**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 
| **ý****Quarterly Report  Under Section 13 or 15(d)  of the Securities Exchange Act of 1934**           |
|------------------------------------------------------------------------------------------------------------------|
| **for the quarterly period ended  September 30, 2003**                                                      |
| **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 by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding twelve months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.

 

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

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

 

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

 

As of November 11, 2003the issuer had 30,528,278 shares of common stock outstanding.

 

 

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**COMPUTER HORIZONSCORP. AND SUBSIDIARIES**

 

Index

 
| Part  I   Financial Information | Page No.          |
|------------------------------------------------|-------------------|
|                                           |              |   |
|                                           | Item 1            | Consolidated Balance Sheets September 30, 2003 (unaudited) and  December 31, 2002 | 3 |
|                                           |              |   |
|                                           |              | Consolidated Statements of Operations Three  and Nine Months Ended September 30, 2003 and September 30, 2002  (unaudited) | 4 |
|                                           |              |   |
|                                           |              | Consolidated Statements of Cash Flows Nine  Months Ended September 30, 2003 and September 30, 2002 (unaudited) | 5 |
|                                           |              |   |
|                                           |              | Notes to Consolidated Financial Statements | 6 |
|                                           |              |   |
|                                           | Item 2            | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 25 |
|                                           |              |   |
|                                           | Item 4            | Controls and Procedures | 31 |
|                                           |              |   |
| Part II                                        | Other Information | 32 |
|                                           |              |   |
|                                           | Item 1            | Legal Proceedings | 32 |
|                                           |              |   |
|                                           | Item 6            | Exhibits and Reports on Form 8-K | 33 |
|                                           |              |   |
|                                           |              | Signatures | 34 |

 

2

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COMPUTER HORIZONS CORP. ANDSUBSIDIARIES

CONSOLIDATEDBALANCE SHEETS

(dollars in thousands, exceptper share data)

 
|                                                                                                                                                   |   | **September 30,  2003** |    | **December 31,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
|                                                                                                                                                   |   | **(unaudited)**              |    |                        |   |
| ASSETS                                                                                                                                                 |   |                         |    |                        |   |
| CURRENT ASSETS:                                                                                                                                        |   |                         |    |                        |   |
| Cash and cash equivalents                                                                                                                              |   | $                            | 50,748  |                        | $      | 59,769 |   |
| Accounts receivable, net of  allowance for doubtful accounts of $8,207 and $7,696 at September 30,  2003 and December 31, 2002, respectively |   | 52,506                       |    | 56,616                      |   |
| Deferred income taxes                                                                                                                                  |   | 5,167                        |    | 4,557                       |   |
| Refundable income taxes                                                                                                                                |   | —                       |    | 19,051                      |   |
| Other                                                                                                                                                  |   | 5,557                        |    | 7,219                       |   |
| TOTAL CURRENT ASSETS                                                                                                                                   |   | 113,978                      |    | 147,212                     |   |
|                                                                                                                                                   |   |                         |    |                        |   |
| PROPERTY AND EQUIPMENT                                                                                                                                 |   | 41,476                       |    | 37,643                      |   |
| Less accumulated depreciation                                                                                                                          |   | (31,357                      | )       | (26,626                     | )      |
|                                                                                                                                                   |   | 10,119                       |    | 11,017                      |   |
|                                                                                                                                                   |   |                         |    |                        |   |
| OTHER ASSETS - NET:                                                                                                                                    |   |                         |    |                        |   |
| Goodwill  (Note 3)                                                                                                                                |   | 33,551                       |    | 19,203                      |   |
| Intangibles (Note 3)                                                                                                                                   |   | 2,966                        |    | —                      |   |
| Deferred income taxes                                                                                                                                  |   | 12,361                       |    | 8,020                       |   |
| Other                                                                                                                                                  |   | 11,267                       |    | 8,279                       |   |
| TOTAL OTHER ASSETS                                                                                                                                     |   | 60,145                       |    | 35,502                      |   |
|                                                                                                                                                   |   |                         |    |                        |   |
| TOTAL ASSETS                                                                                                                                           |   | $                            | 184,242 |                        | $      | 193,731 |   |
|                                                                                                                                                   |   |                         |    |                        |   |
| LIABILITIES AND SHAREHOLDERS’  EQUITY                                                                                                             |   |                         |    |                        |   |
| CURRENT LIABILITIES:                                                                                                                                   |   |                         |    |                        |   |
| Accounts payable                                                                                                                                       |   | $                            | 10,836  |                        | $      | 10,830 |   |
| Accrued payroll, payroll taxes  and benefits                                                                                                           |   | 3,636                        |    | 4,529                       |   |
| Restructuring reserve                                                                                                                                  |   | 3,028                        |    | 3,266                       |   |
| Income taxes payable                                                                                                                                   |   | 1,144                        |    | —                      |   |
| Tax benefit reserve                                                                                                                                    |   | 19,600                       |    | 19,600                      |   |
| Other accrued expenses                                                                                                                                 |   | 5,932                        |    | 3,408                       |   |
| TOTAL CURRENT LIABILITIES                                                                                                                              |   | 44,176                       |    | 41,633                      |   |
|                                                                                                                                                   |   |                         |    |                        |   |
| OTHER LIABILITIES                                                                                                                                      |   | 6,488                        |    | 6,243                       |   |
|                                                                                                                                                   |   |                         |    |                        |   |
| 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 September 30,  2003 and December 31, 2002 respectively   |   | 3,315                        |    | 3,315                       |   |
| Additional paid-in capital                                                                                                                             |   | 133,162                      |    | 133,518                     |   |
| Accumulated comprehensive loss                                                                                                                         |   | (3,324                       | )       | (4,306                      | )      |
| Retained earnings                                                                                                                                      |   | 14,996                       |    | 28,255                      |   |
|                                                                                                                                                   |   | 148,149                      |    | 160,782                     |   |
| Less shares held in treasury,  at cost; 2,586,344 shares and 2,660,667 shares at September 30, 2003 and  December 31, 2002, respectively     |   | (14,571                      | )       | (14,927                     | )      |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                        |   | 133,578                      |    | 145,855                     |   |
|                                                                                                                                                   |   |                         |    |                        |   |
| TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                       |   | $                            | 184,242 |                        | $      | 193,731 |   |

 

3

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COMPUTER HORIZONS CORP. ANDSUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Unaudited)

(dollars in thousands, exceptper share data)

 
|                                                                                                 |   | **THREE MONTHS ENDED**      |   | **NINE MONTHS ENDED**       |   |
|------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                                                                                                 |   | **September 30, 2003** |   | **September 30, 2002** |   | **September 30, 2003** |   | **September 30, 2002** |   |
|                                                                                                 |   |                        |   | **%****of  revenue**        |   |   |   | **%****of  revenue** |   |   |   | **%****of  revenue** |   |   |   | **%****of  revenue** |   |
| REVENUES:                                                                                            |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| IT Services                                                                                          |   | $                           | 32,235 |                        | 50.0   | % | $ | 49,127 |   | 66.8 | % | $ | 103,738 |   | 56.5 | % | $ | 157,800 |   | 68.6 | % |
| Solutions Group                                                                                      |   | 27,016                      |   | 41.9                        | %      | 20,151 |   | 27.4 | % | 65,308 |   | 35.6 | % | 60,294 |   | 26.2 | % |
| Chimes                                                                                               |   | 5,208                       |   | 8.1                         | %      | 4,296 |   | 5.8 | % | 14,499 |   | 7.9 | % | 12,017 |   | 5.2 | % |
|                                                                                                 |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                 |   | 64,459                      |   | 100.0                       | %      | 73,574 |   | 100.0 | % | 183,545 |   | 100.0 | % | 230,111 |   | 100.0 | % |
|                                                                                                 |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| COSTS AND EXPENSES:                                                                                  |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Direct costs                                                                                         |   | 44,406                      |   | 68.9                        | %      | 52,865 |   | 71.9 | % | 128,690 |   | 70.1 | % | 167,627 |   | 72.8 | % |
| Selling, general and administrative                                                                  |   | 20,494                      |   | 31.8                        | %      | 21,687 |   | 29.5 | % | 56,273 |   | 30.7 | % | 69,208 |   | 30.1 | % |
| Bad Debt Expense                                                                                     |   | 389                         |   | 0.6                         | %      | 660 |   | 0.9 | % | 4,252 |   | 2.3 | % | 2,050 |   | 0.9 | % |
| Restructuring charge (Note 6)                                                                        |   | 787                         |   | 1.2                         | %      | — |   | 0.0 | % | 2,985 |   | 1.6 | % | — |   | 0.0 | % |
| Special charges  (Note 13)                                                                      |   | 800                         |   | 1.2                         | %      | — |   | 0.0 | % | 8,778 |   | 4.8 | % | — |   | 0.0 | % |
| Amortization of Intangibles                                                                          |   | 526                         |   | 0.8                         | %      | — |   | 0.0 | % | 526 |   | 0.3 | % | — |   | 0.0 | % |
|                                                                                                 |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                 |   | 67,402                      |   | 104.5                       | %      | 75,212 |   | 102.3 | % | 201,504 |   | 109.8 | % | 238,885 |   | 103.8 | % |
|                                                                                                 |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| LOSS FROM OPERATIONS                                                                                 |   | (2,943                      | )      | -4.5                        | %      | (1,638 | ) | -2.3 | % | (17,959 | ) | -9.8 | % | (8,774 | ) | -3.8 | % |
|                                                                                                 |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| OTHER INCOME / (EXPENSE):                                                                            |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gain/(loss) on sale of assets                                                                        |   | —                      |   | 0.0                         | %      | — |   | 0.0 | % | (273 | ) | -0.1 | % | 3,570 |   | 1.6 | % |
| Loss on investments                                                                                  |   | —                      |   | 0.0                         | %      | — |   | 0.0 | % | — |   | 0.0 | % | (61 | ) | 0.0 | % |
| Interest income                                                                                      |   | 96                          |   | 0.1                         | %      | 252 |   | 0.3 | % | 372 |   | 0.2 | % | 725 |   | 0.3 | % |
| Interest expense                                                                                     |   | (18                         | )      | 0.0                         | %      | (5 | ) | 0.0 | % | (36 | ) | 0.0 | % | (168 | ) | -0.1 | % |
|                                                                                                 |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                 |   | 78                          |   | 0.1                         | %      | 247 |   | 0.3 | % | 63 |   | 0.1 | % | 4,066 |   | 1.8 | % |
|                                                                                                 |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| LOSS BEFORE INCOME TAXES, CUMULATIVE  EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE AND MINORITY INTEREST |   | (2,865                      | )      | -4.4                        | %      | (1,391 | ) | -2.0 | % | (17,896 | ) | -9.7 | % | (4,708 | ) | -2.0 | % |
|                                                                                                 |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| INCOME TAXES/(BENEFIT):                                                                              |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current                                                                                              |   | 298                         |   | 0.5                         | %      | — |   | 0.0 | % | 298 |   | 0.2 | % | — |   | 0.0 | % |
| Deferred                                                                                             |   | (692                        | )      | -1.1                        | %      | (473 | ) | -0.6 | % | (4,951 | ) | -2.7 | % | (1,601 | ) | -0.7 | % |
|                                                                                                 |   | (394                        | )      | -0.6                        | %      | (473 | ) | -0.6 | % | (4,653 | ) | -2.5 | % | (1,601 | ) | -0.7 | % |
|                                                                                                 |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN  ACCOUNTING PRINCIPLE AND MINORITY INTEREST               |   | (2,471                      | )      | -3.8                        | %      | (918 | ) | -1.4 | % | (13,243 | ) | -7.2 | % | (3,107 | ) | -1.3 | % |
| Minority Interest                                                                                    |   | 21                          |   | 0.0                         | %      | — |   | 0.0 | % | (16 | ) | 0.0 | % | — |   | 0.0 | % |
| Cumulative effect of change in accounting  principle (Note 3)                                        |   | —                      |   | 0.0                         | %      | — |   | 0.0 | % | — |   | 0.0 | % | (29,861 | ) | -13.0 | % |
|                                                                                                 |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NET LOSS                                                                                             |   | $                           | (2,450 | )                           | -3.8   | % | $ | (918 | ) | -1.4 | % | $ | (13,259 | ) | -7.2 | % | $ | (32,968 | ) | -14.3 | % |
|                                                                                                 |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| LOSS PER SHARE (BASIC & DILUTED):                                                                |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                 |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Before Cumulative Effect of Change in  Accounting Principle and Minority Interest                    |   | $                           | (0.08  | )                           |   |   | $ | (0.03 | ) |   |   | $ | (0.44 | ) |   |   | $ | (0.10 | ) |   |   |
|                                                                                                 |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative Effect of Change in Accounting  Principle                                                 |   | $                           | — |                        |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | (0.95 | ) |   |   |
|                                                                                                 |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Loss                                                                                             |   | $                           | (0.08  | )                           |   |   | $ | (0.03 | ) |   |   | $ | (0.44 | ) |   |   | $ | (1.05 | ) |   |   |
|                                                                                                 |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:                                                       |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic & Diluted                                                                                  |   | 30,548,000                  |   |                        |   | 31,218,000 |   |   |   | 30,403,000 |   |   |   | 31,388,000 |   |   |   |

