**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

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**FORM 10-Q/A**

**(Amendment No. 1)**

 
| **ý** | **Quarterly Report Under Section 13 or 15(d)   of the Securities Exchange Act of 1934**                                     | ** ** |
|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| ** ** | **for the quarterly  period ended March 31, 2004**                                                                          | ** ** |
|       |                                                                                                                        |       |
|       | **or**                                                                                                                      |       |
|       |                                                                                                                        |       |
| **o**      | **Transition Report pursuant to Section 13 or 15(d)   of the Securities Exchange Act of 1934**                              | ** ** |
| ** ** | **for the transition  period from         to       ** |       |

 

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**Commission File Number 0-7282**

 

**COMPUTER HORIZONS CORP.**

(Exact name of registrant as specified in its charter)

 

| **New York**                                                                                              |   | **13-2638902**                           |
|-----------------------------------------------------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                                           |   | (I.R.S. Employer  Identification Number) |
|                                                                                                      |   |                                     |
| **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**                                |
|                                                                                                      |   |                                     |
| **Not Applicable**                                                                                        |
| (Former name, former address and former fiscal year, if changed  since last report)                       |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding twelve months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filing requirementsfor the past 90 days.

 

| ý |   | o  |
|--------|--------|----|
| Yes    |   | No |

 

Indicated by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).

 

| ý |   | o  |
|--------|--------|----|
| Yes    |   | No |

 

As of May 7, 2004 the issuer had30,678,549 shares of common stock outstanding.

 

 

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**EXPLANATORY NOTE**

 

The purpose of this Amendment No. 1 onForm 10-Q/A to the Quarterly Report on Form 10-Q of Computer HorizonsCorp. the (“Company”) for the three months ended March 31, 2004 as filed withthe Securities and Exchange Commission is to reflect the restatement of theCompany’s consolidated 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 discoveredan error pertaining to the incorrect adjustment of consulting costs relating tointercompany transactions between the Company and its Canadian subsidiary.  This error caused an understatement ofconsolidated consultant costs (i.e. direct costs) in the Company’s consolidatedincome statement and accrued payroll on the balance sheet.

 

The aggregate amount for all periods affected was anunderstatement of consultant costs totaling $5,555,000, with an after-taximpact of $3,462,000 or $(0.12) per share. The pre-tax, after tax and EPS effect of this non-cash charge for eachperiod affected are shown below (dollars in thousands, exceptper 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’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 overstatements of accumulatedcomprehensive loss).  The cumulativebalance sheet adjustments for the affected dates are as follows (in thousands):

 
| **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 ofall previous quarterly periods deemed not material on an individual quarterbasis.

 

In addition, in the second quarterof 2003, the Company made a balance sheet correction resulting in an increasein shareholders’ equity and a decrease in accrued payroll of $41,000. In 2004,the Company made a balance sheet correction resulting in an increase inaccounts receivable and shareholder’s equity (specifically accumulatedcomprehensive income/loss) of approximately $65,000 and $42,000 in the quartersending March 31, 2004 and June 30, 2004 respectively.

 

As a result of the Company’sinvestigation into the causes of this accounting error, several remediatingactions have been or are in the process of being implemented to prevent futurereoccurrence and are included in Part 1 - Item 4. Control and Procedures onthis Amendment No. 2 of Form 10-Q/A.

 

The effects of this restatement onthe consolidated balance sheet of the Company as at June 30, 2003, and onthe consolidated statements of operations and condensed consolidated statementsof cash flows for the three months and six months ended June 30, 2003, arepresented in Item 1 (Restated Financial Statements) and Item 2 (RestatedManagement’s Discussion and Analysis of Financial Condition and Results ofOperations) of Part I of this Amendment No. 2. Certain internalaccounting control issues identified by management and related to therestatement are disclosed in Item 4 of Part I of this AmendmentNo. 2. The Company’s Chief Executive Officer and Chief Financial Officerhave also reissued their certifications required by Sections 302 and 906 of theSarbanes-Oxley Act.

 

    The Company’srestatement of its financial statements for the year ended December 31,2003, is reflected in Amendment No. 2 on Form 10-K/A, filedconcurrently herewith, which amends its previously filed Form 10-KA forthe year ended December 31, 2003. The Company is also concurrently filingamendments on Forms 10-Q/A to its previously filed Forms 10-Q foreach of the periods ended June 30, 2004, September 30, 2003 andJune 30, 2004 to reflect the restatement of its financial statements forthose periods.

 

    Additionaldetail regarding the restatement is included in Note 2 of the Notes toConsolidated Financial Statements included in Part I — Item 1 ofthis Amendment No. 2 on Form 10-Q/A.

 

     Except as required to reflect the effects of the restatement, no attempt hasbeen made in this Amendment No. 2 to modify or update other disclosurespresented in the original report on Form 10-Q/A for the period ended March31, 2004. This Form 10-Q/A does not reflect events occurring after thefiling of the original Form 10-Q or modify or update those disclosuresaffected by subsequent events.  

 

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**COMPUTER HORIZONS CORP. AND SUBSIDIARIES**

 

Index

 
| Part I  | Restated Financial  Information |                                                                                                     |
|---------|---------------------------------|----------------------------------------------------------------------------------------------------------|
|    |                            |
|    | Item 1                          | Consolidated Balance Sheets  March 31, 2004 (unaudited) and December 31, 2003                            | 3 |
|    |                            |                                                                                                     |   |
|    |                            | Consolidated  Statements of Operations Three Months Ended March 31, 2004 and March 31, 2003  (unaudited) | 4 |
|    |                            |                                                                                                     |   |   |
|    |                            | Consolidated  Statements of Cash Flows Three Months Ended March 31, 2004 and March 31, 2003  (unaudited) | 5 |
|    |                            |                                                                                                     |   |
|    |                            | Notes to  Consolidated Financial Statements                                                              | 6 |
|    |                            |                                                                                                     |   |
|    | Item 2                          | Restated  Management’s Discussion and Analysis of Financial Condition and Results of  Operations    | 21 |
|    |                            |                                                                                                     |   |
|    | Item 4                          | Controls and Procedures                                                                                  | 31 |
|    |                            |                                                                                                     |   |
| Part II | Other Information               |                                                                                                     |
|    |                            |                                                                                                     |   |
|    | Item 6                          | Exhibits and Reports on Form 8-K                                                                         | 34 |
|    |                            |                                                                                                     |   |
|    |                            | Signatures                                                                                               | 35 |
|         |                                 |                                                                                                          |  |  |  |

 

2

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Part I Financial Information

Item I

 

COMPUTER HORIZONS CORP. ANDSUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except pershare data)

 
| ** **                                                                                                                               | ** ** | **March 31,  2004**       | ** ** | **December 31,  2003**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                                                                                               | ** ** | **(As restated  note 2)** | ** ** | **(As restated  note 2)** | ** ** |
| ** **                                                                                                                               | ** ** | **(unaudited)**           | ** ** | ** **                | ** ** |
| ASSETS                                                                                                                                   |       |                      |       |                      | ** ** |
| CURRENT  ASSETS:                                                                                                                         |       |                      |       |                      | ** ** |
| Cash and cash equivalents                                                                                                                |       | $                         | 49,757     |                      | $          | 52,610 | ** ** |
| Accounts receivable, net of allowance for  doubtful accounts of $5,671  and $5,432 at March 31, 2004 and December 31, 2003, respectively |       | 50,947                    |       | 48,295                    |       |
| Deferred income taxes                                                                                                                    |       | 4,137                     |       | 4,514                     |       |
| Other                                                                                                                                    |       | 3,637                     |       | 4,759                     |       |
| TOTAL CURRENT ASSETS                                                                                                                     |       | 108,478                   |       | 110,178                   |       |
|                                                                                                                                     |       |                      |       |                      |       |
| PROPERTY AND EQUIPMENT                                                                                                                   |       | 42,769                    |       | 42,252                    |       |
| Less accumulated depreciation                                                                                                            |       | (34,265                   | )          | (32,929                   | )          |
|                                                                                                                                     |       | 8,504                     |       | 9,323                     |       |
| OTHER ASSETS - NET:                                                                                                                      |       |                      |       |                      |       |
| Goodwill                                                                                                                                 |       | 34,218                    |       | 34,218                    |       |
| Intangibles                                                                                                                              |       | 2,200                     |       | 2,408                     |       |
| Deferred income taxes                                                                                                                    |       | 15,569                    |       | 14,813                    |       |
| Other                                                                                                                                    |       | 9,666                     |       | 9,386                     |       |
| TOTAL OTHER ASSETS                                                                                                                       |       | 61,653                    |       | 60,825                    |       |
|                                                                                                                                     |       |                      |       |                      |       |
| TOTAL ASSETS                                                                                                                             |       | $                         | 178,635    |                      | $          | 180,326 |   |
|                                                                                                                                     |       |                      |       |                      |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                |       |                      |       |                      |       |
| CURRENT LIABILITIES:                                                                                                                     |       |                      |       |                      |       |
| Accounts payable                                                                                                                         |       | $                         | 8,848      |                      | $          | 8,287 |   |
| Accrued payroll, payroll taxes and benefits                                                                                              |       | 8,660                     |       | 7,791                     |       |
| Restructuring reserve                                                                                                                    |       | 2,152                     |       | 2,620                     |       |
| Income taxes payable                                                                                                                     |       | 671                       |       | 1,243                     |       |
| Tax benefit reserve                                                                                                                      |       | —                    |       | 19,600                    |       |
| Other accrued expenses                                                                                                                   |       | 3,341                     |       | 5,813                     |       |
| TOTAL CURRENT LIABILITIES                                                                                                                |       | 23,672                    |       | 45,354                    |       |
|                                                                                                                                     |       |                      |       |                      |       |
| OTHER LIABILITIES                                                                                                                        |       | 5,008                     |       | 4,635                     |       |
|                                                                                                                                     |       |                      |       |                      |       |
| 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 March 31, 2004and December  31, 2003 respectively    |       | 3,315                     |       | 3,315                     |       |
| Additional paid-in capital                                                                                                               |       | 152,808                   |       | 133,046                   |       |
| Accumulated comprehensive loss                                                                                                           |       | (2,867                    | )          | (2,789                    | )          |
| Retained earnings                                                                                                                        |       | 10,534                    |       | 11,100                    |       |
|                                                                                                                                     |       | 163,790                   |       | 144,672                   |       |
| Less shares held in treasury, at cost;  2,408,662 shares and 2,537,692 shares at March 31, 2004 and December 31,  2003, respectively     |       | (13,835                   | )          | (14,335                   | )          |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                          |       | 149,955                   |       | 130,337                   |       |
|                                                                                                                                     |       |                      |       |                      |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                          |       | $                         | 178,635    |                      | $          | 180,326 |   |
|                                                                                                                                          |            |                           |            |                           |            |  |  |  |  |

