RGII acquired in July 2003), from approximately 2,300 atDecember 31, 2002.

 

The loss from operations in 2003 totaled $23.1 million,including special charges of $10.1 million, restructuring charges of $3.3million and amortization of intangibles of $1.1 million.  The loss fromoperations in 2002 totaled $12.9 million and included $2.5 million ofrestructuring charges.  The decrease in the loss from operations during 2003,excluding these special items, was primarily a result of gross marginimprovement attributable to the change in the consolidated revenue mix to 46%Solutions revenue (including Chimes) for 2003, from 32% Solutions revenue(including Chimes) in 2002.  In addition, selling, general andadministrative expenses were reduced due to office closures and staff headcountreductions.

 

Management continues to focus on maintaining a strong balancesheet, with $52.6 million of cash at December 31, 2003, along with $64.8million in working capital and no debt outstanding.  Cash flow generatedfrom operations exceeded $16.8 million for 2003, partially due to the receiptof a $20 million income tax refund and a significant reduction in accountsreceivable.

 

Although 2003 showed a significant improvement in the Company’soperating results, the level of business activity in the IT market remainsuncertain.  This uncertainty significantly reduced revenues (specificallyrevenues from IT Services) and results from operations in 2003.  As longas this uncertainty remains, the Company believes that demand for IT Serviceswill continue to be diminished.  CHC cannot predict when the level ofbusiness activity in the IT market will improve, and if it does improve, CHC cannotpredict whether and to what extent demand for the Company’s IT Services willincrease.

 

**Forward Looking Statements**

 

The following section should be read in conjunction with ourconsolidated financial statements and related notes appearing in this Form10K/A.  Statements included in thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and elsewhere in this document that do not relate to present orhistorical conditions are “forward-looking statements” within the meaning ofthat term in Section 27A of the Securities Act of 1933, as amended, and inSection 21F of the Securities Exchange Act of 1934, as amended. Additional oral or written forward-looking statements may be made by theCompany from time to time, and such statements may be included in documentsthat are filed with the Securities and Exchange Commission (SEC).  Suchforward-looking statements involve risks and uncertainties that could causeresults or outcomes to differ materially from those expressed in such forward-lookingstatements.  Forward-looking statements may include, without limitation,statements relating to the Company’s plans, strategies, objectives,expectations and intentions and are intended to be made pursuant to the safeharbor provisions of the Private Securities Litigation Reform Act of1995.  Words such as “believes,” “forecasts,” “intends,” “possible,” “expects,”“estimates,” “anticipates,” or “plans” and similar

 

15

----

 

expressions are intended to identify forward-lookingstatements.  Among the important factors on which such statements arebased are assumptions concerning the anticipated growth of the informationtechnology industry, the continued need of current and prospective customersfor the Company’s services, the availability of qualified professional staff,and price and wage inflation.

 

The Management’s Discussion and Analysis of FinancialCondition and Results of Operations set forth in this Item 2 has been restatedto reflect certain adjustments to the Company’s consolidated financialstatements for 2003 as previously reported in the Company’s Form 10K for theyear ended December 31, 2003, as amended and 2002.  Details of the adjustments are shown belowand address all quarterly periods affected by the adjustments, which includethe quarterly periods ending June 30 2003 through June 30, 2004.

 

Subsequent to the issuance ofits financial statements for the year ended December 31, 2003, and inconnection with an internal review of accounting processes and proceduresconducted in the third quarter of 2004, the companydiscovered an error pertaining to the incorrect adjustment of consulting costsrelating to intercompany transactions between the Company and its Canadiansubsidiary.  This error caused anunderstatement of consolidated consultant costs (i.e. direct costs) in theCompany’s consolidated income statement and accrued payroll on the balancesheet.

 

The aggregate amount forall periods affected was an understatement of consultant costs totaling$5,555,000, with an after-tax impact of $3,462,000 or $(0.12) per share.  The pre-tax, after tax and EPS effect of thisnon-cash charge for each period affected are shown below (dollarsinthousands, except per share data):

 
| **Quarter  Ended**             | ** ** | **Gross  Amount** | ** ** | **Net  of Tax  Effect** | ** ** | **Effect  on  EPS** | ** ** | **Restated  Loss per  share** | ** ** |
|--------------------------------|------------|-------------------|------------|-------------------------|------------|---------------------|------------|-------------------------------|------------|
| June 30, 2003                  |       | $                 | 1,983      |                    | $          | 1,321               |       | $                             | (0.05      | ) | $ | (0.36 | ) |
| September 30, 2003             |       | 664               |       | 394                     |       | (0.01               | )          | (0.09                         | )          |
| December 31, 2003              |       | 749               |       | 492                     |       | (0.01               | )          | (0.07                         | )          |
| Year ended December 31, 2003   |       | 3,396             |       | 2,207                   |       | (0.07               | )          | (0.56                         | )          |
| March 31, 2004                 |       | 864               |       | 562                     |       | (0.02               | )          | (0.02                         | )          |
| June 30, 2004                  |       | 1,295             |       | 693                     |       | (0.03               | )          | (0.00                         | )          |
| Six months ended June 30, 2003 |       | 2,159             |       | 1,255                   |       | (0.05               | )          | (0.02                         | )          |
| Total Restatement Impact       |       | $                 | 5,555      |                    | $          | 3,462               |       | $                             | (0.12      | ) |   |   |
|                                |            |                   |            |                         |            |                     |            |                               |            |  |  |  |  |

 

As part of management’s investigation of this accountingerror, an extensive review of intercompany transactions was completed.  As a result, other adjustments, not affectingoperating results, were recorded.  Theseadjustments to the balance sheet corrected an overstatement of accrued expensesand an understatement of shareholders’ equity (specifically the overstatementof accumulated comprehensive loss).  Thecumulative balance sheet adjustments for the affected dates are as follows (inthousands):

 
| **Balance  Sheet Date**   | ** ** | **Cumulative  Reduction  in Accrued  Expenses** | ** ** | **Cumulative  Increase in  Shareholders’  Equity** | ** ** | **Quarterly  Net  Change** | ** ** |
|---------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------|------------|
| As of June 30,  2003      |       | $                                               | 1,376      |                                                    | $          | 1,376                      |       | 1,376 | * |
| As of September  30, 2003 |       | 1,351                                           |       | 1,351                                                   |       | (25                        | )          |
| As of December  31, 2003  |       | 1,760                                           |       | 1,760                                                   |       | 409                        |       |
| As of March 31,  2004     |       | 2,195                                           |       | 2,195                                                   |       | 435                        |       |
| As of June 30,  2004      |       | 2,212                                           |       | 2,212                                                   |       | 17                         |       |
|                           |            |                                                 |            |                                                         |            |                            |            |  |  |

 

----

*Represents cumulative effect of all previous quarterlyperiods deemed not material on an individual quarter basis.

 

16

----

 

In addition, in the second quarter of 2003, the Company made abalance sheet correction resulting in an increase in shareholders’ equity and adecrease in accrued payroll of $41,000.

 

Additional detail with respect to the impact of therestatement on the Company’s results of operations is reported in Note 2 of thenotes to the Consolidated Financial Statements included in Part II Item 8 ofthis Amendment No 3 of Form 10K/A.

 

## **RevenueGenerating Activities**

 

The majority of the Company’s revenues are derived fromprofessional services rendered in the information technology sector. TheCompany also owned a stand-alone software products company, Princeton SoftechInc., (“Princeton”) which accounted for less than 1% of consolidated revenuesin 2002.  On March 25, 2002, the net assets of Princeton were sold for acash payment of approximately $16 million.

 

The Company operates its business in three basic segments, ITServices, the Solutions Group and Chimes, Inc.  The distinctions betweenthe IT Services and Solutions Group segments primarily relate to the managementand supervision of services performed and related gross margins.  Chimes,Inc., a wholly-owned subsidiary of CHC, provides workforce procurement andmanagement services to Global 2000 companies.

 

The IT Services business consists of providing technologyconsultants to large organizations on a temporary hire basis. The consultantwork is supervised and managed by the customer. For the most recent year 2003,this segment represented approximately 54% of total revenues. The IT Servicesbusiness tends to be a lower risk, lower gross margin business with verycompetitive pricing.

 

The Solutions Group, tends to be a higher margin, higher riskbusiness, due to the fact that the Company is responsible for projectdeliverables and other conditions contained in statements of work and/orcontracts with customers. Virtually all projects performed by the SolutionsGroup are IT related and consist of practices such as application development,outsourcing arrangements, government services, Health Insurance Portability andAccountability Act, (“HIPAA”), services, technology training and managedservices.   For the year 2003, the Solutions Group (excluding Chimes)accounted for 38% of consolidated revenues.

 

The Company’s customer relationships are memorialized in amaster agreement, which address the terms and conditions which define theclient engagement.  Depending on the service to be performed for theclient, either a task order (in the case of a Staffing engagement) or aStatement of Work (“SOW”) (in the case of a Solutions engagement) is generated.The SOW is signed by both the Company and the customer.  In general, noSolutions work is done unless there is a SOW because the SOW provides thetechnical details of the work to be done.  The SOW, although falling underthe corresponding master agreement, is a stand-alone binding contractualdocument, typically outlining the project objectives, describing the personnelwho will work on the project, describing phases of the project, the timeframesfor work performance, and the rate of compensation, on a time-and-materialbasis.  In the event that the parameters of the project expand orotherwise change, a Project Change Request is implemented, to memorializewhatever change has occurred to the deliverables, personnel and/ortime-and-material.  The master agreements, in conjunction with the SOW’s,are written to define, with as much detail as possible, the client relationshipand all aspects of the work to be performed for the client.  With regardto revenues expected in future periods, each SOW has a defined term or setsforth the anticipated length of a project.  Where a client engagement ison-going, like certain “Help Desk” type services, the master agreements wouldstill have a term length, but would recite that the agreement wasrenewable.  Generally, Solutions engagements are for a year or less. Staffing engagements can and do last for more than a year, with variations inthe number of consultants being provided at any given time.  Staffingengagements are generally cancelable by clients with a two to four week noticeperiod.

 

Chimes, Inc. is a human capital management solution that,through the use of proprietary software and processes, manages the temporaryworkforce of large organizations. During 2003, Chimes accounted forapproximately 8% of total revenues.

 

17

----

 

## **CriticalAccounting Policies**

 

The most critical accounting policies used in the preparationof the Company’s financial statements are related to revenue recognition, theevaluation of the bad debt reserve, the valuation of goodwill and the valuationof the deferred tax asset.

 

Revenue Recognition 

 

Approximately 94% and 93% of consolidated revenue in 2003 and2002, respectively, was derived from time-and-material contracts.

 

For the IT Services division revenues are recognized asservices are performed under time-and material contracts.  Under a typicaltime-and-material billing arrangement, our customers are billed on a regularlyscheduled basis, such as biweekly or monthly.  At the end of eachaccounting period, revenue is estimated and accrued for services performedsince the last billing cycle.  These unbilled amounts are billed thefollowing month.

 

The Solutions Group recognizes revenue either on atime-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.  Each fixed fee contract has differentterms, milestones and deliverables.  The milestones and deliverablesprimarily relate to the work to be performed and the timing of thebilling.  At the end of each reporting period an assessment of revenuerecognized on the percentage of completion and milestones achieved criteria ismade.  If it becomes apparent that estimated cost will be exceeded orrequired milestones or deliverables will not have been obtained, an adjustmentwill be made.  The cumulative effect of revisions in estimated revenuesand costs are recognized in the period in which the facts that give rise to theimpact of any revisions become known.

 

Unbilled accounts receivable, in the IT Services andSolutions Group, represent amounts recognized as revenue based on servicesperformed in advance of customer billings principally on a time-and- materialbasis.  At the end of each accounting period, revenue is accrued forservices performed since the last billing cycle.  These unbilled amountsare billed the following month.  Costs and estimated earnings in excess ofbillings on fixed fee contracts arise when percentage of completion accountingis used.  Such amounts are billed at specific dates or at contractcompletion.

 

The Company’s Chimes subsidiary recognizes revenue on atransaction fee basis.  The Chimes service offering aggregates thesuppliers of temporary workers to the customer and renders one invoice to thecustomer.  Upon payment from the customer, Chimes deducts a transactionfee and remits the balance of the client payment to the applicablevendor.  Chimes recognizes only their fee for the service, not theaggregate billing to the customer.  The gross amount of the customerinvoicing is not considered revenue or receivable to Chimes because there is noearnings process for the gross amount and by contract terms, Chimes is notobligated to pay the vendor until paid by the customer.

 

Princeton Softech, Inc., which was sold in 2002, recognizedrevenue in accordance 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 recognized software license revenue when anoncancelable license agreement had been executed, fees were fixed anddeterminable, the software had been delivered and collection was consideredprobable.

 

18

----

 

Evaluation of Bad Debt Reserve 

 

The Company determines its bad debt reserve by considering anumber of factors, including the length of time trade accounts receivable arepast due, the Company’s previous loss history, the customer’s current abilityto pay its obligation to the Company and the condition of the general economyand the industry as a whole.  The Company writes off accounts receivablewhen they become uncollectible, and payments subsequently received on such receivablesare credited to the allowance for doubtful accounts.

 

Goodwill 

 

In June 2001, the Financial Accounting Standards Boardapproved the issuance of SFAS No. 141, “Business Combinations” and in July2001, SFAS No. 142, “Goodwill and Other Intangible Assets.”  The newstandards require that all business combinations initiated after June 30, 2001must be accounted for under the purchase method.  In addition, allintangible assets acquired that are obtained through contractual or legalright, or are capable of being separately sold, transferred, licensed, rentedor exchanged are recognized as an asset apart from goodwill.  Goodwill andintangibles with indefinite lives are no longer subject to amortization, butare subject to at least an annual assessment for impairment by applying a fairvalue based test.  The Company adopted SFAS 142 as of January 1, 2002 andin compliance with this new regulation has discontinued the amortization ofgoodwill.

 

During the quarter ended June 30, 2002, the Company completedthe initial 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) pershare was retroactively recorded as the cumulative effect of an accountingchange in the six months ended June 30, 2002 statement of operations.  Forthe years ended December 31, 2003 and 2002, the Company completed valuations ofthe carrying value of the remaining goodwill and it was determined that noimpairment had occurred at either date.

 

The reporting units are equal to, or one level below,reportable segments.  The Company engaged independent valuationconsultants to assist with the transitional goodwill and annual impairmenttests.

 

As of December 31, 2003 and 2002, the fair value of each ofthe reporting units was calculated using the following approaches (i) marketapproach and (ii) income approach.  Under the market approach, value isestimated by comparing the performance fundamentals relating to similar publiccompanies’ stock prices.  Multiples are then developed of the value of thepublicly traded stock to various measures and are then applied to eachreporting unit to estimate the value of its equity.  Under the incomeapproach, value was determined using the present value of the projected futurecash flows to be generated by the reporting unit.

 

The fair value conclusion of the reporting units reflects anappropriately weighted value of the market multiple approach and the incomeapproach discussed above.  An asset approach was not used because theasset approach is most relevant for liquidation approaches, investment companyvaluations and asset rich company valuations (i.e. real estate entities) andwas not deemed relevant for manufacturing and service company going-concernvaluations.  When either the income approach or the market approach wasused, each indicated value of the Solutions entity’s equity exceeded thecarrying value of the Solutions entity by at least $12 million and $15 millionas of December 31, 2003 and 2002, respectively.  Since each of the twoapproaches yielded values in excess of carrying value, any weighting of the twoapproaches or either approach used alone results in the same conclusion, thatthe goodwill was not impaired.

 

When the other entities, of the Company, were tested (ITServices 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

 

19

----

 

recognized in June 2002 and recorded as a cumulative effectof change in accounting principle in the accompanying Consolidated Statementsof Operations.  There was no income tax effect on the impairment charge asapproximately $19 million of the charge related to goodwill in foreign taxjurisdictions where the Company believes it is more likely than not that futuretaxable income in these jurisdictions will not be sufficient to realize therelated income tax benefits associated with the charge.  The remaining $11million of the charge was related primarily to goodwill that was acquired priorto the ability to deduct goodwill for tax purposes.

 

Valuation of the Deferred Tax Asset

 

The Company records deferred tax assets for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and their respective tax bases, and tooperating 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 deferred tax assets, management considers thescheduled reversal periods of the deferred tax assets as well as projectedfuture taxable income and tax planning strategies.

