**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 March 31, 2005**                                                                      | ** ** |
| ** ** | ** ** | ** **                                                                                                                   | ** ** |
|       |       | **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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**CommissionFile Number 0-7282**

 

**COMPUTER HORIZONS CORP.**

(Exact name of registrantas 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 allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding twelve months (or for such shorterperiod that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days.

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

 

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

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

 

As of May 6, 2005 the issuer had 31,271,798 shares of common stockoutstanding.

 

 

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**COMPUTERHORIZONS CORP. AND SUBSIDIARIES**

 

Index

 
| Part I  | Financial Information |                                                                                                               |
|--------------|-----------------------|--------------------------------------------------------------------------------------------------------------------|
|         |                  |
|         | Item  1               | Consolidated  Balance Sheets March 31, 2005 (unaudited) and December 31, 2004                            |   |
|         |                  |                                                                                                               |   |
|         |                  | Consolidated  Statements of Operations Three Months Ended March 31, 2005 and  March 31, 2004 (unaudited) |   |
|         |                  |                                                                                                               |   |   |
|         |                  | Consolidated  Statements of Cash Flows Three Months Ended March 31, 2005 and  March 31, 2004 (unaudited) |   |
|         |                  |                                                                                                               |   |
|         |                  | Notes to  Consolidated Financial Statements                                                                        |   |
|         |                  |                                                                                                               |   |
|         | Item  2               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        |   |
|         |                  |                                                                                                               |   |
|         | Item 4                | Controls and Procedures                                                                                            |   |
|         |                  |                                                                                                               |   |
| Part II | Other Information     |                                                                                                               |
|         |                  |                                                                                                               |   |
|         | Item6                 | Exhibits and Reports on  Form 8-K                                                                             |   |
|         |                  |                                                                                                               |   |
|         |                  | Signatures                                                                                                         |   |
|              |                       |                                                                                                                    |  |  |  |

 

 

2

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Part I Financial Information

Item 1

**COMPUTERHORIZONS CORP. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

(dollars inthousands)

 
| ** **                                                                                                                                                       | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                       | ** ** | **(unaudited)**         | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                                                       |       |                    |       |                       |       |
| CURRENT ASSETS:                                                                                                                                                  |       |                    |       |                       |       |
| Cash and cash  equivalents                                                                                                                                       |       | $                       | 31,373     |                       | $          | 33,649 |   |
| Accounts  receivable, less allowance for doubtful accounts of $3,978 and $5,914 at  March 31, 2005 and December 31, 2004, respectively                 |       | 51,179                  |       | 51,322                     |       |
| Deferred income  taxes                                                                                                                                           |       | 875                     |       | 1,868                      |       |
| Refundable  income taxes                                                                                                                                         |       | 4,924                   |       | 4,088                      |       |
| Other                                                                                                                                                            |       | 4,019                   |       | 5,550                      |       |
| TOTAL CURRENT  ASSETS                                                                                                                                            |       | 92,370                  |       | 96,477                     |       |
|                                                                                                                                                             |       |                    |       |                       |       |
| PROPERTY AND  EQUIPMENT                                                                                                                                          |       | 43,333                  |       | 42,810                     |       |
| Less accumulated  depreciation                                                                                                                                   |       | (37,841                 | )          | (36,815                    | )          |
|                                                                                                                                                             |       | 5,492                   |       | 5,995                      |       |
| OTHER ASSETS -  NET:                                                                                                                                             |       |                    |       |                       |       |
| Goodwill                                                                                                                                                         |       | 27,625                  |       | 27,625                     |       |
| Intangibles                                                                                                                                                      |       | 2,903                   |       | 3,253                      |       |
| Deferred income  taxes                                                                                                                                           |       | 18,637                  |       | 17,698                     |       |
| Other                                                                                                                                                            |       | 7,912                   |       | 8,036                      |       |
| TOTAL OTHER  ASSETS                                                                                                                                              |       | 57,077                  |       | 56,612                     |       |
|                                                                                                                                                             |       |                    |       |                       |       |
| TOTAL ASSETS                                                                                                                                                     |       | $                       | 154,939    |                       | $          | 159,084 |   |
|                                                                                                                                                             |       |                    |       |                       |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                   |       |                    |       |                       |       |
| CURRENT  LIABILITIES:                                                                                                                                            |       |                    |       |                       |       |
| Accounts payable                                                                                                                                                 |       | $                       | 9,809      |                       | $          | 7,615 |   |
| Accrued payroll,  payroll taxes and benefits                                                                                                                     |       | 8,512                   |       | 8,489                      |       |
| Income taxes  payable                                                                                                                                            |       | 1,468                   |       | 1,377                      |       |
| Restructuring  reserve                                                                                                                                           |       | 893                     |       | 3,351                      |       |
| RGII contingency  payment                                                                                                                                        |       | —                  |       | 1,851                      |       |
| Other accrued  expenses                                                                                                                                          |       | 2,703                   |       | 4,912                      |       |
| TOTAL CURRENT  LIABILITIES                                                                                                                                       |       | 23,385                  |       | 27,595                     |       |
|                                                                                                                                                             |       |                    |       |                       |       |
| OTHER  LIABILITIES:                                                                                                                                              |       |                    |       |                       |       |
| Deferred  compensation                                                                                                                                           |       | 2,493                   |       | 2,633                      |       |
| Supplemental  executive retirement plan                                                                                                                          |       | 2,197                   |       | 2,162                      |       |
| Other                                                                                                                                                            |       | 800                     |       | 913                        |       |
| TOTAL  LIABILITIES                                                                                                                                               |       | 28,875                  |       | 33,303                     |       |
|                                                                                                                                                             |       |                    |       |                       |       |
| SHAREHOLERS’  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 33,158,105 and 33,153,805 shares  at March 31, 2005 and December 31, 2004, respectively |       | 3,315                   |       | 3,315                      |       |
| Additional paid  in capital                                                                                                                                      |       | 151,167                 |       | 151,281                    |       |
| Accumulated  comprehensive loss                                                                                                                                  |       | (2,601                  | )          | (2,200                     | )          |
| Retained  earnings / (deficit)                                                                                                                                   |       | (13,741                 | )          | (14,072                    | )          |
|                                                                                                                                                             |       | 138,140                 |       | 138,324                    |       |
| Less shares held  in treasury, at cost; 1,938,151 and 2,060,011 shares at March 31, 2005 and  December 31, 2004, respectively                               |       | (12,076                 | )          | (12,543                    | )          |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                                                                                 |       | 126,064                 |       | 125,781                    |       |
|                                                                                                                                                             |       |                    |       |                       |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                 |       | $                       | 154,939    |                       | $          | 159,084 |   |

 

3

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**COMPUTERHORIZONS CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(Unaudited)

(dollars inthousands, except per share data)

 
| ** **                                               | ** ** | **THREE MONTHS ENDED**  | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|
| ** **                                               | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
| ** **                                               | ** ** | ** **              | ** ** | **% of  revenue** | ** ** | ** ** | ** ** | **% of  revenue** | ** ** |
| REVENUES:                                                |       |                    |       |   |   |   |   |   |   |
| Commercial                                               |       | $                       | 48,671     |   | 73.1 | % | $ | 44,783 |   | 75.0 | % |
| Federal                                                  |       | 11,539                  |       | 17.3 | % | 9,570 |   | 16.0 | % |
| Chimes                                                   |       | 6,363                   |       | 9.6 | % | 5,353 |   | 9.0 | % |
| Total                                                    |       | 66,573                  |       | 100.0 | % | 59,706 |   | 100.0 | % |
|                                                     |       |                    |       |   |   |   |   |   |   |
| COSTS AND  EXPENSES:                                     |       |                    |       |   |   |   |   |   |   |
| Direct costs                                             |       | 45,588                  |       | 68.5 | % | 40,805 |   | 68.3 | % |
| Selling,  general & administrative              |       | 20,977                  |       | 31.5 | % | 19,587 |   | 32.8 | % |
| Amortization of  intangibles                             |       | 350                     |       | 0.5 | % | 208 |   | 0.3 | % |
| Special charges  / (credits)                             |       | (675                    | )          | -1.0 | % | — |   | 0.0 | % |
|                                                     |       | 66,240                  |       | 99.5 | % | 60,600 |   | 101.5 | % |
|                                                     |       |                    |       |   |   |   |   |   |   |
| INCOME/(LOSS)  FROM OPERATIONS                           |       | 333                     |       | 0.5 | % | (894 | ) | -1.5 | % |
|                                                     |       |                    |       |   |   |   |   |   |   |
| OTHER  INCOME/(EXPENSE):                                 |       |                    |       |   |   |   |   |   |   |
| Interest income                                          |       | 180                     |       | 0.3 | % | 93 |   | 0.2 | % |
| Interest expense                                         |       | (5                      | )          | 0.0 | % | (10 | ) | 0.0 | % |
|                                                     |       | 175                     |       | 0.3 | % | 83 |   | 0.1 | % |
|                                                     |       |                    |       |   |   |   |   |   |   |
| INCOME/(LOSS)  BEFORE INCOME TAXES                       |       | 508                     |       | 0.8 | % | (811 | ) | -1.4 | % |
|                                                     |       |                    |       |   |   |   |   |   |   |
| INCOME  (TAXES)/BENEFIT:                                 |       |                    |       |   |   |   |   |   |   |
| Current                                                  |       | (124                    | )          | -0.2 | % | (125 | ) | -0.2 | % |
| Deferred                                                 |       | (54                     | )          | -0.1 | % | 379 |   | 0.6 | % |
|                                                     |       | (178                    | )          | -0.3 | % | 254 |   | 0.4 | % |
|                                                     |       |                    |       |   |   |   |   |   |   |
| INCOME/(LOSS)  BEFORE MINORITY INTEREST                  |       | 330                     |       | 0.5 | % | (557 | ) | -0.9 | % |
|                                                     |       |                    |       |   |   |   |   |   |   |
| Minority  Interest                                       |       | —                  |       | 0.0 | % | (9 | ) | 0.0 | % |
| NET  INCOME/(LOSS)                                       |       | $                       | 330        |   | 0.5 | % | $ | (566 | ) | -0.9 | % |
|                                                     |       |                    |       |   |   |   |   |   |   |
| EARNINGS/(LOSS)  PER SHARE - BASIC:                      |       | $                       | 0.01       |   |   |   | $ | (0.02 | ) |   |   |
|                                                     |       |                    |       |   |   |   |   |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING - BASIC   |       | 31,193,000              |       |   |   | 30,676,000 |   |   |   |
|                                                     |       |                    |       |   |   |   |   |   |   |
| EARNINGS/(LOSS)  PER SHARE - DILUTED:                    |       | $                       | 0.01       |   |   |   | $ | (0.02 | ) |   |   |
|                                                     |       |                    |       |   |   |   |   |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING - DILUTED |       | 31,524,000              |       |   |   | 30,676,000 |   |   |   |