 

4

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COMPUTER HORIZONS CORP. ANDSUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

(dollars in thousands)

 
|                                                                             |   | **Nine Months Ended**        |       |
|----------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                             |   | **September 30,  2003** |       | **September 30,  2002** |   |
| CASH FLOWS FROM OPERATING  ACTIVITIES                                            |   |                         |       |   |   |
| Net loss                                                                         |   | $                            | (13,259    | ) | $ | (32,968 | ) |
| Adjustments to reconcile net  loss to net cash provided by operating activities: |   |                         |       |   |   |
| Deferred taxes                                                                   |   | (4,951                       | )          | 3,153 |   |
| Depreciation                                                                     |   | 3,836                        |       | 3,479 |   |
| Amortization of intangibles                                                      |   | 526                          |       | — |   |
| Provision for bad debts                                                          |   | 4,252                        |       | 2,050 |   |
| Loss/(Gain) on sale of assets                                                    |   | 273                          |       | (3,570 | ) |
| Write off of goodwill                                                            |   | —                       |       | 29,861 |   |
| Change in assets and  liabilities, net of acquisitions:                          |   |                         |       |   |   |
| Accounts receivable                                                              |   | 10,816                       |       | 17,185 |   |
| Other current assets                                                             |   | 1,741                        |       | (1,822 | ) |
| Assets held for sale                                                             |   | —                       |       | (1,929 | ) |
| Other assets                                                                     |   | (2,544                       | )          | 1,393 |   |
| Refundable income taxes                                                          |   | 19,051                       |       | 8,361 |   |
| Accrued payroll, payroll taxes  and benefits                                     |   | (893                         | )          | (2,121 | ) |
| Accounts payable                                                                 |   | (1,477                       | )          | (859 | ) |
| Income taxes payable                                                             |   | 934                          |       | — |   |
| Other accrued expenses                                                           |   | (36                          | )          | (513 | ) |
| Other liabilities                                                                |   | (347                         | )          | (775 | ) |
|                                                                             |   |                         |       |   |   |
| NET CASH PROVIDED BY OPERATING  ACTIVITIES                                       |   | 17,922                       |       | 20,925 |   |
|                                                                             |   |                         |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES                                            |   |                         | ** ** |   | ** ** |
| Purchases of furniture and  equipment                                            |   | (1,683                       | )          | (2,455 | ) |
| Acquisitions, net of cash                                                        |   | (22,141                      | )          | — |   |
| Proceeds received from the  sale of assets                                       |   | 149                          |       | 15,880 |   |
| Acquisition of intangibles                                                       |   | (566                         | )          | — |   |
| Acquisition of goodwill                                                          |   | (427                         | )          | — |   |
| NET CASH PROVIDED BY / (USED  IN) INVESTING ACTIVITIES                           |   | (24,668                      | )          | 13,425 |   |
|                                                                             |   |                         |       |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES                                            |   |                         |       |   |   |
| Payment of notes payable                                                         |   | (2,636                       | )          | — |   |
| Notes payable - banks, net                                                       |   | —                       |       | (10,000 | ) |
| Stock options exercised                                                          |   | 939                          |       | 443 |   |
| Purchase of treasury shares                                                      |   | (1,230                       | )          | (4,357 | ) |
| Stock issued on employee stock  purchase plan                                    |   | 291                          |       | 948 |   |
| NET CASH USED IN FINANCING  ACTIVITIES                                           |   | (2,636                       | )          | (12,966 | ) |
|                                                                             |   |                         |       |   |   |
| Foreign currency losses                                                          |   | 361                          |       | (370 | ) |
|                                                                             |   |                         |       |   |   |
| NET INCREASE/(DECREASE) IN  CASH AND CASH EQUIVALENTS                            |   | (9,021                       | )          | 21,014 |   |
|                                                                             |   |                         |       |   |   |
| CASH AND CASH EQUIVALENTS AT  BEGINNING OF YEAR                                  |   | 59,769                       |       | 41,033 |   |
|                                                                             |   |                         |       |   |   |
| CASH AND CASH EQUIVALENTS AT  END OF PERIOD                                      |   | $                            | 50,748     |   | $ | 62,047 |   |
|                                                                             |   |                         |       |   |   |
| **Supplemental  disclosure of cash flow information:**                           |   |                         |       |   |   |
|                                                                             |   |                         |       |   |   |
| Details of acquisition:                                                          |   |                         |       |   |   |
| Tangible assets acquired  (including cash of $347)                               |   | $                            | 13,083     |   | $ | — |   |
| Liabilities assumed                                                              |   | (7,442                       | )          | — |   |
| Goodwill                                                                         |   | 13,921                       |       | — |   |
| Intangibles                                                                      |   | 2,926                        |       | — |   |
| Cash paid                                                                        |   | 22,488                       |       | — |   |
| Less: Cash received in  acquisition                                              |   | (347                         | )          | — |   |
| Net cash paid*                                                                   |   | $                            | 22,141     |   | $ | — |   |

 

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* Includes a $1.5 million notepayment

 

5

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**COMPUTER HORIZONSCORP.**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

For the Periods September 30, 2003 and September 30, 2002

(unaudited)

 

**1.****              Basisof Presentation**

 

The consolidated balance sheetas of September 30, 2003, the consolidated statements of operations forthe three and nine months ended September 30, 2003 and September 30,2002, respectively and the statement of cash flows for the nine months endedSeptember 30, 2003 and 2002 have been prepared by the Company withoutaudit.  In the opinion of management,all adjustments (which include normal recurring adjustments) necessary topresent fairly the financial position, results of operations and cash flows atSeptember 30, 2003 (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 theseconsolidated financial statements be read in conjunction with the financialstatements and notes thereto included in the Annual Report on Form 10-K for theyear ended December 31, 2002 filed by the Company.  The results of operations for the periodsended September 30, 2003 and 2002 are not necessarily indicative of theoperating results for the respective full years.

 

*Reclassifications*

 

Certain reclassifications havebeen made to the 2002 comparative financial statements to conform to the 2003presentation.

 

**2.****              RecentAccounting Pronouncements**

 

In June 2001, theFinancial Accounting Standards Board approved the issuance of SFAS No. 141,“Business Combinations” and in July 2001, SFAS 142, “Goodwill and OtherIntangible Assets.”  The new standardsrequire that all business combinations initiated after June 30, 2001 mustbe accounted for under the purchase method. In addition, all intangible assets acquired that are obtained throughcontractual or legal right, or are capable of being separately sold,transferred, licensed, rented or exchanged shall be recognized as an assetapart from goodwill.  Goodwill andintangibles with indefinite lives will no longer be subject to amortization,but will be subject to at least an annual assessment for impairment by applyinga fair value based test.  The Companyadopted SFAS 142 as of January 1, 2002 and in compliance with this newregulation has discontinued the amortization of goodwill.  For the effect of this statement on theCompany see Note 3.

 

6

----

 

In November 2002, the EITFreached a consensus on Issue No. 00-21, “ Accounting for Revenue Arrangementswith Multiple Deliverables.”  This Issueprovides guidance on when and how to separate elements of an arrangement thatmay involve the delivery or performance of multiple products, services andrights to use assets into separate units of accounting.  The guidance in the consensus is effectivefor revenue arrangements entered into in fiscal periods ending afterDecember 15, 2003.  The transitionprovision allows either prospective application or a cumulative effectadjustment upon adoption.  The effect ofthe adoption of this statement was immaterial to the Company.

 

In December 2002, theFinancial Accounting Standards Board approved the issuance of SFAS No. 148,“Accounting for Stock-Based Compensation – Translation and Disclosure.”  This statement amends FASB Statement No.123, “Accounting for Stock-Based Compensation,” to provide alternative methodsof transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation.  In addition, this Statement amended the disclosure requirementsof Statement 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the methods used on reported results.  The Company adopted the disclosureprovisions as of December 31, 2002.