 

20

----

 

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

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

 

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

 

Solutions Group revenues, which included revenue from assetsheld for sale of $2.9 million for Princeton in 2002, increased to $92.1 millionin the year ended December 31, 2003 from $79.3 million in the year endedDecember 31, 2002, an increase of $12.8 million or 16.1%.  The increase inSolutions Group revenues for the year ended December 31, 2003 is attributableto the acquisition of RGII in July 2003.  Solutions Group revenue was$73.9 million for the year ended December 31, 2003 excluding RGII.  TheSolutions Group revenue excluding Princeton Softech, Inc. in 2002 was $76.4million.  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 $133.1 million in theyear ended December 31, 2003 from $201.3 million in the year ended December 312002, a decrease of $68.2 million or 33.9%.  The decrease in IT Servicesrevenue of $68.2 million, is the result of continued decreases in the demandfor temporary technology workers, the trend of companies to outsourcetechnology jobs offshore, the impact of pricing decreases by customers and thelagging economy.  For the year ended December 31, 2003, IT Servicesconsultant average headcount decreased by 23.9%, accounting for approximately$48 million of the revenue decrease.  The balance of the decrease inrevenue (approximately $20 million) is attributable to a reduction in average billrates **.**  The reduction inaverage bill rates was due to the competitive pricing pressures in the domesticstaff augmentation market.  The Company does not anticipate growth during2004 in IT Services headcount levels unless IT spending increases at theCompany’s clients.

 

Chimes revenue increased to $20.0 million in the year endedDecember 31, 2003, from $16.5 million in the year ended December 31, 2002, anincrease of $3.5 million or 21.2%.  This increase was primarily due to anincrease in revenue from new customers of approximately $2.8 million and anincrease of approximately $700,000 in revenue from existing customers in thissegment.

 

*Direct Costs*. Direct costs decreased to $173.2 million in the year ended December 31, 2003from $216.2 million in the year ended December 31, 2002. Consolidated grossmargin, revenue less direct costs, increased to 29.4% for the year endedDecember 31, 2003 from 27.2% in the same period of 2002.  In the Company’sSolutions Group, gross profit increased to $26.6 million, or 28.7% as a resultof the RGII acquisition.  Without RGII, gross profit for the year endedDecember 31, 2003 declined approximately $7.0 million from the year endedDecember 31, 2002.  These declines were a result of continued softness inthe healthcare arena.  Gross margin in the Company’s IT Services segmentstayed relatively flat at 20.1% for the year ended December 31, 2003. Gross margin in the Company’s Chimes segment increased to 93.0% from 88.3% forthe year ended December 31, 2003 and 2002, respectively, due to improvedmargins at existing customers.

 

Excluding the asset held for sale, Princeton Softech, Inc.,in the year ended December 31, 2002, direct costs decreased to $173.2 millionin the year ended December 31, 2003 from $215.7 million for the year endedDecember 31, 2002.  Gross margin for the year of 2002 excluding PrincetonSoftech, Inc. was 26.7%.

 

The Company’s consolidated gross margin improvement isprimarily attributable to the change in the revenue mix among the Company’sbusiness segments.  Chimes and the Solutions Group, including RGII, arehigher gross margin businesses than the Company’s IT Services segment. For the year ended December 31, 2003, Chimes and Solutions Group revenuetotaled 45.7% of consolidated revenue, compared to 32.3% of consolidatedrevenue for the comparable period in 2002.

 

21

----

 

*Selling, general and administrativeexpenses.*  Selling, general and administrative expensesdecreased to $80.6 million in the year ended December 31, 2003 from $91.3million for the comparable period of 2002.  As a percentage of revenue,the Company’s SG&A expenses increased to 32.9% in the year ended December31, 2003 from 30.7% in the year ended December 31, 2002.  The expenses in2003 included a bad debt charge of $3.1 million related to the write-off of asub-contract with ATEB, a privately held company, which the Company voluntarilyterminated for financial reasons.  ATEB was the primary contractor todevelop a new pharmacy system for Royal Ahold.  The Company is continuingrecovery efforts for this receivable.  The expenses in 2002 includedassets held for sale (Princeton Softech, Inc.) of $4.3 million.  Withoutthese special items in 2003 and 2002, SG&A expenses would have decreased to$77.5 million in the year ended December 31, 2003 from $87.0 million in thecomparable periods of 2002.  This decrease in SG&A expenses wasprimarily attributable to cost reductions in all segments, with approximately$544,000 from rent savings (office closures) and the balance primarily relatedto staff reduction and personnel costs.

 

*Amortization of Intangibles.* During the year ended December 31, 2003, the Company recorded $1.1 million ofamortization expense related to the 2003 acquisition of intangibles for RGIIand Xpress Software.

 

*Restructuring charges / (credits)*.  During the year ended December 31, 2003, the Company recorded restructuringcharges of $3.3 million for terminated leases ($1.4 million), severance ($1.6million) and general office closure expense ($330,000) relating primarily tothe closing of facilities in Canada and the United Kingdom.  During theyear ended December 31, 2002, the Company recorded a restructuring charge of$2.5 million pertaining to 2002 office closings, including a reversal of$192,000 of the previously recorded restructure reserves pertaining to leasebuyouts and $140,000 pertaining to severance adjustments.  In both 2003and 2002, the office closings were made to eliminate the infrastructure costsrelated to having offices in certain areas.  The Company did not eliminatemarketing efforts or business in these areas, but rather turned these areasinto virtual marketplaces whereby sales personnel work from their homes. As a result of these office closings, in both IT Services and the Solutionsbusiness areas, rent expense and the related reduction of SG&A headcount(salary and fringe benefits) were eliminated from the current SG&A coststructure.

 

*Special charges*. For the year ended December 31, 2003, the Company incurred special charges of$10.1 million consisting of a severance package for the Company’s former CEOand expenses related to the unilateral acquisition proposal and activities ofAquent LLC.  The separation package of the former CEO included a $3.5million severance payment and $200,000 in continued medical coverage.  Theremaining $6.4 million of the expense pertained to the unilateral acquisitionproposal and activities of Aquent LLC.  This expense is primarilyattributable to approximately $3.4 million of legal fees, $1.8 million infinancial advisor fees and $1.2 million of proxy solicitation and otherfees.  As management considers these special items to be infrequent andmaterial in nature, the Company has reported the expenses on a separate linefor full disclosure purposes, however, the amounts are reported withinoperating income.

 

*Loss from Operations*.  The Company’s loss from operations totaled $23.1 million in the year endedDecember 31, 2003, an increased loss of $10.2 million, from a loss of $12.9million in the year ended December 31, 2002.  As discussed above, thisincrease in the loss from operations in 2003 included special charges of $10.1million, or 4.1% of revenue, restructuring charges of $3.3 million, or 1.3% ofrevenue, amortization of intangibles of $1.1 million, or 0.4% of revenue and aspecial bad debt charge of $3.1 million, or 1.3% of revenue due to thewrite-off of a terminated contract with a customer for financial reasons. The loss from operations in 2002 included the loss from operations of the assetheld for sale, Princeton Softech, Inc., of $1.9 million, or 0.6% of revenue andrestructuring charges of $2.5 million or 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 $5.6 million and was comprised of a loss of $4.1million in IT Services, profit of $2.5 million in the Solutions Group and aloss of $4.0 million in Chimes.  This compares to the loss before incometax benefit of $10.4 million, excluding the special items noted above and gainon sale of assets, net loss on investments and net interest income totalingincome of $6.6 million in the year ended December 31, 2002, consisting of aloss of $2.2 million in IT Services, income of $766,000 in the Solutions Groupand a loss

 

22

----

 

of $8.9 million in Chimes.  Loss before income taxbenefit, excluding all special items, was a loss of 2.3% of revenue for theyear ended December 31, 2003 as compared to a loss of 3.5% in the comparableperiod of 2002.

 

*Other Income/(Expense)*.  Other expense was $378,000 in the year ended December 31, 2003, compared toother income of $6.6 million in the comparable period of 2002.  Thisdifference was primarily due to the gain on the sale of Princeton and Spargo in2002 totaling approximately $5.9 million.

 

*Provision for Income Taxes*. The effective tax rate for Federal, state and local income taxes was a taxbenefit of 27.3% for the year ended December 31, 2003 compared with a taxexpense of 29.5% for the year ended December 31, 2002.  The primary reasonfor the change in the effective tax rate was the establishment of a valuationallowance of state deferred tax assets in 2002.  A review of all availablepositive and negative evidence was conducted by the Company, including theCompany’s current and past performance, market environment in which the companyoperates, and the length of carryback and carryforward periods.  InJanuary 2003, the Company received a federal income tax refund of $20 million,resulting from the Economic Stimulus Act of 2002 (see Note 8).

 

*Net Loss*. For the year ended December 31, 2003, the net loss was $17.2 million, or $0.56loss per diluted share, compared to a net loss of $38.0 million, or $1.22 lossper diluted share for the year ended December 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 netloss in the year ended December 31, 2002 includes a charge for the cumulativeeffect of change in accounting principle of $29.9 million, or $0.96 per shareand differences in the effective tax rate primarily relating to the recordingof a valuation allowance in the Company’s state deferred tax assets ofapproximately $4.0 million, or $0.13 per share.  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 $297.1 million in the year ended December31, 2002 from $400.8 million in the year ended December 31, 2001, a decrease of$103.7 million, or 25.9%.

 

Solutions Group revenues, which included revenue from assetsheld for sale of $2.9 million for Princeton in 2002, and $29.0 million forPrinceton and $11.5 million for eB Networks, (“EBN”) in 2001, decreased to$79.3 million in the year ended December 31, 2002 from $116.9 million in theyear ended December 31, 2001, a decrease of $37.6 million or 32.2 %.  TheSolutions Group revenue, excluding the revenue of Princeton in 2002 andPrinceton and EBN in 2001 remained flat at $76.4 million in the year ended December31, 2002 and December 31, 2001, respectively.

 

IT Services revenues decreased to $201.3 million in the yearended 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 in IT Servicesrevenue of $73.1 million is the result of continued decreases in the demand fortemporary technology workers, the trend of companies to outsource technologyjobs offshore, the impact of pricing decreases by customers and the laggingeconomy.  For the year ended December 31, 2002, IT Services consultantaverage headcount decreased by 24%, accounting for approximately $66 million ofthe revenue decrease.  The balance of the decrease in revenue(approximately $7 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.

 

Chimes revenue increased to $16.5 million in the year endedDecember 31, 2002, from $9.5 million in the year ended December 31, 2001, anincrease of $7 million, or 73.7%.  This increase was primarily due to anincrease in revenue from existing customers of approximately $2.2 million andan increase of approximately $4.8 million in revenue from new customers in thissegment.

 

23

----

 

*Direct Costs*. Direct costs decreased to $216.2 million in the year ended December 31, 2002from $281.6 million in the year ended December 31, 2001.  Gross margindecreased to 27.2% in the year ended December 31, 2002 from 29.7% in the yearended December 31, 2001.

 

Direct costs, excluding $494,000 of direct expense fromPrinceton in 2002 and $6.3 million of direct expense from Princeton and $7.3million from EBN in 2001, decreased to $215.7 million in the year endedDecember 31, 2002 from $268.0 million in the year ended December 31,2001.  Gross margins excluding these expenses in both years increased to26.7% in the year ended December 31, 2002 from 25.6% in the year ended December31, 2001.

 

This increase in gross margins was primarily attributable tothe increase in higher margin 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 $4.3million for Princeton in 2002 and $28.4 million for Princeton and $5.3 millionfor EBN in 2001.

 

The decrease in selling, general and administrative expenseswas 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 the Company continues to invest in thissubsidiary.  Chimes average headcount increased 21% from approximately 168at December 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 restructuringcharge of $2.5 million pertaining to 2002 office closings, including a reversalof $192,000 of the previously recorded restructure reserves pertaining to leasebuyouts and $140,000 pertaining to severance adjustments.  These officeclosings were made to eliminate the infrastructure costs related to havingoffices in certain areas.  The Company did not eliminate marketing effortsor business in these areas, but rather turned these areas into virtualmarketplaces whereby sales personnel work from their homes.  As a resultof these office closings, in both IT Services and the Solutions business areas,rent expense and the related reduction of SG&A headcount (salary and fringebenefits) were eliminated from the current SG&A cost structure.

 

During the year ended December 31, 2001, the Company recordeda 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 onthe rent payments, it was necessary to restore the Company’s liability for theremaining lease obligations.

 

*Write-down of Assets Held for Sale*.  Inthe second quarter of 2001, the Company recorded $5.5 million expense for thewrite-down of assets held for sale to further reduce the carrying amount of EBNto the estimated net realizable value.

 

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

 

24

----

 

of $7.2 million in the Solutions Group and loss of $10.1million 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.

 

The Company’s loss from operations, excluding the losses fromthe assets held for sale of $1.9 million loss in Princeton in 2002 and $5.7million loss for Princeton and $1.1 million loss for EBN in 2001, restructuringcharges, amortization expense and the write-down of assets held for sale,totaled $8.5 million in the year ended December 31, 2002, a decline of $5.6million or 193.1%, from a loss of $2.9 million in the year ended December 31,2001.  The composition of the operating loss of $8.5 million included aloss of $2.4 million in IT Services, profit of $2.8 million in the SolutionsGroup and a loss of $8.9 million in Chimes.  This compares to theoperating loss of $2.9 million in the year ended December 31, 2001, consistingof profit of $5.7 million in IT Services, profit of $1.5 million in theSolutions Group and loss of $10.1 million in Chimes.  Operating margins,excluding restructuring charges, write-down of assets held for sale andamortization expense in 2001, were a loss of 2.9% in the year ended December31, 2002 as compared to a loss of 0.8% in the year ended December 31, 2001.

 

*Other Income/(Expense)*. For the year ended December 31, 2002, other income increased to $6.6 millionfrom other expense of $2.8 million in the year ended December 31, 2001. This increase in other income was primarily attributable to a $3.2 million gainon the sale of Princeton and a $2.7 million gain on the sale of Spargo whichresulted from a favorable purchase price adjustment after the final resolutionof outstanding accounts receivables and the termination of leases.  In2001, a $4.0 million loss was recorded on the sale of EBN offset in part by a$332,000 gain on the sale of ICM Education and the original $438,000 gainrecorded for the sale of Spargo in 2001.

 

*Provision for Income Taxes*. The effective tax rate for Federal, state, and local income taxes was 29.5% forthe year ended December 31, 2002, and a tax benefit rate of 33.1% in the yearended December 31, 2001.  The primary reason for the change in theeffective tax rate in 2002 was the establishment of a valuation allowance ofstate deferred tax assets.  A review of all available positive andnegative evidence was conducted by the Company, including the Company’s currentand past performance, the market environment in which the company operates, andthe length of carry back and carry forward periods.  In January 2003, theCompany received a federal income tax refund of $20 million, resulting from theEconomic Stimulus Act of 2002 (see Note 8).

 

*Net Loss*. The Company recorded a net loss of $38.0 million in the year ended December 31,2002, a decline of $23.5 million or 162.1% from net loss of $14.5 million inthe year ended December 31, 2001.  Net loss per share (diluted) totaled$1.22 in the year ended December 31, 2002 from net loss per share (diluted) of$0.45 in the year ended December 31, 2001.  The net loss in 2002 includesthe cumulative effect of change in accounting principle of $29.9 million, or$0.96 per share and differences in the effective tax rate primarily relating tothe recording of a valuation allowance in the Company’s state deferred taxassets of approximately $4.0 million, or $0.13 per share.  The effect ofrestructuring 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 of restructuring charges, loss on sale ofassets, amortization expense and the operations of the assets held for saleamounted to $0.40 loss per share, net of taxes, in 2001.

 

**Liquidityand Capital Resources**

 

Computer Horizons has historically financedits operations primarily through cash generated from operations, borrowingsagainst bank lines of credit and the public sale of its common stock.  AtDecember 31, 2003, the Company had $64.8 million in working capital, of which$52.6 million was cash and cash equivalents.  The Company’s workingcapital ratio at December 31, 2003 was 2.4 to 1.  The Company has remaineddebt free throughout 2003.   In January 2003, the Company received afederal income tax refund of $20 million, resulting from the Economic StimulusAct of 2002.  This refund pertains to deductions carried back to prioryears and

 

25

----

 

since the tax structure of the transaction giving rise to thededuction is subject to determination by the tax authorities, the Company hasrecorded a reserve for the tax benefit until IRS audits for the applicableyears are completed.