 

4

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**COMPUTERHORIZONS CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(Unaudited)

(dollars inthousands)

 
| ** **                                                                                 | ** ** | **Three Months Ended**  | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                 | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                  |       |                    |       |   |   |
| Net income /  (loss)                                                                       |       | $                       | 330        |   | $ | (566 | ) |
| Adjustments to  reconcile net loss to net cash provided by/(used in) operating activities: |       |                    |       |   |   |
| Deferred taxes                                                                             |       | 54                      |       | (379 | ) |
| Depreciation                                                                               |       | 1,058                   |       | 1,316 |   |
| Amortization of  intangibles                                                               |       | 350                     |       | 208 |   |
| Provision for  bad debts                                                                   |       | 201                     |       | 390 |   |
|                                                                                       |       |                    |       |   |   |
| Changes in  assets and liabilities, net of acquisitions:                                   |       |                    |       |   |   |
| Accounts  receivable                                                                       |       | (58                     | )          | (3,042 | ) |
| Other current  assets                                                                      |       | 1,530                   |       | 1,122 |   |
| Other assets                                                                               |       | 124                     |       | (280 | ) |
| Refundable  income taxes/benefit reserve                                                   |       | (836                    | )          | — |   |
| Accrued payroll,  payroll taxes and benefits                                               |       | 23                      |       | 869 |   |
| Accounts payable                                                                           |       | 2,194                   |       | 561 |   |
| Income taxes  payable                                                                      |       | 91                      |       | (572 | ) |
| RGII contingency  payment                                                                  |       | (1,851                  | )          | (630 | ) |
| Other accrued  expenses and restructuring reserve                                          |       | (4,834                  | )          | (1,999 | ) |
| Deferred  compensation                                                                     |       | (140                    | )          | (103 | ) |
| Supplemental  executive retirement plan                                                    |       | 35                      |       | 120 |   |
| Other  liabilities                                                                         |       | (113                    | )          | 373 |   |
|                                                                                       |       |                    |       |   |   |
| **NET  CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES**                                   |       | (1,842                  | )          | (2,612 | ) |
|                                                                                       |       |                    |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                  |       |                    |       |   |   |
| Purchases of  furniture and equipment                                                      |       | (555                    | )          | (497 | ) |
| **NET  CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES**                                   |       | (555                    | )          | (497 | ) |
|                                                                                       |       |                    |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                  |       |                    |       |   |   |
| Stock options  exercised                                                                   |       | 325                     |       | 262 |   |
| Stock issued on  employee stock purchase plan                                              |       | 28                      |       | 146 |   |
| **NET  CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES**                                   |       | 353                     |       | 408 |   |
|                                                                                       |       |                    |       |   |   |
| Foreign currency  gains/ (losses)                                                          |       | (232                    | )          | (152 | ) |
| **NET  INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS**                                  |       | (2,276                  | )          | (2,853 | ) |
| **CASH  AND CASH EQUIVALENTS AT BEGINNING OF YEAR**                                        |       | 33,649                  |       | 52,610 |   |
| **CASH  AND CASH EQUIVALENTS AT END OF PERIOD**                                            |       | $                       | 31,373     |   | $ | 49,757 |   |

 

Non CashActivities:

 

During the firstquarter of 2004, the Company recorded a reduction in tax benefit reserves andan increase in additional paid-in capital of $19.9 million.

 

5

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**COMPUTERHORIZONS CORP. AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

For the Periods EndedMarch 31, 2005 and March 31, 2004

(unaudited)

 

**1.             Basisof Presentation**

 

The consolidated balance sheet as of March 31, 2005, theconsolidated statements of operations for the three months ended March 31,2005 and March 31, 2004, respectively, and the consolidated statement ofcash flows for the three months ended March 31, 2005 and 2004 have beenprepared by the Company without audit.  In the opinion of management, alladjustments (which include normal recurring adjustments) necessary to presentfairly the financial position, results of operations and cash flows atMarch 31, 2005 (and for all periods presented) have been made.

 

Certain information and note disclosures, normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America, which are not required forinterim purposes, have been condensed or omitted.  It is suggested thatthese consolidated financial statements be read in conjunction with thefinancial statements and notes thereto included in the Annual Report onForm 10-K for the year ended December 31, 2004 filed by theCompany.  The results of operations for the periods ended March 31,2005 and 2004 are not necessarily indicative of the operating results for therespective full years.

 

**2.             RealignedBusiness Segments**

 

During the fourth quarter of 2004, the Companycompleted a restructuring initiative whereby the Company’s business model hasbeen realigned, effective January 1, 2005, around its three distinctsegments of clients : Federal Government, Commercial and Vendor Managementservices (Chimes), and is reporting in accordance to the new presentation ofthe Company’s business segments for the first quarter of 2005.   This realigned business model is designed tofocus on improving operational performance for the Company and reduce annualoperating costs.

 

As a result of the business realignment, the Company has reclassifiedthe prior year amounts in order to provide a basis for comparison, conformingto our lines of business in the chart below. Income/(loss) before income taxes/ (benefit) consists of income/(loss)before income taxes, excluding interest income, interest expense, specialcharges/(credits), minority interest, and amortization of intangibles. Corporate services, consisting of general and administrative services, areprovided to the segments from a centralized location.  Such costs areallocated to the applicable segments receiving Corporate services based onrevenue.

 

6

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| ** **                                 | ** ** | **Full Year** | ** ** | **Three Months Ended**     | ** ** |
|--------------------------------------------|------------|---------------|------------|----------------------------|------------|
| **(dollars in thousands)**                 | ** ** | **2004**      | ** ** | **December 31, 2004** | ** ** | **September 30, 2004** | ** ** | **June 30, 2004** | ** ** | **March 31, 2004** | ** ** |
| Revenues :                                 |       |          |       |                       |       |   |   |   |   |   |   |
| Commercial                                 |       | $             | 191,096    |                       | $          | 50,179 |   | $ | 50,128 |   | $ | 46,006 |   | $ | 44,783 |   |
| Federal                                    |       | 48,339        |       | 11,647                     |       | 13,267 |   | 13,855 |   | 9,570 |   |
| Chimes                                     |       | 23,092        |       | 5,808                      |       | 6,002 |   | 5,929 |   | 5,353 |   |
| Total Revenues                             |       | $             | 262,527    |                       | $          | 67,634 |   | $ | 69,397 |   | $ | 65,790 |   | $ | 59,706 |   |
|                                       |       |          |       |                       |       |   |   |   |   |   |   |
| Gross Profit :                             |       |          |       |                       |       |   |   |   |   |   |   |
| Commercial                                 |       | $             | 38,005     |                       | $          | 9,336 |   | $ | 9,625 |   | $ | 9,353 |   | $ | 9,691 |   |
| Federal                                    |       | 22,220        |       | 5,465                      |       | 6,237 |   | 6,368 |   | 4,150 |   |
| Chimes                                     |       | 21,696        |       | 5,419                      |       | 5,655 |   | 5,561 |   | 5,061 |   |
| Total Gross  Profit                        |       | $             | 81,921     |                       | $          | 20,220 |   | $ | 21,517 |   | $ | 21,282 |   | $ | 18,902 |   |
| %                                          |       | 31.2          | %          | 29.9                       | %          | 31.0 | % | 32.3 | % | 31.7 | % |
|                                       |       |          |       |                       |       |   |   |   |   |   |   |
| Operating Income  :                        |       |          |       |                       |       |   |   |   |   |   |   |
| Commercial                                 |       | $             | 8,350      |                       | $          | 1,386 |   | $ | 1,632 |   | $ | 2,222 |   | $ | 3,110 |   |
| Federal                                    |       | 6,468         |       | 1,223                      |       | 2,005 |   | 2,272 |   | 968 |   |
| Chimes                                     |       | 1,420         |       | 203                        |       | 395 |   | 728 |   | 94 |   |
| Total Operating  Income                    |       | $             | 16,238     |                       | $          | 2,812 |   | $ | 4,032 |   | $ | 5,222 |   | $ | 4,172 |   |
| %                                          |       | 6.2           | %          | 4.2                        | %          | 5.8 | % | 7.9 | % | 7.0 | % |
|                                       |       |          |       |                       |       |   |   |   |   |   |   |
| Corporate  Allocation :                    |       |          |       |                       |       |   |   |   |   |   |   |
| Commercial                                 |       | $             | 15,602     |                       | $          | 3,840 |   | $ | 3,493 |   | $ | 4,310 |   | $ | 3,959 |   |
| Federal                                    |       | 1,792         |       | 408                        |       | 417 |   | 578 |   | 389 |   |
| Chimes                                     |       | 2,064         |       | 492                        |       | 457 |   | 605 |   | 510 |   |
| Total Corporate  Allocation                |       | $             | 19,458     |                       | $          | 4,740 |   | $ | 4,367 |   | $ | 5,493 |   | $ | 4,858 |   |
| %                                          |       | 7.4           | %          | 7.0                        | %          | 6.3 | % | 8.3 | % | 8.1 | % |
|                                       |       |          |       |                       |       |   |   |   |   |   |   |
| Total Income /  (Loss) before Income       |       |          |       |                       |       |   |   |   |   |   |   |
| Taxes /  (Benefit) :                       |       |          |       |                       |       |   |   |   |   |   |   |
| Commercial                                 |       | $             | (7,252     | )                          | $          | (2,453 | ) | $ | (1,862 | ) | $ | (2,088 | ) | $ | (849 | ) |
| Federal                                    |       | 4,676         |       | 815                        |       | 1,588 |   | 1,694 |   | 579 |   |
| Chimes                                     |       | (644          | )          | (290                       | )          | (61 | ) | 123 |   | (416 | ) |
| Total Income /  (Loss) before Income Taxes |       | $             | (3,220     | )                          | $          | (1,928 | ) | $ | (335 | ) | $ | (271 | ) | $ | (686 | ) |
| %                                          |       | -1.2          | %          | -2.9                       | %          | -0.5 | % | -0.4 | % | -1.1 | % |