 

3

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COMPUTER HORIZONS CORP. ANDSUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(Unaudited)

(dollars in thousands, except pershare data)

 
| ** **                                            | ** ** | **THREE MONTHS ENDED**   | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|
| ** **                                            | ** ** | **March 31, 2004**       | ** ** | **March 31, 2003** | ** ** |
| ** **                                            | ** ** | **(As restated note 2)** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **               | ** ** | **%of  revenue** | ** ** | ** ** | ** ** | **%of  revenue** | ** ** |
| REVENUES:                                             |       |                     |       |   |   |   |   |   |   |
| IT Services                                           |       | $                        | 29,804     |   | 49.9 | % | $ | 36,183 |   | 60.1 | % |
| Solutions Group                                       |       | 24,549                   |       | 41.1 | % | 19,601 |   | 32.5 | % |
| Chimes                                                |       | 5,353                    |       | 9.0 | % | 4,469 |   | 7.4 | % |
|                                                  |       |                     |       |   |   |   |   |   |   |
|                                                  |       | 59,706                   |       | 100.0 | % | 60,253 |   | 100.0 | % |
|                                                  |       |                     |       |   |   |   |   |   |   |
| COSTS AND EXPENSES:                                   |       |                     |       |   |   |   |   |   |   |
| Direct costs                                          |       | 40,805                   |       | 68.3 | % | 42,773 |   | 71.0 | % |
| Selling, general and administrative                   |       | 19,587                   |       | 32.8 | % | 18,926 |   | 31.4 | % |
| Amortization of intangibles                           |       | 208                      |       | 0.3 | % | — |   | 0.0 | % |
| Restructuring charges                                 |       | —                   |       | 0.0 | % | 249 |   | 0.4 | % |
|                                                  |       |                     |       |   |   |   |   |   |   |
|                                                  |       | 60,600                   |       | 101.5 | % | 61,948 |   | 102.8 | % |
|                                                  |       |                     |       |   |   |   |   |   |   |
| LOSS FROM OPERATIONS                                  |       | (894                     | )          | -1.5 | % | (1,695 | ) | -2.8 | % |
|                                                  |       |                     |       |   |   |   |   |   |   |
| OTHER INCOME / (EXPENSE):                             |       |                     |       |   |   |   |   |   |   |
| Loss on sale of assets                                |       | —                   |       | 0.0 | % | (273 | ) | -0.5 | % |
| Interest income                                       |       | 93                       |       | 0.2 | % | 174 |   | 0.3 | % |
| Interest expense                                      |       | (10                      | )          | 0.0 | % | (6 | ) | 0.0 | % |
|                                                  |       |                     |       |   |   |   |   |   |   |
|                                                  |       | 83                       |       | 0.1 | % | (105 | ) | -0.2 | % |
|                                                  |       |                     |       |   |   |   |   |   |   |
| INCOME/(LOSS) BEFORE INCOME TAXES  (BENEFIT)/EXPENSE: |       | (811                     | )          | -1.4 | % | (1,800 | ) | -3.0 | % |
|                                                  |       |                     |       |   |   |   |   |   |   |
| INCOME TAXES/(BENEFIT)                                |       |                     |       |   |   |   |   |   |   |
| Current                                               |       | 125                      |       | 0.2 | % | — |   | 0.0 | % |
| Deferred                                              |       | (379                     | )          | -0.6 | % | (540 | ) | -0.9 | % |
|                                                  |       | (254                     | )          | -0.4 | % | (540 | ) | -0.9 | % |
|                                                  |       |                     |       |   |   |   |   |   |   |
| INCOME/(LOSS) BEFORE MINORITY INTEREST                |       | (557                     | )          | -0.9 | % | (1,260 | ) | -2.1 | % |
|                                                  |       |                     |       |   |   |   |   |   |   |
| Minority Interest                                     |       | (9                       | )          | 0.0 | % | (19 | ) | 0.0 | % |
|                                                  |       |                     |       |   |   |   |   |   |   |
| NET LOSS                                              |       | $                        | (566       | ) | -0.9 | % | $ | (1,279 | ) | 2.1 | % |
|                                                  |       |                     |       |   |   |   |   |   |   |
| LOSS PER SHARE (BASIC & DILUTED):                 |       |                     |       |   |   |   |   |   |   |
|                                                  |       |                     |       |   |   |   |   |   |   |
| Net Loss                                              |       | $                        | (0.02      | ) |   |   | $ | 0.04 |   |   |   |
|                                                  |       |                     |       |   |   |   |   |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING:       |       |                     |       |   |   |   |   |   |   |
| Basic & Diluted                                   |       | 30,676,000               |       |   |   | 30,369,000 |   |   |   |

 

4

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COMPUTER HORIZONS CORP. ANDSUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASHFLOWS

(Unaudited)

(dollars in thousands)

 
| ** **                                                                       | ** ** | **Three Months Ended**    | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                       | ** ** | **March 31,  2004**       | ** ** | **March 31,  2003** | ** ** |
|                                                                             |       | **(As restated  note 2)** |       |   |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES                                            |       |                      |       |   |   |
| Net  loss                                                                        |       | $                         | (566       | ) | $ | (1,279 | ) |
| Adjustments to reconcile net loss to net cash provided by operating  activities: |       |                      |       |   |   |
| Deferred taxes                                                                   |       | (379                      | )          | (540 | ) |
| Depreciation                                                                     |       | 1,316                     |       | 1,299 |   |
| Amortization of intangibles                                                      |       | 208                       |       | — |   |
| Provision for bad debts                                                          |       | 390                       |       | 385 |   |
| Loss on sale of assets                                                           |       | —                    |       | 273 |   |
|                                                                             |       |                      |       |   |   |
| Change in assets and liabilities, net of  acquisitions:                          |       |                      |       |   |   |
| Accounts receivable                                                              |       | (3,042                    | )          | (629 | ) |
| Other current assets                                                             |       | 1,122                     |       | 1,071 |   |
| Other assets                                                                     |       | (280                      | )          | (2,842 | ) |
| Refundable income taxes                                                          |       | —                    |       | 19,051 |   |
| Accrued payroll, payroll taxes and benefits                                      |       | 869                       |       | (225 | ) |
| Accounts payable                                                                 |       | 561                       |       | (2,963 | ) |
| Income taxes payable                                                             |       | (572                      | )          | 624 |   |
| Other accrued expenses                                                           |       | (2,612                    | )          | (1,255 | ) |
| Other liabilities                                                                |       | 373                       |       | (409 | ) |
|                                                                             |       |                      |       |   |   |
| NET CASH PROVIDED/ (USED) BY OPERATING  ACTIVITIES                               |       | (2,612                    | )          | 12,561 |   |
|                                                                             |       |                      |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                             |       |                      |       |   |   |
| Purchases of furniture and equipment                                             |       | (497                      | )          | (820 | ) |
| Proceeds received from the sale of assets                                        |       | —                    |       | 149 |   |
| Changes in goodwill                                                              |       | —                    |       | (387 | ) |
| NET CASH (USED) IN INVESTING ACTIVITIES                                          |       | (497                      | )          | (1,058 | ) |
|                                                                             |       |                      |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                             |       |                      |       |   |   |
| Stock options exercised                                                          |       | 262                       |       | 11 |   |
| Purchase of treasury shares                                                      |       | —                    |       | (875 | ) |
| Stock issued on employee stock purchase  plan                                    |       | 146                       |       | — |   |
| NET CASH PROVIDED BY/(USED) IN FINANCING  ACTIVITIES                             |       | 408                       |       | (864 | ) |
|                                                                             |       |                      |       |   |   |
| Foreign currency losses                                                          |       | (152                      | )          | (14 | ) |
|                                                                             |       |                      |       |   |   |
| NET (DECREASE)/INCREASE IN CASH AND CASH  EQUIVALENTS                            |       | (2,853                    | )          | 10,625 |   |
|                                                                             |       |                      |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  YEAR                                  |       | 52,610                    |       | 59,769 |   |
|                                                                             |       |                      |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                       |       | $                         | 49,757     |   | $ | 70,394 |   |

 

Non Cash Activities:

 

During the first quarter of 2004,the Company recorded a reduction in tax benefit reserves and an increase inadditional paid-in capital of $19.9 million.

 

5

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**COMPUTER HORIZONS CORP. AND SUBSIDIARIES**

 

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

For the Periods Ended March 31, 2004 and March 31, 2003

(unaudited)

 

**1.****             ****Basis of Presentation**

 

The consolidated balance sheets asof March 31, 2004, the consolidated statements of operations for the threemonths ended March 31, 2004 and March 31, 2003, respectively, and the statementof cash flows for the three months ended March 31, 2004 and 2003 have beenprepared by the Company without audit.  In the opinion of management, alladjustments (which include normal recurring adjustments) necessary to presentfairly the financial position, results of operations and cash flows at March31, 2004 (and for all periods presented) have been made.

 

Certain information and notedisclosures, normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of America,which are not required for interim purposes, have been condensed oromitted.  It is suggested that these consolidated financial statements beread in conjunction with the financial statements and notes thereto included inthe Annual Report on Form 10-K for the year ended December 31, 2003 filed bythe Company.  The results of operations for the periods ended March 31,2004 and 2003 are not necessarily indicative of the operating results for therespective full years.

 

**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 company discovered an error pertaining to theincorrect adjustment of consulting costs relating to intercompany transactionsbetween the Company and its Canadian subsidiary.  This error caused an understatement of consolidatedconsultant costs (i.e. direct costs) in the Company’s consolidated incomestatement and accrued payroll on the balance sheet.

 

As part ofmanagement's investigation of this accounting error, an extensive review ofintercompany transactions was completed. As a result, other adjustments, notaffecting operating results, were recorded. These adjustments to the balancesheet corrected an overstatement of accrued expenses and an understatement ofshareholders' equity (specifically the overstatement of accumulatedcomprehensive loss). In addition, in the second quarter of 2003, the Companymade a balance sheet correction resulting in an increase in shareholders'equity and a decrease in accrued payroll of $41,000. In 2004, the Company madea balance sheet correction resulting in an increase in accounts receivable andshareholder's equity (specifically accumulated comprehensive income/loss) ofapproximately $65,000 and $42,000 in the quarters ending March 31, 2004 andJune 30, 2004 respectively.