 

Net cash provided by operating activities for the years endedDecember 31, 2003, December 31, 2002 and December 31, 2001 totaled $16.9million, $20.7 million, and $31.9 million respectively.  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 to a 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 investing activities was $23.5 million forthe year ended December 31, 2003.  This was primarily attributable to thepurchase of RGII.  Net cash provided by investing activities was $13.0million and $6.1 million for the years ended December 31, 2002 and 2001,respectively.  In both years this was primarily attributable to cashreceived from the sale of assets.

 

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

 

On July 31, 2001, amended February 14, 2003, the Companyentered into a secured asset-based lending facility that replaced its twounsecured discretionary lines of credit.  This asset-based lendingfacility is a three-year, $40 million facility with availability basedprimarily on eligible customer receivables.  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 lessoutstanding loans must equal or exceed $17.5 million.  At the time ofclosing there was a $170,000 commitment fee paid to the agent.  As ofDecember 31, 2003, the Company had no outstanding loan balance against thefacility.  Borrowings under this facility are collateralized by certainassets 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 line of credit is0.375% per annum charged to the Company monthly.  This charge wasapproximately $109,000 and $143,000 for the year ended December 31, 2003 and2002.  This line of credit includes covenants relating to the maintenanceof cash balances and providing for limitations on incurring obligations andspending limits on capital expenditures.  One covenant pertains to minimumcash collections over a three-month period.  The Company did not satisfythis covenant for the period December 2003 through February 2004.  Awaiver was received from the lending institution for the three month periodending February 29, 2004. This facility is scheduled to expire in July 2004 andthe Company intends to enter into a new asset-based lending facility prior toexpiration.

 

As a result of the Company’s acquisition of RGII, the sellerof RGII may be entitled to contingent payments based on RGII’s performanceagainst profitability objectives over the next three years.  Thecontingent payments are evidenced by a contingent note with a face value of $10million that is payable over three years, only if certain financial performanceobjectives are met.  These financial performance objectives are based onearnings before interest and taxes (“EBIT”) targets totaling $19.8 million overa three-year period.  There are no minimum or maximum payment obligationsunder the terms of the contingent note. The contingent payment will be reducedon a dollar for dollar basis for financial performance below EBIT targets andincreased by 29 cents ($0.29) for each dollar exceeding EBIT targets.  Thepayments, if the applicable EBIT targets are met, will be due as follows: 2003 payment of $1.7 million, 2004 payment of $3.3 million, 2005 payment of$3.3 million, and 2006 payment of $1.7 million.  These payments will bereduced or increased based on actual EBIT performance.

 

26

----

 

On February 24, 2004 a payment was made for the firstsix-month installment of approximately $631,000, pertaining to this contingentnote.

 

The Company believes that its cash and cash equivalents,asset-based lending facility, internally generated funds and tax refunds(received in 2003) will be sufficient to meet its working capital needs through2004.

 

The Company’s billed accounts receivable were $44.5 millionand $49.4 million at December 31, 2003 and December 31, 2002,respectively.  Including both billed and unbilled receivables, days salesoutstanding were 70 days at December 31, 2003 and 76 days at December 31, 2002,based on quarterly sales.

 

**Contractual Obligations and CommercialCommitments**

 

The Company does not utilize off balance sheet financingother than operating lease arrangements for office premises and relatedequipment. Leases are short term in nature and non-capital. The following tablesummarizes all commitments under contractual obligations 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 |   |

 

----

*  Obligation ifapplicable EBIT targets are met.

 

**Foreign Currency Exposure**

 

The Company’s international operations expose it totranslation risk when the local currency financial statements are translated toU.S. dollars.  As currency exchange rates fluctuate, translation of thefinancial statements of international businesses into U.S. dollars will affectthe comparability of revenues and expenses between years.  None of thecomponents of the Company’s consolidated statements of income was materiallyaffected by exchange rate fluctuations in 2003, 2002 or 2001.  At December31, 2003 the Company had $1,945,000 in cash maintained in overseas financialinstitutions.

 

27

----

 

**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 how to separate elements of anarrangement that may involve the delivery or performance of multiple products,services and rights to use assets into separate units of accounting.  Theguidance in the consensus is effective for revenue arrangements entered into infiscal periods beginning after June 15, 2003.  The transition provisionallows either prospective application or a cumulative effect adjustment uponadoption.  The effect of the adoption of this statement was immaterial tothe Company.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity.”  It establishes classification and measurement standards forthree types of freestanding financial instruments that have characteristics ofboth 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-existinginstruments as of the first interim period after June 15, 2003.  SFAS 150did not have a material effect on the Company’s financial statements.

 

In January 2003, the FASB issued Financial Interpretation No. 46, “Consolidationof Variable Interest Entities” (“FIN 46”), which addresses consolidation bybusiness enterprises of variable interest entities (“VIEs”).  Theaccounting provisions and disclosure requirements of FIN 46 are effectiveimmediately for VIEs created after January 31, 2003, and are effective for theCompany’s fiscal period ending March 31, 2004, for VIEs created prior toFebruary 1, 2003.  In December 2003, the FASB published a revision to FIN46 (“FIN 46R”) to clarify some of the provisions of the interpretation and todefer the effective date of implementation for certain entities.  Underthe guidance of FIN 46R, public companies that have interests in VIE’s that arecommonly referred to as special purpose entities are required to apply theprovisions of FIN 46R for periods ending after December 15, 2003.  A publiccompany that does not have any interests in special purpose entities but doeshave a variable interest in a VIE created before February 1, 2003, must applythe provisions of FIN 46R by the end of the first interim or annual reportingperiod ending after March 14, 2004.  Although the Company is stillevaluating the impact of FIN 46R, it is not expected to have a material effecton the Company’s financial statements.

 

Item 7A. Quantitative andQualitative Disclosures about Market Risk 

 

**Market****Risk Exposure**

 

The Company has financial instruments that are subject tointerest rate risk.  Historically, the Company has not experiencedmaterial gains or losses due to interest rate changes.  Based on thecurrent holdings, the exposure to interest rate risk is not material. Additionally, at December 31, 2003 the Company was debt free.

 

28

----

 

Item 8.  Financial Statements and Supplementary Data 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

Computer Horizons Corp.

 

We have audited the accompanying consolidated balance sheetsof Computer Horizons Corp. and Subsidiaries as of December 31, 2003 and 2002,and the related consolidated statements of operations, shareholders’ equity andcash flows for each of the three years in the period ended December 31,2003.  These financial statements are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audits in accordance with auditing standardsof the Public Company Accounting Oversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements.  Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe that our audits provide a reasonablebasis for our opinion.

 

In our opinion, the financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Computer Horizons Corp. and Subsidiaries as of December 31, 2003 and 2002and the consolidated results of their operations and their consolidated cashflows for each of the three years in the period ended December 31, 2003, inconformity with accounting principles generally accepted in the United Statesof America.

 

As discussed in note 2, theconsolidated financial statements as of December 31, 2003 and for the year thenended, have been restated to reflect adjustments related to an understatementof the Company’s Consultant costs and accrued payroll and an overstatement of accruedexpenses and an understatement of shareholders equity.

 

 
| /s/ Grant Thornton LLP                                                                                                                                  |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| GRANT THORNTON LLP                                                                                                                                      |
|                                                                                                                                                    |
|                                                                                                                                                    |
| Edison, New Jersey                                                                                                                                      |
| February 17, 2004 (except for Note 2 and the second  paragraph of Note 5, as to which the dates are November 8, 2004 and March 9,  2004, respectively). |

 

29

----

 

Computer Horizons Corp. andSubsidiaries

 

CONSOLIDATED BALANCE SHEETS

 
| ** **                         | ** ** | **December 31,**                           | ** **  |
|------------------------------------|------------|--------------------------------------------|-------------|
| ** **                         | ** ** | **2003**                                   | ** **  | **2002** | ** ** |
| ** **                         | ** ** | **(As restated  note 2)**                  | ** **  | ** ** | ** ** |
| ** **                         | ** ** | **(in thousands, except per  share data)** | ** **  |
| ASSETS                             |       |                                       |        |   |   |
|                               |       |                                       |        |   |   |
| *Current assets:*                  |       |                                       |        |   |   |
| Cash and cash equivalents (Note 1) |       | **$**                                      | **52,610**  | ** ** | $ | 59,769 |   |
| Accounts receivable (Note 3)       |       | **48,295**                                 | ** **  | 56,616 |   |
| Deferred income taxes (Note 8)     |       | **4,514**                                  | ** **  | 4,557 |   |
| Refundable income taxes (Note 8)   |       | **—**                                 | ** **  | 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 8)     |       | **14,813**                                 | ** **  | 8,020 |   |
| Other                              |       | **9,386**                                  | ** **  | 8,279 |   |
|                               |       | ** **                                 | ** **  |   |   |
|                               |       | **60,825**                                 | ** **  | 35,502 |   |
|                               |       | ** **                                 | ** **  |   |   |
| Total Assets                       |       | **$**                                      | **180,326** | ** ** | $ | 193,731 |   |

 

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

 

30

----

 
| ** **                                                                                                                    | ** ** | **December 31,**                           | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                                                                    | ** ** | **2003**                                   | ** **  | **2002** | ** ** |
| ** **                                                                                                                    | ** ** | **(As restated  note 2)**                  | ** **  | ** ** | ** ** |
| ** **                                                                                                                    | ** ** | **(in thousands, except per  share data)** | ** **  |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                     |       |                                       |        |   |   |
|                                                                                                                          |       |                                       |        |   |   |
| *Current liabilities*:                                                                                                        |       |                                       |        |   |   |
| Accrued payroll, payroll taxes and benefits                                                                                   |       | **$**                                      | **7,791**   | ** ** | $ | 4,529 |   |
| Accounts payable                                                                                                              |       | **8,287**                                  | ** **  | 10,830 |   |
| Restructuring reserve (Note 14)                                                                                               |       | **2,620**                                  | ** **  | 3,266 |   |
| Income taxes payable                                                                                                          |       | **1,243**                                  | ** **  | — |   |
| Tax benefit reserve (Note 8)                                                                                                  |       | **19,600**                                 | ** **  | 19,600 |   |
| Other accrued expenses                                                                                                        |       | **5,813**                                  | ** **  | 3,408 |   |
|                                                                                                                          |       | ** **                                 | ** **  |   |   |
| Total current liabilities                                                                                                     |       | **45,354**                                 | ** **  | 41,633 |   |
|                                                                                                                          |       | ** **                                 | ** **  |   |   |
| Other liabilities                                                                                                             |       | **4,635**                                  | ** **  | 6,243 |   |
|                                                                                                                          |       | ** **                                 | ** **  |   |   |
| Commitments and Contingencies (Notes 5, 8, 12 and 21)                                                                         |       | ** **                                 | ** **  |   |   |
|                                                                                                                          |       | ** **                                 | ** **  |   |   |
| *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                                                                                          |       | **(2,789**                                 | **)**       | (4,306 | ) |
| Retained earnings                                                                                                             |       | **11,100**                                 | ** **  | 28,255 |   |
|                                                                                                                          |       | ** **                                 | ** **  |   |   |
|                                                                                                                          |       | **144,672**                                |        | 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                                                                                               |       | **130,337**                                | ** **  | 145,855 |   |
|                                                                                                                          |       | ** **                                 | ** **  |   |   |
| Total Liabilities and Shareholders’ Equity                                                                               |       | **$**                                      | **180,326** | ** ** | $ | 193,731 |   |

 

31

----

 

Computer Horizons Corp. andSubsidiaries

CONSOLIDATED STATEMENTS OFOPERATIONS

 
| ** **                                                                                                | ** ** | **Year ended December 31,**               | ** **  |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                                                                                | ** ** | **2003**                                  | ** **  | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                                | ** ** | **(As  restated,  note 2)**               | ** **  | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                | ** ** | **(in thousands, except per share data)** | ** **  |
|                                                                                                      |       |                                      |        |   |   |   |   |
| Revenues                                                                                                  |       | **$**                                     | **245,210** | ** ** | $ | 297,115 |   | $ | 400,784 |   |
|                                                                                                      |       | ** **                                | ** **  |   |   |   |   |
| *Costs and expenses:*                                                                                     |       | ** **                                | ** **  |   |   |   |   |
| Direct costs                                                                                              |       | **173,198**                               | ** **  | 216,181 |   | 281,576 |   |
| Selling, general and administrative                                                                       |       | **80,634**                                | ** **  | 91,343 |   | 128,832 |   |
| Amortization of intangibles                                                                               |       | **1,084**                                 | ** **  | — |   | 2,695 |   |
| Restructuring charges (Note 14)                                                                           |       | **3,278**                                 | ** **  | 2,515 |   | 1,048 |   |
| Special charges (Note 19)                                                                                 |       | **10,113**                                | ** **  | — |   | — |   |
| Write-down of assets held for sale                                                                        |       | **—**                                | ** **  | — |   | 5,473 |   |
|                                                                                                      |       | ** **                                | ** **  |   |   |   |   |
|                                                                                                      |       | **268,307**                               | ** **  | 310,039 |   | 419,624 |   |
|                                                                                                      |       | ** **                                | ** **  |   |   |   |   |
| Loss from operations                                                                                      |       | **(23,097**                               | **)**       | (12,924 | ) | (18,840 | ) |
|                                                                                                      |       | ** **                                | ** **  |   |   |   |   |
| *Other income /(expense):*                                                                                |       | ** **                                | ** **  |   |   |   |   |
| Gain / (loss) on sale of assets (Note 18)                                                                 |       | **(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 |       | **(23,475**                               | **)**       | (6,341 | ) | (21,598 | ) |
|                                                                                                      |       | ** **                                | ** **  |   |   |   |   |
| *Income taxes / (benefit) (Notes 1 and 8):*                                                               |       | ** **                                | ** **  |   |   |   |   |
| Current                                                                                                   |       | **341**                                   | ** **  | (4,292 | ) | (10,292 | ) |
| Deferred                                                                                                  |       | **(6,750**                                | **)**       | 6,161 |   | 3,144 |   |
|                                                                                                      |       | ** **                                | ** **  |   |   |   |   |
|                                                                                                      |       | **(6,409**                                | **)**       | 1,869 |   | (7,148 | ) |
|                                                                                                      |       | ** **                                | ** **  |   |   |   |   |
| Loss before cumulative effect of change in accounting principle and  minority interest                    |       | **(17,066**                               | **)**       | (8,210 | ) | (14,450 | ) |
|                                                                                                      |       | ** **                                | ** **  |   |   |   |   |
| Cumulative effect of change in accounting principle (Note 1)                                              |       | **—**                                | ** **  | (29,861 | ) | — |   |
| Minority interest                                                                                         |       | **(89**                                   | **)**       | 35 |   | — |   |
|                                                                                                      |       | ** **                                | ** **  |   |   |   |   |
| Net Loss                                                                                                  |       | **$**                                     | **(17,155** | **)** | $ | (38,036 | ) | $ | (14,450 | ) |
|                                                                                                      |       | ** **                                | ** **  |   |   |   |   |
| Loss per share – Basic and Diluted (Notes 1 and 9):                                                  |       | ** **                                | ** **  |   |   |   |   |
| Before cumulative effect of change in accounting principle                                                |       | **$**                                     | **(0.56**   | **)** | $ | (0.26 | ) | $ | (0.45 | ) |
| Cumulative effect of change in accounting principle                                                       |       | **$**                                     | **—**  | ** ** | $ | (0.96 | ) | $ | — |   |
| Net Loss                                                                                                  |       | **$**                                     | **(0.56**   | **)** | $ | (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 anintegral part of these statements.*

 

32

----

 

CONSOLIDATED STATEMENT OFSHAREHOLDERS’ EQUITY

 