 

**3.             RecentAccounting Pronouncements**

 

In March 2004, the Financial Accounting Standards Board (FASB)Emerging Issues Task Force (EITF) released Issue No. 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments.”EITF 03-1 provides guidance for determining whether impairment for certain debtand equity investments is other-than-temporary and the measurement of animpaired loss. The recognition and measurement requirements of EITF 03-1 wereinitially effective for reporting periods beginning after June 15, 2004.In September 2004, the FASB Staff issued FASB Staff Position (“FSP”) EITF03-1-1 that delayed the effective date for certain measurement and recognitionguidance contained in EITF 03-1. The FSP requires that entities continue toapply previously existing “other-than-temporary” guidance until a finalconsensus is reached. Management does not anticipate that issuance of a finalconsensus will materially impact the Company’s financial condition or resultsof operations.

 

In December 2004, the FASB issued Statement of FinancialAccounting Standard No. 123 (revised 2004), “Share-Based Payment” (FAS123R).  FAS 123R requires compensationcost be recognized for new awards of equity instruments and unvested awards onthe adoption date.  The SEC amended theeffective dates of FAS 123R for public companies in April 2005, whichallows registrants to implement FAS 123R at the beginning of their next fiscalyear, instead of the next interim period, that begins after June 15, 2005.  The SEC also issued Staff Accounting Bulletin(SAB) 107, Share-Based Payment, in April 2005, which provides the views ofthe SEC staff regarding certain aspects of the application of FAS 123R,Share-Based Payment.  The staff’s intentin issuing SAB 107 is to assist issuers in their initial implementation of FAS123R and to communicate that the staff understands that, particularly in theperiod of initial implementation, issuers may reasonably arrive at differentestimates and option valuations in applying FAS 123R.  We expect the adoption of this statement willhave a material effect on the Company’s financial statements, but we cannotreasonably estimate the impact of the adoption because certain assumptions usedin the calculation of the value of share-based payments may change in 2005.

 

**4.             Accountingfor Stock-Based Compensation**

 

In December 2002, the FASB approved the issuance of Statement ofFinancial Accounting Standard No. 148, “Accounting for Stock-BasedCompensation – Translation and Disclosure” (FAS No. 148).  Thisstatement amends FASB Statement No. 123, “Accounting for Stock-BasedCompensation,” to provide alternative methods of transition for a voluntarychange to the fair value 

 

7

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based method of accounting for stock-based employee compensation. In addition, this Statement amended the disclosure requirements of the FAS 123to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based compensation and theeffect of the methods used on reported results. The Company adopted disclosureprovisions as of December 31, 2002.

 

The exercise price per share on all options granted may not be lessthan the fair value at the date of the option grant.  The Company appliesAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (APB 25), as modified by FIN 44, “Accounting for CertainTransactions Involving Stock Compensation,” in accounting for stock-basedemployee compensation, whereby no compensation cost had been recognized for theplans.  The Company expects to continue following the guidance under APB25 for stock-based compensation to employees.  Had compensation cost forthe plans been determined based on the fair value of the options at the grantdates and been consistent with the method of FAS 123, the Company’s net lossand loss per share would have been increased to the pro forma amounts indicatedbelow:

 
| **(in thousands, except per share data)** | ** ** | **March 31, 2005**                                                                                                                        | ** ** | **March 31, 2004** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
|                                      |       |                                                                                                                                           |       |                    |       |   |   |
| Net  income/(loss)                        |       | As reported                                                                                                                                    |       | $                       | 330        |   | $ | (566 | ) |
|                                      |       | Deduct : Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (271                    | )          | (724 | ) |
|                                      |       |                                                                                                                                           |       |                    |       |   |   |
|                                      |       | Pro forma                                                                                                                                      |       | $                       | 59         |   | $ | (1,290 | ) |
|                                      |       |                                                                                                                                           |       |                    |       |   |   |
| Earnings per  share                       |       |                                                                                                                                           |       |                    |       |   |   |
| Basic                                     |       | As reported                                                                                                                                    |       | $                       | 0.01       |   | $ | (0.02 | ) |
|                                      |       | Pro forma                                                                                                                                      |       | 0.00                    |       | (0.04 | ) |
|                                      |       |                                                                                                                                           |       |                    |       |   |   |
| Diluted                                   |       | As reported                                                                                                                                    |       | $                       | 0.01       |   | $ | (0.02 | ) |
|                                      |       | Pro forma                                                                                                                                      |       | 0.00                    |       | (0.04 | ) |

 

**5**.             **Restricted Cash**

 

Included in cash and cash equivalents at March 31, 2005 andDecember 31, 2004 is restricted cash of nil and $191,000,respectively.  Restricted cash represents funds received by Chimes andheld in client-specific bank accounts, to be used to make payments to vendorsof the applicable client.

 

**6.**             **Earnings Per Share**

 

Basic Earnings Per Share (“EPS”) is based on the weighted averagenumber of common shares outstanding without consideration of common stockequivalents.  Diluted earnings per shareis based on the weighted average number of common and common equivalent sharesoutstanding, except the three-month period ended March 31, 2004, where theeffect would have been antidilutive.  Thecalculation takes into account the shares that may be issued upon exercise ofstock options, reduced by the shares that may be repurchased with the fundsreceived from the exercise, based on the average price during the year.

 

In accordance with SFAS No. 128, the table below presents both basicand diluted earnings per share:

 
| ** **                                                                                                          | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                          | ** ** | **March 31, 2005**     | ** ** | **March 31, 2004** | ** ** |
|                                                                                                                |       |                   |       |   |   |
| Numerator:                                                                                                          |       |                   |       |   |   |
| Net income/(loss)  - in thousands                                                                                   |       | $                      | 330        |   | $ | (566 | ) |
| Denominator:                                                                                                        |       |                   |       |   |   |
| Denominator for  basic earnings per share - weighted average shares outstanding                                     |       | 31,193,000             |       | 30,676,000 |   |
| Effect of stock  options                                                                                            |       | 331,000                |       | — |   |
| Diluted  earnings/(loss) per share:                                                                                 |       |                   |       |   |   |
| Denominator for  diluted earnings per share - adjusted weighted average shares outstanding and  assumed conversions |       | 31,524,000             |       | 30,676,000 |   |
| Basic  earnings/(loss) per share                                                                                    |       | $                      | 0.01       |   | $ | (0.02 | ) |
| Diluted  earnings/(loss) per share                                                                                  |       | $                      | 0.01       |   | $ | (0.02 | ) |

 

The computation of diluted earnings per share excludes all options withexercise prices greater than the average market price in 2005 and all optionsin 2004 since their inclusion would be anti-dilutive.  During the three months ended March 31,2005, 1,005,769 options were excluded with exercise prices between $3.89 and$23.00.  During the three months ended March 31, 2004, 3,802,000options were excluded with exercise prices between $4.40 and $23.00.

 

**7.             Segment Information**

 

During the fourth quarter of 2004, the Company completed arestructuring initiative whereby the Company’s business model has beenrealigned, effective January 1, 2005, around its three distinct segmentsof clients : Federal Government, Commercial and Vendor Management services(Chimes).  As a result of the businessrealignment, the Company has reclassified the prior year amounts in order toprovide a basis for comparison, conforming to our new lines of business.  Income/(loss) before income taxes/ (benefit)consists of income/(loss) before income taxes, excluding interest income,interest expense, special charges/(credits), minority interest, andamortization of intangibles.  These exclusions total income of $0.5million and expense of $0.1 million for the quarter ended March 31, 2005and 2004, respectively (see reconciliation of segment income/(loss) beforeincome taxes/(benefit) to consolidated income/(loss) before incometaxes/(benefit)).  Corporate services, consisting of general and administrativeservices, are provided to the segments from a centralized location.  Suchcosts are allocated to the applicable segments receiving Corporate servicesbased on revenue.