 

The followingschedule reconciles net loss for the three months ended March 31, 2004 asoriginally reported, to the corresponding amounts on a restated basis aftergiven effect to the adjustment described above.

 
| **(In thousands, except  per share data)**                 | ** ** | **Three Months  Ended March 31, 2004** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                 | ** ** | **(unaudited)**                        | ** ** |
|                                                       |       |                                   |       |
| Net loss as originally reported                            |       | (4                                     | )          |
|                                                       |       |                                   |       |
| Direct costs adjustment (pretax)                           |       | (864                                   | )          |
|                                                       |       |                                   |       |
| Income tax benefit                                         |       | 302                                    |       |
| Net loss as restated                                       |       | (566                                   | )          |
|                                                       |       |                                   |       |
| Loss per share (basic and diluted) as  originally reported |       | —                                 |       |
| Effect of Direct Costs adjustment                          |       | (0.02                                  | )          |
| Loss per share (basic and diluted) as  restated            |       | (0.02                                  | )          |

 

The previouslyreported results of operations for the three-month ended March 31, 2004 asreported on Form 10Q with the Securities and Exchange Commission, have beenamended to reflect the above adjustments. The results of such adjustments, as compared with the Company’spreviously reported results for the three-month periods ended March 31, 2004,are set forth below.

 
| **(In thousands, except  per share data**       | ** ** | **Three Months Ended  March 31, 2004** | ** ** | **Three Months Ended  March 31, 2004** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **As Originally Reported**             | ** ** | **As Restated**                        | ** ** |
|                                            |       | **(unaudited)**                        |       | **(unaudited)**                        |       |
|                                            |       |                                   |       |                                   |       |
| Revenue                                         |       | 59,706                                 |       | 59,706                                 |       |
|                                            |       |                                   |       |                                   |       |
| Cost and expenses                               |       |                                   |       |                                   |       |
| Direct costs                                    |       | 39,941                                 |       | 40,805                                 |       |
| Selling, general and administrative             |       | 19,587                                 |       | 19,587                                 |       |
| Amortization of intangibles                     |       | 208                                    |       | 208                                    |       |
| Restructuring charge                            |       | —                                 |       | —                                 |       |
|                                            |       | 59,736                                 |       | 60,600                                 |       |
|                                            |       |                                   |       |                                   |       |
| Loss from Operations                            |       | (30                                    | )          | (894                                   | )          |
|                                            |       |                                   |       |                                   |       |
| Other income/expenses                           |       |                                   |       |                                   |       |
| Loss on sale of assets                          |       | —                                 |       | —                                 |       |
| Interest income                                 |       | 93                                     |       | 93                                     |       |
| Interest expense                                |       | (10                                    | )          | (10                                    | )          |
|                                            |       | 83                                     |       | 83                                     |       |
|                                            |       |                                   |       |                                   |       |
| Loss before income taxes and minority  interest |       | 53                                     |       | (811                                   | )          |
|                                            |       |                                   |       |                                   |       |
| Income tax / (benefit) (Notes 1 and 18):        |       |                                   |       |                                   |       |
| Current                                         |       | 24                                     |       | 125                                    |       |
| Deferred                                        |       | 24                                     |       | (379                                   | )          |
| Income tax benefit                              |       | 48                                     |       | (254                                   | )          |
|                                            |       |                                   |       |                                   |       |
| Net loss before minority interest               |       | 5                                      |       | (557                                   | )          |
| Minority Interest                               |       | (9                                     | )          | (9                                     | )          |
| Net loss                                        |       | (4                                     | )          | (566                                   | )          |
|                                            |       |                                   |       |                                   |       |
| Net Loss per share                              |       | (0.00                                  | )          | (0.02                                  | )          |
|                                            |       |                                   |       |                                   |       |
| Weighted average number of shares  outstanding: |       |                                   |       |                                   |       |
| Basic and Diluted                               |       | 30,676,000                             |       | 30,676,000                             |       |

 

6

----

 

The following table sets forth theeffects of the restatement adjustments discussed above on the consolidatedbalance sheets at March 31, 2004.

 
| ** **                                                                                         | ** ** | **March 31,  2004**                        | ** ** | **March 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------|------------|
| ** **                                                                                         | ** ** | **(As originally  reported)**              | ** ** | **(As restated)**   | ** ** |
| ** **                                                                                         |       | **(in  thousands, except per share data)** |       |
| ASSETS                                                                                             |       |                                       |       |                |       |
| CURRENT ASSETS:                                                                                    |       |                                       |       |                |       |
| Cash and cash equivalents                                                                          |       | $                                          | 49,757     |                | $          | 49,757 |   |
| Accounts receivable                                                                                |       | 50,882                                     |       | 50,947              |       |
| Deferred income taxes                                                                              |       | 4,137                                      |       | 4,137               |       |
| Refundable income taxes                                                                            |       | —                                     |       | —              |       |
| Other                                                                                              |       | 3,637                                      |       | 3,637               |       |
|                                                                                               |       |                                       |       |                |       |
| TOTAL CURRENT ASSETS                                                                               |       | 108,413                                    |       | 108,478             |       |
|                                                                                               |       |                                       |       |                |       |
| PROPERTY AND EQUIPMENT                                                                             |       |                                       |       |                |       |
| Furniture, equipment and other                                                                     |       | 42,769                                     |       | 42,769              |       |
| Less accumulated depreciation                                                                      |       | (34,265                                    | )          | (34,265             | )          |
|                                                                                               |       |                                       |       |                |       |
|                                                                                               |       | 8,504                                      |       | 8,504               |       |
|                                                                                               |       |                                       |       |                |       |
| OTHER ASSETS - NET:                                                                                |       |                                       |       |                |       |
| Goodwill                                                                                           |       | 34,218                                     |       | 34,218              |       |
| Intangibles                                                                                        |       | 2,200                                      |       | 2,200               |       |
| Deferred income taxes                                                                              |       | 13,977                                     |       | 15,569              |       |
| Other                                                                                              |       | 9,666                                      |       | 9,666               |       |
|                                                                                               |       |                                       |       |                |       |
| TOTAL OTHER ASSETS                                                                                 |       | 60,061                                     |       | 61,653              |       |
|                                                                                               |       |                                       |       |                |       |
|                                                                                               |       |                                       |       |                |       |
|                                                                                               |       | $                                          | 176,978    |                | $          | 178,635 |   |
| TOTAL ASSETS                                                                                       |       |                                       |       |                |       |
|                                                                                               |       |                                       |       |                |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                          |       |                                       |       |                |       |
| CURRENT LIABILITIES:                                                                               |       |                                       |       |                |       |
| Accrued payroll, payroll taxes and benefits                                                        |       | $                                          | 4,441      |                | $          | 8,660 |   |
| Accounts payable                                                                                   |       | 8,848                                      |       | 8,848               |       |
| Restructuring reserve                                                                              |       | 2,152                                      |       | 2,152               |       |
| Income taxes payable                                                                               |       | 570                                        |       | 671                 |       |
| Tax benefit reserve                                                                                |       | 0                                          |       | 0                   |       |
| Other accrued expenses                                                                             |       | 5,535                                      |       | 3,341               |       |
|                                                                                               |       |                                       |       |                |       |
| TOTAL CURRENT LIABILITIES                                                                          |       | 21,546                                     |       | 23,672              |       |
|                                                                                               |       |                                       |       |                |       |
|                                                                                               |       |                                       |       |                |       |
| OTHER LIABILITIES                                                                                  |       | 5,008                                      |       | 5,008               |       |
|                                                                                               |       |                                       |       |                |       |
| SHAREHOLDERS’ EQUITY:                                                                         |       |                                       |       |                |       |
| Preferred stock, $.10 par; authorized and  unissued 200,000 shares, including 50,000 Series A |       | 3,315                                      |       | 3,315               |       |
| Additional paid-in capital                                                                         |       | 152,808                                    |       | 152,808             |       |
| Accumulated comprehensive loss                                                                     |       | (5,167                                     | )          | (2,867              | )          |
| Retained earnings                                                                                  |       | 13,303                                     |       | 10,534              |       |
|                                                                                               |       |                                       |       |                |       |
|                                                                                               |       | 164,259                                    |       | 163,790             |       |
|                                                                                               |       |                                       |       |                |       |
| Less shares held in treasury, at cost;  2,408,662 shares                                           |       | (13,835                                    | )          | (13,835             | )          |
|                                                                                               |       |                                       |       |                |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                    |       | 150,424                                    |       | 149,955             |       |
|                                                                                               |       |                                       |       |                |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                    |       | $                                          | 176,978    |                | $          | 178,635 |   |
|                                                                                                    |            |                                            |            |                     |            |  |  |  |  |

 

**3.****             ****Recent Accounting Pronouncements**

 

In January 2003, the FASB issuedFinancial Interpretation No. 46, “Consolidation of Variable Interest Entities”(“FIN 46”), which addresses consolidation by business enterprises of variableinterest entities (VIEs).  The accounting provisions and disclosurerequirements of FIN 46 are effective immediately for VIEs created after January31, 2003, and are effective for the Company’s fiscal period ending March 31,2004, for VIEs created prior to February 1, 2003.  In December 2003, theFASB published a revision to FIN 46 (“FIN 46R”) to clarify some of theprovisions of the interpretation and to defer the effective date ofimplementation for certain entities.  Under the guidance of FIN 46R,public companies that have interests in VIE’s that are commonly referred to asspecial purpose entities are required to apply the provisions of FIN 46R forperiods ending after December 15, 2003.  A public company that does nothave any interests in special purpose entities but does have a variableinterest in a VIE created before February 1, 2003, must apply the provisions ofFIN 46R by the end of the first interim or annual reporting period ending afterMarch 14, 2004.  During the quarter ended March 31, 2004 the Company adoptedthe provisions of FIN 46R.  Adoption of FIN46R did not have a materialeffect on the Company’s financial statements.

 

7

----

 

**4.     Accountingfor Stock Based Compensation**

 

In December 2002, the FinancialAccounting Standards Board approved the issuance of SFAS No. 148, “Accountingfor Stock-Based Compensation – Translation and Disclosure.”  Thisstatement amends FASB Statement No. 123, “Accounting for Stock-BasedCompensation,” to provide alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation.  In addition, this Statement amended the disclosurerequirements of Statement 123 to require prominent disclosures in both annualand interim financial statements about the method of accounting for stock-basedemployee compensation. In addition, this statement amended the disclosurerequirements of the Statement 123 to require prominent disclosures in bothannual and interim financial statements about the method of accounting forstock-based compensation and the effect of the methods used on reportedresults. The Company adopted disclosure provisions as of December 31, 2002.