Years ended December 31, 2003, 2002and 2001

 
| ** **                                            | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|-------------|------------|-------------------|------------|-------------------|------------|---------------------|------------|--------------|------------|------------|------------|---------------|------------|
| ** **                                            | ** ** | ** **                 | ** ** | ** **  | ** ** | **Additional**    | ** ** | **other**         | ** ** | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** | ** **    | ** ** |
| ** **                                            | ** ** | **Common  Stock**          | ** ** | **Paid-in** | ** ** | **Comprehensive** | ** ** | **Retained**      | ** ** | **Treasury  Stock** | ** ** | ** **   | ** ** |
| ** **                                            | ** ** | **Shares**                 | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Income/(Loss)** | ** ** | **Earnings**        | ** ** | **Shares**   | ** ** | **Amount** | ** ** | **Total**     | ** ** |
| ** **                                            | ** ** | **(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**                            | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **        | ** ** | ** **        | ** ** | **(17,155**         | **)**      | ** **   | ** ** | ** ** | ** ** | **(17,155**   | **)**      |
| **Other  comprehensive loss:**                        | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **        | ** ** | ** **        | ** ** | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** | ** **    | ** ** |
| **Current  year unrealized loss on investments**      | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **        | ** ** | **(489**          | **)**      | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** | **(489**      | **)**      |
| **Foreign  currency translation adjustments**         | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **        | ** ** | **2,006**         | ** ** | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** | **2,006**     | ** ** |
| **Total  comprehensive loss**                         | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **        | ** ** | ** **        | ** ** | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** | **(15,638**   | **)**      |
| ** **                                            | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **        | ** ** | ** **        | ** ** | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** | ** **    | ** ** |
| **Stock  options exercised**                          | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **        | ** ** | ** **        | ** ** | ** **          | ** ** | **(361,410** | **)**      | **959**    | ** ** | **959**       | ** ** |
| **Employee  stock purchase program**                  | ** ** | ** **                 | ** ** | ** **  | ** ** | **(472**          | **)**      | ** **        | ** ** | ** **          | ** ** | **(153,765** | **)**      | **863**    | ** ** | **391**       | ** ** |
| **Purchase  of treasury shares**                      | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **        | ** ** | ** **        | ** ** | ** **          | ** ** | **392,200**  | ** ** | **(1,230** | **)**      | **(1,230**    | **)**      |
| ** **                                            | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **        | ** ** | ** **        | ** ** | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** | ** **    | ** ** |
| ***Balance, December 31, 2003 (As restated note 2)*** | ** ** | **33,153,107**             | ** ** | **$**       | **3,315**  | ** **        | **$**      | **133,046**       | ** ** | **$**               | **(2,789** | **)**        | **$**      | **11,100** | ** ** | **2,537,692** | ** ** | **$** | **(14,335** | **)** | **$** | **130,337** | ** ** |

 

*The accompanying notes are an integralpart of this statement.*

 

33

----

 

Computer Horizons Corp. andSubsidiaries

CONSOLIDATED STATEMENTS OF CASHFLOWS

 
| ** **                                                                                 | ** ** | **Year ended December 31,** | ** **  |
|--------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                                                                 | ** ** | **2003**                    | ** **  | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                 | ** ** | **(As  restated  note 2)**  | ** **  | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                 | ** ** | **(in thousands)**          | ** **  |
| ***Cash flows from operating  activities***                                                |       | ** **                  | ** **  |   |   |   |   |
| Net loss                                                                                   |       | **$**                       | **(17,155** | **)** | $ | (38,036 | ) | $ | (14,450 | ) |
| Adjustments to reconcile net loss to net cash provided by/(used in)  operating activities: |       | ** **                  | ** **  |   |   |   |   |
| Deferred taxes                                                                             |       | **(6,750**                  | **)**       | 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                                                |       | **3,262**                   | ** **  | (4,648 | ) | (2,023 | ) |
| Accounts payable                                                                           |       | **(4,026**                  | **)**       | (4,366 | ) | (2,749 | ) |
| Income taxes payable                                                                       |       | **1,033**                   | ** **  | — |   | — |   |
| Other accrued expenses                                                                     |       | **(1,673**                  | **)**       | (1,432 | ) | (560 | ) |
| Other liabilities                                                                          |       | **(2,200**                  | **)**       | (837 | ) | 1,426 |   |
| **Net cash provided by operating activities**                                              |       | **16,873**                  | ** **  | 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)                                                 |       | **2,006**                   | ** **  | (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** |   |

 

----

*  Includes a $1.5 million note payment

 

***Non Cash Activities:***

 

During 2002, the Company recorded a refundable income tax andtax benefit reserve of $19.6 million.

 

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

 

34

----

 

Computer Horizons Corp. andSubsidiaries 

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS 

December 31, 2003, 2002 and 2001

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

*Description of Business*

 

Computer Horizons Corp. is a strategic e-Business solutionsand professional services company which does business principally in the UnitedStates.  The Company enables 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 realize competitiveadvantages through three major divisions, IT Services, Solutions and Chimes,Inc.  The IT Services division provides highly skilled software professionalsto augment the internal information management staffs of major corporations.The Solutions division, which includes RGII Technologies Inc., (“RGII”),provides enterprise application services, e-business solutions, customized Webdevelopment and Web enablement of strategic applications, Customer RelationshipManagement (CRM), network services, strategic outsourcing and managedresourcing as well as software and relational 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 management services to Global 2000companies.

 

*Principles of Consolidation*

 

The consolidated financial statements include the accounts ofComputer Horizons Corp. and its wholly-owned and majority-owned subsidiaries(the “Company”).  All subsidiaries of the Company have been consolidatedinto these financial statements.  ISG - Canada reports their financials ona one-month lag.  All material intercompany accounts and transactions havebeen eliminated.

 

*Revenue Recognition*

 

Approximately 94% and 93% of consolidated revenue in 2003 and2002, respectively, was derived from time-and-material contracts.

 

For the IT Services division revenues are recognized asservices are performed under time-and material contracts.  Under a typicaltime-and-material billing arrangement, our customers are billed on a regularlyscheduled basis, such as biweekly or monthly.  At the end of each accountingperiod, unbilled revenue is estimated and accrued for services performed sincethe last billing cycle.  These unbilled amounts are billed the followingmonth.

 

The Solutions Group recognizes revenue either on atime-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 contracthas different terms, milestones and deliverables.  The milestones anddeliverables primarily relate to the work to be performed and the timing of thebilling.  At the end of each reporting period an assessment of revenuerecognized on the percentage of completion and milestones achieved criteria ismade.  If it becomes apparent that estimated cost will be exceeded orrequired milestones or deliverables will not have been obtained, an adjustmentwill be made.  The cumulative effect of revisions in estimated revenuesand costs are recognized in the period in which the facts that give rise to theimpact of any revisions become known.

 

35

----

 

Unbilled accounts receivables represent amounts recognized asrevenue based on services performed in advance of customer billings principallyon 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 the following month.  Costs andestimated earnings in excess of billing on fixed fee contracts arise whenpercentage of completion accounting is used.  Such amounts are billed atspecific dates or at contract completion.

 

The Company’s Chimes subsidiary recognizes revenue on atransaction fee basis.  The Chimes service offering aggregates thesuppliers of temporary workers to the customer and renders one invoice to thecustomer.  Upon payment from the customer, Chimes deducts a transactionfee and remits the balance of the client payment to the applicablevendor.  Chimes recognizes only their fee for the service, not theaggregate billing to the customer.  The gross amount of the customerinvoicing is not considered revenue or receivable to Chimes because there is noearnings process for the gross amount and by contract terms, Chimes is notobligated to pay the vendor until paid by the customer.

 

The Company’s Princeton subsidiary 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 recognized software license revenue when anoncancelable license agreement had been executed, fees were fixed anddeterminable, the software had been delivered, and collection was consideredprobable.  Princeton Softech was sold on March 25, 2002, (see Note 18).

 

*Recruitment Costs*

 

Recruitment costs are charged to operations as incurred.

 

*Advertising Costs*

 

The Company expenses all advertising costs as incurred andclassifies these costs under selling, general and administrativeexpenses.  Advertising costs for the years ended December 31, 2003, 2002and 2001 were $ 0.2 million, $0.3 million and $0.6 million, respectively.

 

*Research and Development Costs*

 

The Company charges all costs incurred to establish thetechnological feasibility of software products or product enhancements toresearch and development costs, which are included in selling, general andadministrative expenses.  Research and Development costs for the yearsended December 31, 2003, 2002 and 2001 were approximately $98,000, $0.9 millionand $5.4 million, respectively.

 

36

----

 

*Cash and CashEquivalents*

 

Cash and cash equivalents include highly liquidinstruments with an original maturity of three months or less at the time ofpurchase and consist of 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 by Chimesand held in client-specific bank accounts, to be used to make payments to vendorsof 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 gains and losses are reflected as a netamount under the caption of accumulated other comprehensive loss within thestatement 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 theCompany to concentrations of credit risk, regardless of the degree of suchrisk, consist principally of cash and cash equivalents and trade accountsreceivable. The Company invests the majority of its excess cash in overnightcommercial paper of high-credit, high quality short-term money marketinstruments, high-quality financial institutions or companies, with certainlimitations as to the amount that can be invested in any one entity.

 

The Company maintains its cash balances principally innine financial institutions located in the United States, Canada, India and theUnited Kingdom.  The balances in U.S. banks are insured by the FederalDeposit Insurance Corporation up to $100,000 for each entity at eachinstitution. The balance in the Canadian bank is insured by the Canadian DepositInsurance Corporation up to $60,000 Canadian (approximately $46,000U.S.).  The balance in the Indian bank is insured by the Deposit Insuranceand Credit Guarantee Corporation up to 100,000 Rupees (approximately $2,000U.S.).  There is no depository insurance in the United Kingdom.  AtDecember 31, 2003, uninsured amounts held by the Company at these financialinstitutions total approximately $51,862,000.  At December 31, 2003, theCompany had approximately $1,945,000 in cash maintained in overseas financialinstitutions.

 

The Company’s customers are generally very large,Global 2000 companies in many industries and with wide geographicdispersion.  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 Company’s largest customers are the FederalGovernment and the City of New York. The Federal Government accounts forapproximately 16.0% of consolidated billed accounts receivable at December 31,2003 and the City of New York accounts for approximately 10.0 %, 19.6% and15.0% of billed accounts receivable at December 31, 2003, 2002 and 2001,respectively.  Revenues from the Federal Government totaled approximately$18 million, or 7% of total consolidated revenues.  Revenues from the Cityof New York totaled approximately $12.5 million, or 5% of total consolidatedrevenues, $11.9 million, or 4% of total consolidated revenues and $9.1 million,or 2% of total consolidated revenues for the years ended December 31, 2003,2002 and 2001, respectively.  Historically, there have been no collectionissues with either customer; however, the payment cycle is significantly slowerthan the Company’s commercial customers.   The

 

37

----

 

Company establishes an allowance for doubtful accountsbased upon factors surrounding the credit risk of specific customers,historical trends, and other information.

 

*Fair Value ofFinancial Instruments*

 

The carrying value of financial instruments(principally consisting of cash and cash equivalents, accounts receivable andpayable) approximates fair value 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 the estimateduseful lives of the assets which range from three to seven years.

 

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

 

Up to and including the year ended December 31, 2001,the Company evaluated its long-lived assets and certain identifiableintangibles for impairment whenever events or changes in circumstancesindicated that the carrying amount of such assets or intangibles may not berecoverable.  Recoverability of assets to be held and used was measured bya comparison of the carrying amount of an asset to future net cash flowsexpected to be generated by the asset.  If such an asset was considered tobe 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 were reported at the lower of thecarrying amount or fair value less costs to sell.

 

Effective on January 1, 2002, the Company adoptedFinancial Accounting Standard No. 144 “Accounting for the Impairment orDisposal of Long Lived Assets,” (“SFAS 144”).  This supersedes SFAS 121,while retaining many of the requirements of such statement. The effect of thisstatement was immaterial to the Company.

 

*Income Taxes*

 

The Company and its domestic subsidiaries file aconsolidated Federal income tax return.  The foreign subsidiaries file ineach of their local jurisdictions.

 

The Company follows the liability method of accountingfor income taxes.  Income taxes are provided for the tax effects oftransactions reported in the financial statements and consist of taxescurrently due plus deferred taxes.  Deferred income taxes are recognizedfor temporary differences between the financial statement carrying amounts andthe tax bases of certain assets and liabilities.  Temporary differencesresult primarily from net operating loss carryovers, amortization of goodwill,allowance for doubtful accounts and certain accrued liabilities which aredeductible, for tax purposes, only when paid.  In assessing therealizability of deferred tax assets, management considers the scheduledreversal periods of the deferred tax assets as well as projected future taxableincome and tax planning strategies.  A valuation allowance is providedwhen it is more likely than not that some portion or all of the deferred taxasset will not be realized.

 

Tax benefits from early disposition of the stock byoptionees under incentive stock options and from exercise of non-qualifiedoptions are credited to additional paid-in capital.

 

The Company provides United States income taxes on theearnings of foreign subsidiaries, unless they are considered permanentlyinvested outside the United States.  As of December 31, 2003, there is nocumulative amount of foreign earnings on which United States income taxes havenot been provided.

 

*Loss Per Share*

 

Basic loss per share is based on the weighted averagenumber of common shares outstanding without consideration of common stockequivalents.  Diluted loss per share is based on the weighted average

 

38

----

 

number of common and common equivalent sharesoutstanding, except when the effect is anti-dilutive.  The calculationtakes into account when dilutive, the shares that may be issued upon exerciseof stock options, reduced by the shares that may be repurchased with the fundsreceived from the exercise, based on the average price during the year. For all years presented all stock options (See Note 9) were excluded fordiluted loss per share because they were antidilutive.

 

*Use of Estimatesin Financial Statements*

 

In preparing financial statements in conformity withaccounting principles generally accepted in the United States of America,management makes estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosures of contingent assets and liabilities atthe date of the financial statements, as well as the reported amounts ofrevenues and expenses during the reporting period.  Actual results coulddiffer from those estimates.

 

*Foreign CurrencyTranslation*

 

For operations outside the United States that preparefinancial statements in currencies other than the United States dollar(Canadian dollar, British pound, and Indian Rupee), results of operations andcash flows are translated at the average exchange rates during the period, andassets and liabilities are translated at end of period exchange rates. Translation adjustments are included as a separate component of comprehensiveincome/(loss) within the statement of shareholders’ equity.

 

*AccountsReceivable*

 

Accounts receivable are generally due within 30 daysand are stated at amounts due from customers net of an allowance for doubtfulaccounts.  Accounts outstanding longer than the contractual payment termsare considered past due.  The Company determines its allowance byconsidering a number of factors, including the length of time trade accountsreceivable are past due, the Company’s previous loss history, the customer’scurrent ability to pay its obligation to the Company and the condition of thegeneral economy and the industry as a whole.  The Company writes offaccounts receivable when they become uncollectible, and payments subsequentlyreceived on such receivables are credited to the allowance for doubtfulaccounts.

 

*Goodwill*

 

In June 2001, the Financial Accounting Standards Boardapproved the issuance of SFAS No. 141, “Business Combinations” and in July2001, SFAS 142, “Goodwill and Other Intangible Assets.”  The new standardsrequire that all business combinations initiated after June 30, 2001 must beaccounted for under the purchase 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 intangibleswith indefinite lives are no longer subject to amortization, but are subject toat least an annual assessment for impairment by applying a fair value basedtest.  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, the Companycompleted the initial valuation of the carrying value of goodwill existing atJanuary 1, 2002.  As a result, a non-cash charge of $29.9 million, or$(0.96) per share was retroactively recorded as the cumulative effect of anaccounting change in the six months ended June 30, 2002 statement ofoperations.  For the years ended December 31, 2003 and 2002 the Companycompleted valuations of the carrying value of the remaining goodwill and it wasdetermined that no additional impairment had occurred.

 

39

----

 

The changes in the carrying amount of goodwill for theyears ended December 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 |   |

 

----

* Reflects goodwill recorded as a result of the RGII($14,588) and Global Business Technology Services, (“GBTS”) ($427)acquisitions.  See Note 16 of the notes to the consolidated financialstatements.

 

The reporting units are equal to, or one level below,reportable segments.  The Company engaged independent valuationconsultants to assist with the transitional goodwill impairment tests.