 

8

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| ** **                                               | ** ** | **THREE MONTHS ENDED**  | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|
| **(dollars in thousands)**                               | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
| Revenues :                                               |       |                    |       |   |   |
| Commercial                                               |       | $                       | 48,671     |   | $ | 44,783 |   |
| Federal                                                  |       | 11,539                  |       | 9,570 |   |
| Chimes                                                   |       | 6,363                   |       | 5,353 |   |
| Total revenues                                           |       | $                       | 66,573     |   | $ | 59,706 |   |
|                                                     |       |                    |       |   |   |
| Gross Profit :                                           |       |                    |       |   |   |
| Commercial                                               |       | $                       | 9,518      |   | $ | 9,691 |   |
| Federal                                                  |       | 5,415                   |       | 4,150 |   |
| Chimes                                                   |       | 6,052                   |       | 5,061 |   |
| Total Gross  Profit                                      |       | $                       | 20,985     |   | $ | 18,902 |   |
| %                                                        |       | 31.5                    | %          | 31.7 | % |
|                                                     |       |                    |       |   |   |
| Operating Income  :                                      |       |                    |       |   |   |
| Commercial                                               |       | $                       | 2,606      |   | $ | 3,110 |   |
| Federal                                                  |       | 1,323                   |       | 968 |   |
| Chimes                                                   |       | 1,189                   |       | 94 |   |
| Total Operating  Income                                  |       | $                       | 5,118      |   | $ | 4,172 |   |
| %                                                        |       | 7.7                     | %          | 7.0 | % |
|                                                     |       |                    |       |   |   |
| Corporate  Allocation :                                  |       |                    |       |   |   |
| Commercial                                               |       | $                       | 4,073      |   | $ | 3,959 |   |
| Federal                                                  |       | 443                     |       | 389 |   |
| Chimes                                                   |       | 594                     |       | 510 |   |
| Total Corporate  Allocation                              |       | $                       | 5,110      |   | $ | 4,858 |   |
| %                                                        |       | 7.7                     | %          | 8.1 | % |
|                                                     |       |                    |       |   |   |
| Total Income /  (Loss) before Income Taxes / (benefit) : |       |                    |       |   |   |
| Commercial                                               |       | $                       | (1,467     | ) | $ | (849 | ) |
| Federal                                                  |       | 880                     |       | 579 |   |
| Chimes                                                   |       | 595                     |       | (416 | ) |
| Total Income /  (Loss) before Income Taxes               |       | $                       | 8          |   | $ | (686 | ) |
| %                                                        |       | 0.0                     | %          | -1.1 | % |

 

*Reconciliation of SegmentIncome/(Loss) before Income Taxes/(Benefit) to Consolidated Income/(Loss)Before Income Taxes/(Benefit):*

 
| ** **                                                   | ** ** | **THREE MONTHS ENDED**  | ** ** |
|--------------------------------------------------------------|------------|-------------------------|------------|
| **(dollars in thousands)**                                   | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
|                                                         |       |                    |       |   |   |
| Total segment  income/(loss) before income taxes/(benefit) : |       | $                       | 8          |   | $ | (686 | ) |
|                                                         |       |                    |       |   |   |
| Adjustments :                                                |       |                    |       |   |   |
| Special  (charges) / credits                                 |       | 675                     |       | — |   |
| Amortization of  intangibles                                 |       | (350                    | )          | (208 | ) |
| Net interest  income                                         |       | 175                     |       | 83 |   |
| Total  adjustments                                           |       | 500                     |       | (125 | ) |
|                                                         |       |                    |       |   |   |
| Consolidated  income/(loss) before income taxes/(benefit)    |       | $                       | 508        |   | $ | (811 | ) |

 

9

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**8.             Restructuring Charges**

 

During the fourth quarter of 2004, in connection withthe Company’s business model realignment, the Company recorded a restructuringcharge of approximately $2.9 million comprised of approximately $2.8 million inseverance costs and $0.1 million in lease obligation costs.  The leaseobligation of $0.1 million is calculated based on current rent commitments lessa calculated sublease amount based on current market conditions.

 
| **(dollars in thousands)** | ** ** | **Remaining at  December 31, 2004** | ** ** | **Paid** | ** ** | **Currency  Translation *** | ** ** | **Remaining at  March 31, 2005** | ** ** |
|----------------------------|------------|-------------------------------------|------------|----------|------------|-----------------------------|------------|---------------------------------------|------------|
|                       |       |                                |       |     |       |                        |       |                                  |       |
| Severance :                |       |                                |       |     |       |                        |       |                                  |       |
| Canada                     |       | $                                   | 535        |     | $          | (318                        | )          | $                                     | (7         | ) | $ | 210 |   |
| United States              |       | 1,902                               |       | (1,858   | )          | —                      |       | $                                     | 44         |   |
| Total Severance            |       | $                                   | 2,437      |     | $          | (2,176                      | )          | $                                     | (7         | ) | $ | 254 |   |
|                       |       |                                |       |     |       |                        |       |                                  |       |
| Lease  Obligations :       |       |                                |       |     |       |                        |       |                                  |       |
| United States              |       | $                                   | 110        |     | $          | (27                         | )          | $                                     | —     |   | $ | 83 |   |
|                       |       |                                |       |     |       |                        |       |                                  |       |
| Total                      |       | $                                   | 2,547      |     | $          | (2,203                      | )          | $                                     | (7         | ) | $ | 337 |   |

 

During 2003, the Company recorded restructuringcharges of approximately $3.3 million relating to the closing of severaloffices in the United States, Canada and the United Kingdom, including therelated severance costs.  The severancecosts approximated $1.5 million and the future lease obligation costs (less acalculated sublease amount), including office closure expenses, approximated$1.8 million.

 
| **(dollars in thousands)** | ** ** | **Remaining at  December 31, 2004** | ** ** | **Paid** | ** ** | **Currency  Translation *** | ** ** | **Remaining at  March 31, 2005** | ** ** |
|----------------------------|------------|-------------------------------------|------------|----------|------------|-----------------------------|------------|---------------------------------------|------------|
|                       |       |                                |       |     |       |                        |       |                                  |       |
| Severance :                |       |                                |       |     |       |                        |       |                                  |       |
| United Kingdom *           |       | $                                   | 50         |     | $          | 1                           |       | $                                     | (1         | ) | $ | 50 |   |
| Total Severance            |       | $                                   | 50         |     | $          | 1                           |       | $                                     | (1         | ) | $ | 50 |   |
|                       |       |                                |       |     |       |                        |       |                                  |       |
| Lease  Obligations :       |       |                                |       |     |       |                        |       |                                  |       |
| United Kingdom *           |       | $                                   | 123        |     | $          | (9                          | )          | $                                     | (2         | ) | 112 |   |
| Canada                     |       | 319                                 |       | (38      | )          | (9                          | )          | 272                                   |       |
| Total Lease  Obligations : |       | $                                   | 442        |     | $          | (47                         | )          | $                                     | (11        | ) | $ | 384 |   |
|                       |       |                                |       |     |       |                        |       |                                  |       |
| General Office  Closure :  |       |                                |       |     |       |                        |       |                                  |       |
| United Kingdom *           |       | $                                   | 45         |     | $          | (13                         | )          | $                                     | (0         | ) | $ | 32 |   |
|                       |       |                                |       |     |       |                        |       |                                  |       |
| Total                      |       | $                                   | 537        |     | $          | (59                         | )          | $                                     | (12        | ) | $ | 466 |   |

 

----

*   Recordedbalances change due to fluctuations in exchange rates

 

During 2002, the Company recorded restructuringcharges approximating $2.8 million, primarily pertaining to office closings.Amounts remaining from this restructuring, and previous restructurings, pertainto future lease obligation costs.

 
| ** **                 | ** ** | **Remaining at**      | ** ** | ** ** | ** ** | ** **   | ** ** | **Remaining at**        | ** ** |
|----------------------------|------------|-----------------------|------------|------------|------------|--------------|------------|-------------------------|------------|
| **(dollars in thousands)** | ** ** | **December 31, 2004** | ** ** | **Paid**   | ** ** | **Adjusted** | ** ** | **March 31, 2005** | ** ** |
|                       |       |                  |       |       |       |         |       |                    |       |
| Lease  Obligations :       |       |                  |       |       |       |         |       |                    |       |
| United States              |       | $                     | 267        |       | $          | (177         | )          | $                       | —     |   | $ | 90 |   |
|                            |            |                       |            |            |            |              |            |                         |            |  |  |  |  |

 

10

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**9.             Shareholders’Equity**

** **
| ** **                                        | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **Amount**                                  | ** ** | **Shares** | ** ** |
| ** **                                        | ** ** | **(dollars in thousands)**                  | ** ** | ** ** | ** ** |
|                                              |       |                                        |       |   |   |
| Balance at  beginning of period                   |       | $                                           | 125,781    |   | 31,093,794 |   |
| Net income                                        |       | 330                                         |       |   |   |
| Proceeds upon  exercise of stock options and ESPP |       | 353                                         |       | 126,160 |   |
| Other  comprehensive loss                         |       | (401                                        | )          |   |   |
|                                              |       | $                                           | 126,064    |   | 31,219,954 |   |

 

**10**.          **Comprehensive Income /(Loss)**

 

Statement of Financial Accounting Standards No. 130 “ReportingComprehensive Income” (FAS No. 130) requires that items defined as othercomprehensive income/(loss), such as foreign currency translation adjustmentsand unrealized gains and losses, be separately classified in the financialstatements 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 months ended March 31, 2005 andMarch 31, 2004 are as follows:

 
| ** **                                                        | ** ** | **Three Months Ended**  | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|
| **(dollars in thousands)**                                        | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
| Comprehensive  income/(loss) :                                    |       |                    |       |   |   |
|                                                              |       |                    |       |   |   |
| Net  income/(loss)                                                |       | $                       | 330        |   | $ | (566 | ) |
| Other  comprehensive income/(loss) -  Foreign currency adjustment |       | (232                    | )          | (152 | ) |
| Unrealized  gain/(loss) on SERP investments                       |       | (169                    | )          | 74 |   |
| Comprehensive  income/(loss)                                      |       | $                       | (71        | ) | $ | (644 | ) |

 