 

The exercise price per share on alloptions granted may not be less than the fair value at the date of the optiongrant.  The Company applies Accounting Principles Board Opinion No. 25, “Accountingfor Stock 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 increased to the pro forma amountsindicated below:

 
| ** **         | ** ** | ** **                                                                                                                                    | ** ** | **March 31,  2004**                       | ** ** | **March 31,  2003** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|---------------------|------------|
| ** **         | ** ** | ** **                                                                                                                                    | ** ** | **(in thousands, except per share data)** | ** ** |
| ** **         | ** ** | ** **                                                                                                                                    | ** ** | **(As restated Note 2)**                  | ** ** | ** **          | ** ** |
| Net loss           |       | As reported                                                                                                                                   |       | $                                         | (566       | )                   | $          | (1,279 | ) |
|               |       | Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (724                                      | )          | (828                | )          |
|               |       |                                                                                                                                          |       |                                      |       |                |       |
|               |       | Pro forma                                                                                                                                     |       | $                                         | (1,290     | )                   | $          | (2,107 | ) |
|               |       |                                                                                                                                          |       |                                      |       |                |       |
| Earnings per share |       |                                                                                                                                          |       |                                      |       |                |       |
| Basic and diluted  |       | As reported                                                                                                                                   |       | $                                         | (0.02      | )                   | $          | (0.04 | ) |
|               |       | Pro forma                                                                                                                                     |       | (0.04                                     | )          | (0.07               | )          |

 

8

----

 

5.     **Restricted Cash**

 

Included in cash and cashequivalents at March 31, 2004 and December 31, 2003 is restricted cash ofapproximately $2.6 million and $2.2 million respectively.  Restricted cashrepresents funds received by Chimes and held in client-specific bank accounts,to be used to make payments to vendors of the applicable client.

 

9

----

 

6.     **Earnings Per Share**

 

The computation of diluted earningsper share excludes all options since their inclusion would beanti-dilutive.  During the three months ended March 31, 2004, 3,802,000options were excluded.  During the three months ended March 31, 2003,2,902,602 options were excluded.

 

7.     **Segment Information**

 

The Company has identified threebusiness segments: IT Services, the Solutions Group and Chimes, Inc.  TheIT Services division provides highly skilled software professionals to augmentthe internal information management staffs of major corporations.  ITServices is primarily staffing augmentation.  The Solutions divisionprovides enterprise application services, e-business solutions, customized Webdevelopment and Web enablement of strategic applications, Customer RelationshipManagement (CRM), network services, strategic outsourcing and managed resourcing.Chimes, Inc., a wholly-owned subsidiary of CHC, provides workforce procurementand management services to Global 2000 companies which, according to Forbesmagazine, represents the biggest and most important companies, as measured bysales, profits, assets and market value. Income/(loss) before income taxes/(benefit) consists of income/(loss) before income taxes, excluding interestincome, interest expense, gain/(loss) on the sale of assets, restructuringcharges, minority interest, and amortization of intangibles.  Theseexclusions total expense of $0.1 million and expense of $0.4 million at March31, 2004 and 2003, respectively (see reconciliation of segment income/(loss)before income taxes/(benefit) to consolidated income/(loss) before income taxes/(benefit)). Corporate services, consisting of general and administrative services areprovided to the segments from a centralized location.  Such costs areallocated to the applicable segments receiving Corporate services based onrevenue.

 

10

----

 
| ** **                                      | ** ** | **Three Months Ended**   | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|
| **(in 000’s)**                             | ** ** | **March 31,  2004**      | ** ** | **March 31,  2003** | ** ** |
| ** **                                      | ** ** | **(As restated note 2)** | ** ** | ** ** | ** ** |
| *Revenue:*                                      |       |                     |       |   |   |
| IT Services                                     |       | $                        | 29,804     |   | $ | 36,183 |   |
| Solutions Group                                 |       | 24,549                   |       | 19,601 |   |
| Chimes                                          |       | 5,353                    |       | 4,469 |   |
| TOTAL                                           |       | $                        | 59,706     |   | $ | 60,253 |   |
|                                            |       |                     |       |   |   |
| *Gross Margin:*                                 |       |                     |       |   |   |
| IT Services                                     |       | $                        | 6,057      |   | $ | 7,170 |   |
| Solutions Group                                 |       | 7,784                    |       | 6,206 |   |
| Chimes                                          |       | 5,061                    |       | 4,104 |   |
| TOTAL                                           |       | $                        | 18,902     |   | $ | 17,480 |   |
|                                            |       |                     |       |   |   |
| *Operating income / (loss):*                    |       |                     |       |   |   |
| IT Services                                     |       | $                        | 2,041      |   | $ | 1,886 |   |
| Solutions Group                                 |       | 2,037                    |       | 3,355 |   |
| Chimes                                          |       | 94                       |       | (1,567 | ) |
| TOTAL                                           |       | $                        | 4,172      |   | $ | 3,674 |   |
|                                            |       |                     |       |   |   |
| *Corporate Allocation:*                         |       |                     |       |   |   |
| IT Services                                     |       | $                        | 2,888      |   | $ | 3,075 |   |
| Solutions Group                                 |       | 1,451                    |       | 1,665 |   |
| Chimes                                          |       | 519                      |       | 380 |   |
| TOTAL                                           |       | $                        | 4,858      |   | $ | 5,120 |   |
|                                            |       |                     |       |   |   |
| *Income/(loss) before income  taxes/(benefit):* |       |                     |       |   |   |
| IT Services                                     |       | $                        | (847       | ) | $ | (1,189 | ) |
| Solutions Group                                 |       | 586                      |       | 1,689 |   |
| Chimes                                          |       | (425                     | )          | (1,947 | ) |
| TOTAL                                           |       | $                        | (686       | ) | $ | (1,446 | ) |
|                                            |       |                     |       |   |   |
| *Assets:*                                       |       |                     |       |   |   |
| IT Services                                     |       | $                        | 22,927     |   | $ | 33,884 |   |
| Solutions Group                                 |       | 86,739                   |       | 44,710 |   |
| Chimes                                          |       | 15,118                   |       | 11,733 |   |
| Corporate and other                             |       | 53,851                   |       | 97,441 |   |
| TOTAL                                           |       | $                        | 178,635    |   | $ | 187,768 |   |

 

11

----

 

*Reconciliationof Segment Income/(Loss) before Income Taxes/(Benefit) to ConsolidatedIncome/(Loss) Before Income Taxes/(Benefit):*

 
| ** **                                                            | ** ** | **Three Months Ended**   | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                            | ** ** | **March 31, 2004**       | ** ** | **March 31, 2003** | ** ** |
|                                                                  |       | **(As restated note 2)** |       |   |   |
| Total Segments Loss before Income  Taxes/(Benefit)                    |       | $                        | (686       | ) | $ | (1,446 | ) |
|                                                                  |       |                     |       |   |   |
| Adjustments:                                                          |       |                     |       |   |   |
|                                                                  |       |                     |       |   |   |
| Interest income, net                                                  |       | 83                       |       | 168 |   |
|                                                                  |       |                     |       |   |   |
| Gain/(loss) on sale of assets                                         |       | —                   |       | (273 | ) |
|                                                                  |       |                     |       |   |   |
| Restructuring charges                                                 |       | (249                     | )          |   |   |
|                                                                  |       |                     |       |   |   |
| Amortization of intangibles                                           |       | (208                     | )          | — |   |
|                                                                  |       |                     |       |   |   |
| Total Adjustments:                                                    |       | $                        | (125       | ) | $ | (354 | ) |
| Consolidated income/(loss) before income  taxes and minority interest |       | $                        | (811       | ) | $ | (1,800 | ) |

 

8.     **Restructuring Charges**

 

During the fourth quarter of 2003,the Company recorded a restructuring charge of approximately $329,000 relatingto the closing of one office in the US 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.

 
| ** **         | ** ** | **Remaining at  December 31, 2003** | ** ** | **Paid** | ** ** | **Remaining at March 31,  2004** | ** ** |
|--------------------|------------|-------------------------------------|------------|----------|------------|----------------------------------|------------|
| Lease Obligations: |       |                                |       |     |       |                             |       |
| United States      |       | $                                   | 90         |     | $          | —                           |       | $ | 90 |   |
|                    |            |                                     |            |          |            |                                  |            |  |  |  |

 

12

----

 

During the third quarter of 2003,the Company recorded a restructuring charge of approximately $787,000 relatingto the closing of Chimes (UK) Ltd. and severance charges related to USoperations.  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.

 
| ** **             | ** ** | **Remaining at  December 31,  2003** | ** ** | **Paid** | ** ** | **Exchange rate  Fluctuation** | ** ** | **Remaining at  March 31,  2004** | ** ** |
|------------------------|------------|--------------------------------------|------------|----------|------------|--------------------------------|------------|-----------------------------------|------------|
|                   |       |                                 |       |     |       |                           |       |                              |       |
| Severance              |       | 47                                   |       |     |       | 1                              |       | 48                                |       |
|                   |       |                                 |       |     |       |                           |       |                              |       |
| Lease Obligation       |       | 150                                  |       |     |       | 5                              |       | 155                               |       |
|                   |       |                                 |       |     |       |                           |       |                              |       |
| General Office Closure |       | 49                                   |       | (7       | )          | 2                              |       | 44                                |       |
|                   |       |                                 |       |     |       |                           |       |                              |       |
| Total                  |       | 246                                  |       | (7       | )          | 8                              |       | 247                               |       |

 

During the second quarter of 2003,the Company evaluated the geographic area in Canada and decided to closefacilities and go virtual in the smaller Canadian markets.  After thebuildings were entirely closed, the Company recorded a restructuring charge ofapproximately $1.7 million relating to the consolidating and closing of thesefacilities in the Canadian subsidiary.  The $1.3 million expense for leaseobligations was calculated based on current rent commitments less a calculatedsublease amount based on current market conditions.  The entire provisionof $1.3 million included an accrual relating to the future costs associatedwith continuing rent on six properties, five of which are in Canada, with rentscontinuing through 2004, 2006 and 2007.