 

As of December 31, 2003 and 2002, the fair value ofeach of the reporting units was calculated using the following approaches (i)market approach and (ii) income approach.  Under the market approach,value is estimated by comparing the performance fundamentals relating tosimilar public companies’ stock prices.  Multiples are then developed ofthe value of the publicly traded stock to various measures and are then appliedto each reporting unit to estimate the value of its equity.  Under theincome approach, value was determined using the present value of the projectedfuture cash flows to 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.  An asset approach was not usedbecause the asset approach is most relevant for liquidation approaches,investment company valuations and asset rich company valuations (i.e. realestate entities) and was not deemed relevant for manufacturing and servicecompany 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 ofthe two approaches yielded values in excess of carrying value, any weighting ofthe two approaches or either approach used alone results in the sameconclusion, that the goodwill was 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 June2002 and recorded as a cumulative effect of change in accounting principle in theaccompanying Consolidated Statements of Operations.  There was no incometax effect 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 million of the charge was related primarilyto goodwill that was acquired prior to the ability to deduct goodwill for taxpurposes.

 

40

----

 

The following pro forma table shows the effect ofamortization expense and the cumulative effect of change in accountingprinciple on the Company’s net loss as follows:

  
| ** **                                                           | ** ** | **December  31,  2003**     | ** ** | **December  31,  2002** | ** ** | **December  31,  2001** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                           | ** ** | **(As  restated,  Note 2)** | ** ** | ** **              | ** ** | ** **              | ** ** |
| Reported net loss                                                    |       | $                           | (17,155    | )                       | $          | (38,036                 | )          | $ | (14,450 | ) |
|                                                                 |       |                        |       |                    |       |                    |       |
| Cumulative effect of change in accounting  principle                 |       | —                      |       | 29,861                  |       | —                  |       |
|                                                                 |       |                        |       |                    |       |                    |       |
| Amortization of intangibles                                          |       | —                      |       | —                  |       | 2,695                   |       |
|                                                                 |       |                        |       |                    |       |                    |       |
| Adjusted net loss                                                    |       | $                           | (17,155    | )                       | $          | (8,175                  | )          | $ | (11,755 | ) |
|                                                                 |       |                        |       |                    |       |                    |       |
| Reported loss per share:                                             |       |                        |       |                    |       |                    |       |
| Basic & Diluted                                                  |       | $                           | (0.56      | )                       | $          | (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                                                  |       | $                           | (0.56      | )                       | $          | (0.26                   | )          | $ | (0.37 | ) |

 

41

----

 

*Intangible Assets*

 

Intangible assets are the result of the acquisition,in July 2003, of certain assets and operations of RGII and the acquisition ofthe Xpress software from Commerce One. During the third quarter of 2003, theCompany completed a purchase price allocation review and according to SFAS No.142, assessed the useful lives of its acquired intangible assets.

 

The following table summarizes the acquired intangibleassets, the remaining components and the accumulated amortization as ofDecember 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 over periodsranging from six months to seven years, based on the estimated useful lives.The amortization expense on these intangible assets for the year ended December31, 2003 was $1,084,000.  The estimated remaining amortization expense foreach year ending December 31, is as follows (in thousands):

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

 

*Recent AccountingPronouncements*

 

In November 2002, the EITF reached a consensus onIssue No. 00-21, “ Accounting for Revenue Arrangements with MultipleDeliverables.”  This Issue provides guidance on when and how to separateelements of an arrangement that may involve the delivery or performance ofmultiple products, services and rights to use assets into separate units ofaccounting.  The guidance in the consensus is effective for revenuearrangements entered into in fiscal periods beginning after June 15,2003.  The transition provision allows either prospective application or acumulative effect adjustment upon adoption.  The effect of the adoption ofthis statement was immaterial to the Company.

 

42

----

 

In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.”  It establishes classification and measurement standards forthree types of freestanding financial instruments that have characteristics ofboth 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-existinginstruments as of the first interim period after June 15, 2003.  SFAS 150did not have a material effect on the Company’s financial statements.

 

In January 2003, the FASB issued FinancialInterpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”),which addresses consolidation by business enterprises of variable interestentities (“VIEs”).  The accounting provisions and disclosure requirementsof FIN 46 are effective immediately for VIEs created after January 31, 2003,and are effective for reporting periods ending after December 15, 2003, forVIEs created prior to February 1, 2003.  In December 2003, the FASBpublished a revision to FIN 46 (“FIN 46R”) to clarify some of the provisions ofthe interpretation and to defer the effective date of implementation forcertain entities.  Under the guidance of FIN 46R, public companies thathave interests in VIE’s that are commonly referred to as special purposeentities are required to apply the provisions of FIN 46R for periods endingafter December 15, 2003.  A public company that does not have anyinterests in special purpose entities but does have a variable interest in aVIE created before February 1, 2003, must apply the provisions of FIN 46R bythe end of the first interim or annual reporting period ending after March 14,2004.  Although the Company is still evaluating the impact of FIN 46R, itis not expected to have a material effect on the Company’s financialstatements.

 

43

----

 

*Accounting forStock Based Compensation*

 

In December 2002, the Financial Accounting StandardsBoard approved the issuance of SFAS No. 148, “Accounting for Stock-BasedCompensation – Translation and Disclosure.”  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.  Inaddition, this Statement amended the disclosure requirements of Statement 123to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the methods used on reported results.  The Companyadopted the disclosure provisions as of December 31, 2002.

 

The exercise price per share on all options grantedmay not be less than the fair value at the date of the option grant.  TheCompany applies Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” as modified by FIN 44, “Accounting for CertainTransactions Involving Stock Compensation,” in accounting for stock-basedemployee compensation, whereby no compensation cost had been recognized for theplans.  The Company expects to continue following the guidance under APB25 for stock based compensation to employees.  Had compensation cost forthe plans been determined based on the fair value of the options at the grantdates and been consistent with the method of SFAS No. 123, the Company’s netloss and loss per share would have been reduced to the pro forma amountsindicated below:

  
| ** **         | ** ** | ** **                                                                                                                                    | ** ** | **2003**                   | ** **  | **2002**   | ** ** | **2001**    | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|------------|------------|-------------|------------|
| ** **         | ** ** | ** **                                                                                                                                    | ** ** | **(As restated,  note 2)** | ** **  | ** ** | ** ** | ** **  | ** ** |
|               |       |                                                                                                                                          |       |                       |        |       |       |        |       |
| Net loss           |       | As reported                                                                                                                                   |       | $                          | (17,155,000 | )          | $          | (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                                                                                                                                     |       | $                          | (19,556,000 | )          | $          | (41,370,000 | )          | $ | (18,297,000 | ) |
|               |       |                                                                                                                                          |       |                       |        |       |       |        |       |
| Earnings per share |       |                                                                                                                                          |       |                       |        |       |       |        |       |
| Basic              |       | As reported                                                                                                                                   |       | $                          | (0.56       | )          | $          | (1.22       | )          | $ | (0.45 | ) |
|               |       | Pro forma                                                                                                                                     |       | (0.64                      | )           | (1.32      | )          | (0.57       | )          |
|               |       |                                                                                                                                          |       |                       |        |       |       |        |       |
| Diluted            |       | As reported                                                                                                                                   |       | $                          | (0.56       | )          | $          | (1.22       | )          | $ | (0.45 | ) |
|               |       | Pro forma                                                                                                                                     |       | (0.64                      | )           | (1.32      | )          | (0.57       | )          |

 

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes options-pricing model with thefollowing weighted-average assumptions used for grants in 2003, 2002 and 2001,respectively:  expected volatility of 62%, 64% and 84%; risk-free interestrates 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 2002and 2001 comparative financial statements to conform to the 2003 presentation.

 

44

----

 

**NOTE 2 –RESTATEMENT OF FINANCIAL STATEMENTS**

 

Subsequent to theissuance of its financial statements for the year ended December 31, 2003,and in connection with an internal review of accounting processes andprocedures conducted in the third quarter of 2004, the companydiscovered an error pertaining to the incorrect adjustment of consulting costsrelating to intercompany transactions between the Company and its Canadiansubsidiary.  This error caused anunderstatement of consolidated consultant costs (i.e. direct costs) in theCompany’s consolidated income statement and accrued payroll on the balancesheet.

 

As part of management’sinvestigation of this accounting error, an extensive review of intercompanytransactions was completed.  As a result,other adjustments, not affecting operating results, were recorded.  These adjustments to the balance sheetcorrected an overstatement of accrued expenses and an understatement ofshareholders’ equity (specifically the overstatement of accumulated comprehensiveloss).  In addition, in the secondquarter of 2003, the Company made a balance sheet correction resulting in anincrease in shareholders’ equity and a decrease in accrued payroll of $41,000.

 

The following schedule reconciles net loss for the yearended December 31, 2003 as originally reported, to the corresponding amounts ona restated basis after given effect to the adjustment described.

 
| ** **                            | ** ** | **The Year Ended  December 31, 2003** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
|                                  |       |                                  |       |
| Net loss as originally reported       |       | (14,948                               | )          |
|                                  |       |                                  |       |
| Direct costs adjustment (pretax)      |       | (3,396                                | )          |
|                                  |       |                                  |       |
| Income tax benefit                    |       | 1,189                                 |       |
| Net loss as restated                  |       | (17,155                               | )          |
|                                  |       |                                  |       |
| Loss per share as originally reported |       | (0.49                                 | )          |
| Effect of Direct Costs adjustment     |       | (0.07                                 | )          |
| Loss per share as restated            |       | (0.56                                 | )          |

 

The previously reported results of operations for theyear ended December 31, 2003 as reported on Form 10KA with the Securities andExchange Commission, have been amended to reflect the above prior periodadjustments.  The results of such priorperiod adjustments, as compares with the Company’s previously reported resultsfor the year ended December 31, 2003, are set forth below.

 
| ** **                                      | ** ** | **Year ended  December 31, 2003** | ** ** | **Year ended  December 31, 2003** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                      | ** ** | **As Originally Reported**        | ** ** | **As Restated**                   | ** ** |
|                                            |       |                              |       |                              |       |
| Revenue                                         |       | 245,210                           |       | 245,210                           |       |
|                                            |       |                              |       |                              |       |
| Cost and expenses                               |       |                              |       |                              |       |
| Direct costs                                    |       | 169,802                           |       | 173,198                           |       |
| Selling, general and administrative             |       | 80,634                            |       | 80,634                            |       |
| Amortization of intangibles                     |       | 1,084                             |       | 1,084                             |       |
| Restructuring charge (Note 14)                  |       | 3,278                             |       | 3,278                             |       |
| Special charges (Note 19)                       |       | 10,113                            |       | 10,113                            |       |
|                                            |       | 264,911                           |       | 268,307                           |       |
|                                            |       |                              |       |                              |       |
| Loss from Operations                            |       | (19,701                           | )          | (23,097                           | )          |
|                                            |       |                              |       |                              |       |
| Other income/expenses                           |       |                              |       |                              |       |
| Loss on sale of assets (Note 18)                |       | (424                              | )          | (424                              | )          |
| Loss on investments                             |       | (432                              | )          | (432                              | )          |
| Interest income                                 |       | 529                               |       | 529                               |       |
| Interest expense                                |       | (51                               | )          | (51                               | )          |
|                                            |       | (378                              | )          | (378                              | )          |
|                                            |       |                              |       |                              |       |
| Loss before income taxes and minority  interest |       | (20,079                           | )          | (23,475                           | )          |
|                                            |       |                              |       |                              |       |
| Income tax / (benefit) (Notes 1 and 18):        |       |                              |       |                              |       |
| Current                                         |       | 341                               |       | 341                               |       |
| Deferred                                        |       | (5,561                            | )          | (6,750                            | )          |
| Income tax benefit                              |       | (5,220                            | )          | (6,409                            | )          |
|                                            |       |                              |       |                              |       |
| Net loss before minority interest               |       | (14,859                           | )          | (17,066                           | )          |
| Minority Interest                               |       | (89                               | )          | (89                               | )          |
| Net loss                                        |       | (14,948                           | )          | (17,155                           | )          |
|                                            |       |                              |       |                              |       |
| Net Loss per share                              |       | (0.49                             | )          | (0.56                             | )          |
|                                            |       |                              |       |                              |       |
| Weighted average number of shares  outstanding: |       |                              |       |                              |       |
| Basic and Diluted                               |       | 30,455,000                        |       | 30,455,000                        |       |

 

45

----

 

The following table sets forth the effects of therestatement adjustments discussed above on the consolidated balance sheets atDecember 31, 2003.

 
| ** **                                                                                                        | ** ** | **December 30,  2003**                    | ** ** | **December 30,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                        | ** ** | **(As originally  reported)**             | ** ** | **(As restated****)**  | ** ** |
| ** **                                                                                                        | ** ** | **(in thousands, except per share data)** | ** ** |
| ASSETS                                                                                                            |       |                                      |       |                   |       |
| CURRENT ASSETS:                                                                                                   |       |                                      |       |                   |       |
| Cash and cash equivalents (Note 1)                                                                                |       | $                                         | 52,610     |                   | $          | 52,610 |   |
| Accounts receivable (Note 3)                                                                                      |       | 48,295                                    |       | 48,295                 |       |
| Deferred income taxes (Note 8)                                                                                    |       | 4,514                                     |       | 4,514                  |       |
| Refundable income taxes (Note 8)                                                                                  |       | —                                    |       | —                 |       |
| Other                                                                                                             |       | 4,759                                     |       | 4,759                  |       |
|                                                                                                              |       |                                      |       |                   |       |
| TOTAL CURRENT ASSETS                                                                                              |       | 110,178                                   |       | 110,178                |       |
|                                                                                                              |       |                                      |       |                   |       |
| PROPERTY AND EQUIPMENT                                                                                            |       |                                      |       |                   |       |
| Furniture, equipment and other                                                                                    |       | 42,252                                    |       | 42,252                 |       |
| Less accumulated depreciation                                                                                     |       | (32,929                                   | )          | (32,929                | )          |
|                                                                                                              |       |                                      |       |                   |       |
|                                                                                                              |       | 9,323                                     |       | 9,323                  |       |
|                                                                                                              |       |                                      |       |                   |       |
| OTHER ASSETS - NET:                                                                                          |       |                                      |       |                   |       |
| Goodwill (Note 1)                                                                                            |       | 34,218                                    |       | 34,218                 |       |
| Intangibles (Note 1)                                                                                         |       | 2,408                                     |       | 2,408                  |       |
| Deferred income taxes (Note 8)                                                                                    |       | 13,624                                    |       | 14,813                 |       |
| Other                                                                                                             |       | 9,386                                     |       | 9,386                  |       |
|                                                                                                              |       |                                      |       |                   |       |
| TOTAL OTHER ASSETS                                                                                                |       | 59,636                                    |       | 60,825                 |       |
|                                                                                                              |       |                                      |       |                   |       |
| TOTAL ASSETS                                                                                                      |       | $                                         | 179,137    |                   | $          | 180,326 |   |
|                                                                                                              |       |                                      |       |                   |       |
|                                                                                                              |       |                                      |       |                   |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                         |       |                                      |       |                   |       |
| CURRENT LIABILITIES:                                                                                              |       |                                      |       |                   |       |
| Accrued payroll, payroll taxes and benefits                                                                       |       | $                                         | 4,436      |                   | $          | 7,791 |   |
| Accounts payable                                                                                                  |       | 8,287                                     |       | 8,287                  |       |
| Restructuring reserve (Note 14)                                                                                   |       | 2,620                                     |       | 2,620                  |       |
| Income taxes payable                                                                                              |       | 1,243                                     |       | 1,243                  |       |
| Tax benefit reserve (Note 7)                                                                                      |       | 19,600                                    |       | 19,600                 |       |
| Other accrued expenses                                                                                            |       | 7,572                                     |       | 5,813                  |       |
|                                                                                                              |       |                                      |       |                   |       |
| TOTAL CURRENT LIABILITIES                                                                                         |       | 43,758                                    |       | 45,354                 |       |
|                                                                                                              |       |                                      |       |                   |       |
| OTHER LIABILITIES                                                                                                 |       | 4,635                                     |       | 4,635                  |       |
|                                                                                                              |       |                                      |       |                   |       |
| SHAREHOLDERS’ EQUITY:                                                                                        |       |                                      |       |                   |       |
|                                                                                                              |       |                                      |       |                   |       |
| Preferred stock, $.10 par; authorized and  unissued 200,000 shares, including 50,000 Series A                |       |                                      |       |                   |       |
| Common stock, $.10 par, 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                                   |       | 133,046                |       |
| Accumulated comprehensive loss                                                                                    |       | (4,589                                    | )          | (2,789                 | )          |
| Retained earnings                                                                                                 |       | 13,307                                    |       | 11,100                 |       |
|                                                                                                              |       |                                      |       |                   |       |
|                                                                                                              |       | 145,079                                   |       | 144,672                |       |
|                                                                                                              |       |                                      |       |                   |       |
| Less shares held in treasury, at cost;  2,537,691shares                                                           |       | (14,335                                   | )          | (14,335                | )          |
|                                                                                                              |       |                                      |       |                   |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                   |       | 130,744                                   |       | 130,377                |       |
|                                                                                                              |       |                                      |       |                   |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                   |       | $                                         | 179,137    |                   | $          |  180,326 |   |

 

46

----

 

**NOTE 3 - ACCOUNTSRECEIVABLE**

 

Accounts receivable consist of the following atDecember 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 doubtfulaccounts includes $400,000 and $0 respectively, pertaining to unbilledreceivables.  Included in unbilled accounts receivable at December 31,2003 and 2002 are amounts not yet billable to customers of approximately$708,000 and $0, respectively.