The accumulated balances related to each component of othercomprehensive income (loss) for the three months ended March 31, 2005 andMarch 31, 2004 were as follows:

 
| **(dollars in thousands)**               | ** ** | **Foreign  Currency  Translation** | ** ** | **Unrealized  Gain/(Loss) on  Investments** | ** ** | **Accumulated Other  Comprehensive  Income/(Loss)** | ** ** |
|------------------------------------------|------------|------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------------|------------|
|                                     |       |                               |       |                                        |       |                                                |       |
| Balance at  December 31, 2004       |       | $                                  | (936       | )                                           | $          | (1,264                                              | )          | $ | (2,200 | ) |
| Accumulated  comprehensive income/(loss) |       | (232                               | )          | (169                                        | )          | (401                                                | )          |
| Balance at  March 31, 2005          |       | $                                  | (1,168     | )                                           | $          | (1,433                                              | )          | $ | (2,601 | ) |
|                                     |       |                               |       |                                        |       |                                                |       |
| Balance at  December 31, 2003       |       | $                                  | (1,200     | )                                           | $          | (1,589                                              | )          | $ | (2,789 | ) |
| Accumulated  comprehensive income/(loss) |       | (152                               | )          | 74                                          |       | (78                                                 | )          |
| Balance at  March 31, 2004          |       | $                                  | (1,352     | )                                           | $          | (1,515                                              | )          | $ | (2,867 | ) |

 

**11**.          **Purchase of TreasuryStock**

 

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.  The Company did not repurchase sharesof its common stock during the three months ended March 31, 2005 and 2004,respectively.  As of March 31, 2005,the remaining authorization for repurchase is approximately 93,000 shares.

 

11

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**12**.          **Asset-Based LendingFacility**

 

The Company has a $40 million line of credit facilitywith availability based primarily on eligible client receivables.  Theinterest rate is LIBOR plus 2.75% based on unpaid principal.  Theborrowing base less outstanding loans must equal or exceed $5.0 million. As of March 31, 2005, the Company had no outstanding loan balance againstthe facility.  Based on the Company’s eligible client receivables and cashbalances, $15.7 million was available for borrowing as of March 31,2005.  The fee for the unused portion of the line of credit is 0.375% perannum charged to the Company monthly.  This charge was approximately$27,000 and $26,000 for the three months ended March 31, 2005 and 2004,respectively.  This line of credit includes covenants relating to themaintenance of cash balances and providing for limitations on incurringobligations and spending limits on capital expenditures.  The Company didnot satisfy this covenant for the quarter ended incurring March 31,2004.  A waiver was received from the lending institution for the quarterended March 31, 2004 along with an amendment to the loan agreementlowering the three-month average minimum collections covenant to $10million.  At March 31, 2005, the Company is in compliance with thecovenant.  The facility was scheduled to expire in July 2004.However, on July 14, 2004, the Company signed a one-year extension of thefacility, which will remain in effect until July 2005.  In February 2005, the Company and itscurrent lending institution agreed in principal to terms (non-binding) whichwould extend the credit facility for a three-year term. The line of creditwould remain at $40 million, with all other terms, conditions and costs similarto those which were in effect as of December 31, 2004.

 

**13**.          **Income Taxes**

 

*Tax Benefit Reserve*

 

On March 9, 2002, the Job Creation and Worker Assistance Act of2002 (the “Act”) was enacted into law.  This Act contained many economicand tax incentives, including the extension of the carryback period for lossesarising in years ending during 2001 and 2002 to five years from the previous twoyear carryback rule.  As a result, the Company’s tax refund claim ofapproximately $10 million at December 31, 2001, which was received inApril 2002,  was increased toapproximately $30 million.  The additional refund amount of $20 millionwas received in January 2003.

 

During 1998, the Company completed a business combination which, forfinancial statement purposes, was accounted for as a pooling-of-interests. For income tax purposes, the transaction was treated as a taxablepurchase that gave rise to future tax deductions.  Upon the sale of theacquired business in 2001, these deductions were recognized for taxpurposes.  The tax benefit of $19.6 million relating to the part of thesedeductions that was carried back to prior years was included in refundableincome taxes in 2002.  Since the tax structure of the transaction wassubject to review by the tax authorities, the Company recorded a reserve forthe tax benefits resulting from the carryback and did not record deferred taxassets for the tax benefits being carried forward.

 

In December 2003, the Internal Revenue Service examined theCompany’s Federal income tax returns for the years ended December 31, 2001and 2000, along with its Federal refund claims for the calendar years 1996through 1999.  The additional refund amount received in January 2003was shown as a liability until the audit was completed.  During the firstquarter of 2004, the Internal Revenue Service and the Joint Committee onTaxation completed their examination of the Company’s Federal income taxreturns and Federal refund claims, and accepted them without change. Accordingly, the tax benefit was recorded as a decrease in tax benefit reservesof $19.6 million, a decrease in other tax reserves of $0.3 million, and anincrease in additional paid-in capital of $19.9 million. There was no charge orcredit to income.  The Company did notrecord deferred tax assets for the tax benefits being carried forward due toremaining uncertainties.  It isanticipated that a deferred tax asset, net of an appropriate valuationallowance, will be recorded when it is probable that the tax benefit will berealized.  The tax benefit will bereflected as an increase in additional paid-in capital.

 

*Deferred Tax Asset*

 

The Company records deferred tax assets for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and their respective tax bases, and net operating losscarryforwards.  Deferred tax assets are reduced by a valuation allowanceif, based on available evidence, it is more likely than not that some portionor all of the deferred tax assets will not be realized.  In assessing therealizability of deferred tax assets, management considers the scheduledreversal periods of the deferred tax assets as well as projected future taxableincome and tax planning strategies.

 

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

 

12

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The Company believes that it is more likely than not that the netremaining deferred tax assets of $19.5 million at March 31, 2005 will berealized, principally based upon forecasted taxable income.  Although the Company has experiencedoperating losses in past years, the Company experienced improved operationalperformance in the first quarter of 2005 resulting from the Company’srealignment initiatives completed in the fourth quarter of 2004, and continuedimprovement in the operating results of its Chimes subsidiary.  This operating improvement is expected tocontinue in 2005.  The minimum averageannual taxable income required to realize the deferred tax assets over the 20-yearnet operating loss carryforwrd period is approximately $2.8 million.

 

Current federal and state tax laws impose restrictions on theutilization of net operating loss carryforwards and other deferred tax assetsfollowing an ownership change as provided in Section 382 of the InternalRevenue Code.  If the Company were toundergo a Section 382 ownership change, the deferred tax assets may besubject to an annual limitation which may limit the Company’s ability toutilize the deferred tax assets.

 

**14**.          **Rescission Offer**

 

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

 

As a result, the Company made a rescission offer,effective July 27, 2004, to all those persons who purchased shares ofcommon stock pursuant to the Employee Stock Purchase Plan during the affectedperiods.  The rescission offer was made pursuant to a registrationstatement filed under the Securities Act and pursuant to applicable statesecurities laws.  In this rescission offer, the Company offered torepurchase the shares, subject to our rescission offer, for the price paid pershare plus interest from the date of purchase until the rescission offerexpires, at the current statutory rate per year mandated by the state in whichthe shares were purchased.  The rescission offer expired onAugust 27, 2004, with no individuals accepting the rescission offer.

 

**15**.          **Legal Matters**

 

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

 

**16.          SpecialItems**

 

Income from operations for the first quarterof 2005 includes a credit of $675,000, which relates to a bad debtrecovery.  The Company has reported thecredit on a separate line for disclosure purposes and the amount is reportedwithin operating income.

 

**17**.          **Subsequent Events**

 

On April 12,2005, the Company, a New York corporation, JV Merger Corp., a Minnesotacorporation and a wholly-owned subsidiary of the Company (the “Sub”), andAnalysts International Corporation, a Minnesota corporation (“Analysts”),entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuantto the terms of the Merger Agreement, Sub will be merged with and into Analysts(the “Merger”) and each issued and outstanding share of common stock, par value$.10 per share, of Analysts (other than shares held of record by the Company,Sub, Analysts and any of their subsidiaries) shall be converted into the rightto receive 1.15 fully paid and nonassessable shares of the Company’s commonstock, par value $.10 per share (the “Merger Consideration”).  Inaddition, upon completion of the Merger, the Company will assume all optionsthen outstanding under Analysts’ existing equity incentive plans, each of whichwill be exercisable for a number of shares of Company Common Stock (and at anexercise price) adjusted to reflect the Merger Consideration.  Completion of the Merger is subject to several conditions, includingapproval by the shareholders of each company, effectiveness of a Form S-4registration statement to be filed with the Securities and Exchange Commission,expiration or termination of applicable waiting periods under theHart-Scott-Rodino Antitrust Improvements Act of 1976 and clearance under anyapplicable foreign antitrust laws, and other customary closingconditions.  The transaction is intended to qualify as a tax-freereorganization under Section 368(a) of the Internal Revenue Code of1986, as amended.  Additionally, the Merger Agreement may be terminated bythe Company or Analysts upon the occurrence or failure to occur of certainevents, including a failure of the Merger to be consummated byNovember 30, 2005.

 

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The MergerAgreement provides that the board of directors of the Company following theMerger will consist of ten directors, including five of whom shall be selectedfrom the current Company board and five of whom shall be selected from thecurrent Analysts board.

 

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Item 2

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

For the Periods EndedMarch 31, 2005 and March 31, 2004

 

The following detailed discussion and analysis of the Company’sfinancial condition and results of operations should be read in conjunctionwith the December 31, 2004 financial statements and related notes includedin the Company’s Form 10-K and the Financial Statements and notes includedelsewhere in this Form 10-Q.