 

13

----

 
| ** **         | ** ** | **Remaining at  December 31,  2003** | ** ** | **Paid** | ** ** | **Exchange rate  Fluctuation** | ** ** | **Remaining at  March 31, 2004** | ** ** |
|--------------------|------------|--------------------------------------|------------|----------|------------|--------------------------------|------------|----------------------------------|------------|
| Lease Obligations: |       |                                 |       |     |       |                           |       |                             |       |
| Canada             |       | $                                    | 739        |     | $          | (131                           | )          | $                                | (14        | ) | $ | 593 |   |
|                    |            |                                      |            |          |            |                                |            |                                  |            |  |  |  |  |

 

During the fourth quarter of 2002,the Company recorded a restructuring charge of $2.8 million pertaining to 2002office closings.  During the second quarter of 2003, half of the rent forone office closing was reversed after the rent was negotiated at a lower ratefor half the building.  During the fourth quarter of 2003, the Companymade an additional adjustment to the reserve for four of the properties due tosublease.

 
| ** **         | ** ** | **Remaining at  December 31,  2003** | ** ** | **Paid** | ** ** | **Remaining at  March 31, 2004** | ** ** |
|--------------------|------------|--------------------------------------|------------|----------|------------|----------------------------------|------------|
| Lease Obligations: |       |                                 |       |     |       |                             |       |
| United States      |       | $                                    | 1,159      |     | $          | (241                             | )          | $ | 918 |   |
|                    |            |                                      |            |          |            |                                  |            |  |  |  |

 
| ** **         | ** ** | **Remaining at  December 31,  2003** | ** ** | **Paid** | ** ** | **Remaining at  March 31, 2004** | ** ** |
|--------------------|------------|--------------------------------------|------------|----------|------------|----------------------------------|------------|
| Lease Obligations: |       |                                 |       |     |       |                             |       |
| United States      |       | $                                    | 2,483      |     | $          | (355                             | )          | $ | 2,128 |   |
|                    |            |                                      |            |          |            |                                  |            |  |  |  |

 

14

----

 

At the end of 2003, the Company had$78,000 of five lease obligations remaining from the restructure expenserecorded in 2001.  Of the five lease obligations, four remain and thebalance as of March 31, 2004 was $41,000.

 
| ** **         | ** ** | **Remaining at  Dec. 31, 2003** | ** ** | **Paid** | ** ** | **Remaining at  March 31,  2004** | ** ** |
|--------------------|------------|---------------------------------|------------|----------|------------|-----------------------------------|------------|
| Lease Obligations: |       |                            |       |     |       |                              |       |
| United States      |       | $                               | 78         |     | $          | (37                               | )          | $ | 41 |   |
|                    |            |                                 |            |          |            |                                   |            |  |  |  |

 
| ** **         | ** ** | **Remaining at December 31,  2002** | ** ** | **Paid** | ** ** | **Remaining at  March 31, 2003** | ** ** |
|--------------------|------------|-------------------------------------|------------|----------|------------|----------------------------------|------------|
| Lease Obligations: |       |                                |       |     |       |                             |       |
| United States      |       | $                                   | 294        |     | $          | (77                              | )          | $ | 217 |   |
|                    |            |                                     |            |          |            |                                  |            |  |  |  |

 

At the end of 2003 the Company had$308,000 of one lease obligation remaining on the restructure expense recordedin 2000 with the lease terminating in 2005.  The balance remaining atMarch 31, 2004 was $262,000.

 
| ** **         | ** ** | **Remaining at  Dec. 31, 2003** | ** ** | **Paid** | ** ** | **Remaining at  March 31, 2004** | ** ** |
|--------------------|------------|---------------------------------|------------|----------|------------|----------------------------------|------------|
| Lease Obligations: |       |                            |       |     |       |                             |       |
| United States      |       | $                               | 308        |     | $          | (46                              | )          | $ | 262 |   |
|                    |            |                                 |            |          |            |                                  |            |  |  |  |

 
| ** **         | ** ** | **Remaining at December 31,  2002** | ** ** | **Paid** | ** ** | **Remaining at  March 31, 2003** | ** ** |
|--------------------|------------|-------------------------------------|------------|----------|------------|----------------------------------|------------|
| Lease Obligations: |       |                                |       |     |       |                             |       |
| United States      |       | $                                   | 488        |     | $          | (44                              | )          | $ | 444 |   |
|                    |            |                                     |            |          |            |                                  |            |  |  |  |

 

15

----

9.               **ComprehensiveIncome / (Loss)**

 

Statement of FinancialAccounting Standards No. 130, Reporting Comprehensive Income (“SFAS No. 130”),requires that items defined as other comprehensive income/(loss), such asforeign currency translation adjustments and unrealized gains and losses, beseparately classified in the financial statements and that the accumulatedbalance of other comprehensive income/(loss) be reported separately fromretained earnings and additional paid-in capital in the equity section of thebalance sheet. The components of comprehensive loss for the three months endedMarch 31, 2004 and March 31, 2003 are as follows:

 
| ** **                                                            | ** ** | **Three Months Ended**   | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                            | ** ** | **March 31,  2004**      | ** ** | **March 31,  2003** | ** ** |
| ** **                                                            | ** ** | **(As restated note 2)** | ** ** | ** ** | ** ** |
| Comprehensive Loss:                                                   |       |                     |       |   |   |
|                                                                  |       |                     |       |   |   |
| Net Loss                                                              |       | $                        | (566       | ) | $ | (1,279 | ) |
| Other comprehensive income/(loss) – Foreign  currency adjustment |       | (152                     | )          | (14 | ) |
| Unrealized gain/(loss) on SERP investments                            |       | 74                       |       | (210 | ) |
| Comprehensive Loss                                                    |       | $                        | (644       | ) | $ | (1,503 | ) |

 

10.         **Acquisitions**

 

On September 12, 2003, theCompany acquired, from Commerce One, the Xpress solution, a suite of softwareand services designed to rapidly facilitate product data synchronizationbetween trading partners.  The purchase price of the software was$566,000, recorded as intangible assets, and is being amortized over a threeyear period.

 

On July 8, 2003, the Companyacquired all of the stock of privately-held RGII Technologies, Inc. (“RGII”). The Company purchased RGII because acquiring a platform company in the Federalgovernment IT Services marketplace has been a long-term priority for theCompany.  The purchase price of approximately $22.1 million included anup-front cash payment, acquisition expenses, working capital adjustment and thepayoff of a note payable of $1.5 million.  In addition, the seller may beentitled to contingent payments based on RGII’s performance againstprofitability objectives over the next three years.  The contingentpayments are evidenced by a contingent note with a face value of $10 millionthat is payable over three years, only if performance objectives are met. These financial performance objectives are based on earnings before interestand taxes (“EBIT”) targets totaling $19.8 million over a three yearperiod.  There are no minimum or maximum payment obligations under theterms of the contingent note. The contingent payment will be reduced on adollar-for-dollar basis for financial performance below EBIT targets, andincreased by 29 cents ($0.29) for each dollar exceeding EBIT targets.  TheCompany made a payment of $631,000 during the first quarter of 2004.  TheCompany also entered into employment agreements with the former shareholder andemployees of RGII and has agreed to issue an aggregate of 600,000 options topurchase shares of Computer Horizons stock over a three year period.

 

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The Company completed theallocation of the purchase price to assets and liabilities acquired utilizingoutside valuation consultants to assist in this process.

 

On January 31, 2003, theCompany acquired the IT Solutions operations of Global Business TechnologySolutions (GBTS), from Alea (Bermuda) Limited, a member of the Alea Group ofcompanies and Westfield Services, Inc., a subsidiary of Westfield FinancialCorporation for $400,000.  The outsourcing facility and its ITprofessionals are located in Chenni (Madras), India.  This transaction wasaccounted for as a purchase and the entire purchase price was allocated togoodwill.

 

11.         **Sale of Subsidiary**

 

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

 

12.         **Purchase of Treasury Stock**

 

In April of 2001, the Board ofDirectors approved the repurchase in the open market of up to 10% of its commonshares outstanding, or approximately 3.2 million shares.  As of March 31,2004, the remaining authorization for repurchase is approximately 93,000shares.

 

13.         **Asset-Based Lending Facility**

 

The Company has a $40 millionline of credit facility with availability based primarily on eligible customerreceivables.  The interest rate is LIBOR plus 2.75% based on unpaidprincipal.  The borrowing base less outstanding loans must equal or exceed$17.5 million.  As of March 31, 2004, the Company had no outstanding loanbalance against the facility.  Based on the Company’s eligible customerreceivables and cash balances, $18.5 million was available for borrowing as ofMarch 31, 2004.  The fee for the unused portion of the line of credit is0.375% per annum charged to the Company monthly. This charge was approximately$26,000 and $42,000 for the three-month periods ended March, 2004 and 2003,respectively.  This line of credit includes covenants relating to themaintenance of cash balances and providing for limitations on incurringobligations and spending limits on capital expenditures.  This line ofcredit includes convenants relating to the maintenance of cash balances andproviding for limitations on recurring obligations and spending limits oncapital expenditures.  One convenant pertains to minimum cash collectionsover a three month period.  The Company did not satisfy this convenant forthe quarter ending March 31, 2004.  A waiver was received from the lendinginstitution for the quarter ended March 31, 2004, along with an amendment tothe loan agreement lowering the three month average minimum cash collectionscovenant to $10 million.  This facility is scheduled to expire in July2004 and the Company intends to enter into a new asset-based lending facilityprior to expiration.

 

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14.         **Tax Benefit Reserve**

 

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

 

During 1998, the Companycompleted a business combination which, for financial statement purposes, wasaccounted for as a pooling-of-interests.  For income tax purposes, thetransaction was treated as a taxable purchase that gave rise to future taxdeductions.  Upon the sale of the acquired business in 2001, thesedeductions were recognized for tax purposes.  The tax benefit of $19.6million relating to the part of these deductions that was carried back to prioryears was included in refundable income taxes in 2002.  Since the taxstructure of the transaction was subject to review by the tax authorities, theCompany recorded a reserve for the tax benefits resulting from the carrybackand did not record deferred tax assets for the tax benefits being carriedforward. The Company intended that upon conclusion of review of the relevanttax returns by the authorities, it would record a deferred tax asset for thepart of the tax benefits being carried forward and a tax benefit for theportion that was carried back, net of an appropriate valuation allowance. Thetax benefit would be reflected as an increase in additional paid-incapital.  Any adjustments to the valuation allowance would be charged orcredited to income.

 

At December 31, 2003, theInternal Revenue Service was examining the Company’s federal income tax returnsfor the years ended December 31, 2001 and 2000, along with its federal refundclaims for the calendar years 1996 through 1999.  The additional refundamount received in January 2003 was shown as a liability until the audit wascompleted.  During the first quarter of 2004, the Internal Revenue Serviceand the Joint Committee on Taxation completed their examination of the Company’sfederal income tax returns and federal refund claims, and accepted them withoutchange.  Accordingly, the tax benefit was recorded as a decrease in thetax benefit reserve of $19.6 million, a decrease in other tax reserves of $0.3million, and an increase in additional paid-in capital of $19.9 million. There was no charge or credit to income.