 

**NOTE 4 – PROPERTYAND 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 the estimateduseful lives of the assets which range from three to seven years. Depreciation expense was $5.3 million, $4.6 million and $5.3 million for theyears ended December 31, 2003, 2003 and 2001, respectively.

 

**NOTE 5 –ASSET-BASED LENDING FACILITY**

 

On July 31, 2001, amended February 14, 2003, theCompany entered into a secured asset-based lending facility that replaced itstwo unsecured discretionary lines of credit.  This new line of credit is athree-year, $40 million facility with availability based primarily on eligiblecustomer receivables and requires a separate lockbox.  The interest ratefor the first ninety days from closing was Prime plus 0.5%, thereafter the ratewas LIBOR plus 2.75% based on the unpaid principal.  The borrowing baseless outstanding loans must equal or exceed $17.5 million.  At the time ofclosing there was a $170,000 commitment fee paid to the agent.

 

As of December 31, 2003, the Company had no outstandingloan balance against this facility.  Borrowings under this facility arecollateralized by certain assets of the Company.  Based on the Company’seligible customer receivables and cash balances, $16.0 million, $24.7 millionand $23.1 million was available for borrowing as of December 31, 2003, 2002 and2001, respectively.  The fee for the unused portion of the line of creditis 0.375% per annum charged to the Company monthly.  This charge wasapproximately $109,000, $144,000 and $42,000 for the year ended December 31,2003, 2002 and 2001, respectively.  This line

 

47

----

 

of credit includes covenants relating to themaintenance of cash balances and providing for limitations on incurringobligations and spending limits on capital expenditures.  One covenantpertains to minimum cash collections over a three-month period.  TheCompany did not satisfy this covenant for the period December 2003 throughFebruary 2004.  A waiver was received from the lending institution for thethree month period ending February 29, 2004.  This facility is scheduledto expire in July 2004 and the Company intends to enter into a new asset-basedlending facility prior to expiration.

 

**NOTE 6 - PURCHASEOF TREASURY STOCK**

 

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

 

**NOTE 7 -SHAREHOLDERS’ EQUITY**

 

*Stock Options*

 

In 1994, the Company adopted a stock option plan whichprovides for the granting of options, to officers and key employees, for thepurchase of a maximum of 7,594,000 shares of common stock and stockappreciation rights (“SARs”). Options and SARs generally expire ten years fromthe date of grant and become exercisable in specified amounts during the lifeof the respective options.  No SARs have been granted as of December 31,2003.  This plan, which replaces the Company’s 1985 Plan, will terminateon June 15, 2004.  There were 2,427,000, 2,036,000 and 1,930,000 sharesavailable for option at December 31, 2003, 2002 and 2001, respectively.

 

In 1998, the Company amended the non-qualifiedDirectors’ Stock Option Plan, providing that each new director of the Companywho is not an employee of the Company (i) shall immediately receive options topurchase 10,000 shares of its common stock and (ii) shall receive annual grantsto purchase 10,000 shares of its common stock.  The plan originally was toexpire on March 4, 2001 and was extended by the Board of Directors and Shareholdersto March 6, 2007.  There were 264,000, 334,000 and 384,000 sharesavailable for grant at December 31, 2003, 2002 and 2001, respectively.

 

48

----

 

A summary of the status of the Company’s stock optionplans as of December 31, 2003, 2002 and 2001, and changes during the yearsending on those dates is presented below:

 
| ** **                                                      | ** ** | **2003**         | ** ** | **2002**                               | ** ** | **2001**         | ** ** |
|-----------------------------------------------------------------|------------|------------------|------------|----------------------------------------|------------|------------------|------------|
| ** **                                                      | ** ** | **Shares**       | ** ** | **Weighted  average  exercise  price** | ** ** | **Shares**       | ** ** | **Weighted  average  exercise  price** | ** ** | **Shares** | ** ** | **Weighted  average  exercise  price** | ** ** |
| ** **                                                      | ** ** | **(000’s)** | ** ** | ** **                             | ** ** | **(000’s)** | ** ** | ** ** | ** ** | **(000’s)** | ** ** | ** ** | ** ** |
| 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 optionsoutstanding at December 31, 2003:

 
| **Range of  exercise prices** | ** ** | **Outstanding  as  of December  31,  2003** | ** ** | **Weighted  average  remaining  contractual  life** | ** ** | **Weighted  average  exercise price** | ** ** | **Exercisable as  of December  31, 2003** | ** ** | **Weighted  average  exercise price** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | **(000’s)**                            | ** ** | ** **                                          | ** ** | ** **                            | ** ** | **(000’s)**                          | ** ** | ** **                            | ** ** |
| $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 borrowfrom the Company against the exercise price of options exercised.  As ofDecember 31, 2003 and 2002, total outstanding borrowings, pertaining to oneofficer, amounted to $100,000 which was issued by the Company in 1999, prior tothe adoption of FIN 44 and the Sarbanes-Oxley Act of 2002.

 

In 2001, the Company adopted a stock option plan forits Princeton subsidiary which provided for the granting, to Princeton keyemployees, of options for the purchase of a maximum of 3,000,000 shares ofPrinceton common stock.  These options expire ten years from the date ofgrant and become exercisable in two years.  As of the date of the sale ofPrinceton, the stock option plan was terminated.

 

The Company issued 150,001 warrants in 2003 topurchase shares of its common stock to one major shareholder.  Theexercise price is the fair value at the date of grant.  As of December 31,2003, 152,134 warrants were outstanding.  There were no warrants exercisedin 2003, 2002 or 2001.

 

49

----

 

*ShareholderRights Plan*

 

In July 1989, the Board of Directors declared adividend distribution of .131 preferred stock purchase right on eachoutstanding share of common stock of the Company.  The rights were amendedon February 13, 1990.  Each right will, under certain circumstances,entitle the holder to buy one one-thousandth (1/1000) of a share of Series Apreferred stock at an exercise price of $90.00 per one one-thousandth (1/1000)share, subject to adjustment.  Each one one-thousandth (1/1000) of a shareof Series A preferred stock has voting, dividend and liquidation rights andpreferences substantively equivalent to one share of common stock.

 

The rights will be exercisable and transferableseparately from the common stock only if a person or group acquires 20% ormore, subject to certain exceptions, of the Company’s outstanding common stockor announces a tender offer that would result in the ownership of 20% or moreof the common stock.  If a person becomes the owner of at least 20% of theCompany’s common shares (an “Acquiring Person”), each holder of a right otherthan the Acquiring Person is entitled, upon payment of the then currentexercise price per right (the “Exercise Price”), to receive shares of commonstock (or common stock equivalents) having a market value equal to twice theExercise Price.

 

Additionally, if the Company subsequently engages in amerger or other business combination with the Acquiring Person in which theCompany is not the surviving corporation, or in which the outstanding shares ofthe Company’s common stock are changed or exchanged, or if more than 50% of theCompany’s assets or earning power is sold or transferred, a right would entitlea Computer 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.  Priorto a person becoming an Acquiring Person, the rights may be redeemed at aredemption price of one cent per right, subject to adjustment.  The rightsare subject to amendment by the Board.  No shareholder rights have becomeexercisable.  The rights originally would have expired on July 16, 1999,however, the Board of Directors approved the adoption of a new ShareholderRights Plan to replace the existing plan.  The terms of the new RightsPlan are substantially the same as the original plan.  The new rights willexpire on July 15, 2009.

 

*Stock OptionExchange Program*

 

On January 8, 2003, the Company commenced a tenderoffer to its employees to exchange stock options granted under the Company’s1994 Incentive Stock Option and Appreciation Plan with an exercise price of$10.01 or greater for new stock options with a new exercise price.  Thetender offer expired on February 10, 2003, and 1,635,526 options were acceptedfor exchange.  On August 13, 2003, 545,928 options were issued for theexchange at an exercise price of $3.89 per share.

 

50

----

 

**NOTE 8 - INCOMETAXES**

 

The following is a geographical breakdown of theCompany’s loss before taxes:

 
| ** ** | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|-----------------------------|------------|
| ** ** | ** ** | **2003**                    | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** ** | ** ** | **(As  restated,  note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | ** ** | ** **                  | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
|       |       |                        |       |   |   |   |   |
| Domestic   |       | $                           | (20,360    | ) | $ | (6,005 | ) | $ | (20,679 | ) |
| Foreign    |       | (3,115                      | )          | (336 | ) | (919 | ) |
|       |       |                        |       |   |   |   |   |
|       |       | $                           | (23,475    | ) | $ | (6,341 | ) | $ | (21,598 | ) |

 

The provision for income taxes/(benefit) consists ofthe 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        |       | (6,750     | )          | 819                |       | 3,501      |       |
| State          |       | —     |       | 5,342              |       | (508       | )          |
| Foreign        |       | —     |       | —             |       | 151        |       |
|           |       |       |       |               |       |       |       |
| Total deferred |       | (6,750     | )          | 6,161              |       | 3,144      |       |
|           |       |       |       |               |       |       |       |
|           |       | $          | (6,409     | )                  | $          | 1,869      |       | $ | (7,148 | ) |

 

Refundable income taxes result primarily from netoperating loss carrybacks.

 

51

----

 

Deferred tax assets and liabilities consist of thefollowing at December 31:

 
| ** **                             | ** ** | **2003**                    | ** ** | **2002**   | ** ** |
|----------------------------------------|------------|-----------------------------|------------|------------|------------|
| ** **                             | ** ** | **(As  restated,  note 2)** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **(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 |       | 16,260                      |       | 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                                  |       | 1,398                       |       | 1,686      |       |
|                                   |       |                        |       |       |       |
| Total deferred tax assets              |       | 31,437                      |       | 23,952     |       |
|                                   |       |                        |       |       |       |
| Valuation allowance                    |       | (11,612                     | )          | (10,289    | )          |
|                                   |       |                        |       |       |       |
| Net deferred tax assets                |       | $                           | 19,327     |       | $          | 12,577 |   |
|                                   |       |                        |       |       |       |
| Current                                |       | $                           | 4,514      |       | $          | 4,557 |   |
| Non current                            |       | 14,813                      |       | 8,020      |       |
| Total                                  |       | $                           | 19,327     |       | $          | 12,577 |   |

 

52

----

 

A reconciliation of income taxes/(benefit), asreflected in the accompanying statements, with the statutory Federal income taxrate of 35% for the years ended December 31, 2003, 2002 and 2001 is as follows:

 
| ** **                                                          | ** ** | **2003**                    | ** ** | **2002**           | ** ** | **2001**   | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------|------------|--------------------|------------|------------|------------|
| ** **                                                          | ** ** | **(As  restated,  note 2)** | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | ** **                  | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
|                                                                |       |                        |       |               |       |       |       |
| Statutory Federal income taxes                                      |       | $                           | (8,217     | )                  | $          | (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        |       |
|                                                                |       |                        |       |               |       |       |       |
|                                                                |       | $                           | (6,409     | )                  | $          | 1,869      |       | $ | (7,148 | ) |

 

At December 31, 2003 the Company had a federal netoperating loss carryforward of approximately $37.7 million; $8.7 millionexpires in 2021, $11.4 million expires in 2022 and $17.6 million expires in2023.

 

At December 31, 2003 the Company had state deferredtax assets, net of federal tax effect, of approximately $7.4 million relatingprimarily to state net operating loss carryforwards.  These state netoperating loss carryforwards are subject to limitations which differ fromfederal law.  Many states do not allow the carryback of net operatinglosses, have shorter carryforward periods and do not allow the filing ofconsolidated returns.  Additionally, New Jersey and California temporarilysuspended the deduction for net operating loss carryforwards.  These statelimitations create uncertainties with respect to the realization of these statedeferred tax assets.  Accordingly, the Company has recorded a valuationallowance of approximately $6.1 million with respect to these assets.

 

Certain foreign subsidiaries of the Company had netoperating loss carryforwards at December 31, 2003, totaling approximately $14.7million (including $5.3 million in Canada and $9.4 million in the UnitedKingdom); $1.5 million expires in 2006, $1.0 million expires in 2007, $1.7million expires in 2008, $1.1 million expires in 2010 and the remainder has noexpiration.  A full valuation allowance has been recorded on the foreigntaxes due to the uncertainty of the realization of certain tax benefit fromthese net operating loss carryforwards.

 

On March 9, 2002, the Job Creation and WorkerAssistance Act of 2002 (the”Act”) was enacted into law.  This Actcontained 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, theCompany’s tax refund claim of approximately $10 million at December 31, 2001,which was received in April 2002, was increased to approximately $30million.  The additional refund amount of $20 million was received inJanuary 2003.

 

During 1998, the Company completed a businesscombination which, for financial statement purposes, has been accounted for asa pooling-of-interests.  For income tax purposes the Company believes thetransaction qualifies as a taxable purchase that gives rise to future taxdeductions.  Upon the sale of the acquired business in 2001, thesedeductions were recognized for tax purposes.  The tax benefit of $19.6million relating to the part of these deductions that was carried back to prioryears was included in refundable income taxes in 2002.  Since the taxstructure of the transaction is subject to determination by the tax authorities,the Company has recorded a reserve for the tax benefits resulting from thecarryback and has not recorded deferred tax assets for the tax benefits beingcarried forward.   When resolved, the Company will record a deferredtax asset for the part of the tax benefits being carried forward and a taxbenefit for the portion that was carried back, net of an appropriate valuationallowance. The tax benefit will be reflected as an increase in additionalpaid-in capital.  Any adjustments to the valuation allowance will becharged or credited to income.

 

53

----

 

The Internal Revenue Service is currently examiningthe Company’s federal income tax returns for the years ended December 31, 2001and 2000, along with its federal refund claims for the calendar years 1996through 1999.  As required by law, the Joint Committee on Taxation hasalso reviewed the Company’s refund claims.  The Company believes that theInternal Revenue 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 anticipatesthat this examination will be formally closed in 2004.

 

**NOTE 9 - LOSS PERSHARE DISCLOSURES**

 

The computation of diluted loss per share excludes alloptions because they are antidilutive.  During 2003, there were 3,845,000excluded options outstanding at December 31, 2003 with a weighted averageexercise price of $4.08 per share.  During 2002, there were 4,527,000excluded options outstanding at December 31, 2002 with a weighted averageexercise price of $7.93 per share.  During 2001, there were 4,841,000excluded options outstanding at December 31, 2001 with a weighted averageexercise prices of $10.11 per share.

 

**NOTE 10 - SEGMENTINFORMATION**

 

The Company has identified three business segments: ITServices, the Solutions Group and Chimes, Inc.  The IT Services divisionprovides highly skilled software professionals to augment the internal informationmanagement staffs of major corporations.  IT Services is primarilystaffing augmentation.  The Solutions division provides federalgovernment, enterprise application services, e-business solutions, customizedWeb development and Web enablement of strategic applications, CustomerRelationship Management (CRM), network services, strategic outsourcing andmanaged resourcing as well as software and relational database products, up tothe time of sale, March 25, 2002, of Princeton Softech Inc.