 

**Overview**

 

Computer Horizons Corp., (“CHC” or the “Company”), is a strategicsolutions and human capital management company with more than thirty-sevenyears of experience, specifically in information technology.  TheCompany’s clients are primarily Global 2000 companies, serviced by over 20offices in the United States, Canada, and India.

 

This is the first quarter that the Company is reporting by therealigned operating segments : Commercial, Federal Government and VendorManagement services (Chimes.).  As aresult of the business realignment, the Company has reclassified the prior yearamounts in order to provide a basis for comparison, conforming to our new linesof business.

 

The Company recorded revenues for the quarter ended March 31, 2005of $66.6 million, a twelve percent increase from the comparable period in2004.  The income from operations in thefirst quarter of 2005 totaled $508,000, including $350,000 of amortizationexpense related to intangibles and a $675,000 special credit related to a baddebt recovery.  This compares to a loss from operations of approximately$894,000 for the first quarter of 2004, which included an amortization expenserelated to intangibles of $208,000.

 

Management continues to focus on maintaining a strong balance sheet,with approximately $31 million in cash at March 31, 2005, along with $69.0million in working capital and no debt outstanding.

 

On April 1, 2004, the Company’s subsidiary, RGIITechnologies, Inc., acquired Automated Information Management, Inc.(AIM), a federal government IT Services company for approximately $15.7 millionin cash.  The acquisition of AIM is directly linked to our strategy ofexpanding our presence in the federal government IT market and pursuing bolt onexpansions to our RGII subsidiary.

 

**RecentDevelopments**

 

On April 12,2005, the Company., a New York corporation, JV Merger Corp., a Minnesotacorporation and a wholly-owned subsidiary of the Company (the “Sub”), andAnalysts International Corporation, a Minnesota corporation (“Analysts”),entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuantto the terms of the Merger Agreement, Sub will be merged with and into Analysts(the “Merger”) and each issued and outstanding share of common stock, par value$.10 per share, of Analysts (other than shares held of record by the Company,Sub, Analysts and any of their subsidiaries) shall be converted into the rightto receive 1.15 fully paid and nonassessable shares of the Company’s commonstock, par value $.10 per share (the “Merger Consideration”).  Inaddition, upon completion of the Merger, the Company will assume all optionsthen outstanding under Analysts’ existing equity incentive plans, each of whichwill be exercisable for a number of shares of Company Common Stock (and at anexercise price) adjusted to reflect the Merger Consideration.  Completion of the Merger is subject to several conditions, includingapproval by the shareholders of each company, effectiveness of a Form S-4registration statement to be filed with the Securities and Exchange Commission,expiration or termination of applicable waiting periods under theHart-Scott-Rodino Antitrust Improvements Act of 1976 and clearance under anyapplicable foreign antitrust laws, and other customary closingconditions.  The transaction is intended to qualify as a tax-freereorganization under Section 368(a) of the Internal Revenue Code of1986, as amended.  Additionally, the Merger Agreement may be terminated bythe Company or Analysts upon the occurrence or failure to occur of certain events,including a failure of the Merger to be consummated by November 30, 2005.

 

The MergerAgreement provides that the board of directors of the Company following theMerger will consist of ten directors, including five of whom shall be selectedfrom the current Company board and five of whom shall be selected from thecurrent Analysts board.

 

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**Forward-looking statements**

 

This Reportcontains forward-looking statements within the meaning of the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.  Insome cases, forward-looking statements can be identified by words such as“believe,” “expect,” “anticipate,” “plan,” “potential,” “continue” or similarexpressions.  Forward-looking statements also include the assumptionsunderlying or relating to any of the foregoing statements.  Suchforward-looking statements are based upon current expectations and beliefs andare subject to a number of factors and uncertainties that could cause actualresults to differ materially from those described in the forward-lookingstatements.  The forward-looking statements contained in this Report mayinclude statements about future financial and operating results and about theproposed merger of Computer Horizons and Analysts International.—Thesestatements are not guarantees of future performance, involve certain risks,uncertainties and assumptions that are difficult to predict, and are based uponassumptions as to future events that may not prove accurate.  Therefore,actual outcomes and results may differ materially from what is expressedherein.  For example, if either of the companies does not receivedrequired shareholder or governmental approvals or fails to satisfy otherconditions to closing, the transaction will not be consummated.  In anyforward-looking statement in which Computer Horizons or Analysts Internationalexpresses an expectation or belief as to future results, such expectation orbelief is expressed in good faith and believed to have a reasonable basis, butthere can be no assurance that the statement or expectation or belief willresult or be achieved or accomplished.  The following factors, amongothers, could cause actual results to differ materially from those described inthe forward-looking statements: (i) the risk that the Computer Horizons ‘and Analysts’ businesses will not be integrated successfully to yield theanticipated cost savings and financial results; (ii)  costs related to theproposed merger may be higher due to delays in obtaining regulatory approval;(iii) failure of the Computer Horizons and Analysts shareholders toapprove the proposed merger; and (iii) other economic, business,competitive and/or regulatory factors affecting Computer Horizons ‘ and Analysts’ businesses generally, including those set forth in Computer Horizons’ andAnalysts’  filings with the SEC, including in their respective AnnualReports on Form 10-K for the most recent fiscal years, especially in theManagement’s Discussion and Analysis section, the most recent Quarterly Reportson Form 10-Q and the Current Reports on Form 8-K.  Allforward-looking statements included in this report are based on informationavailable to Computer Horizons and Analysts on the date hereof.  ComputerHorizons and Analysts undertake no obligation (and expressly disclaim any suchobligation) to update forward-looking statements made in this Report to reflectevents or circumstances after the date of this Report or to update reasons whyactual results would differ from those anticipated in such forward-lookingstatements.

 

**AdditionalInformation and Where to Find It**

 

Computer HorizonsCorp. intends to file with the Securities and Exchange Commission aregistration statement on Form S-4 and Computer Horizons Corp. and AnalystsInternational Corporation intend to file with the Commission a related jointproxy statement/prospectus in connection with the merger transaction involvingComputer Horizons and Analysts International.  **INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE REGISTRATIONSTATEMENT AND RELATED JOINT PROXY STATEMENT/ PROSPECTUS REGARDING THE PROPOSEDMERGER WHEN IT BECOMES AVAILABLE BECAUSE IT WILL CONTAIN IMPORTANT INFORMATIONABOUT THE MERGER TRANSACTION.**  Investors and securityholders may obtain a free copy of the joint proxy statement/ prospectus (whenit is available) and other documents filed by Computer Horizons Corp. andAnalysts International Corporation with the Securities and Exchange Commissionat the Securities and Exchange Commission’s web site at http://www.sec.gov. Free copies of the joint proxy statement/prospectus, once available, and otherdocuments may also be obtained for free from Computer Horizons Corp.’s andAnalysts International Corporation’s respective investor relations at dreingold@computerhorizons.comand Analysts International Corporation investor relations atpquist@analysts.com.

 

Computer HorizonsCorp. and Analysts International Corporation and their respective directors,officers and other employees and proxy solicitors may be deemed to beparticipants in the solicitation of proxies from the shareholders of ComputerHorizons and Analysts International with respect to the transactionscontemplated by the merger agreement.  Information regarding ComputerHorizons’ officers and directors is included in Computer Horizons’ ProxyStatement for its 2005 Annual Meeting of Shareholders filed with the Securitiesand Exchange Commission on April 11, 2005.  Information regardingAnalysts International’s officers and directors is included in AnalystsInternational’s Proxy Statement for its 2005 Annual Meeting of Shareholdersfiled with the Securities and Exchange Commission on April 22, 2005. These documents are or will be available free of charge at the Securities andExchange Commission’s web site at http://www.sec.gov and from Computer HorizonsCorp.’s investor relations at dreingold@computerhorizons.com and AnalystsInternational Corporation investor relations at pquist@analysts.com.

 

The Management’s Discussion and Analysis of Financial Condition andResults of Operations set forth in this Item 2 has been changed to reflect therealigned operating segments : Commercial, Federal Government and VendorManagement services (Chimes) for 2004, as previously reported in the Company’sForm 10-Q/A for the quarter March 31, 2004.

 

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**Revenue Generating Activities**

 

The majority of the Company’s revenues are derived from professionalservices rendered in the information technology sector.  Effective January 1, 2005, the Companyrealigned its business operations into three segments : Commercial, FederalGovernment and Vendor Management services (Chimes).

 

The Commercial business consists of providingtechnology consultants to large organizations on a temporary hire basis and isclassified in two general categories, staff augmentation and solutionswork.  For the quarter endedMarch 31, 2005, this segment represented approximately 73% of totalrevenues, including $35.5 million of staff augmentation revenue and $13.2million of commercial solutions revenue. For staff augmentation assignments, the consultant work is supervisedand managed by the customer. Staff augmentation tends to be a lower risk, lowergross margin business with very competitive pricing.  The Company’s solutions work tends to behigher margin, higher risk business, due to the fact that the Company isresponsible for project deliverables and other conditions contained instatements of work and/or contracts with clients.  Virtually all projects performed by thecommercial solutions group are IT related and consist of practices such asapplication development, outsourcing arrangements, government services, HealthInsurance Portability and Accountability Act, (“HIPAA”), services, technologytraining and managed services.