 

The exercise price per share onall options granted may not be less than the fair value at the date of theoption grant.  The Company appliesAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” as modified by FIN 44, “Accounting for Certain TransactionsInvolving Stock Compensation,” in accounting for stock-based employeecompensation, whereby no compensation cost had been recognized for theplans.  The Company expects to continuefollowing the guidance under APB 25 for stock based compensation toemployees.  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:

 

7

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|               |   |                                                                                                                                                |   | **Three  Months Ended**      |   | **Nine Months  Ended**       |   |
|--------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|------------------------------|--------|
|               |   |                                                                                                                                                |   | **September 30,  2003** |   | **September 30,  2002** |   | **September 30,  2003** |   | **September 30,  2002** |   |
| Net loss           |   | As reported                                                                                                                                         |   | $                            | (2,450 | )                            | $      | (918 | ) | $ | (13,259 | ) | $ | (32,968 | ) |
|               |   | Deduct:   Total stock-based employee compensation expense determined under fair  value based method for all awards, net of related tax effects |   | (438                         | )      | (882                         | )      | (1,746 | ) | (3,693 | ) |
|               |   |                                                                                                                                                |   |                         |   |                         |   |   |   |   |   |
|               |   | Pro forma                                                                                                                                           |   | $                            | (2,888 | )                            | $      | (1,800 | ) | $ | (15,005 | ) | $ | (36,661 | ) |
| Earnings per share |   |                                                                                                                                                |   |                         |   |                         |   |   |   |   |   |
| Basic              |   | As reported                                                                                                                                         |   | $                            | (0.08  | )                            | $      | (0.03 | ) | $ | (0.44 | ) | $ | (1.05 | ) |
|               |   | Pro forma                                                                                                                                           |   | (0.09                        | )      | (0.06                        | )      | (0.49 | ) | (1.17 | ) |
|               |   |                                                                                                                                                |   |                         |   |                         |   |   |   |   |   |
| Diluted            |   | As reported                                                                                                                                         |   | $                            | (0.08  | )                            | $      | (0.03 | **)** | $ | (0.44 | ) | $ | (1.05 | ) |
|               |   | Pro forma                                                                                                                                           |   | (0.09                        | )      | (0.06                        | )      | (0.49 | ) | (1.17 | ) |

 

Effective on January 1,2003 the Company adopted Financial Accounting Standards Board No. 146,“Accounting for Exit or Disposal Activities,” (“SFAS 146”), which supersedesEmerging Issues Task Force Issue No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” The new standards require that a liability for a cost associated with anexit or disposal activity, including costs related to terminating a contractthat is not a capital lease and the termination benefits that employees who areinvoluntarily terminated receive under the terms of a one-time benefitarrangement that is not ongoing or an individual deferred-compensationcontract, be recognized when the liability is incurred.  Previously, under Issue No. 94-3, a liabilityfor an exit cost was recognized at the date of an entity’s commitment to anexit plan, which may not necessarily meet the definition of a liability.  SFAS 146 is effective for exit or disposalactivities of the Company that are initiated after December 31, 2002.  The Company adopted SFAS 146 as ofJanuary 1, 2003 (See Note 6).

 

In May 2003, the FASBissued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.”  It establishes classification and measurement standards for threetypes of freestanding financial instruments that have characteristics of bothliabilities and equity.  Instrumentswithin the scope of SFAS 150 must be classified as liabilities within theCompany’s financial statements.  Theprovisions of SFAS No. 150 are effective for (1) instruments entered into ormodified after May 31, 2003 and (2) pre-existing instruments as ofJuly 1, 2003.  SFAS 150 is notexpected to have a material effect on the Company’s financial statements.

 

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).  Theaccounting provisions and disclosure requirements of FIN 46 are effectiveimmediately for VIEs created after January 31, 2003, and are effective forreporting periods ending after December 15, 2003, for VIEs created priorto February 1, 2003.  Although theCompany is still evaluating the impact of FIN 46, it is not expected to have amaterial effect on the Company’s financial statements.

 

8

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**3.****              Adoption of FAS 142**

 

*Intangible Assets*

 

Intangibleassets are the result of the acquisition of certain assets and operations ofRGII and the acquisition of the Xpress software from Commerce One. During thethird quarter of 2003, the Company completed a purchase price allocation reviewand according to SFAS No. 142, assessed the useful lives of its acquiredintangible assets.

 

The followingtable summarizes the acquired intangible assets, the remaining components andthe accumulated amortization as of September 30, 2003 (in thousands):

 
|                         |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net  Carrying  Amount** |   |
|------------------------------|--------|-----------------------------|--------|-------------------------------|--------|---------------------------|--------|
| Amortized intangible assets: |   |                        |   |                          |   |                      |   |
| Non-compete agreements       |   | $                           | 250    |                          | $      | 9                         |   | $ | 241 |   |
| RGII Trademark               |   | 150                         |   | 37                            |   | 113                       |   |
| RGII software                |   | 726                         |   | 37                            |   | 689                       |   |
| Customer contracts           |   | 1,800                       |   | 427                           |   | 1,373                     |   |
| Xpress software              |   | 566                         |   | 16                            |   | 550                       |   |
| Total                        |   | $                           | 3,492  |                          | $      | 526                       |   | $ | 2,966 |   |

 

Intangibleassets are being amortized over periods ranging from six months to seven years,based on the estimated useful lives. The amortization expense on these intangible assets for the three andnine months ended September 30, 2003 was $526,000.  The estimated remaining amortization expensefor each year ending December 31, is as follows (in thousands):

 

| 2003 (remaining period) |   | $   | 558    |   |
|-------------------------|--------|-----|--------|--------|
| 2004                    |   | 755 |   |
| 2005                    |   | 680 |   |
| 2006                    |   | 613 |   |
| 2007                    |   | 201 |   |
| thereafter              |   | 159 |   |
| Total                   |   | $   | 2,966  |   |

 

*Goodwill*

 

During thequarter ended June 30, 2002, the Company completed the initial valuationof the carrying value of goodwill existing at January 1, 2002.  As a result a non-cash charge of $29.9million, or $(0.95) per share was retroactively recorded as the cumulativeeffect of an accounting change in the six months ended June 30, 2002statement of operations. For the year ended December 31, 2002 the Companycompleted a second valuation of the carrying value of the remaining goodwilland it was determined that no further impairment had occurred. The changes inthe carrying amount of goodwill for the nine months ended September 30,2003, are as follows:

 

9

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| **Reporting  Units**                  |   | **Solutions** |   | **IT  Services** |   | **Education**       |   | **Chimes** |   | **Consolidated** |   |
|---------------------------------------|--------|---------------|--------|------------------|--------|---------------------|--------|------------|--------|------------------|--------|
|                                  |   |          |   |             |   | **(in 000’s)** |   |       |   |             |   |
| Balance as of December 31, 2002  |   | $             | 19,203 |             | $      | —              |   | $          | — |             | $      | — |   | $ | 19,203 |   |
| Additions to goodwill*                |   | 14,348        |   | —           |   | —              |   | —     |   | 14,348           |   |
|                                  |   |          |   |             |   |                |   |       |   |             |   |
| Balance as of September 30, 2003 |   | $             | 33,551 |             | $      | —              |   | $          | — |             | $      | — |   | $ | 33,551 |   |

 

----

* reflectsgoodwill acquired as a result of the RGII ($13,921) and GBTS ($427)acquisitions.  See Note 8.

 

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

 

As of December31, 2002, the fair value of each of the reporting units was calculated usingthe following approaches:  (i) marketapproach and (ii) income approach. Under the market approach, value is estimated by comparing theperformance fundamentals relating to similar public companies’ stockprices.  Multiples are then developed ofthe value of the publicly traded stock to various measures and are then appliedto each reporting unit to estimate the value of its equity.  Under the income approach, value wasdetermined using the present value of the projected future cash flows to begenerated by the reporting unit.

 

The fair valueconclusion of the reporting units reflects an appropriately weighted value ofthe market multiple approach and the income approach discussed above.  An asset approach was not used because theasset approach is most relevant for liquidation approaches, investment companyvaluations and asset rich company valuations (i.e. real estate entities) andwas not deemed relevant for manufacturing and service company going-concernvaluations.  When either the incomeapproach or the market approach was used, each indicated value of the Solutionsentity's equity exceeds the carrying value of the Solutions entity by at least$15 million.  Since each of the twoapproaches yielded values far in excess of carrying value, any weighting of thetwo approaches or either approach used alone results in the same conclusion,that the goodwill was not impaired. When the other entities were tested, both approaches yielded anindicated value which was far below the carrying value of those entity’sequity, therefore the entire amount of goodwill was written off.  As a result, a loss of $29.9 million wasrecognized in June 2002 and recorded as a cumulative effect of change inaccounting principle in the accompanying Consolidated Statements ofOperations.  There was no income taxeffect on the impairment charge as approximately $19 million of the chargerelated to goodwill in foreign tax jurisdictions where the Company believes itis more likely than not that future taxable income in these jurisdictions willnot be sufficient to realize the related income tax benefits associated withthe charge.  The remaining $11 millionof the charge was related primarily to goodwill that was acquired prior to theability to deduct goodwill for tax purposes.

 

10

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The followingpro forma table shows the effect of the cumulative effect of change inaccounting principle on the Company’s net loss as follows (in thousands, exceptper share data):

 
|                                                                 |   | **Three  Months Ended**      |   | **Nine  Months Ended**       |   |
|----------------------------------------------------------------------|--------|------------------------------|--------|------------------------------|--------|
|                                                                 |   | **September 30,  2003** |   | **September 30,  2002** |   | **September 30,  2003** |   | **September 30,  2002** |   |
|                                                                 |   |                         |   |                         |   |   |   |   |   |
| Reported Net Loss                                                    |   | $                            | (2,450 | )                            | $      | (918 | ) | $ | (13,259 | ) | $ | (32,968 | ) |
|                                                                 |   |                         |   |                         |   |   |   |   |   |
| Cumulative Effect of Change  in Accounting Principle                 |   | —                       |   | —                       |   | — |   | 29,861 |   |
|                                                                 |   |                         |   |                         |   |   |   |   |   |
| Adjusted Net Loss                                                    |   | $                            | (2,450 | )                            | $      | (918 | ) | $ | (13,259 | ) | $ | (3,107 | ) |
|                                                                 |   |                         |   |                         |   |   |   |   |   |
| Reported Loss per Share:                                             |   |                         |   |                         |   |   |   |   |   |
| Basic & Diluted                                                  |   | $                            | (0.08  | )                            | $      | (0.03 | ) | $ | (0.44 | ) | $ | (1.05 | ) |
|                                                                 |   |                         |   |                         |   |   |   |   |   |
| Adjustment for Cumulative Effect of Change  in Accounting Principle: |   |                         |   |                         |   |   |   |   |   |
| Basic & Diluted                                                  |   | —                       |   | —                       |   | — |   | 0.95 |   |
|                                                                 |   |                         |   |                         |   |   |   |   |   |
| Adjusted Loss per Share:                                             |   |                         |   |                         |   |   |   |   |   |
| Basic & Diluted                                                  |   | $                            | (0.08  | )                            | $      | (0.03 | ) | $ | (0.44 | ) | $ | (0.10 | ) |

 

**4.****              EarningsPer Share**

 

Thecomputation of diluted earnings per share excludes options with exercise pricesgreater than the average market price. As of September 30, 2003, there were 275,138 and 285,263 excludedoptions, respectively, for the third quarter and the first nine months endedSeptember 30, 2003, with exercise prices between $4.40 and $26.63 and $4.00 and$26.63, respectively, per share.  Therewere 3,096,126 and 5,743,813 excluded options, respectively, for the thirdquarter and the first nine months ended September 30, 2002, outstanding atSeptember 30, 2002 with exercise prices between $4.40 and $26.63 and $2.02and $26.63, respectively, per share.