 

During 2002, Princeton made up the following withinthe Solutions Group; $2.9 million of revenue, $2.4 million of gross margin,$1.9 million operating loss and depreciation expense of $84,000.  During2001, Princeton made up the following within the Solutions Group; $29.0 millionof revenue, $22.7 million of gross margin, $5.7 million of operating loss anddepreciation expense of $582,000.

 

Chimes, Inc., a wholly-owned subsidiary of CHC,provides workforce procurement and management services to Global 2000companies, (which Forbes magazine, defines as the biggest and most importantcompanies as measured by sales, profits, assets and market value).

 

Income/(loss) before income tax benefit consists ofincome/(loss) before income taxes, excluding interest income, interest expense,gain/(loss) on the sale of assets, restructuring charges, special charges, thewrite-off of a terminated project, amortization of intangibles, write-down ofassets held for sale and net loss on investments.  These exclusions totalexpense of $18.0 million, income of $4.1 million and expense of $12.0 millionat December 31, 2003, 2002 and 2001, respectively.   Long-term assetsinclude goodwill, intangibles and property, plant and equipment for 2003 andgoodwill and property, plant and equipment for 2002 and 2001.  Corporateservices, consisting of general and administrative services are provided to thesegments from a centralized location.  Such costs are allocated to thesegments based on either revenue or headcount.

 

54

----

 
| **BY LINE OF BUSINESS**                          | ** ** | **2003**                    | ** **  | **2002**           | ** ** | **2001**   | ** ** |
|--------------------------------------------------|------------|-----------------------------|-------------|--------------------|------------|------------|------------|
| ** **                                       | ** ** | **(As  restated,  note 2)** | ** **  | ** **         | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | ** **                  | ** **  | **(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                                  | ** ** | **26,646**                  |        | 25,712             |       | 51,419     |       |
| Chimes                                           | ** ** | **18,626**                  |        | 14,596             |       | 9,037      |       |
|                                             |       |                        |        |               |       |       |       |
| Total gross margin                               | ** ** | **$**                       | **72,012**  |               | $          | 80,934     |       | $ | 119,208 |   |
|                                             |       |                        |        |               |       |       |       |
| *Operating income / (loss):*                     |       |                        |        |               |       |       |       |
|                                             |       |                        |        |               |       |       |       |
| IT Services                                      | ** ** | **$**                       | **8,053**   |               | $          | 15,044     |       | $ | 26,053 |   |
| Solutions Group                                  | ** ** | **9,258**                   |        | 7,621              |       | 710        |       |
| Chimes                                           | ** ** | **(2,177**                  | **)**       | (7,490             | )          | (9,516     | )          |
|                                             |       |                        |        |               |       |       |       |
| Total operating income/(loss)                    | ** ** | **$**                       | **15,134**  |               | $          | 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                                  | ** ** | **2,515**                   | ** **  | 766                |       | (7,206     | )          |
| Chimes                                           | ** ** | **(4,018**                  | **)**       | (8,932             | )          | (10,153    | )          |
|                                             |       |                        | ** **  |               |       |       |       |
| Total income / (loss) before income tax  benefit | ** ** | **$**                       | **(5,558**  | **)**              | $          | (10,409    | )          | $ | (9,624 | ) |
|                                             |       |                        | ** **  |               |       |       |       |
| *Assets:*                                        |       |                        | ** **  |               |       |       |       |
| IT Services                                      | ** ** | **$**                       | **21,253**  | ** **         | $          | 47,876     |       | $ | 93,920 |   |
| Solutions Group                                  | ** ** | **70,322**                  | ** **  | 29,640             |       | 63,126     |       |
| Chimes                                           | ** ** | **14,402**                  | ** **  | 26,762             |       | 8,354      |       |
| Corporate and other                              | ** ** | **74,349**                  | ** **  | 89,453             |       | 72,321     |       |
|                                             |       |                        | ** **  |               |       |       |       |
| Total assets                                     | ** ** | **$**                       | **180,326** | ** **         | $          | 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 |   |

 

55

----

 
| **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 isgenerated 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 ofSegments Loss before Income Tax Benefit to Consolidated Loss Before Income TaxBenefit:*

 
| ** **                                     | ** ** | **2003**                    | ** ** | **2002**   | ** ** | **2001**   | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **(As  restated,  note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **(in thousands)**          | ** ** |
|                                           |       |                        |       |       |       |       |       |
| Total segments loss before income tax  benefit |       | $                           | (5,558     | )          | $          | (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          |       | $                           | (23,475    | )          | $          | (6,341     | )          | $ | (21,598 | ) |

 

56

----

 

**NOTE 11 - SAVINGSPLAN AND OTHER RETIREMENT PLANS**

 

The Company maintains a defined contribution savingsplan covering eligible employees.  The Company makes contributions up to aspecific percentage of participants’ contributions.  The Companycontributed approximately $821,000, $1,089,000 and $1,413,000 in 2003, 2002 and2001, respectively.

 

In 1995, the Company instituted a SupplementalExecutive Retirement Plan, or SERP, whereby key executives are entitled toreceive lump-sum payments (or, if they elect, a ten-year payout) upon reachingthe age of 65 and being in the employment of the Company.  The maximumcommitment if all plan members remain in the employment of the Company untilage 65 is approximately $11.3 million.  Benefits accrue and vest based ona formula which includes total years with the Company and total years possibleuntil age 65.  The plan is nonqualified and not formally funded. Life insurance policies on the members are purchased to assist in funding thecost.  The SERP expense is charged to operations during the remainingservice lives of the members and was $480,000 in 2003, $407,000 in 2002 and$115,000 in 2001.  The cumulative accrued liability for the SERP was $1.7million as of December 31, 2003 based on the Unit Credit Method by using adiscounting rate of 9% until age 65 for each participant.  Contributionsare expected 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 StockPurchase Plan to provide substantially all employees who have completed oneyear of service an opportunity to purchase shares of its common stock throughpayroll deductions, up to 10 percent of eligible compensation.  Quarterly,participant account balances are used to purchase shares of stock at 85 percentof its fair market value on either the first or last trading day of eachcalendar quarter.  A total of 4 million shares are available for purchaseunder the plan.  There were 153,765, 405,366 and 643,280 shares purchasedunder the plan in 2003, 2002 and 2001, respectively.

 

In addition, the Company adopted a DeferredCompensation Plan for Key Executives that permits the individuals to defer aportion of their annual salary or bonus for a period of at least fiveyears.  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 other liabilities and amounted to $2.1million, $3.2 million and $3.3 million as of December 31, 2003, 2002 and 2001,respectively.

 

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

 

57

----

 

**NOTE 12 -COMMITMENTS**

 

Leases

 

The Company leases office space under long-termoperating leases expiring through 2008.  As of December 31, 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 onincreases in real estate taxes and operating expenses.  Rent expense, netof sublease income of approximately $137,000, $480,000 and $208,000 forDecember 31, 2003, 2002 and 2001, respectively, for operating leasesapproximated $5.0 million, $5.3 million and $7.8 million in the years endedDecember 31, 2003, 2002 and 2001, respectively.

 

Other

 

In 2003, the Company entered into a separation packagewith the Company’s former CEO which contained a commitment for the Company toprovide continued medical coverage until age 75, with payments totalingapproximately $200,000.

 

58

----

 

**NOTE 13 - SELECTEDQUARTERLY FINANCIAL DATA (UNAUDITED)**

 

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

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

 

59

----

 
| ** **                                                       | ** ** | **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 | ) |

 

70

----

 

**NOTE 14 -RESTRUCTURING CHARGES**

 

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

 

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.  TheCompany decided to continue business in this area through virtual offices andtherefore recorded the charge after the building was closed.  The leaseobligation of $90,000 was calculated based on current rent commitments less acalculated sublease amount based 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 Company recordeda restructuring charge of approximately $787,000 relating to the closing ofChimes (UK) Ltd. and severance charges related to United Statesoperations.  The Company decided to continue business in this geographicarea through a third party and therefore recorded the charge after the buildingwas closed.  The provision includes an accrual relating to the futurecosts associated with continuing rent on this property in the UnitedKingdom.  The closing of this office resulted in a severance charge of$305,000.  As of December 31, 2003, $258,000 had been paid in severance toterminated employees due 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 in exchangerates

 

71

----

 

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 wereentirely closed, the Company recorded a restructuring charge of approximately$1.7 million relating to the consolidating and closing of these facilities inthe Canadian subsidiary.  The $1.3 million expense for lease obligationswas calculated based on current rent commitments less a calculated subleaseamount based on current market conditions.  The entire provision of $1.3million included an accrual relating to the future costs associated withcontinuing rent on six properties, five of which are in Canada, with rentscontinuing through 2004, 2006 and 2007.  The closing of all of theseoffices resulted in the termination of 20 employees with a severance charge of$734,000.  As of December 31, 2003, $734,000 had been paid in severance tothe terminated employees.  In the fourth quarter of 2003, the Companyadjusted the rent obligation in the United States due to the sublease of thisfacility.

 
| ** **              | ** ** | **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 currencyfluctuations

 

During the fourth quarter of 2002, the Companyrecorded a restructuring charge of $2.8 million pertaining to 2002 officeclosings.  During the second quarter of 2003, half of the rent for oneoffice closing was reversed after the rent was negotiated at a lower rate forhalf the building.  During the fourth quarter of 2003, the Company made anadditional adjustment to the reserve for four of the properties due tosublease.

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

 

72

----

 

At the end of 2002, the Company had $295,000 of fivelease obligations remaining from the restructure expense recorded in2001.  Of the five lease obligations, four remain and the balance as ofDecember 31, 2003 was $78,000.  During the fourth quarter of 2003, theCompany made an adjustment to 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 |   |

 

At the end of 2002 the Company had $488,000 of onelease obligation remaining on the restructure expense recorded in 2000 with thelease terminating in 2005.  The balance remaining at December 31, 2003 was$308,000.

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

 

73

----

 

**NOTE 15 –MAJORITY-OWNED SUBSIDIARY**

 

On September 30, 2002, the Company announced that ithad joined its existing HIPAA compliance, healthcare information technology andother compliance business practices with ZA Consulting LLC (ZAC) to form CHCHealthcare Solutions, LLC.  Under the terms of the agreement, CHC has an80% interest in the newly formed company.

 

**NOTE 16 -ACQUISITIONS**

 

On September 12, 2003, the Company acquired, fromCommerce One, the Xpress solution, a suite of software and services designed torapidly facilitate product data synchronization between trading partners. The purchase price of the software was $566,000, recorded as intangible assets,and is being amortized over a three year period.

 

On July 8, 2003, the Company acquired all of the stockof privately-held RGII Technologies, Inc. (“RGII”).    TheCompany purchased RGII because acquiring a platform company in the Federalgovernment IT Services marketplace has been a long-term priority for the Company. The purchase price was approximately $22.1 million including an up-front cashpayment, acquisition expenses, working capital adjustment and the payoff of anote 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.  Inaddition, the seller may be entitled to contingent payments based on RGII’sperformance against profitability objectives over the next three years. The contingent payments are evidenced by a contingent note with a face value of$10 million that is payable over three years, only if certain financialperformance objectives are met.  These financial performance objectivesare based on earnings before interest and taxes (“EBIT”) targets totaling $19.8million over a three-year period.  There are no minimum or maximum paymentobligations under the terms of the contingent note. The contingent payment willbe reduced on a dollar for dollar basis for financial performance below EBITtargets, and increased by 29 cents ($0.29) for each dollar exceeding EBITtargets.  At December 31, 2003 the seller was entitled to additionalpayments of $631,000 for the first installment.  The Company also enteredinto employment agreements with the former shareholder and key employees of RGIIand have agreed to issue an aggregate of 600,000 options to purchase shares ofComputer Horizons stock over a three-year period.

 

The Company completed the allocation of the purchaseprice to assets and liabilities acquired utilizing outside valuation consultantsto assist in this process.  Audited historical financial statements ofRGII together with applicable pro forma financial information were filed withthe SEC on September 19, 2003.

 

74

----

 

The allocation of the purchase price to assets acquired andliabilities assumed was as follows (in thousands):

  
| ** **             | ** ** | **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 includedunfunded backlog, funded backlog, software and non compete agreements. Approximately $14.0 million was recorded as goodwill.

 

The acquisition will be treated as a purchase ofassets for tax purposes.  Accordingly, goodwill will be subject toamortization for tax purposes over fifteen years.

 

75

----

 

Pro Forma Results

 

Effective July 1, 2003, the results of RGII’soperations have been included in the consolidated financial statements of theCompany.  The following unaudited pro forma financial information presentsthe combined results of operations of the Company and RGII as if theacquisition had occurred as of the beginning of the periods presented. The revenues and results of operations included in the following unaudited proforma consolidated financial information is not considered necessarilyindicative of the results of operations for the periods specified had thetransaction actually been completed at the beginning 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         |       | (16,780                                                          | )          | (7,462 | ) |
| Minority interest                                                         |       | (89                                                              | )          | 35 |   |
| Cumulative effect of change in accounting  principle                      |       | —                                                           |       | (29,861 | ) |
| Net loss                                                                  |       | $                                                                | (16,869    | ) | $ | (37,288 | ) |
| Loss per share – (basic & diluted):                              |       |                                                             |       |   |   |
| Net loss                                                                  |       | $                                                                | (0.55      | ) | $ | (1.19 | ) |
| Weighted average number of shares  outstanding – basis & diluted |       | 30,455,000                                                       |       | 31,243,000 |   |

 

The unaudited pro forma financial information abovereflects the following adjustments to the historical consolidated financialstatements for the year ended December 31, 2003:  $1.0 millionamortization expense on purchased intangible assets, $55,000 reduction ofinterest 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 Company acquired the ITSolutions operations of Global Business Technology Solutions (“GBTS”), fromAlea (Bermuda) Limited, a member of the Alea Group of companies and WestfieldServices, Inc., a subsidiary of Westfield Financial Corporation for $400,000 inorder to augment the Company’s outsourcing solution to include India.  Theoutsourcing facility and its IT professionals are located in Chenni (Madras),India.  This transaction was accounted for as a purchase and the entirepurchase price was allocated to goodwill.  Pro forma information has notbeen presented as the amounts are not material.

 

On February 27,1998, the Company acquired all of thecommon stock of Princeton Softech, Inc. (“Princeton”) in exchange for 954,213shares of Computer Horizons stock.  Princeton specializes in relationaldatabases, data synchronization, intelligent data migration and data managementtools, and is based in Princeton, New Jersey.  This transaction wasaccounted for as an immaterial pooling of interests and the results ofPrinceton have been included since January 1, 1998.  On March 25, 2002 theCompany sold Princeton to Apax Partners, Inc. and LLR Partners (see Note 18).

 

76

----

 

**NOTE 17 - NETASSETS HELD FOR SALE**

 

The Company decided in 2000 to offer three of itssubsidiaries (Princeton Softech “Princeton”, including the SELECT SoftwareTools division “Select”, CHC International Limited “Spargo”, and eB Networks “EBN”)for sale or disposition and accordingly classified these entities as “assetsheld for sale.”

 

During 2001, two of the subsidiaries and Select weresold (See Note 18).  During 2002, the last remaining asset held for sale,Princeton, was sold (See Note 18).  During the years ended December 31,2002 and 2001 these respective entities generated net losses of $1.3 millionand $4.4 million, respectively.  At December 31, 2001, the assets andliabilities of the remaining subsidiary Princeton, were classified in theconsolidated balance sheet as net assets held for sale and were included in theSolutions segment (see Note 9).  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 ended December 31, 2002, Princeton’srevenue was $2.9 million and its loss, net of taxes, was $1.3 million.

 

**NOTE 18 - SALE OFSUBSIDIARIES**

 

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

 

On March 25, 2002, the Company sold the net assets ofPrinceton Softech to Apax Partners, Inc. and LLR Partners, for cash of $16million, including amounts held in escrow of $1.5 million. The gain from thetransaction was initially estimated as $3.6 million and was adjusted in thefourth quarter of 2002 to $3.2 million due to a purchase priceadjustment.  During the second quarter of 2003, the Company receivedapproximately $748,000 of the escrow.  The results of operations areincluded in the consolidated financial statements through February 28, 2002within the Solutions group.