 

The Company’s customer relationships are memorialized in a masteragreement, which address the terms and conditions which define the clientengagement.  Depending on the service to be performed for the client,either a task order (in the case of a Staffing engagement) or a Statement ofWork (“SOW”) (in the case of a Solutions engagement) is generated. The SOW issigned by both the Company and the customer.  In general, no Solutionswork is done unless there is a SOW because the SOW provides the technicaldetails of the work to be done.  The SOW, although falling under thecorresponding master agreement, is a stand-alone binding contractual document,typically outlining the project objectives, describing the personnel who willwork on the project, describing phases of the project, the timeframes for workperformance, and the rate of compensation, on a time and materials basis. In the event that the parameters of the project expand or otherwise change, aProject Change Request is implemented, to memorialize whatever change hasoccurred to the deliverables, personnel and or time/materials.  The masteragreements, in conjunction with the SOW’s, are written to define, with as muchdetail as possible, the client relationship and all aspects of the work to beperformed for the client.  With regard to revenues expected in futureperiods, each SOW has a defined term or sets forth the anticipated length of aproject.  Where a client engagement is on-going, like certain “Help Desk”type services, the master agreements would still have a term length, but wouldrecite that the agreement was renewable.  Generally commercial solutionsengagements are for a year or less. Staff augmentation engagements can and do last for more than a year, withvariations in the number of consultants being provided at any given time. Staffing engagements are generally cancelable by clients with a two to fourweek notice period.

 

The Federal Government segment consists primarily of solutions typeassignments, whereby the Company is responsible for project deliverables andother conditions contained in statements of work and/or contracts with theFederal Government.  Federal Government engagements generally have aduration of several years, contingent upon the Federal Government exercisingannual options to continue work.   For the quarter ended March 31,2005, the Federal Government segment accounted for approximately 17% ofconsolidated revenues.

 

Chimes, Inc. is a human capital management solution that, throughthe use of proprietary software and processes, manages the temporary workforceof large organizations. During the quarter ended March 31, 2005, Chimesaccounted for approximately 10% of total revenues.

 

**Critical Accounting Policies**

 

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

 

Revenue Recognition

 

Approximately 94% of consolidated revenue in the quarter endedMarch 31, 2005 and March 31, 2004, respectively, was derived fromtime-and-material contracts.

 

The Company recognizes revenues either on time-and material basis orfixed fee basis.  Under a typical time and materials billing arrangement,our customers are billed on a regularly scheduled basis, such as biweekly ormonthly.  At the end of each accounting period, revenue is estimated andaccrued for services performed since the last billing cycle.  These unbilledamounts are billed the following month.

 

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

 

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

 

The Company’s Chimes subsidiary recognizes revenue on a transaction feebasis.  The Chimes service offering aggregates the suppliers of temporaryworkers to the customer and renders one invoice to the customer.  Uponpayment from the customer, Chimes deducts a transaction fee and remits thebalance of the client payment to the applicable vendor.  Chimes recognizesonly their fee for the service, not the aggregate billing to thecustomer.  The gross amount of the customer invoicing is not consideredrevenue or receivable to Chimes because there is no earnings process for thegross amount and by contract terms, Chimes is not obligated to pay the vendoruntil paid by the customer.

 

*Evaluation of Bad Debt Reserve*

 

The Company determines its allowance by considering a number offactors, including the length of time trade accounts receivable are past due,the Company’s previous loss history, the customer’s current ability to pay itsobligation to the Company and the condition of the general economy and theindustry as a whole.  The Company writes off accounts receivable when theybecome uncollectible, and payments subsequently received on such receivablesare credited to the allowance for doubtful accounts.

 

*Goodwill*

 

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

 

The fair value conclusion of the reporting unitsreflects an appropriately weighted value of the market multiple approach andthe income approach discussed above.  An asset approach was not usedbecause the asset approach is most relevant for liquidation approaches,investment company valuations and asset rich company valuations (i.e. realestate entities) and was not deemed relevant for manufacturing and servicecompany going-concern valuations.

 

For the year ended December 31, 2004, using anevaluation prepared by an independent appraisal firm, the Company reassessedthe carrying value of goodwill associated with its Solutions Group.  Because of a reduction in projected futurecash flows in the Commercial Solutions business unit, primarily resulting fromsignificant revenue declines in 2004, the Company determined that goodwill wasimpaired and recorded a non-cash charge of $20.3 million, related to thewrite-off of the Commercial Solutions goodwill. There was no income tax effect on the impairment charge as the relatedgoodwill was primarily attributable to acquisitions which yielded no tax basisfor the Company. The remaining Solutions goodwill of $27.6 million, as ofDecember 31, 2004, is associated with the Company’s Federal Governmentpractice.  As of December 31, 2004,the indicated fair value of the Federal Government reporting unit exceeded thecarrying value.  As a result, the Companyconcluded that the goodwill of approximately $27.6 million is not impaired.

 

*Valuation of the Deferred Tax Asset*

 

The Company records deferred tax assets for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and their respective tax bases, and net operating losscarryforwards.  Deferred tax assets are reduced by a valuation allowanceif, based on available evidence, it is more likely than not that some portionor all of the deferred tax assets will not be realized.  In assessing therealizability of deferred tax assets, management considers the scheduled 

 

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reversal periods of the deferred tax assets as well as projected futuretaxable income and tax planning strategies.

 

**RESULTS OF OPERATIONS**

 

*Revenues* . Revenues increased to $66.6 million in the first quarter of 2005 from $59.7million in the first quarter of 2004, an increase of $6.9 million or 12%.

 

Commercial Group revenues increased to $48.7 million in the firstquarter of 2005 from $44.8 million in the first quarter of 2004, an increase of$3.9 million or 9%. The year-over-year increase in the Commercial Grouprevenues for the first quarter of 2005 is primarily attributable to an increasein consultant headcount of approximately 11% from the first quarter of 2004,partially offset by a reduction in average bill rates.

 

Federal Government Group revenues (comprised of RGII and AIM) increasedto $11.5 million in the first quarter of 2005 from $9.6 million in the firstquarter of 2004, a net increase of $1.9 million or 21%.  This net increaseis comprised of a $4.1 million increase from the AIM acquisition completed bythe Company in April 2004, partially offset by a $2.2 million decrease inRGII revenues from the first quarter of 2004. The RGII revenue decrease is related to the transition of8(a) restricted contracts during 2004.

 

Chimes revenue increased to $6.4 million in the first quarter of 2005from $5.4 million in the first quarter of 2004, an increase of $1 million or19%.   This increase in Chimes revenue is due to an increase ofapproximately $ 0.3 million in revenue from new customers and $0.7 million fromexisting customers in this segment.

 

*Direct Costs*..  Direct costs increased to $45.6 million in the first quarter of2005 from $40.8 million in the first quarter of 2004.  Consolidatedgross margin, revenues less direct costs, slightly decreased to 31.5% in thefirst quarter of 2005 from 31.7% in the same period of 2004.  In the Company’s Commercial Group, grossmargin decreased to 19.6% in the first quarter of 2005, compared to 21.6% inthe first quarter of 2004 due to competitive pressures in this business segmentand the resulting reduction in bill rates and margins.  Federal Government Group’s gross margin forthe first quarter of 2005 was 46.9%, compared to 43.4% in the comparable periodof 2004, primarily due to the April 2004 AIM acquisition.  Chimesgross margin approximated 95.1% in the first quarter of 2005, compared to 94.5%in the same period of 2004.

 

*Costs and Expenses*..  Selling, general and administrative expenses increased to approximately$21 million in the first quarter of 2005 from approximately $19.6 million inthe first quarter of 2004, an increase of $1.4 million or 7.1%.  Thisincrease is due to the acquisition of AIM in April 2004.  As a percentage of revenue, the Company’sSG&A expenses decreased to 31.5% in the first quarter of 2005 from 32.8% inthe comparable period of 2004.

 

*Income/(Loss) from Operations*..  The Company’s income from operations totaled $333,000 in the firstquarter of 2005, including amortization expense totaling $350,000 and a specialcredit of $675,000 related to a bad debt recovery.  This represents animprovement from the $894,000 loss in the first quarter of 2004 which includesamortization expense of $208,000.

 

The composition of the operating profit for the quarter endedMarch 31, 2005, excluding amortization expense of $350,000 and the specialcredit of $675,000 related to a bad debt recovery, included a loss of$1,467,000 in the Commercial Group, income of $880,000 in the FederalGovernment Group and income of $595,000 in Chimes.  For the comparable quarter of 2004, theCommercial Group had a loss of $849,000, the Federal Group had income ofapproximately $579,000, and Chimes had a loss of $416,000.

 

*Other Income/(Expense)*..  Other income (primarily net interest income) totaled $175,000 in thefirst quarter of 2005 compared to income of $83,000 in the same period of 2004.

 

*Provision for Income Taxes*..  The effective tax rate for Federal, state and local income taxes wasexpense of 35% for the first quarter of 2005 and benefit of 31.3% for the firstquarter of 2004 (due to the losses incurred in this quarter).

 

*Net Income/(Loss)*..  Net income for the first quarter of 2005 was $330,000 or $0.01 earningsper basic and diluted share, compared to net loss of $566,000, or $(0.02) lossper basic share for the first quarter of 2004.  The effect of amortizationexpense and the special credit pertaining to a bad debt recovery in the firstquarter of 2005 amounted to $(0.01) loss per share and $0.01 earnings pershare, net of taxes, respectively.

 

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**Liquidity and Capital Resources**

 

Computer Horizons has historically financed its operations through cashgenerated from operations, borrowings against bank lines of credit and thepublic sale of its common stock.  At March 31, 2005, the Company hadapproximately $69.0 million in working capital, of which $31.4 million was cashand cash equivalents.  At March 31, 2005, the Company had a currentratio position of 3.9 to 1.

 

Net cash used in operating activities in the first three months of 2005was $1.8 million, attributable to a decrease in accrued expenses of $4.8million, partially offset by net income, depreciation/amortization expense(non-cash), totaling $1.8 million, and a decrease in other current assets of$1.5 million.   The decrease in accruedexpenses is primarily due to payments made in the first quarter of 2005 againstyear end accruals, including the restructure reserve established in the fourthquarter of 2004.