 

11

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**5.****              SegmentInformation**

 

The Company has identifiedthree business segments: IT Services, the Solutions Group and Chimes, Inc.  The IT Services division provides highlyskilled software professionals to augment the internal information managementstaffs of major corporations.  ITServices is primarily staffing augmentation. The Solutions division provides enterprise application services,e-business solutions, customized Web development and Web enablement of strategicapplications, Customer Relationship Management (CRM), network services,strategic outsourcing and managed resourcing as well as software and relationaldatabase products, up to the time of sale, March 25, 2002, of PrincetonSoftech Inc.  In the segment informationchart below, amounts pertaining to Princeton Softech Inc. for the nine monthsended September 30, 2002, are included and total: revenues of $2.9million, gross profit of $2.4 million and an operating loss of $1.9 million.  Chimes, Inc., a wholly-owned subsidiary ofCHC, provides workforce procurement and management services to Global 2000companies, which, according to Forbes magazine, represent the biggest and mostimportant companies, as measured by sales, profits, assets and market value.  Loss before income tax benefit consists ofloss before income taxes, excluding interest income, interest expense,gain/(loss) on the sale of assets, restructuring charges, special charges, thewrite-off of a terminated project, minority interest, amortization ofintangibles, and net loss on investments. These exclusions total expense of $2.0 million and income of  $247,000 for the quarter endedSeptember 30, 2003 and 2002, respectively and expense of $15.3 million andincome of $4.1 million for the first nine months ended September 30, 2003and 2002, respectively  (seereconciliation of segments operating loss to consolidated loss before incometaxes).  Corporate services, consistingof general and administrative services are provided to the segments from a centralizedlocation.  Such costs are allocated tothe applicable segments based on revenue.

 

12

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|                                       |   | **Three  Months Ended**      |   | **Nine  Months Ended**       |   |
|--------------------------------------------|--------|------------------------------|--------|------------------------------|--------|
| **(in 000’s)**                        |   | **September 30,  2003** |   | **September 30,  2002** |   | **September 30,  2003** |   | **September 30,  2002** |   |
| *Revenue:*                                 |   |                         |   |                         |   |   |   |   |   |
| IT Services                                |   | $                            | 32,235 |                         | $      | 49,127 |   | $ | 103,738 |   | $ | 157,800 |   |
| Solutions Group                            |   | 27,016                       |   | 20,151                       |   | 65,308 |   | 60,294 |   |
| Chimes                                     |   | 5,208                        |   | 4,296                        |   | 14,499 |   | 12,017 |   |
| TOTAL                                      |   | $                            | 64,459 |                         | $      | 73,574 |   | $ | 183,545 |   | $ | 230,111 |   |
|                                       |   |                         |   |                         |   |   |   |   |   |
| *Gross Margin:*                            |   |                         |   |                         |   |   |   |   |   |
| IT Services                                |   | $                            | 6,514  |                         | $      | 10,441 |   | $ | 20,763 |   | $ | 31,997 |   |
| Solutions Group                            |   | 8,657                        |   | 6,361                        |   | 20,656 |   | 19,965 |   |
| Chimes                                     |   | 4,882                        |   | 3,907                        |   | 13,436 |   | 10,522 |   |
| TOTAL                                      |   | $                            | 20,053 |                         | $      | 20,709 |   | $ | 54,855 |   | $ | 62,484 |   |
|                                       |   |                         |   |                         |   |   |   |   |   |
| *Operating income / (loss):*               |   |                         |   |                         |   |   |   |   |   |
| IT Services                                |   | $                            | 1,975  |                         | $      | 4,110 |   | $ | 6,150 |   | $ | 11,512 |   |
| Solutions Group                            |   | 2,807                        |   | 2,252                        |   | 9,172 |   | 4,586 |   |
| Chimes                                     |   | (113                         | )      | (1,682                       | )      | (2,377 | ) | (6,091 | ) |
| TOTAL                                      |   | $                            | 4,669  |                         | $      | 4,680 |   | $ | 12,945 |   | $ | 10,007 |   |
|                                       |   |                         |   |                         |   |   |   |   |   |
| *Corporate Allocation:*                    |   |                         |   |                         |   |   |   |   |   |
| IT Services                                |   | $                            | 3,213  |                         | $      | 4,219 |   | $ | 9,249 |   | $ | 12,871 |   |
| Solutions Group                            |   | 1,767                        |   | 1,730                        |   | 4,999 |   | 4,927 |   |
| Chimes                                     |   | 519                          |   | 369                          |   | 1,303 |   | 984 |   |
| TOTAL                                      |   | $                            | 5,499  |                         | $      | 6,318 |   | $ | 15,551 |   | $ | 18,782 |   |
|                                       |   |                         |   |                         |   |   |   |   |   |
| *Income/(loss) before income tax benefit:* |   |                         |   |                         |   |   |   |   |   |
| IT Services                                |   | $                            | (1,238 | )                            | $      | (109 | ) | $ | (3,099 | ) | $ | (1,359 | ) |
| Solutions Group                            |   | 1,040                        |   | 522                          |   | 4,173 |   | (341 | ) |
| Chimes                                     |   | (632                         | )      | (2,051                       | )      | (3,680 | ) | (7,075 | ) |
| TOTAL                                      |   | $                            | (830   | )                            | $      | (1,638 | ) | $ | (2,606 | ) | $ | (8,775 | ) |
|                                       |   |                         |   |                         |   |   |   |   |   |
| *Assets:*                                  |   |                         |   |                         |   |   |   |   |   |
| IT Services                                |   |                         |   |                         |   | $ | 27,057 |   | $ | 43,579 |   |
| Solutions Group                            |   |                         |   |                         |   | 66,244 |   | 43,370 |   |
| Chimes                                     |   |                         |   |                         |   | 15,625 |   | 20,285 |   |
| Corporate and other                        |   |                         |   |                         |   | 75,316 |   | 99,515 |   |
| TOTAL                                      |   |                         |   |                         |   | $ | 184,242 |   | $ | 206,749 |   |

 

13

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*Reconciliation of Segment Loss before IncomeTax Benefit to Consolidated Loss Before Income Tax Benefit:*

 
|                                                                                                               |   | **Three  Months Ended** |   | **Nine Months Ended**        |   |
|--------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|------------------------------|--------|
|                                                                                                               |   | **September 30,  2003** |   | **September 30,  2002** |   | **September 30,  2003** |   | **September 30,  2002** |   |
| Total Segments Loss before Income  Tax Benefit                                                                     |   | $                            | (830   | )                            | $      | (1,638 | ) | $ | (2,606 | ) | $ | (8,775 | ) |
| Adjustments:                                                                                                       |   |                         |   |                         |   |   |   |   |   |
| Interest income, net                                                                                               |   | 78                           |   | 247                          |   | 336 |   | 558 |   |
| Gain/(loss) on sale of assets                                                                                      |   | —                       |   | —                       |   | (273 | ) | 3,570 |   |
| Restructuring charges                                                                                              |   | (787                         | )      | —                       |   | (2,985 | ) | — |   |
| Amortization of intangibles                                                                                        |   | (526                         | )      | —                       |   | (526 | ) | — |   |
| Special charges                                                                                                    |   | (800                         | )      | —                       |   | (8,778 | ) | — |   |
| Write-off of terminated project                                                                                    |   | —                       |   | —                       |   | (3,064 | ) | — |   |
| Net loss on investments                                                                                            |   | —                       |   | —                       |   | — |   | (61 | ) |
| Total Adjustments:                                                                                                 |   | $                            | (2,035 | )                            | $      | (247 | ) | (15,290 | ) | 4,067 |   |
| Consolidated loss before income  taxes, cumulative effect of change in accounting principle and minority  interest |   | $                            | (2,865 | )                            | $      | (1,391 | ) | $ | (17,896 | ) | $ | (4,708 | ) |

 

14

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**6.****              RestructuringCharges**

 

Duringthe third quarter of 2003, the Company recorded a restructuring charge ofapproximately $787,000 relating to the closing of Chimes (UK) Ltd. andseverance charges related to US operations. The Company decided to continue business in this geographic area via athird party and therefore recorded the charge after the building wasclosed.  The provision includes anaccrual relating to the future costs associated with continuing rent on thisproperty in the United Kingdom.  Theclosing of this office resulted in a severance charge of $247,000.  As of September 30, 2003, $203,000 hadbeen paid in severance to terminated employees.

 
|                    |   | **Recorded** |   | **Paid** |   | **Remaining at  September 30,  2003** |   |
|-------------------------|--------|--------------|--------|----------|--------|--------------------------------------------|--------|
| Severance:              |   |         |   |     |   |                                       |   |
| United Kingdom          |   | $            | 247    |     | $      | (203                                       | )      | $ | 44 |   |
| United States           |   | 219          |   | (219     | )      | —                                     |   |
| Total Severance         |   | $            | 466    |     | $      | (422                                       | )      | $ | 44 |   |
|                    |   |         |   |     |   |                                       |   |
| Lease Obligations:      |   |         |   |     |   |                                       |   |
| United Kingdom          |   | $            | 149    |     | $      | (4                                         | )      | $ | 145 |   |
|                    |   |         |   |     |   |                                       |   |
| General Office Closure: |   |         |   |     |   |                                       |   |
| United Kingdom          |   | $            | 172    |     | $      | (105                                       | )      | $ | 67 |   |
|                    |   |         |   |     |   |                                       |   |
| Total                   |   | $            | 787    |     | $      | (531                                       | )      | $ | 256 |   |

 

15

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Duringthe second quarter of 2003, the Company evaluated the geographic area in Canadaand decided to close facilities and go virtual in the smaller Canadianmarkets.  After the buildings wereentirely closed, the Company recorded a restructuring charge of approximately$1.9 million relating to the consolidating and closing of these facilities inthe Canadian subsidiary.  This $1.9million expense was calculated based on current rent commitments less acalculated sublease amount based on current market conditions.  The provision included an accrual relatingto the future costs associated with continuing rent on six properties, five ofwhich are in Canada, with rents continuing through 2004, 2006 and 2007.  The closing of these offices resulted in thetermination of 20 employees with a severance charge of $697,000.  As of September 30, 2003, $524,000 hadbeen paid in severance to the terminated employees.

 
|                    |   | **Recorded** |   | **Paid** |   | **Remaining at  September 30,  2003** |   |
|-------------------------|--------|--------------|--------|----------|--------|--------------------------------------------|--------|
| Lease Obligations:      |   |         |   |     |   |                                       |   |
| Canada                  |   | $            | 1,100  |     | $      | (461                                       | )      | $ | 639 |   |
| United States           |   | 36           |   | (7       | )      | 29                                         |   |
| Total Lease Obligations |   | $            | 1,136  |     | $      | (468                                       | )      | $ | 668 |   |
|                    |   |         |   |     |   |                                       |   |
| Severance:              |   |         |   |     |   |                                       |   |
| Canada                  |   | $            | 358    |     | $      | (185                                       | )      | $ | 173 |   |
| United States           |   | 197          |   | (197     | )      | —                                     |   |
| United Kingdom          |   | 142          |   | (142     | )      | —                                     |   |
| Total Severance         |   | $            | 697    |     | $      | (524                                       | )      | $ | 173 |   |
|                    |   |         |   |     |   |                                       |   |
| General Office Closure: |   |         |   |     |   |                                       |   |
| Canada                  |   | $            | 116    |     | $      | (116                                       | )      | $ | — |   |
|                    |   |         |   |     |   |                                       |   |
| Total                   |   | $            | 1,949  |     | $      | (1,108                                     | )      | $ | 841 |   |

 

Duringthe fourth quarter of 2002, the Company recorded a restructuring charge of $2.8million pertaining to 2002 office closings. During the second quarter of 2003, half of the rent for one officeclosing was reversed after the rent was negotiated at a lower rate for half thebuilding.