 

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15.         **Rescission Offer**

 

From April 2001 through January2003, the sale of shares of the Company’s common stock pursuant to the EmployeeStock Purchase Plan were not exempt from registration or qualification underfederal securities laws.  As a result, the Company may have failed tocomply with the registration or qualification requirements of federal andapplicable state securities laws because the Company did not register orqualify these stock issuances under either federal or applicable statesecurities laws.

 

As a result the Company intendsto make a rescission offer to all those persons who purchased shares of commonstock pursuant to the Employee Stock Purchase Plan during the affected periods. The rescission offer will be made pursuant to a registration statement filedunder the Securities Act and pursuant to applicable state securitieslaws.  In this rescission offer, the Company is offering to repurchase theshares subject to our rescission offer for the price paid per share plusinterest from the date of purchase until the rescission offer expires, at thecurrent statutory rate per year mandated by the state in which the shares werepurchased.  The rescission offer will expire approximately 30 days afterthe effective date of the registration statement.  Assuming all of theshares subject to the rescission offer (approximately 659,000) are tendered inthe rescission offer, the aggregate purchase price, excluding interest is estimatedto be approximately $1.8 million.  This contingency payment is consideredremote by the Company as the current price of the stock is above the price atwhich the shares would be repurchased.

 

16.         **Aquent/Legal Matters**

 

On April 29, 2003, the Companyfiled an action in the United States District Court for the District of NewJersey against Aquent LLC, seeking (i) to enjoin Aquent from disseminatingfalse and misleading proxy materials and press releases in support of its twonominees for director positions in connection with the Company’s May 14, 2003Annual Meeting; (ii) to invalidate any proxies secured by Aquent through theuse of unlawful proxy solicitation materials; and (iii) to require Aquent todisseminate corrective disclosure that not only amended the false andmisleading proxy materials but also advised CHC shareholders how Aquent’ssolicitations had violated the securities laws.

 

On May 27, 2003, the Companybrought an action in the Supreme Court of the State of New York, New YorkCounty, seeking an order invalidating votes for directors Karl Meyer and RobertTrevisani cast at the Annual Meeting by stockholders of record who sold theirshares between the record date and the date of the Annual Meeting.

 

Each of the legal proceedingsdescribed above were settled and dismissed as a result of a settlementagreement between the Company and Aquent LLC entered into on December 12,2003.  As part of the settlement, the Company agreed to modify its June30, 2003 by-law agreement regarding special meeting procedures by, among otherthings, reducing from 75 to 50 minimum number of days between the time a 10percent or more shareholder requests a special meeting of shareholders and thedate of that meeting.  In addition, Aquent entered into a standstill agreementpursuant to which, for a period of one year, it agreed not to request a specialmeeting of Computer Horizons’ shareholders for any purpose, or nominate anyoneto serve as a member of CHC’s Board of Directors, or engage in any proxysolicitation of Computer Horizons’ shareholders.

 

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

 

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17.         **Subsequent Events**

 

On April 1, 2004, the Company’ssubsidiary, RGII Technologies, Inc., closed on its acquisition of AutomatedInformation Management Inc. (AIM), a federal government IT Services companywith 2003 revenues of approximately $18.5 million.  The all-cashtransaction totaled approximately $15.7 million, including a working capitaladjustment.  The acquisition of AIM is directly linked to the Company’sstrategy of expanding its presence in the federal government IT market andpursuing bolt on expansions for its RGII subsidiary.

 

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Item 2

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Forthe Periods Ended March 31, 2004 and March 31, 2003

 

The following detaileddiscussion and analysis of the Company’s financial condition and results ofoperations should be read in conjunction with the December 31, 2003 financialstatements and related notes included in the Company’s Form 10K and theFinancial Statements and notes included elsewhere in this Form 10Q.

 

**Overview**

 

Computer Horizons Corp.,(“CHC” or the “Company”), is a strategic solutions and human capital managementcompany with more than thirty-six years of experience, specifically ininformation technology.  The Company’s clients are primarily Global 2000companies, serviced by over 20 offices in the United States, Canada, and India.

 

The Company recorded revenuesfor the quarter ending March 31, 2004 of $59.7 million, a one percent declinefrom the comparable period in 2003.  This decline is comprised ofsignificant revenue growth in our Solutions business due to the July 2003acquisition of RGII, partially offset by revenue reductions in our commercial(non-federal) solutions business.  Also contributing to the one percentrevenue decline is reduced IT Services (staff augmentation) revenue due to acontinued decrease in demand for temporary technology workers and the trend ofcompanies to outsource technology jobs offshore.

 

The loss from operationsin the first quarter of 2004 totaled $894,000, including $208,000 ofamortization expense related to intangibles.  This compares to a loss fromoperations of approximately $1.7 million for the first quarter of 2003, whichincluded restructuring charges of $249,000.

 

Management continues tofocus on maintaining a strong balance sheet, with approximately $50 million incash at March 31, 2004, along with $84.8 million in working capital and no debtoutstanding.

 

On April 1, 2004, theCompany’s subsidiary, RGII Technologies, Inc., acquired Automated InformationManagement, Inc. (AIM), a federal government IT Services company forapproximately $15.7 million in cash.  The acquisition of AIM is directlylinked to our strategy of expanding our presence in the federal government ITmarket and pursuing bolt on expansions to our RGII subsidiary.

 

Although the firstquarter of 2004 showed an approximate breakeven earnings per share, the levelof business activity in the IT market remains uncertain.  This uncertaintysignificantly reduced revenues (specifically revenues in IT Services) from thecomparable quarter in 2003.  The Company cannot predict when thisuncertainty will subside or when the level of business activity in the ITmarket will improve.

 

**Forward-lookingstatements**

 

The following section should beread in conjunction with our consolidated financial statements and relatednotes appearing in this Form 10Q/A. Statements included in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations andelsewhere in this document that do not relate to present or historicalconditions are “forward-looking statements” within the meaning of that term inSection 27A of the Securities Act of 1933, as amended, and in Section 21F ofthe Securities Exchange Act of 1934, as amended.  Additional oral orwritten forward-looking statements may be made by the Company from time totime, and such statements may be included in documents that are filed with theSecurities and Exchange Commission (SEC).  Such forward-looking statementsinvolve risks and uncertainties that could cause results or outcomes to differmaterially from those expressed in such forward-looking statements. Forward-looking statements may include, without limitation, statements relatingto the Company’s plans, strategies,

 

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objectives, expectations andintentions and are intended to be made pursuant to the safe harbor provisionsof the Private Securities Litigation Reform Act of 1995.  Words such as “believes,”“forecasts,” “intends,” “possible,” “expects,” estimates,” “anticipates,” or “plans”and similar 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 andAnalysis of Financial Condition and Results of Operations set forth in thisItem 2 has been restated to reflect certain adjustments to the Company’sconsolidated financial statements for 2003 as previously reported in theCompany’s Form 10-Q for the quarters June 30, 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 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 investigationof this accounting 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 accumulatedcomprehensive loss).  The cumulativebalance sheet adjustments for the affected dates are as follows (in thousands):

 
| **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                         |       |
|                           |            |                                                 |            |                                                         |            |                            |            |  |  |

 

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*Represents cumulative effectof all previous quarterly periods deemed not material on an individual quarterbasis.

 

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.In 2004, the Company made a balance sheet correction resulting in an increasein accounts receivable and shareholder’s equity (specifically accumulatedcomprehensive income/loss) of approximately $65,000 and $42,000 in the quartersending March 31, 2004 and June 30, 2004 respectively.

 

Additional detail with respectto the impact of the restatement on the Company’s results of operations isreported in note 2 of the Notes to the Consolidated Financial Statements includedin Part I—Item 1 of this Amendment No. 1 of Form 10Q/A.

 

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## **Revenue Generating Activities**

 

The majority of the Company’srevenues are derived from professional services rendered in the informationtechnology sector.

 

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

 

The IT Services businessconsists of providing technology consultants to large organizations on atemporary hire basis. The consultant work is supervised and managed by thecustomer. For the quarter ended March 31,2004, this segment representedapproximately 50% of total revenues. The IT Services business tends to be alower risk, lower gross margin business with very competitive pricing.

 

The Solutions Group, tends tobe a higher margin, higher risk business, due to the fact that the Company isresponsible for project deliverables and other conditions contained instatements of work and/or contracts with customers. Virtually all projectsperformed by the Solutions Group are IT related and consist of practices suchas application development, outsourcing arrangements, government services,Health Insurance Portability and Accountability Act, or HIPAA, services,technology training and managed services.   For the quarter endedMarch 31, 2004, the Solutions Group (excluding Chimes) accounted for 41% ofconsolidated revenues.

 

The Company’s customerrelationships are memorialized in a master agreement, which address the termsand conditions which define the client engagement.  Depending on theservice to be performed for the client, either a task order (in the case of a Staffingengagement) or a Statement of Work (“SOW”) (in the case of a Solutionsengagement) is generated. The SOW is signed by both the Company and thecustomer.  In general, no Solutions work is done unless there is a SOWbecause the SOW provides the technical details of the work to be done. The SOW, although falling under the corresponding master agreement, is astand-alone binding contractual document, typically outlining the projectobjectives, describing the personnel who will work on the project, describingphases of the project, the timeframes for work performance, and the rate ofcompensation, on a time and materials basis.  In the event that theparameters of the project expand or otherwise change, a Project Change Requestis implemented, to memorialize whatever change has occurred to thedeliverables, personnel and or time/materials.  The master agreements, inconjunction with the SOW’s, are written to define, with as much detail aspossible, the client relationship and all aspects of the work to be performedfor the client.  With regard to revenues expected in future periods, eachSOW has a defined term or sets forth the anticipated length of a project. Where a client engagement is on-going, like certain “Help Desk” type services,the master agreements would still have a term length, but would recite that theagreement was renewable.  Generally Solutions engagements are for a yearor less.  Staffing engagements can and do last for more than a year, withvariations in the number of consultants being provided at any given time. Staffing engagements are generally cancelable by clients with a two to fourweek notice period.

 

Chimes, Inc. is a human capitalmanagement solution that, through the use of proprietary software andprocesses, manages the temporary workforce of large organizations. During thequarter ended March 31, 2004, Chimes accounted for approximately 9.0% of totalrevenues.