 

Total accounts receivable decreased $143,000 to $51.2 million atMarch 31, 2005, from $51.3 million at December 31, 2004. Accountsreceivable days sales outstanding (“DSO”) improved to 69 days at March 31,2005, compared to 77 days at March 31, 2004.  DSO’s are expected to approximate the currentlevel during the remainder of 2005.  Allclient receivable collectibility and billing issues identified by managementhave been adequately reserved. For the period ended March 31, 2005, therewere no significant changes in credit terms, credit policies or collectionefforts.

 

Net cash used in investing activities in the first three months of 2005was $0.6 million, consisting of capital expenditures.

 

Net cash provided by financing activities in the first three months of2005 was $0.4 million primarily consisting of shares issued pursuant to theemployee stock option plan.

 

The Company has a $40 million line of credit facilitywith availability based primarily on eligible client receivables.  Theinterest rate is LIBOR plus 2.75% based on unpaid principal.  Theborrowing base less outstanding loans must equal or exceed $5.0 million. As of March 31, 2005, the Company had no outstanding loan balance againstthe facility.  Based on the Company’s eligible client receivables and cashbalances, $15.7 million was available for borrowing as of March 31,2005.  The fee for the unused portion of the line of credit is 0.375% perannum charged to the Company monthly.  This charge was approximately$27,000 and $26,000 for the three months ended March 31, 2005 and 2004,respectively.  This line of credit includes covenants relating to themaintenance of cash balances and providing for limitations on incurring obligationsand spending limits on capital expenditures.  The Company did not satisfythis covenant for the quarter ended incurring March 31, 2004.  Awaiver was received from the lending institution for the quarter endedMarch 31, 2004 along with an amendment to the loan agreement lowering thethree-month average minimum collections covenant to $10 million.  AtMarch 31, 2005, the Company is in compliance with the covenant.  Thefacility was scheduled to expire in July 2004. However, on July 14,2004, the Company signed a one-year extension of the facility, which willremain in effect until July 2005. In February 2005, the Company and its current lending institutionagreed in principal to terms (non-binding) which would extend the creditfacility for a three-year term. The line of credit would remain at $40 million,with all other terms, conditions and costs similar to those which were ineffect as of December 31, 2004.

 

Pursuant to the terms of the Company’s acquisition ofRGII, the seller of RGII may be entitled to contingent payments based on RGII’sperformance against profitability objectives over three years.  Thecontingent payments are evidenced by a contingent note with a face value of $10million that is payable over three years only if certain financial performanceobjectives are met.  These financial performance objectives are based onearnings before interest and taxes (“EBIT”) targets totaling $19.8 million overa three-year period.  There are no minimum or maximum payment obligationsunder the terms of the contingent note. The contingent payment will be reducedon a dollar for dollar basis for financial performance below EBIT targets andincreased by 29 cents ($0.29) for each dollar exceeding EBIT targets.  InFebruary 2004, a payment was made for the first six-month installment ofapproximately $631,000, pertaining to this contingent note.  In February 2005, a payment ofapproximately $1.8 million was made representing the second installment of thecontingent note.  Future payments, if the applicable EBIT targets are met,will be due as follows: 2005 payment of $3.3 million and 2006 payment of$4.3 million.  These payments will be reduced or increased based on actualEBIT performance over the three-year period.

 

During the first quarter of 2004, the Company recorded a non-cashreduction in tax benefit reserves and an increase in additional paid-in capitalof $19.9 million.

 

The Company believes that its cash and cash equivalents, availableborrowings and internally generated funds will be sufficient to meet itsworking capital needs through the next year.

 

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**Contractual Obligations andCommercial Commitments**

 

The Company does not utilize off balance sheet financing other thanoperating lease arrangements for office premises and related equipment. The following table summarizes all commitments under contractual obligations asof March 31, 2005:

 
| ** **                    | ** ** | **Obligation Due** | ** ** |
|-------------------------------|------------|--------------------|------------|
| **(dollars in thousands)**    | ** ** | **Total Amount**   | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **Over 5 Years** | ** ** |
|                          |       |               |       |   |   |   |   |   |   |   |   |
| Operating Leases              |       | $                  | 10,137     |   | $ | 5,609 |   | $ | 4,512 |   | $ | 16 |   | $ | — |   |
| RGII Contingent  Notes *      |       | 7,596              |       | 3,300 |   | 4,296 |   | — |   | — |   |
| Deferred  Compensation        |       | 2,494              |       | 2 |   | 13 |   | 410 |   | 2,069 |   |
| Supplemental  Retirement Plan |       | 9,750              |       | — |   | 250 |   | 1,000 |   | 8,500 |   |
| Other                         |       | 350                |       | 350 |   | — |   | — |   | — |   |
| Total Cash  Obligations       |       | $                  | 30,327     |   | $ | 9,261 |   | $ | 9,071 |   | $ | 1,426 |   | $ | 10,569 |   |

 

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* Obligation if applicable EBIT targets are met.

 

**Recent Accounting Pronouncements**

 

In March 2004, the Financial Accounting Standards Board (FASB)Emerging Issues Task Force (EITF) released Issue No. 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments.”EITF 03-1 provides guidance for determining whether impairment for certain debtand equity investments is other-than-temporary and the measurement of animpaired loss. The recognition and measurement requirements of EITF 03-1 wereinitially effective for reporting periods beginning after June 15, 2004.In September 2004, the FASB Staff issued FASB Staff Position (“FSP”) EITF03-1-1 that delayed the effective date for certain measurement and recognitionguidance contained in EITF 03-1. The FSP requires that entities continue toapply previously existing “other-than-temporary” guidance until a finalconsensus is reached. Management does not anticipate that issuance of a finalconsensus will materially impact the Company’s financial condition or resultsof operations.

 

In December 2004, the FASB issued Statement of FinancialAccounting Standard No. 123 (revised 2004), “Share-Based Payment” (FAS123R).  FAS 123R requires compensationcost be recognized for new awards of equity instruments and unvested awards onthe adoption date.  The SEC amended theeffective dates of FAS 123R for public companies in April 2005, which allowsregistrants to implement FAS 123R at the beginning of their next fiscal year,instead of the next interim period, that begins after June 15, 2005.  The SEC also issued Staff Accounting Bulletin(SAB) 107, Share-Based Payment, in April 2005, which provides the views ofthe SEC staff regarding certain aspects of the application of FAS 123R,Share-Based Payment.  The staff’s intentin issuing SAB 107 is to assist issuers in their initial implementation of FAS123R and to communicate that the staff understands that, particularly in theperiod of initial implementation, issuers may reasonably arrive at differentestimates and option valuations in applying FAS 123R.  We expect the adoption of this statement willhave a material effect on the Company’s financial statements, but we cannotreasonably estimate the impact of the adoption because certain assumptions usedin the calculation of the value of share-based payments may change in 2005.

 

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Item 4.    Controland Procedures

 

Disclosure Controls and Procedures

 

The Company’s CEO and CFO have evaluated theeffectiveness of the Company’s disclosure controls and procedures (as such termis defined in Rules 13a-15(e) under the Securities Exchange Act of1934, as amended) as of the end of the period covered by this report. Based upon such evaluation, the Company’s Chief Executive Officer and ChiefFinancial Officer have concluded that, as of the end of the 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.

 

Internal Controls over Financial Reporting

 

There have not been any changes in the Company’s internal controls overfinancial reporting (as such term is defined in Rules 13a-15(f) underthe Securities Exchange Act of 1934, as amended) during the period 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 6. | Exhibits and Reports on  Form 8-K |
|---------|----------------------------------------|
|    |                                   |
| a)      |                                   | Exhibits |
|    |                                   |   |   |
|    |                                   | 31.1 | CEO Certification required by Rule 13a-14(a)/15d-14(a) under  the Securities Exchange Act of 1934. |
|    |                                   |   |   |
|    |                                   | 31.2 | CFO Certification required by Rule 13a-14(a)/15d-14(a) under  the Securities Exchange Act of 1934. |
|    |                                   |   |   |
|    |                                   | 32.1 | CEO Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|    |                                   |   |   |
|    |                                   | 32.2 | CFO Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

b)            *Report on Form 8-K*

 

A report on Form 8-K was filed on February 17, 2005 reportingthe Company’s financial results for its fourth fiscal quarter and year endedDecember 31, 2004.

 

A report on Form 8-K was filed on February 18, 2005 reportinga full transcript of the conference call discussing the Company’s results forthe fourth quarter and year ended December 31, 2004.

 

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Signatures

 

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

 
|   |              |   | COMPUTER HORIZONS CORP.                                                                                                        |   |
|--------|-------------------|--------|--------------------------------------------------------------------------------------------------------------------------------|--------|
|   |              |   |                    (Registrant) |
|   |              |   |                                                                                                                           |
|   |              |   |                                                                                                                           |
| DATE:  | May 10, 2005 |   | /s/  William J. Murphy                                                                                                    |   |
|   |              |   | William J. Murphy, President, CEO                                                                                              |
|   |              |   | (Principal Executive Officer) and Director                                                                                     |
|   |              |   |                                                                                                                           |
|   |              |   |                                                                                                                           |
| DATE:  | May 10, 2005 |   | /s/ Michael J. Shea                                                                                                            |   |
|   |              |   | Michael J. Shea,                                                                                                               |
|   |              |   | Vice President and CFO                                                                                                         |
|   |              |   | (Principal Financial Officer)                                                                                                  |
|   |              |   |                                                                                                                           |
|   |              |   |                                                                                                                           |
| DATE:  | May 10, 2005 |   | /s/ John E. Ferdinandi                                                                                          |   |
|   |              |   | John E. Ferdinandi,                                                                                                            |
|   |              |   | Corporate Controller                                                                                                           |
|   |              |   | (Principal Accounting Officer)                                                                                                 |
|   |              |   |                                                                                                                           |   |   |   |   |

 

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