 
|               |   | **Remaining  at  December 31,  2002** |   | **Paid** |   | **Reversed** |   | **Remaining  at  September 30,  2003** |   |
|--------------------|--------|--------------------------------------------|--------|----------|--------|--------------|--------|---------------------------------------------|--------|
| Lease Obligations: |   |                                       |   |     |   |         |   |                                        |   |
| United States      |   | $                                          | 2,483  |     | $      | (1,023       | )      | $                                           | (25    | ) | $ | 1,435 |   |
|                    |        |                                            |        |          |        |              |        |                                             |        |  |  |  |  |

 

16

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Atthe end of 2002, the Company had $295,000 of five lease obligations remainingfrom the restructure expense recorded in 2001. Of the five lease obligations, four remain and the balance as ofSeptember 30, 2003 was $141,000.

 
|               |   | **Remaining  at  Dec. 31, 2002** |   | **Paid** |   | **Remaining  at  September 30, 2003** |   |
|--------------------|--------|----------------------------------|--------|----------|--------|--------------------------------------------|--------|
| Severance:         |   |                             |   |     |   |                                       |   |
| United States      |   | $                                | 1      |     | $      | (1                                         | )      | $ | — |   |
|               |   |                             |   |     |   |                                       |   |
| Lease Obligations: |   |                             |   |     |   |                                       |   |
| United States      |   | $                                | 294    |     | $      | (153                                       | )      | $ | 141 |   |
|               |   |                             |   |     |   |                                       |   |
| Total              |   | $                                | 295    |     | $      | (154                                       | )      | $ | 141 |   |

 

At the end of 2002 the Companyhad $488,000 of one lease obligation remaining on the restructure expenserecorded in 2000 with the lease terminating in 2005.  The balance remaining at September 30, 2003 was $355,000.

 
|               |   | **Remaining  at  Dec. 31, 2002** |   | **Paid** |   | **Remaining  at  September 30, 2003** |   |
|--------------------|--------|----------------------------------|--------|----------|--------|--------------------------------------------|--------|
| Lease Obligations: |   |                             |   |     |   |                                       |   |
| United States      |   | $                                | 488    |     | $      | (133                                       | )      | $ | 355 |   |
|                    |        |                                  |        |          |        |                                            |        |  |  |  |

 

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**7.****              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, be separately classified in thefinancial statements and that the accumulated balance of other comprehensiveincome/(loss) be reported separately from retained earnings and additionalpaid-in capital in the equity section of the balance sheet. The componentsof comprehensive loss for the three and nine months ended September 30,2003 and September 30, 2002 are as follows:

 
|                                                             |   | **Three  Months Ended**      |   | **Nine  Months Ended**       |   |
|------------------------------------------------------------------|--------|------------------------------|--------|------------------------------|--------|
|                                                             |   | **September 30,  2003** |   | **September 30,  2002** |   | **September 30,  2003** |   | **September 30,  2002** |   |
|                                                             |   |                         |   |                         |   |   |   |   |   |
| Comprehensive Loss:                                              |   |                         |   |                         |   |   |   |   |   |
|                                                             |   |                         |   |                         |   |   |   |   |   |
| Net Loss                                                         |   | $                            | (2,450 | )                            | $      | (918 | ) | $ | (13,259 | ) | $ | (32,968 | ) |
| Other comprehensive  income/(loss) - Foreign currency adjustment |   | 240                          |   | (48                          | )      | 361 |   | (370 | ) |
| Unrealized gain/(loss) on SERP investments                       |   | (112                         | )      | —                       |   | 621 |   | — |   |
| Comprehensive Loss                                               |   | $                            | (2,322 | )                            | $      | (966 | ) | $ | (12,277 | ) | $ | (33,338 | ) |

 

**8.****              Acquisitions**

 

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

 

OnJuly 8, 2003, the Company acquired all of the stock of privately-held RGIITechnologies, Inc. (“RGII”).  TheCompany purchased RGII because acquiring a platform company in the Federalgovernment IT Services marketplace has been a long-term priority for theCompany.  The purchase price wasapproximately $22.1 million including an up-front cash payment, acquisitionexpenses, working capital adjustment and the payoff of a note payable of $1.5million.  In addition the Company paidoff a RGII $665,000 note and line of credit of approximately $2 million.  In addition, the seller may be entitled tocontingent payments based on RGII’s performance against profitabilityobjectives over the next three years. The contingent payments are evidenced by a contingent note with a facevalue of $10 million that is payable over three years, only if performanceobjectives are met.  The performanceobjectives relate to the calculation of actual earnings before interest andtaxes (“EBIT”) versus the EBIT target. There are no minimum payments required if objectives are not met.  The Company also entered into employmentagreements with the former shareholder and employees of RGII and has agreed toissue an aggregate of 600,000 options to purchase shares of Computer Horizonsstock over a three year period.  TheCompany completed the allocation of the purchase price to assets andliabilities acquired utilizing outside valuation consultants to assist in thisprocess.  Audited historical financialstatements of RGII together with applicable pro forma financial informationwere filed with the SEC on September 19, 2003.

 

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The allocation of the purchaseprice to assets acquired and liabilities assumed was as follows (in thousands):

 
|                   |   | **Allocation  of  Purchase Price** |   |
|------------------------|--------|------------------------------------|--------|
|                   |   |                               |   |
| Accounts receivable    |   | $                                  | 10,958 |   |
| Other current assets   |   | 79                                 |   |
| Property and equipment |   | 1,255                              |   |
| Goodwill               |   | 13,921                             |   |
| Intangibles            |   | 2,926                              |   |
| Other assets           |   | 444                                |   |
| Total assets           |   | 29,583                             |   |
|                   |   |                               |   |
| Accounts payable       |   | 1,483                              |   |
| Taxes payable          |   | 210                                |   |
| Accrued expenses       |   | 2,520                              |   |
| Notes payable          |   | 2,636                              |   |
| Long-term liabilities  |   | 593                                |   |
| Total liabilities      |   | 7,442                              |   |
|                   |   |                               |   |
| Net assets             |   | $                                  | 22,141 |   |

 

Purchased intangibles totaling$2.9 million included unfunded backlog, funded backlog, software and noncompete agreements.  $13.9 millionwas recorded as goodwill.

 

The acquisition will be treatedas a purchase of assets for tax purposes. Accordingly, goodwill will be subject to amortization for tax purposesover fifteen years.

 

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Pro Forma Results

 

Effective July 1, 2003,the results of RGII’s operations have been included in the consolidatedfinancial statements of the Company. The following unaudited pro forma financial information presents thecombined results of operations of the Company and RGII as if the acquisitionhad occurred as of the beginning of the periods presented.  The revenues and results of operationsincluded in the following pro forma unaudited consolidated condensed statementof operations is not considered necessarily indicative of the results ofoperations for the periods specified had the transaction actually beencompleted at the beginning of the period.

 
|                                                                      |   | **Actual**                                  |   | **Pro Forma  (in thousands)**              |   |
|---------------------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
|                                                                      |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|                                                                      |   | **2003**                                    |   | **2002**                                   |   | **2003** |   | **2002** |   |
| Revenues:                                                                 |   |                                        |   |                                       |   |   |   |   |   |
| IT Services                                                               |   | $                                           | 32,235 |                                       | $      | 49,127 |   | $ | 103,738 |   | $ | 157,800 |   |
| Solutions Group                                                           |   | 27,016                                      |   | 28,499                                     |   | 84,173 |   | 83,931 |   |
| Chimes                                                                    |   | 5,208                                       |   | 4,296                                      |   | 14,499 |   | 12,017 |   |
| Total                                                                     |   | 64,459                                      |   | 81,922                                     |   | 202,410 |   | 253,748 |   |
| Loss before minority interest and change in  accounting principle         |   | (2,471                                      | )      | (236                                       | )      | (12,957 | ) | (1,762 | ) |
| Minority interest                                                         |   | 21                                          |   | —                                     |   | (16 | ) | — |   |
| Cumulative effect of change in accounting  principle                      |   | —                                      |   | —                                     |   | — |   | (29,861 | ) |
| Net loss                                                                  |   | $                                           | (2,450 | )                                          | $      | (236 | ) | $ | (12,973 | ) | $ | (31,623 | ) |
| Loss per share – (basic & diluted):                              |   |                                        |   |                                       |   |   |   |   |   |
| Net loss                                                                  |   | $                                           | (0.08  | )                                          | $      | (0.01 | ) | $ | (0.43 | ) | $ | (1.01 | ) |
| Weighted average number of shares  outstanding – basic & diluted |   | 30,548,000                                  |   | 31,218,000                                 |   | 30,403,000 |   | 31,388,000 |   |

 

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The unaudited pro formafinancial information above reflects the following adjustments to thehistorical consolidated financial statements for the nine months endedSeptember 30, 2003:  $1.0 millionamortization expense on purchased intangible assets, elimination of acquisitionrelated costs of $1.8 million, $55,000 reduction of interest income for cashconsideration paid less interest expense reduction pertaining to RGII debt and$66,000 adjustment to taxes to record income taxes for RGII as if it was aC-Corporation and to record income tax effect of pro forma adjustments.

 

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.  Theoutsourcing facility and its IT professionals are located in Chenni (Madras),India.  This transaction was accountedfor as a purchase and the entire purchase price was allocated to goodwill.  Pro forma information has not been presentedas the amounts are not material.

 

**9.****              Saleof Subsidiaries**

 

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 the transaction was $273,000.

 

OnMarch 25, 2002, the Company sold the net assets of Princeton Softech toApax Partners, Inc. and LLR Partners, for cash of $16 million, includingamounts held in escrow of $1.5 million. The gain from the transaction wasinitially estimated as $3.6 million and was adjusted in the fourth quarter of2002 to $3.2 million due to a purchase price adjustment.  During the second quarter of 2003, theCompany received approximately $748,000 of the escrow.  The results of operations are included inthe consolidated financial statements through February 28, 2002 within theSolutions group.

 

On April 17, 2001, theCompany sold the SELECT Software Tools division “Select” of Princeton Softechto Aonix, a member of the Gores Technology Group, for approximately $895,000including $545,000 of cash received and a note receivable of $350,000,subsequently written off with the sale of Princeton Softech on March 25,2002.  This sale included all thesoftware assets and intellectual property rights of Select and was sold at bookvalue.  The results of operations areincluded in the consolidated financial statements through April 17, 2001within the Solutions group.

 

**10.****       Purchaseof Treasury Stock**

 

InApril of 2001, the Board of Directors approved the repurchase in the openmarket of up to 10% of its common shares outstanding, or approximately 3.2million shares.  As of the filing ofthis report, the Company had repurchased, in the open market, 3,114,900 sharesof its stock at an average price of $3.47 per share for an aggregate purchaseamount of $10.8 million.  There were nostock repurchases during the third quarter and as of September 30, 2003the remaining authorization for repurchase is approximately 93,000 shares.