 

## **Critical Accounting Policies**

## ** **

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

 

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Revenue Recognition 

 

Approximately 94% and 93% ofconsolidated revenue in the quarter ended March 31, 2004 and March 31, 2003,respectively, was derived from time-and-material contracts.

 

For the IT Services divisionrevenues are recognized as services are performed under time-and materialcontracts.  Under a typical time and materials billing arrangement, ourcustomers are billed on a regularly scheduled basis, such as biweekly ormonthly.  At the end of each accounting period, revenue is estimated andaccrued for services performed since the last billing cycle.  Theseunbilled amounts are billed the following month.

 

The Solutions Group recognizesrevenue either on a time and material basis or on a fixed fee basis, however,principally on a time and material basis. For fixed-fee contracts, revenue isrecognized 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.

 

Unbilled accounts receivable,in the IT Services and Solutions Group, represent amounts recognized as revenuebased on services performed in advance of customer billings principally on atime-and- material basis.  At the end of each accounting period, revenueis accrued for services performed since the last billing cycle.  Theseunbilled amounts are billed the following month.  Costs and estimatedearnings in excess of billings on fixed fee contracts arise when percentage ofcompletion accounting is used.  Such amounts are billed at specific datesor at contract completion.

 

The Company’s Chimes subsidiaryrecognizes revenue on a transaction fee basis.  The Chimes serviceoffering aggregates the suppliers of temporary workers to the customer andrenders one invoice to the customer.  Upon payment from the customer,Chimes deducts a transaction fee and remits the balance of the client paymentto the applicable vendor.  Chimes recognizes only their fee for theservice, not the aggregate billing to the customer.  The gross amount ofthe customer invoicing is not considered revenue or receivable to Chimesbecause there is no earnings process for the gross amount and by contractterms, Chimes is not obligated to pay the vendor until paid by the customer.

 

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*Evaluation ofBad Debt Reserve*

 

The Company determines itsallowance by considering a number of factors, including the length of timetrade accounts receivable are past due, the Company’s previous loss history,the customer’s current ability to pay its obligation to the Company and thecondition of the general economy and the industry as a whole.  The Companywrites off accounts receivable when they become uncollectible, and paymentssubsequently received on such receivables are credited to the allowance fordoubtful accounts.

 

*Goodwill*

 

During the quarter ended June30, 2002, the Company completed the initial valuation of the carrying value ofgoodwill existing at January 1, 2002.  As a result, a non-cash charge of$29.9 million, or $(0.96) per share was retroactively recorded as thecumulative effect of an accounting change in the six months ended June 30, 2002statement of operations.  For the years ended December 31, 2003 and 2002,the Company completed valuations of the carrying value of the remaininggoodwill and it was determined that no impairment had occurred at either date.

 

As of December 31, 2003 and2002, the fair value of each of the reporting units was calculated using the followingapproaches (i) market approach and (ii) income approach.  Under the marketapproach, value is estimated by comparing the performance fundamentals relatingto similar public companies’ stock prices.  Multiples are then developedof the value of the publicly traded stock to various measures and are thenapplied to each reporting unit to estimate the value of its equity.  Underthe income approach, value was determined using the present value of theprojected future cash flows to be generated by the reporting unit.

 

The fair value conclusion ofthe reporting units reflects an appropriately weighted value of the marketmultiple approach and the income approach discussed above.  An assetapproach was not used because the asset approach is most relevant forliquidation approaches, investment company valuations and asset rich companyvaluations (i.e. real estate entities) and was not deemed relevant formanufacturing and service company going-concern valuations.  When eitherthe income approach or the market approach was used, each indicated value ofthe Solutions entity’s equity exceeded the carrying value of the Solutionsentity by at least $12 million and $15 million as of December 31, 2003 and2002, respectively.  Since each of the two approaches yielded values inexcess of carrying value, any weighting of the two approaches or eitherapproach used alone results in the same conclusion, that the goodwill was notimpaired.

 

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*Valuation ofthe Deferred Tax Asset*

 

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

 

**RESULTS OFOPERATIONS**

 

*Revenues*.  Revenues decreased to$59.7 million in the first quarter of 2004 from $60.3 million in the firstquarter of 2003, a decrease of $0.6 million or 1.0%.

 

Solutions Group revenuesincreased to $24.5 million in the first quarter of 2004 from $19.6 million inthe first quarter of 2003, an increase of $4.9 million or 25.2%. Theyear-over-year increase in Solutions Group revenues for the first quarter of2004 is attributable to the Company’s federal government practice, (an increaseof $9.6 million from the quarter ending March 31, 2003), partially offset byseveral domestic solutions projects ending, along with revenue declinesattributable to projects with the City of New York, totaling approximately $4.7million in comparison to the first quarter of 2003.

 

IT Services revenues decreasedto $29.8 million in the first quarter of 2004 from $36.2 million in the firstquarter of 2003, a decrease of $6.4 million or 17.6%.  For the firstquarter of 2004, IT Services consultant average headcount decreased byapproximately 16%, accounting for approximately $5.9 million of the revenuedecrease.  The balance of the decrease in revenue (approximately $0.5million) is attributable to a reduction in average bill rates.  Thedecrease in IT Services revenue for the first quarter 2004, is the result ofcontinued decreases in the demand for temporary technology workers, the trendof companies to outsource technology jobs offshore and the impact of pricingdecreases by customers.

 

Chimes revenue increased to$5.4 million in the first quarter of 2004 from $4.5 million in the firstquarter of 2003, an increase of $900,000, or 19.8%.   This increasein Chimes revenue is due to an increase of approximately $ 0.6 million inrevenue from new customers and $0.3 million from existing customers in thissegment.

 

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*Direct Costs*.  Direct costs decreasedto $40.8 million in the first quarter of 2004  from $42.8 million in thefirst quarter of 2003.  Consolidated gross margin, revenues less directcosts, increased to 31.7% in the first quarter of 2004 from 29.0% in the sameperiod of 2003. In the Company’s Solutions Group, gross profit totaled $7.8million, or 31.8%,compared to $6.2 million, or 31.7%, for the first quarter of2003.  This increase is primarily attributable to the RGII acquisition. ITServices gross margins for the first quarter of 2004 were 20.3%, whichapproximates the gross margin for the comparable period of 2003.  Chimesgross margins approximated 94.5% in the first quarter of 2004, compared to91.8% in 2003, due to improved leveraging of direct costs.

 

The Company’s consolidatedgross margin improvement is primarily attributable to the change in the revenuemix among the Company’s business segments.  Chimes and the Solutions Groupare higher gross margin businesses than the Company’s IT Servicessegment.  For the quarter ended March 31, 2004, Chimes and Solutions Grouprevenue totaled approximately 50% of consolidated revenue, compared toapproximately 40% of consolidated revenue for the comparable period in 2003.

 

*Costs andExpenses*. Selling, general and administrative expenses increased to $19.6 million in thefirst quarter of 2004 from $18.9 million in the first quarter of 2003, anincrease of $700,000 or 3.7%.  As a percentage of revenue, the Company’sSG&A expenses increased to 32.8% in the first quarter of 2004 from 31.4% inthe comparable period of 2003.   This percentage increase in expensesis primarily attributable to the acquisition of RGII in July 2003.

 

*Loss fromOperations*. The Company’s loss from operations totaled $894,000 in the first quarter of2004, including amortization expense totaling $208,000.  This representsan improvement from the $1.7 million loss in the first quarter of 2003 whichincludes restructuring charges of $249,000.

 

The composition of theoperating profit for the quarter ending March 31, 2004, excluding amortizationexpense, of $178,000 included a loss of $847,000 in IT Services, income of $586,000in the Solutions Group and a loss of $425,000 in Chimes.

 

*OtherIncome/(Expense)*. Other income totaled $83,000 in the first quarter of 2004 compared to expensesof $105,000 in the same period of 2003.  This decrease in other income wasprimarily the result of the loss on sale of assets in 2003 of $273,000.

 

*Provision forIncome Taxes*. The effective tax rate for Federal, state and local income taxes was 31.3% forthe first quarter of 2004 and 30% for the first quarter of 2003.

 

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*Net Loss*.  Net loss for the firstquarter of 2004 was $566,000 or $(0.02) loss per basic and diluted share, comparedto net loss of $1.3 million, or $0.04 loss per diluted share for the firstquarter of 2003.  The effect of restructuring charges and the loss on saleof assets amounted to $0.01 loss per share, net of taxes, in the first quarterof 2003.

 

**Liquidity andCapital Resources**

 

Computer Horizons hashistorically financed its operations through cash generated from operations,borrowings against bank lines of credit and the public sale of its commonstock.  At March 31, 2004, the Company had approximately $84.8 million inworking capital, of which $50 million was cash and cash equivalents.  AtMarch 31, 2004, the Company had a current ratio position of 4.6 to 1.

 

Net cash used by operatingactivities in the first three months of 2004 was $2.6 million, primarily attributableto an increase of accounts receivable of $3.0 million, a decrease in accruedexpenses, partially offset by depreciation expense (non-cash), totaling $1.3million, included in net loss.

 

Total accounts receivableincreased $2.6 million to $50.9 million at March 31, 2004, from $48.3 millionat December 31, 2003. Accounts receivable days sales outstanding (“DSO”)increased to 77 days at March 31, 2004, compared to 70 days at December 31,2003. This increase in DSO’s is primarily attributable to the seasonal slowdownof payments from clients which has historically occurred in the first quarterof each year. DSO’s are expected to decrease during the remainder of 2004. Allclient receivable collectibility and billing issues identified by management havebeen adequately reserved. For the period ending March 31, 2004, there were nosignificant changes in credit terms, credit policies or collection efforts.

 

The decrease in accruedexpenses from December 31, 2003 of approximately $2.6 million is attributableto payments made in the first quarter of 2004 against year-end accruals,including the RGII contingent payment of $631,000 and other legal and auditfees.

 

Net cash used in investingactivities in the first three months of 2004 was $0.5 million, consistingprimarily of capital expenditures.

 

Net cash provided in financingactivities in the first three months of 2004 was $0.4 million primarilyconsisting of shares issued pursuant to the employee stock option and stockpurchase plans.