 

On September 10, 2001, the Company sold the assets ofEBN to Inrange Technologies, a storage networking company, for cash of $5.4million, including amounts held in escrow of $540,000.  The loss from thetransaction was initially estimated as $3.2 million, which included the finalwrite-down of related goodwill of $2.1 million.  A purchase priceadjustment was recorded in the fourth quarter of 2002 resulting in an increaseto

 

77

----

 

the loss of $144,000.  The results of operationsare included in the consolidated financial statements through September 10,2001 within the Solutions group.

 

On August 30, 2001, the Company sold the ICM Educationname to AlphaNet Solutions, Inc., an IT professional services firm, for $0.5million.  The gain from the transaction was $332,000.  The results ofoperations are included in the consolidated financial statements through August30, 2001 within the Solutions group.  In November 2002, the Companyreceived an additional $100,253 from AlphaNet Solutions, Inc. relating to anearnout.

 

On April 17, 2001, the Company sold the SELECTSoftware Tools division “Select” of Princeton Softech to Aonix, a member of theGores Technology Group, for approximately $895,000 including $545,000 of cash receivedand a note receivable of $350,000, subsequently written off with the sale ofPrinceton Softech on March 25, 2002.  This sale included all the softwareassets and intellectual property rights of Select and was sold at bookvalue.  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 CHCInternational Limited, (“Spargo”), to an information technology consultancyservices provider for cash of $3.2 million.  The gain from the transactionwas initially estimated as $438,000.  A purchase price adjustment of $2.7million was recorded, in the fourth quarter of 2002, to increase the gain afterthe final resolution of outstanding accounts receivables and the termination ofleases.  The results of operations for January 2001 were not material tothe consolidated financial statements.

 

**NOTE 19 – SPECIALITEMS**

 

During the year ended December 31, 2003, the Companyincurred special charges of $10.1 million consisting of a severance package forthe Company’s former CEO and expenses related to the unilateral acquisitionproposal and activities of Aquent LLC.  The separation package of theCompany’s former CEO, included a $3.5 million severance payment and $200,000 incontinued medical coverage.  In addition, $6.4 million of the specialcharges pertained to the unilateral acquisition proposal and activities ofAquent LLC.  This expense is primarily attributable to approximately $3.4million of legal fees, $1.8 million in financial advisor fees and $1.2 millionof proxy solicitation and other fees.  As management considers thesespecial items to be infrequent, yet material in nature, the Company hasreported the expenses on a separate line for full disclosure purposes, however,the amounts are reported within operating income.  The Company alsoincurred a restructuring expense of $3.3 million for the year ended December31, 2003 relating primarily to the closing of facilities in Canada and the UnitedKingdom.  In addition, the Company voluntarily terminated a sub-contractwith ATEB, a privately held company, for financial reasons and recorded awrite-off of approximately $3.1 million due to the uncertainty of therealization of the receivable.  ATEB was the primary contractor to developa new pharmacy system for Royal Ahold.  The Company is continuing recoveryefforts for this receivable.

 

78

----

 

**NOTE 20 –RESCISSION OFFER**

 

From April 2001 through January 2003, the sale ofshares of the Company’s common stock pursuant to the Employee Stock PurchasePlan were not exempt from registration or qualification under federalsecurities laws.  As a result, the Company may have failed to comply withthe registration or qualification requirements of federal and applicable statesecurities laws because the Company did not register or qualify these stockissuances under either federal or applicable state securities laws.

 

As a result the Company intends to make a rescissionoffer to all those persons who purchased shares of common stock pursuant to theEmployee Stock Purchase Plan during the affected periods.  The rescissionoffer will be made pursuant to a registration statement filed under theSecurities Act and pursuant to applicable state securities laws.  In thisrescission offer, the Company is offering to repurchase the shares subject toour rescission offer for the price paid per share plus interest from the dateof purchase until the rescission offer expires, at the current statutory rateper year mandated by the state in which the shares were purchased.  Therescission offer will expire approximately 30 days after the effective date ofthe 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.  This contingency payment is considered remoteby the Company as the current price of the stock is above the price at whichthe shares would be repurchased.

 

**NOTE 21 –AQUENT/LEGAL MATTERS**

 

On April 29, 2003, the Company filed an action in theUnited States District Court for the District of New Jersey against Aquent LLC,seeking (i) to enjoin Aquent from disseminating false and misleading proxymaterials and press releases in support of its two nominees for directorpositions in connection with the Company’s May 14, 2003 Annual Meeting; (ii) toinvalidate any proxies secured by Aquent through the use of unlawful proxysolicitation materials; and (iii) to require Aquent to disseminate correctivedisclosure that not only amended the false and misleading proxy materials butalso advised CHC shareholders how Aquent’s solicitations had violated thesecurities laws.

 

On May 27, 2003, the Company brought an action in theSupreme Court of the State of New York, New York County, seeking an orderinvalidating votes for directors Karl Meyer and Robert Trevisani cast at theAnnual Meeting by stockholders of record who sold their shares between therecord date and the date of the Annual Meeting.

 

Each of the legal proceedings described above weresettled and dismissed as a result of a settlement agreement between the Companyand Aquent LLC entered into on December 12, 2003.  As part of thesettlement, the Company agreed to modify its June 30, 2003 by-lawamendment regarding special meeting procedures by, among other things, reducingfrom 75 to 50 minimum number of days between the time a 10 percent or more shareholderrequests a special meeting of shareholders and the date of that meeting. In addition, Aquent entered into a standstill agreement pursuant to which, fora period of one year, it agreed not to request a special meeting of ComputerHorizons’ shareholders for any purpose, or nominate anyone to serve as a memberof CHC’s Board of Directors, or engage in any proxy solicitation of ComputerHorizons’ shareholders.

 

The Company is involved in various and routinelitigation matters, which arise through the normal course of business. Management believes that the resolution of these matters will not have amaterial adverse effect on the Company’s financial position or results ofoperations.

 

79

----

 

Item 9.  Changes in and disagreements withaccountants on accounting and financial disclosures 

 

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

 

Item 9A.  Controls and Procedures 

 

Disclosure Controls and Procedures

 

The Company maintains controlsand procedures designed to ensure that information required to be disclosed byus in the reports filed under the Securities Exchange Act of 1934, is recorded,processed, summarized and reported within the time periods specified by theSEC. Disclosure controls are also designed with the objective of ensuring thatthis information is accumulated and communicated to our management, includingour chief executive officer and chief financial officer, as appropriate toallow timely decisions regarding required disclosure.

 

On October 7, 2004, ouraudit committee was advised by management that, based on an internal review ofaccounting processes and procedures, management had discoveredan accounting error pertaining to the incorrect adjustment of consulting costsrelating to intercompany transactions between the Company and its Canadiansubsidiary.  This error caused anunderstatement of consolidated consultant costs (i.e. direct costs) in theCompany’s consolidated income statement and an under accrual of consolidatedaccrued payroll on the balance sheet.

 

Theaggregate amount for all periods affected was an understatement of consultantcosts totaling $5,555,000, with an after-tax impact of $3,462,000 or $(0.12)per share.

 

80

----

 

As part of management’s investigation of thisaccounting error, an extensive review of intercompany transactions wascompleted.  As a result, otheradjustments, not affecting operating results, were recorded.  These adjustments to the balance sheetcorrected an overstatement of accrued expenses and an understatement ofshareholders’ equity (specifically the overstatement of accumulated othercomprehensive loss).

 

As a result of the discoveryof this error, on October 26, 2004, management and the Audit Committee wereinformed by the Company’s independent accountants of certain matters involvinginternal controls that the Company’s auditors consider material weaknesses.  The first material weakness principallyfocused on the Company’s quarterly consolidation process, includingintercompany transactions relating to the Company’s Canadian subsidiary, whichwere incorrectly recorded over the five fiscal quarters ending June 30,2004.  This resulted in an understatementof consolidated consultant costs (direct cost) and an under accrual ofconsolidated accrued payroll in each period and for the year ended December 31,2003.  The second material weaknessprincipally focused on the fact that certain accounts were not properlyreconciled, resulting in adjustments to accounts including accrued expenses andshareholders’ equity (not affecting operating results,) to be recorded on theconsolidated balance sheet.

 

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

 

As a result of thesedeficiencies, the following actions were taken, or will be taken, to preventfuture reoccurrence:

 

•                  Managementwill implement an improved intercompany transaction process, including foreigncurrency translation and financial reporting/consolidation procedures, whichwill be documented, with all key controls identified.

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

•                  Monthly,the Corporate Controller will review and approve all intercompany eliminationentries to ensure amounts are properly recorded.

•                  Canadianintercompany accounts, which currently record all receivable and payableactivity in the same balance sheet account, will be divided into twointercompany accounts – one to record only intercompany invoicing transactions,one to record other (funding) transactions. This will allow better tracking of intercompany transactions and moreeasily highlight incorrect entries, if any.

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

•                  Additionaltraining (internal and external) will be provided to all General Accountingpersonnel with an emphasis on Consolidation accounting.

•                  InternalAudit will conduct a review of intercompany transactions and the consolidationprocess during the fourth quarter of 2004 to ensure that newly designedcontrols are functioning properly.

 

Management and the Audit Committee intend to closelymonitor the implementation of the remediation actions noted above and areprepared to take additional measures where necessary to strengthen internalcontrols and procedures to meet the internal control reporting requirements ofSection 404 of the Sarbanes-Oxley Act and the rules adopted thereunder.  Other than the foregoing initiatives, sincethe date of management’s evaluation, there have been no material changes in ourdisclosure controls and procedures, including our internal controls overfinancial reporting, which have materially affected, or are reasonably likelyto materially affect, our disclosure controls and procedures, including ourinternal controls over financial reporting.

 

81

----

 

## **PART III**

 

Item 10.  Directors and Executive Officers ofthe Registrant 

(a)    The information called for byItem 10 with respect to identification of directors of the Company isincorporated herein by reference to the material under the caption “Election ofDirectors” in the Company’s Proxy Statement for its 2004 Annual Meeting ofShareholders which is expected to be filed with the Securities and ExchangeCommission on or before April 7, 2004 (the “2004 Proxy Statement”).

(b)    The information called for byItem 10 with respect to executive officers of the Company is included in Part Iherein under the caption “Executive Officers of the Company.”

(c)    The information called for byItem 10 with respect to compliance with Section 16(a) of the SecuritiesExchange Act of 1939 is incorporated herein by reference to the material underthe caption “Compliance with Section 16(a) of the Exchange Act” in the 2004Proxy Statement.

 

**Code of Ethics**

Our executive officers are subject to a code of ethics thatcomplies with standards mandated by the Sarbanes-Oxley Act of 2002.  The completecode of ethics is available on our website at www.computerhorizons.com. At any time it is not available on our website, we will provide a copy uponwritten request made to our Investor Relations Department, at 49 Old BloomfieldAvenue, Mountain Lakes, New Jersey 07046-1495.  Information on our websiteis 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.  Executive Compensation 

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 BeneficialOwners and Management 

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

 

 

Item 13. Certain Relationships and RelatedTransactions 

In December 2003, John Cassese, the former CEO of ComputerHorizons Corp., received a lump-sum payment of $1.3 million, net of taxes fromhis deferred compensation plan account in accordance with his severanceagreement.  The Company redeemed insurance policies to fund this paymentand received approximately $2.5 million for the surrender values of the splitdollar policies.  The Company recorded a realized loss of approximately$432,000 on investments for these insurance policies, which had an originalcost of approximately $2.9 million.

 

 

Item 14. Principal Accountant Fees and Services 

The information called for by Item 14 with respect toPrincipal Accountant Fees and Services is incorporated herein by reference tothe material under the caption “Audit Fees” in the 2004 Proxy Statement.

 

82

----

 

## **PART IV**

 

 

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

 

(a) Financial Statements andFinancial Statement Schedules

 

1.  Consolidatedfinancial statements

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

•  Consolidated balance sheets as of December 3l,2003 and 2002

•  Consolidatedstatements of operations for each of the three years in the period endedDecember 31, 2003

•  Consolidatedstatement of shareholders’ equity for each of the three years in the periodended December 31, 2003

•  Consolidatedstatements of cash flows for each of the three years in the period endedDecember 31, 2003

•  Notes to consolidated financial statements

 

83

----

 

2.  Schedule II - Valuation and qualifying accounts forthe 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 |                              | 1,323,000  |                       | —     |                          | $          | 11,612,000 |   |
| 2003 Restructure Reserve        |       | $                                    | —     |                              | 3,278,000  |                       | 2,203,000  | (2)                           | $          | 1,075,000 |   |
| 2002 Restructure Reserve        |       | $                                    | 2,483,000  |                              | —     |                       | 1,324,000  | (2)                           | $          | 1,159,000 |   |
| 2000 Restructure Reserve        |       | $                                    | 295,000    |                              | —     |                       | 217,000    |                          | $          | 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)           Includescharge for office closings

 

84

----

 

**Report ofIndependent Registered Public Accounting Firm on Schedule II**

 

 

Board of Directors and Shareholders

Computer Horizons Corp.

 

In connection with our audit of the consolidatedfinancial statements of Computer Horizons Corp. and Subsidiaries referred to inour report dated February 17 2004 (except for Note 2 and the secondparagraph of Note 5, as to which the dates are November 8, 2004 and March 9,2004, respectively), 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, this schedule, when considered inrelation to the basic financial statements taken as a whole, presents fairly,in all material respects, the information set forth therein.

 

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

 

85

----

 

Report of independent registered public accountingfirm on the financial statements schedule.

 

All other schedules are omitted because they are notapplicable or the required information is shown in the consolidated financialstatements or notes thereto.

 

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.    |

 

86

----

 

| 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.                                |

 

87

----

 
| 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. |

 

88

----

 
| 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                                                              |

 

89

----

 

4.  Reports on form 8-K during the fourth quarter offiscal 2003.

 

A report on Form 8-K was filed on December 15, 2003 reportingthe appointment of Eric P. Edelstein to the Computer Horizons Corp.’s Board ofDirectors and to report a mutual resolution of all pending litigation betweenthe Company and Aquent LLC.

 

A report on Form 8-K was filed on October 29, 2003 to updateinformation reported in Computer Horizons Corp. conference call that was notincluded in the initial press release.

 

A report on Form 8-K was filed on October 1, 2003 reportingthe issuance of a press release reporting the financial results of ComputerHorizons Corp. for its third fiscal quarter.

 

90

----

 

## **SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

  

|                               | COMPUTER HORIZONS CORP. |
|------------------------------------|-------------------------|
|                               |                    |
| Date:   November 9, 2004 |                    | By: /s/ William J. Murphy |   |
|                               |                    | William J. Murphy, President, CEO |
|                               |                    | (Principal Executive Officer) and Director |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated.

 
|   | COMPUTER HORIZONS CORP. |
|--------|-------------------------|
|   |                    |
| Date:  | November 9, 2004        |   | By: /s/ William J. Murphy |   |
|   |                    | William J. Murphy, President, CEO   (Principal Executive Officer) and Director |
|   |                    |
| Date:  | November 9, 2004        |   | By: /s/ Michael J. Shea |   |
|   |                    | Michael J. Shea, |
|   |                    | Vice President and CFO |
|   |                    | (Principal Financial Officer) |
|   |                    |
| Date:  | November 9, 2004        |   | By: /s/ John E. Ferdinandi |   |
|   |                    | John E. Ferdinandi,  Corporate Controller |
|   |                    |
| Date:  | November 9, 2004        |   | By: /s/ Earl Mason |   |
|   |                    | Earl Mason, Chairman of the Board and Director |
|   |                    |
| Date:  | November 9, 2004        |   | By: /s/ William M. Duncan |   |
|   |                    | William M. Duncan, Director |
|   |                    |
| Date:  | November 9, 2004        |   | By:  /s/ Eric P. Edelstein |   |
|   |                    | Eric P. Edelstein, Director |
|   |                    |
| Date:  | November 9, 2004        |   | By: /s/ William J. Marino |   |
|   |                    | William J. Marino, Director |
|   |                    |
| Date:  | November 9, 2004        |   | By:  /s/ L. White Matthews III |   |
|   |                    | L. White Matthews III, Director |
|   |                    |
| Date:  | November 9, 2004        |   | By:  /s/ Edward J. Obuchowski |   |
|   |                    | Edward J. Obuchowski, Director |
|        |                         |  |  |  |  |  |  |  |  |  |  |

 

91

----