 

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**11.****       Asset-BasedLending Facility**

 

On July 31, 2001, amendedFebruary 14, 2003, the Company entered into a secured asset-based lendingfacility that replaced its two unsecured discretionary lines of credit.  This new line of credit is a three-year, $40million facility with availability based primarily on eligible customerreceivables.  The interest rate for thefirst ninety days from closing was Prime plus 0.5%, thereafter the rate wasLIBOR plus 2.75% based on the unpaid principal. The borrowing base lessoutstanding loans must equal or exceed $17.5 million. At the time of closingthere was a $170,000 commitment fee paid to the agent.  As of September 30, 2003, the Companyhad no outstanding loan balance against the facility.  Based on the Company’s eligible customer receivables and cashbalances, $16.3 million was available for borrowing as of September 30,2003.  The fee for the unused portion ofthe line of credit is 0.375% per annum charged to the Company monthly.  This charge was approximately $84,000 and$104,000 for the nine-month periods ended September 30, 2003 and 2002,respectively.  This line of creditincludes covenants relating to the maintenance of cash balances and providingfor limitations on incurring obligations and spending limits on capitalexpenditures.

 

**12.****       TaxBenefit Reserve**

 

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

 

During 1998, the Companycompleted a business combination, which, for financial statement purposes, hasbeen accounted for as a pooling-of-interests. For income tax purposes the Company believes the transaction qualifiesas a taxable purchase that gives rise to future tax deductions.  Upon the sale of the acquired business in2001, these deductions were recognized for tax purposes.  The tax benefit of $19.6 million relating tothe part of these deductions that was carried back to prior years was includedin refundable income taxes in 2002. Since the tax structure of the transaction is subject to determinationby the tax authorities, the Company has recorded a reserve for the tax benefitsresulting from the carryback and has not recorded deferred tax assets for thetax benefits being carried forward. When resolved, the Company will record a deferred tax asset for the partof the tax benefits being carried forward and a tax benefit for the portionthat was carried back, net of an appropriate valuation allowance. The taxbenefit will be reflected as an increase in additional paid-in capital.  Any adjustments to the valuation allowancewill be charged or credited to income.

 

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The Internal Revenue Service iscurrently examining the Company’s federal income tax returns for the yearsended December 31, 2001 and 2000, along with its federal refund claims forthe calendar years 1996 through 1999. The additional refund amount received in January 2003 is shown as aliability until the audit is completed.

 

**13.****       SpecialItems**

 

Forthe three months ended September 30, 2003, the Company incurred specialcharges of $800,000 related to the unilateral acquisition proposal andactivities of Aquent LLC. The Company also incurred a restructuring expense of$787,000 relating primarily to the closing of facilities in the United Kingdom.During the first nine months of 2003, the Company incurred special charges of$8.8 million consisting primarily of a severance package for the former CEO andexpenses related to Aquent LLC.  Theseparation package of the former CEO, included a $3.5 million severance paymentand $200,000 in continued medical coverage. In addition, a $5.1 million expense pertaining to the unilateralacquisition proposal and activities of Aquent LLC was recorded.  This expense is primarily attributable toapproximately $3.0 million of legal fees, $1.0 million in financial advisorfees and $1.0 million of proxy solicitation and other fees.  As management considers these special itemsto be infrequent and material in nature, the Company has reported the expenseson a separate line for full disclosure purposes, however, the amounts arereported within operating income.  TheCompany also incurred a restructuring expense of $3.0 million for the ninemonths ended September 30, 2003 relating primarily to the closing offacilities in Canada and the United Kingdom. In addition, the Company voluntarily terminated a sub-contract with ATEB,a privately held company, for financial reasons and recorded a write-off ofapproximately $3.1 million due to the uncertainty of the realization of thereceivable.  ATEB was the primarycontractor to develop a new pharmacy system for Royal Ahold.  The Company is continuing recovery effortsfor this receivable.

 

**14.****       RescissionOffer**

 

FromApril 2001 through January 2003, the sale of shares of the Company’scommon stock pursuant to the Employee Stock Purchase Plan were not exempt fromregistration or qualification under federal 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 aresult the Company intends to make a rescission offer to all those persons whopurchased shares of common stock pursuant to the Employee Stock Purchase Planduring the affected periods.  Therescission offer will be made pursuant to a registration statement filed underthe Securities Act and pursuant to applicable state securities laws.  In this rescission offer, the Company isoffering to repurchase the shares subject to our rescission offer for the pricepaid per share plus interest from the date of purchase until the rescissionoffer expires, at the current statutory rate per year mandated by the state inwhich the shares were purchased.  Therescission offer will expire approximately 30 days after the effective date ofthe registration statement.  Assumingall of the shares subject to the rescission offer (approximately 659,000) aretendered in the rescission offer, the aggregate purchase price, excludinginterest is estimated to 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.

 

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**16. Aquent/Legal Matters**

 

On April 29, 2003, theCompany filed an action in the United States District Court for the District ofNew Jersey (the “New Jersey action”) against Aquent LLC, seeking (i) to enjoinAquent from disseminating false and misleading proxy materials and pressreleases in support of its two nominees for director positions in connectionwith the Company’s May 14, 2003 Annual Meeting; (ii) to invalidate anyproxies secured by Aquent through the use of unlawful proxy solicitationmaterials; and (iii) to require Aquent to disseminate corrective disclosurethat not only amended the false and misleading proxy materials but also advisedCHC shareholders how Aquent’s solicitations had violated the securitieslaws.  The court held that Aquent’sproxy materials were false and misleading but invalidated no proxies andpermitted Aquent to limit corrective disclosure to new text enclosed with theold proxy materials, which contained the false and misleading statements.  On May 30, 2003, the Company filed aNotice of Appeal to the United States Court of Appeals for the Third Circuit,contending, among other things, that the corrective disclosure ordered by theUnited States District Court was inadequate and not in compliance with federalsecurities laws.  On October 15, 2003,the Company filed its appellate papers.

 

On May 27, 2003, theCompany brought an action in the Supreme Court of the State of New York, NewYork County (the “New York action”), seeking an order invalidating votes fordirectors Karl Meyer and Robert Trevisani cast at the Annual Meeting by stockholdersof record who sold their shares between the record date and the date of theAnnual Meeting.  The court in the NewYork action denied temporary restraints but on June 11, 2003, deferredruling on the Company’s application for preliminary injunctive relief pendingdiscovery and trial.  The matter hasbeen scheduled for a hearing on December 15, 2003.

 

On or about June 2, 2003,Aquent filed a counterclaim in the New Jersey action against the Company andWilliam J. Murphy, the Company’s President and Chief Executive Officer,alleging breach of fiduciary duty and seeking to enjoin the Company fromdelaying the continuation of the Annual Meeting - at which the certifiedelection results would be accepted - or otherwise interfering with the seatingof the Aquent nominees.  Aquent alsosought attorneys’ fees and costs.  On orabout June 20, 2003, Aquent filed an amended counterclaim in the NewJersey action, alleging breach of the duty of care and the duty of loyalty,waste of corporate assets, and violation of the proxy rules underSection 14(a) of the Securities Exchange Act of 1934.  The amended counterclaim sought,essentially, to enjoin the Company from challenging the election of the Aquentnominees, and it sought attorneys’ fees and costs.  The Company has filed an answer denying Aquent’s allegations.

 

On or about July 15, 2003,Aquent filed an Order to Show Cause in the New Jersey action, challenging anamendment to the Company’s by-laws adopted by the Board of Directors onJune 30, 2003.  The by-law amendmentspecifies (a) that any request for a special meeting of shareholders must set adate for the meeting not fewer than seventy-five (75) nor more than ninety (90)days after the date on which the request is received; (b) that any such requestshall be ineffective, and any special meeting cancelled, if the shareholder(s)who sign the request is/are not the holder(s) of the beneficial interest of 10%or more of the Company’s issued and outstanding shares on each of the followingdates:   the date such request ismailed; the record date for the meeting (to be fixed by the Board within fivebusiness days after the receipt of the request); and the date of the meeting;and (c) that any such request for a special meeting shall be or becomeineffective, and any meeting called or noticed pursuant thereto shall becancelled, if such request of any solicitation therefore is not made incompliance with applicable law.  Thecourt took testimony in the New Jersey action on August 7, 2003 anddirected the parties to submit additional briefs on the issues.  The matter has been fully briefed andsubmitted and is pending before the court.

 

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**MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

 

For the Periods Ended September 30, 2003 and September 30,2002

 

**FORWARD-LOOKING STATEMENTS**

 

Statementsincluded in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations and elsewhere in this document that do not relate topresent or historical conditions are “forward-looking statements” within themeaning of that term in Section 27A of the Securities Act of 1933, asamended, and in Section 21F of the Securities Exchange Act of 1934, asamended.  Additional oral or writtenforward-looking statements may be made by the Company from time to time, andsuch statements may be included in documents that are filed with the Securitiesand Exchange Commission (SEC).  Suchforward-looking statements involve risks and uncertainties that could causeresults or outcomes to differ materially from those expressed in suchforward-looking statements. Forward-looking statements may include, without limitation, statementsrelating to the Company’s plans, strategies, 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” andsimilar expressions are intended to identify forward-looking statements.  Among the important factors on which suchstatements are based are assumptions concerning the anticipated growth of theinformation technology industry, the continued need of current and prospectivecustomers for the Company’s services, the availability of qualifiedprofessional staff, and price and wage inflation.

 

**RESULTS OF OPERATIONS**

 

*Revenues*.  Revenues decreased to $64.5 million in thethird quarter of 2003 from $73.6 million in the third quarter of 2002, adecrease of $9.1 million or 12.4%. Revenues decreased to $183.5 million in the nine months of 2003 from$230.1 million in the nine months of 2002, a decrease of $46.6 million or 20.3%.

 

Solutions Group revenuesincreased to $27.0 million in the third quarter of 2003 from $20.2 million inthe third quarter of 2002, an increase of $6.8 million or 33.7%.  For the third quarter of 2003, RGII revenuestotaled $9.3 million.  Solutions Grouprevenues increased to $65.3 million in the nine months of 2003 from $60.3million in the nine months of 2002, an increase of $5.0 million or 8.3%.  The increase in Solutions Group revenues forthe third quarter and first nine months of 2003 is****attributable to the acquisition of RGII.

 

Excluding the revenue of thebusiness unit held for sale, Princeton Softech, Inc., in the nine months of2002, Solutions Group revenues increased $7.9 million or 13.8% to $65.3million.

 

IT Services revenues decreasedto $32.2 million in the third quarter of 2003 from $49.1 million in the thirdquarter of 2002, a decrease of $16.9 million or 34.4%.  For the third quarter of 2003, IT Servicesconsultant average headcount decreased by 22.1%, accounting for approximately$10.9 million of the revenue decrease. The balance of the decrease in revenue (approximately $6 million) isattributable to a reduction in average bill rates.  IT Services revenues decreased to $103.7 million in the firstnine months of 2003 from $157.8 million in the first nine months of 2002, adecrease of $54.1 million or 34.3%, which is attributable to the softness inthe IT Staffing business.  The decreasein IT Services revenue for the quarter and the first nine months of 2003, isthe result of continued decreases in the demand for temporary technologyworkers, the trend of companies to outsource technology jobs offshore, theimpact of pricing decreases by customers and the lagging economy.

 

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For the first nine months of2003, IT Services consultant average headcount decreased by 23.8%, accountingfor approximately $38 million of the revenue decrease.  The balance of the decrease in revenue(approximately $16 million) is attributable to a reduction in average billrates.  The Company does not anticipateany growth during the remainder of 2003 in IT Services headcount levels.