 

The Company has a $40 millionline of credit facility with availability based primarily on eligible customerreceivables.  The interest rate is LIBOR plus 2.75% based on unpaidprincipal.  The borrowing base less outstanding loans must equal or exceed$17.5 million.  As of March 31, 2004, the Company had no outstanding loanbalance against the facility.  Based on the Company’s eligible customerreceivables and cash balances, $18.5 million was available for borrowing as ofMarch 31, 2004.  The fee for the unused portion of the line of credit is0.375% per annum charged to the Company monthly. This charge was approximately$26,000 and $42,000 for the three-month periods ended March, 2004 and 2003,respectively.  This line of credit includes convenants relating to themaintenance of cash balances and providing for limitations on recurringobligations and spending limits on capital expenditures.  One convenantpertains to minimum cash collections over a three month period.  TheCompany did not satisfy this convenant for the quarter ending March 31,2004.  A waiver was received from the lending institution for the quarterended March 31, 2004, along with an amendment to the loan agreement loweringthe three month average minimum cash collections covenant to $ 10million.  This facility is scheduled to expire in July 2004 and theCompany to enter into a new asset-based lending facility prior to expiration.

 

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As a result of the Company’sacquisition of RGII, the seller of RGII may be entitled to contingent paymentsbased on RGII’s performance against profitability objectives over the nextthree years.  The contingent payments are evidenced by a contingent notewith a face value of $10 million that is payable over three years, only if certainfinancial performance objectives are met.  These financial performanceobjectives are based on earnings before interest and taxes (“EBIT”) targetstotaling $19.8 million over a three-year period.  There are no minimum ormaximum payment obligations under the terms of the contingent note. Thecontingent payment will be reduced on a dollar for dollar basis for financialperformance below EBIT targets and increased by 29 cents ($0.29) for eachdollar exceeding EBIT targets.  The payments, if the applicable EBITtargets 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 be reduced or increased based on actualEBIT performance. On February 24, 2004 a payment was made for the firstsix-month installment of approximately $631,000, pertaining to this contingentnote.

 

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

 

On April 1, 2004, the Company’ssubsidiary, RGII Technologies Inc. closed on its acquisition of AutomatedInformation Management Inc (AIM), a federal government IT Services company with2003 revenues of approximately $18.5 million.  The all-cash transactiontotaled approximately $15.7 million, including a working capital adjustment.

 

The Company believes that itscash and cash equivalents, available borrowings and internally generated fundswill be sufficient to meet its working capital needs through the next year.

 

**ContractualObligations and Commercial Commitments**

 

The Company does not utilizeoff balance sheet financing other than operating lease arrangements for officepremises and related equipment.  Leases are short term in nature andnon-capital.  The following table summarizes all commitments undercontractual obligations as of March 31, 2004:

 
| ** **                   | ** ** | **Total**  | ** ** | **Obligation Due** | ** ** | ** **         | ** ** | ** **    | ** ** |
|------------------------------|------------|------------|------------|--------------------|------------|--------------------|------------|---------------|------------|
| ** **                   | ** ** | **Amount** | ** ** | **1 Year**         | ** ** | **2-3 Years**      | ** ** | **4-5 Years** | ** ** | **Over 5 Years** | ** ** |
| ** **                   | ** ** | ** ** | ** ** | ** **         | ** ** | **(in thousands)** | ** ** | ** **    | ** ** | ** ** | ** ** |
|                         |       |       |       |               |       |               |       |          |       |   |   |
| Operating leases             |       | $          | 10,601     |               | $          | 3,611              |       | $             | 5,909      |   | $ | 1,081 | ** ** | **$** | **—** | ** ** |
| RGII Contingent Note         |       | 9,369      |       |               |       | 9,369              |       |          |       |   |   |
| Deferred Compensation        |       | 2,237      |       |               |       |               |       |          |       | 2,237 |   |
| Supplemental Retirement Plan |       | 12,318     |       |               |       |               |       |          |       | 12,318 |   |
| Other                        |       | 885        |       | 885                |       | —             |       | —        |       |   |   |
| Total Cash Obligations       |       | $          | 35,410     |               | $          | 4,496              |       | $             | 15,278     |   | $ | 1,081 |   | $ | 14,555 |   |

 

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**RecentAccounting Pronouncements**

 

In January 2003, the FASBissued Financial Interpretation No. 46, “Consolidation of Variable InterestEntities” (“FIN 46”), which addresses consolidation by business enterprises ofvariable interest entities (VIEs).  The accounting provisions anddisclosure requirements of FIN 46 are effective immediately for VIEs createdafter January 31, 2003, and are effective for the Company’s fiscal periodending March 31, 2004, for VIEs created prior to February 1, 2003.  InDecember 2003, the FASB published a revision to FIN 46 (“FIN 46R”) to clarifysome of the provisions of the interpretation and to defer the effective date ofimplementation for certain entities.  Under the guidance of FIN 46R,public companies that have interests in VIE’s that are commonly referred to asspecial purpose entities are required to apply the provisions of FIN 46R forperiods ending after December 15, 2003.  A public company that does nothave any interests in special purpose entities but does have a variableinterest in a VIE created before February 1, 2003, must apply the provisions ofFIN 46R by the end of the first interim or annual reporting period ending afterMarch 14, 2004.  During the quarter ended March 31, 2004 the Companyadopted the provisions of FIN 46R.  Adoption of FIN46R did not have amaterial effect on the Company’s financial statements.

 

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Item 4.             Controland Procedures

 

Disclosure Controls andProcedures

 

 

The Company maintains controls and procedures designedto ensure that information required to be disclosed by us in the reports filedunder the Securities Exchange Act, is recorded, processed, summarized andreported within the time periods specified by the SEC. Disclosure controls arealso designed with the objective of ensuring that this information isaccumulated and communicated to our management, including our chief executiveofficer and chief financial officer, as appropriate to allow timely decisionsregarding 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.

 

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.

 

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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 accumulatedcomprehensive loss).

 

As a result of thediscovery of this error, on October 26, 2004, management and the AuditCommittee were informed by the Company’s independent accountants of certainmatters involving internal controls that the Company’s auditors considermaterial weaknesses.  The first materialweakness principally focused on the Company’s quarterly consolidation process,including intercompany transactions relating to the Company’s Canadiansubsidiary, which were incorrectly recorded over the five fiscal quartersending June 30, 2004.  This resulted inan understatement of consolidated consultant costs(direct cost) and an underaccrual of consolidated accrued payroll in each period and for the year endedDecember 31, 2003.  The second materialweakness principally focused on the fact that certain accounts were notproperly reconciled, resulting in adjustments to accounts including accruedexpenses and shareholders equity (not affecting operating results) to berecorded on the consolidated balance sheet.

 

During management’sevaluation of internal controls related to the previously noted accountingerror, certain deficiencies were identified, including a complicated design of

 

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intercompany accounts which increased the potentialfor error, staff turnover in the accounting department, the incorrect recordingof intercompany transactions by an accounting clerk and the failure to detectthese incorrect transactions during management’s review and approval process.

 

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

 

•                  Management will implement animproved intercompany transaction process, including foreign currency translationand financial reporting/consolidation procedures, which will be documented,with all key controls identified.

•                  All intercompany eliminationentries will require two levels of approval (Accounting Manager andController), as opposed to the previous one level of approval.

•                  Monthly, the CorporateController will review and approve all intercompany elimination entries toensure amounts are properly recorded.

•                  Canadian intercompany accounts,which currently record all receivable and payable activity in the same balancesheet account, will be divided into two intercompany accounts – one to recordonly intercompany invoicing transactions, one to record other (funding)transactions.  This will allow bettertracking of intercompany transactions and more easily highlight incorrectentries, if any.

•                  A more detailed review of grossmargins by line of business will be completed by the Controller (and reviewedby the CFO) on a quarterly basis.

•                  Additional training (internaland external) will be provided to all General Accounting personnel with anemphasis on Consolidation accounting.

•                  Internal Audit will conduct areview of intercompany transactions and the consolidation process during thefourth quarter of 2004 to ensure that newly designed controls are functioningproperly.

 

Management and the AuditCommittee intend to closely monitor the implementation of the remediationactions noted above and are prepared to take additional measures wherenecessary to strengthen internal controls and procedures to meet the internalcontrol reporting requirements of Section 404 of the Sarbanes-Oxley Act and therules adopted thereunder.  Other than theforegoing initiatives, since the date of management’s evaluation, there havebeen no material changes in our disclosure controls and procedures, includingour internal controls over financial reporting, which have materially affected,or are reasonably likely to materially affect, our disclosure controls andprocedures, including our internal controls over financial reporting.

 

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PART II   OtherInformation

 

Item 6.             Exhibitsand Reports onForm 8-K 

 
|   | a)     |                                                                                                                          | Exhibits |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|----------|
|   |   |                                                                                                                          |
|   | 31.1   | CEO Certification required by  Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.                            |
|   |   |                                                                                                                          |
|   | 31.2   | CFO Certification required by  Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.                            |
|   |   |                                                                                                                          |
|   | 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. |
|   |   |                                                                                                                          |
|   | 32.2   | CFO Certification pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

b)      *Report on Form 8-K*

 

A report on Form 8-K was filed on March 24, 2004 reportingthat the Internal Revenue Service and the Joint Committee of Taxation havecompleted their examination of the Company’s 2001 federal income tax return andfederal refund claims, and have accepted them without change. Accordingly, thereserves, consisting primarily of the tax benefit reserve of $19.6 million, areno longer required.  The release of these reserves, shown as currentliabilities at December 31, 2003, resulted in an increase in working capitalfor the first quarter of 2004, along with additional paid-in-capital.

 

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Signatures

 

Pursuant to the requirements ofthe Securities and Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|   |             |   | COMPUTER HORIZONS CORP.                                                                                                        |   |
|--------|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------|--------|
|   |             |   |                    (Registrant) |
|   |             |   |                                                                                                                           |
|   |             |   |                                                                                                                           |
| DATE:  | November 9, 2004 |   | /s/  William J. Murphy                                                                                                    |   |
|   |             |   | William J. Murphy, President,  CEO                                                                                             |
|   |             |   | (Principal Executive Officer)  and Director                                                                                    |
|   |             |   |                                                                                                                           |
|   |             |   |                                                                                                                           |
| DATE:  | November 9, 2004 |   | /s/ Michael J. Shea                                                                                                            |   |
|   |             |   | Michael J. Shea,                                                                                                               |
|   |             |   | Vice President and CFO                                                                                                         |
|   |             |   | (Principal Financial Officer)                                                                                                  |
|   |             |   |                                                                                                                           |
|   |             |   |                                                                                                                           |
| DATE:  | November 9, 2004 |   | /s/ John E. Ferdinandi                                                                                          |   |
|   |             |   | John E. Ferdinandi,                                                                                                            |
|   |             |   | Corporate Controller                                                                                                           |
|   |             |   | (Principal Accounting  Officer)                                                                                                |
|        |                  |        |                                                                                                                                |        |  |  |  |

 

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