 

Chimes revenue increased to$5.2 million in the third quarter of 2003 from $4.3 million in the thirdquarter of 2002, an increase of $900,000, or 20.9%.  Chimes revenue, for the first nine months of 2003, increased to$14.5 million from $12.0 million, an increase of $2.5 million or 20.8% from thecomparable period of 2002.  Thisincrease in Chimes revenue is primarily due to a decrease in revenue fromexisting customers (due to a decrease in managed spend) of approximately$400,000 and $1.0 million, respectively, for the third quarter and first ninemonths of 2003, offset by an increase of approximately $1.3 million and $3.5million, respectively, for the third quarter and first nine months of 2003, inrevenue from new customers in this segment.

 

*Direct Costs*.  Direct costs decreased to $44.4 million and$128.7 million in the third quarter and first nine months of 2003,respectively, from $52.9 million and $167.6 million in the comparable periodsof 2002.  Consolidated gross margin,revenues less direct costs, increased to 31.1% in the third quarter of 2003from 28.1% in the same period of 2002. In the Company’s Solutions Group, grossprofit totaled $8.7 million, or 32% as a result of the RGII acquisition.  Without RGII, gross profit declinedapproximately $1.0 million during the third quarter of 2003, as a result oflower utilization rates in the Healthcare Practice and higher direct costs in theEducation division.  Gross margin increasedto 29.9% in the first nine months of 2003 from 27.2% in the same period of2002.

 

Excluding the asset held forsale, Princeton Softech, Inc., in the first nine months of 2002, direct costsdecreased to $128.7 million in the first nine months of 2003 from $167.1million in the same period of 2002. Gross margin in the first nine months of 2002 was 26.4%.

 

The Company’s consolidatedgross margins improvement is primarily attributable to the change in therevenue mix, including RGII, among the Company’s business segments.  Chimes and the Solutions Group are highergross margin businesses than the Company’s IT Services segment.  For the quarter ended September 30,2003, Chimes and Solutions Group revenue totaled 50% of consolidated revenue,compared to 33.2% of consolidated revenue for the comparable period in2002.  For the first nine months of2003, Chimes and Solutions Group revenue totaled 43.5% of consolidated revenue,compared to 31.4% of consolidated revenue for the comparable period in 2002.

 

*Costs and Expenses*.  Selling, general and administrative expenses increased to $22.5million in the third quarter of 2003 from $22.3 million in the comparableperiod of 2002.  As a percentage ofrevenue, the Company’s SG&A expenses increased to 34.9% in the thirdquarter of 2003 from 30.4% in the comparable period of 2002. The expenses inthe third quarter of 2003 included $787,000 of restructuring charges  primarily related to the closing of theChimes UK facility and $800,000 of special charges related to the unilateralacquisition proposal and activities of Aquent LLC. Without these special items,SG&A expenses would have decreased to $20.9 million or 32.4% of revenue.

 

SG&A expense increased to$72.3 million or 39.4% of revenue in the first nine months of 2003 from $71.3million or 31.0% of revenue for the comparable period of 2002.  The expenses in 2003 included specialcharges of $8.8 million or 4.8% of revenue, consisting of $3.7 million for theseparation package of the former CEO and $5.1 million pertaining to expensesrelated to the unilateral acquisition proposal and activities of  Aquent LLC, restructuring charges of $3.0million, or 1.6% of revenue, for terminated leases

 

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($1.3 million), severance ($1.4million) and general office closure expense ($288,000) relating primarily tothe closing of facilities in Canada and the United Kingdom.  Inaddition, the Company voluntarily terminated a sub-contract with ATEB, aprivately held company, for financial reasons and recorded a write-off ofapproximately $3.1 million due to the uncertainty of the realization of thereceivable.  ATEB was the primarycontractor to develop a new pharmacy system for Royal Ahold.  The Company is continuing recovery effortsfor this receivable.  Theexpenses in 2002 included assets held for sale (Princeton Softech, Inc.) of$4.3 million. Without these special items in 2003 and 2002, SG&A expenseswould have decreased to $57.4 million in the first nine months of 2003 from$67.0 million in the comparable periods of 2002.  This decrease in SG&A expenses was primarily attributable tocost reductions in all segments, with approximately $2 million from rentsavings and the balance primarily related to staff reduction and personnelcosts.

 

*Loss from Operations*.  The Company’s loss from operations totaled$2.9 million in the third quarter of 2003, an increase to the loss of $1.3million, from a loss of $1.6 million in the third quarter of 2002.  Operating margins were a loss of 4.5% in thethird quarter of 2003 as compared to a loss of 2.2% in the third quarter of2002.  This increase in the loss fromoperations in 2003 included a special charge of $800,000 or 1.2% of revenue,the entire amount related to the unilateral acquisition proposal and activitiesof Aquent LLC.  In addition, the Companyincurred restructuring charges of $787,000, or 1.2% of revenue, relatingprimarily to the closing of facilities in the United Kingdom and amortizationof intangibles of $526,000, or 0.8% of revenue.  The composition of the operating loss, excluding special items in2003, included a loss of $1.2 million in IT Services, profit of $1.0 million inthe Solutions Group and a loss of $632,000 in Chimes.  This compares to the operating loss of $1.6 million in the thirdquarter of 2002, consisting of a loss of $109,000 in IT Services, profit of$522,000 in the Solutions Group and a loss of $2.0 million in Chimes.  Operating margins, excluding these specialitems, were a loss of 1.3% in the third quarter of 2003 as compared to a lossof 2.2% in the third quarter of 2002.

 

The Company’s loss fromoperations totaled $18.0 million in the first nine months of 2003, an increaseof $9.2 million, from a loss of $8.8 million in the comparable period of2002.  The loss from operations in 2003included a special charge of $8.8 million, or 4.8%, consisting of $3.7 millionfor the separation package of the former CEO and $5.1 million pertaining toexpenses related to the unilateral acquisition proposal and activities of AquentLLC, restructuring charges of $3.0 million, or 1.6% of revenue, relatingprimarily to the closing of facilities in Canada and the United Kingdom,amortization of intangibles of $526,000, or 0.3% of revenue and a special baddebt charge of $3.1 million, or 1.7% of revenue due to the write-off of aterminated contract with a customer for financial reasons.  The loss from operations in 2002 includedthe loss from operations of the asset held for sale, Princeton Softech, Inc.,of $1.9 million, or 1.1% of revenue. The composition of the 2003 operating loss, excluding the special itemsnoted above included a loss of $3.1 million in IT Services, profit of $4.2million in the Solutions Group and a loss of $3.7 million in Chimes.  This compares to the operating loss of $6.8million, excluding operations of Princeton Softech, in the first nine months of2002, consisting of a loss of $1.4 million in IT Services, income of $1.7million in the Solutions Group and a loss of $7.1 million in Chimes.  Operating margins, excluding all specialitems, were a loss of 1.4% in the first nine months of 2003 as compared to aloss of 3.0% in the comparable period of 2002.

 

*Other Income/(Expense)*.  Other income was $78,000 in the thirdquarter of 2003, compared to other income of $247,000 in the comparable periodof 2002.  This decrease of other incomeduring the third quarter of 2003 was due to decreased interest income primarilyresulting from lower interest rates on cash investments.  Other income was $63,000 in the first ninemonths of 2003, compared to other income of $4.1 million in the comparableperiod of 2002.  This difference wasprimarily due to the gain on the sale of Princeton Softech in 2002.

 

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*Provision for Income Taxes*.  The effective tax rates for Federal, stateand local income taxes were 14% and 26% for the third quarter and first ninemonths of 2003, respectively, compared with 34% for the comparable periods of2002.  The decrease in the effective taxrates was primarily attributable to valuation allowances recorded for state andforeign net operating loss carryovers.

 

*Net Loss*.  Net loss for the third quarter of 2003 was$2.5 million, or $0.08 loss per diluted share, compared to net loss of$918,000, or $0.03 loss per diluted share for the third quarter of 2002, anincreased loss of $1.6 million.  Theeffect of special charges, restructuring charges and amortization ofintangibles amounted to $0.06 loss per share, net of taxes, in the thirdquarter of 2003.  For the first ninemonths of 2003, the net loss was $13.3 million, or $0.44 loss per dilutedshare, compared to a net loss of $33.0 million, or $1.05 loss per diluted sharefor the first nine months of 2002.  Thenet loss in the first nine months of 2002 includes a charge for the cumulativeeffect of change in accounting principle of $29.9 million, or $0.95 per share,net of taxes, and operations of assets held for sale and the gain on sale ofassets, which amounted to $1.1 million, or $0.03 loss per share, net of taxes.

 

**Liquidity and Capital Resources**

 

At September 30, 2003, theCompany had approximately $70 million in working capital, of which $50.7million was cash and cash equivalents.

 

Net cash provided by operatingactivities in the first nine months of 2003 was $17.9 million, consistingprimarily of the tax refund received and a reduction in client accountsreceivable.

 

Net cash used in investingactivities in the first nine months of 2003 was $24.7 million, consistingprimarily of the purchase of RGII.

 

Net cash used in financingactivities in the first nine months of 2003 was $2.6 million, consisting of thepayment of the notes for the acquisition of RGII.  In April of 2001, the Board of Directors approved the repurchasein the open market of up to 10% of its common shares outstanding, orapproximately 3.2 million shares.  As ofthe date of filing of this report, the Company had repurchased, in the openmarket, 3,114,900 shares of its stock at an average price of $3.47 per sharefor an aggregate purchase amount of $10.8 million.  There were no stock repurchases during the third quarter and asof September 30, 2003, the remaining authorization for repurchase isapproximately 93,000 shares.

 

At September 30, 2003, theCompany had a current ratio position of 2.6 to 1. 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.

 

On July 31, 2001, amendedFebruary 14, 2003, the Company entered into a secured asset-based lendingfacility that replaced its two unsecured discretionary lines of credit.  This new line of credit is a three-year, $40million facility with availability based primarily on eligible customerreceivables.  The interest rate for thefirst ninety days from closing was Prime plus 0.5%, thereafter the rate wasLIBOR plus 2.75% based on the unpaid principal. The borrowing base lessoutstanding loans must equal or exceed $17.5 million. At the time of closingthere was a $170,000 commitment fee paid to the agent.

 

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As of September 30, 2003,the Company had no outstanding loan balance against the facility.  Based on the Company’s eligible customerreceivables and cash balances, $16.3 million was available for borrowing as ofSeptember 30, 2003.  The fee forthe unused portion of the line of credit is 0.375% per annum charged to theCompany monthly.  This charge wasapproximately $84,000 and $104,000 for the nine month periods ended September 30,2003 and 2002, respectively.  This lineof credit includes covenants relating to the maintenance of cash balances andproviding for limitations on incurring obligations and spending limits on capitalexpenditures.

 

**ContractualObligations and Commercial Commitments**

 

The Company does not utilizeoff balance sheet financing other than operating lease arrangements for officepremises and related equipment.  Leasesare short term in nature and non-capital. The following table summarizes all commitments under contractualobligations as of September 30, 2003:

 
|                   |   | **Obligation  Due** |   |
|------------------------|--------|---------------------|--------|
|                   |   | **Total  Amount**   |   | **1 Year** |   | **2-3 Years** |   | **4-5 Years** |   | **Over 5  Years** |   |
|                   |   | **(in 000’s)** |   |
| Operating leases       |   | $                   | 11,282 |   | $ | 3,774 |   | $ | 5,889 |   | $ | 1,543 |   | $ | 76 |   |
| Other long-term        |   | 6,488               |   | 35 |   | — |   | — |   | 6,453 |   |
|                   |   |                |   |   |   |   |   |   |   |   |   |
| Total Cash Obligations |   | $                   | 17,770 |   | $ | 3,809 |   | $ | 5,889 |   | $ | 1,543 |   | $ | 6,529 |   |

 

## **Recent AccountingPronouncements**

 

In June 2001, theFinancial Accounting Standards Board approved the issuance of SFAS No. 141,“Business Combinations” and in July 2001, SFAS 142, “Goodwill and OtherIntangible Assets.”  The new standardsrequire that all business combinations initiated after June 30, 2001 mustbe accounted for under the purchase method. In addition, all intangible assets acquired that are obtained throughcontractual or legal right, or are capable of being separately sold,transferred, licensed, rented or exchanged shall be recognized as an assetapart from goodwill.  Goodwill andintangibles with indefinite lives will no longer be subject to amortization,but will be subject to at least an annual assessment for impairment by applyinga fair value based test.  The Companyadopted SFAS 142 as of January 1, 2002 and in compliance with this newregulation has discontinued the amortization of goodwill.  For the effect of this statement on theCompany see Note 3.

 

In November 2002, the EITFreached a consensus on Issue No. 00-21, “ Accounting for Revenue Arrangementswith Multiple Deliverables.”  This Issueprovides guidance on when and how to separate elements of an arrangement thatmay involve the delivery or performance of multiple products, services andrights to use assets into separate units of accounting.  The guidance in the consensus is effectivefor revenue arrangements entered into in fiscal periods ending afterDecember 15, 2003.  The transitionprovision allows either prospective application or a cumulative effectadjustment upon adoption.  The effect ofthe adoption of this statement was immaterial to the Company.

 

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In December 2002, theFinancial Accounting Standards Board approved the issuance of SFAS No. 148,“Accounting for Stock-Based Compensation – Translation and Disclosure.”  This statement amends FASB Statement No. 123,“Accounting for Stock-Based Compensation,” to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, this Statement amended the disclosure requirements ofStatement 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the methods used on reported results.  The Company adopted the disclosureprovisions as of December 31, 2002.

 

The exercise price per share onall options granted may not be less than the fair value at the date of theoption grant.  The Company appliesAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” as modified by FIN 44, “Accounting for Certain TransactionsInvolving Stock Compensation,” in accounting for stock-based employeecompensation, whereby no compensation cost had been recognized for the plans.  The Company expects to continue followingthe guidance under APB 25 for stock based compensation to employees and hastherefore included the disclosure requirements of FASB 148 in the accompanyingfinancial statements.

 

Effective on January 1,2003 the Company adopted Financial Accounting Standards Board No. 146,“Accounting for Exit or Disposal Activities,” (“SFAS 146”), which supersedesEmerging Issues Task Force Issue No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring).” The new standards require that a liability for a cost associated with anexit or disposal activity, including costs related to terminating a contractthat is not a capital lease and the termination benefits that employees who areinvoluntarily terminated receive under the terms of a one-time benefitarrangement that is not ongoing or an individual deferred-compensationcontract, be recognized when the liability is incurred.  Previously, under Issue No. 94-3, aliability for an exit cost was recognized at the date of an entity’s commitmentto an exit plan, which may not necessarily meet the definition of aliability.  SFAS 146 is effective forexit or disposal activities of the Company that are initiated afterDecember 31, 2002.  The Companyadopted SFAS 146 as of January 1, 2003 (See Note 6).

 

In May 2003, the FASBissued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.”  It establishes classification and measurement standards for threetypes of freestanding financial instruments that have characteristics of bothliabilities and equity.  Instrumentswithin the scope of SFAS 150 must be classified as liabilities within theCompany’s financial statements.  Theprovisions of SFAS No. 150 are effective for (1) instruments entered into ormodified after May 31, 2003 and (2) pre-existing instruments as ofJuly 1, 2003.  SFAS 150 is notexpected to have a material effect on the Company’s financial statements.

 

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).  Theaccounting provisions and disclosure requirements of FIN 46 are effectiveimmediately for VIEs created after January 31, 2003, and are effective forreporting periods ending after December 15, 2003, for VIEs created prior toFebruary 1, 2003.  Although theCompany is still evaluating the impact of FIN 46, it is not expected to have amaterial effect on the Company’s financial statements.

 

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Item 4.             Control and Procedures

 

DisclosureControls and Procedures

 

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

 

InternalControls over Financial Reporting

 

Therehave not been any changes in the Company’s internal controls over financialreporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under theSecurities Exchange Act of 1934, as amended) during the fiscal quarter to whichthis report relates that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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PART II   Other Information

 

Item 1. Legal Proceedings

 

On April 29, 2003, theCompany filed an action in the United States District Court for the District ofNew Jersey (the “New Jersey action”) against Aquent LLC, seeking (i) to enjoinAquent from disseminating false and misleading proxy materials and pressreleases in support of its two nominees for director positions in connectionwith the Company’s May 14, 2003 Annual Meeting; (ii) to invalidate anyproxies secured by Aquent through the use of unlawful proxy solicitationmaterials; and (iii) to require Aquent to disseminate corrective disclosure thatnot only amended the false and misleading proxy materials but also advised CHCshareholders how Aquent’s solicitations had violated the securities laws.  The court held that Aquent’s proxy materialswere false and misleading but invalidated no proxies and permitted Aquent tolimit corrective disclosure to new text enclosed with the old proxy materials,which contained the false and misleading statements.  On May 30, 2003, the Company filed a Notice of Appeal to theUnited States Court of Appeals for the Third Circuit, contending, among otherthings, that the corrective disclosure ordered by the United States DistrictCourt was inadequate and not in compliance with federal securities laws.  On October 15, 2003, the Company filedits appellate papers.

 

On May 27, 2003, theCompany brought an action in the Supreme Court of the State of New York, NewYork County (the “New York action”), seeking an order invalidating votes fordirectors Karl Meyer and Robert Trevisani cast at the Annual Meeting bystockholders of record who sold their shares between the record date and thedate of the Annual Meeting.  The courtin the New York action denied temporary restraints but on June 11, 2003,deferred ruling on the Company’s application for preliminary injunctive reliefpending discovery and trial.  The matterhas been scheduled for a hearing on December 15, 2003.

 

On or about June 2, 2003,Aquent filed a counterclaim in the New Jersey action against the Company andWilliam J. Murphy, the Company’s President and Chief Executive Officer,alleging breach of fiduciary duty and seeking to enjoin the Company fromdelaying the continuation of the Annual Meeting — at which the certifiedelection results would be accepted — or otherwise interfering with the seatingof the Aquent nominees.  Aquent alsosought attorneys’ fees and costs.  On orabout June 20, 2003, Aquent filed an amended counterclaim in the NewJersey action, alleging breach of the duty of care and the duty of loyalty,waste of corporate assets, and violation of the proxy rules underSection 14(a) of the Securities Exchange Act of 1934.  The amended counterclaim sought,essentially, to enjoin the Company from challenging the election of the Aquentnominees, and it sought attorneys’ fees and costs.  The Company has filed an answer denying Aquent’s allegations.

 

On or about July 15, 2003,Aquent filed an Order to Show Cause in the New Jersey action, challenging anamendment to the Company’s by-laws adopted by the Board of Directors onJune 30, 2003.  The by-law amendmentspecifies (a) that any request for a special meeting of shareholders must set adate for the meeting not fewer than seventy-five (75) nor more than ninety (90)days after the date on which the request is received; (b) that any such requestshall be ineffective, and any special meeting cancelled, if the shareholder(s)who sign the request is/are not the holder(s) of the beneficial interest of 10%or more of the Company’s issued and outstanding shares on each of the followingdates:   the date such request ismailed; the record date for the meeting (to be fixed by the Board within fivebusiness days after the receipt of the request); and the date of the meeting;and (c) that any such request for a special meeting shall be or becomeineffective, and any meeting called or noticed pursuant thereto shall becancelled, if such request of any solicitation therefore is not made incompliance with applicable law.  Thecourt took testimony in the New Jersey action on August 7, 2003 anddirected the parties to submit additional briefs on the issues.  The matter has been fully briefed andsubmitted and is pending before the court.

 

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Item 6.  Exhibits and Reports on Form 8-K

 

a)              Exhibits

 

10.1 – Employment agreement between Computer Horizons Corp. and KristinEvins.

 

31.1 – CEO Certification required by Rule 13a-14(a)/15d-14(a) under theSecurities Exchange Act of 1934.

 

31.2 – CFO Certification required by Rule 13a-14(a)/15d-14(a) under theSecurities Exchange Act of 1934.

 

32.1 – CEO Certification pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.

 

32.2 – CFO Certification pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.

 

b)             Reportson Form 8-K

 

A report onForm 8-K/A was filed on September 19, 2003 to provide the financialstatements and pro forma financial information of RGII.

 

A report onForm 8-K was filed on July 30, 2003, reporting the issuance of a pressrelease reporting the financial results of Computer Horizons for its secondfiscal quarter.

 

A report onForm 8-K was filed July 23, 2003 reporting that on July 8, 2003,pursuant to a Stock Purchase Agreement by and among Computer Horizons Corp.,RGII Technologies, Inc. and Kathryn B. Freeland, Computer Horizons Corp.purchased all of the issued and outstanding capital stock of RGII.

 

A report onForm 8-K was filed on July 9, 2003, reporting the issuance of a pressrelease announcing the completion of the acquisition of RGII Technologies, Inc.

 

A report onForm 8-K was filed on July 1, 2003, reporting the issuance of a pressrelease announcing that its Board of Directors unanimously appointed Earl L.Mason as Chairman of the Board at a meeting held on June 27, 2003.

 

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Signatures

 

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

 

 
|   |                    |   | COMPUTER  HORIZONS CORP.               |   |
|--------|-------------------------|--------|----------------------------------------|--------|
|   |                    |   | (Registrant)                           |   |
|   |                    |   |                                   |   |
|   |                    |   |                                   |   |
| DATE:  | November 14,  2003 |   | /s/ William  J. Murphy                 |   |   |
|   |                    |   | William J.  Murphy, President and  CEO |
|   |                    |   | (Principal  Executive Officer)         |
|   |                    |   |                                   |   |   |
| DATE:  | November 14,  2003 |   | /s/ Michael  J. Shea                   |   |   |
|   |                    |   | Michael J.  Shea,                      |
|   |                    |   | Vice  President and CFO                |
|   |                    |   | (Principal  Financial Officer)         |
|   |                    |   |                                   |   |   |
|   |                    |   |                                   |   |   |
| DATE:  | November 14,  2003 |   | /s/ Kristin  Evins                     |   |   |
|   |                    |   | Kristin  Evins,                        |
|   |                    |   | Controller                             |
|   |                    |   | (Principal  Accounting Officer)        |
|        |                         |        |                                        |        |  |  |  |

 

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