**UNITED STATESSECURITIES 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, 2004**                                                                                   |   |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|       |                                                                                                                                                                                                                     |   |
|       | **or**                                                                                                                                                                                                                   |   |
|       |                                                                                                                                                                                                                     |   |
| **o**      | **Transition  Report pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934  for the transition period from         to         ** |   |

 

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**Commission File Number 0-7282**

 

**COMPUTER HORIZONS CORP.**

(Exactname of registrant as specified in its charter)

 

| **New York**                                                                                                                              |   | **13-2638902**                            |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|
| (State  or other jurisdiction of  incorporation or organization)                                                                          |   | (I.R.S.  Employer  Identification Number) |
|                                                                                                                                      |   |                                      |
| **49 Old  Bloomfield Avenue, Mountain Lakes, New Jersey 07046-1495**                                                                      |
| (Address  of principal executive  offices)              (Zip  code) |
|                                                                                                                                      |   |                                      |
| Registrant’s  telephone number, including area code**(973)  299-4000**                                                               |

 

**Not Applicable**

(Former name, former address and formerfiscal year, ifchanged since last report)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding twelve months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.

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

 

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

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

 

As of May 7, 2004 the issuerhad 30,678,549 shares of common stock outstanding.

 

 

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**COMPUTERHORIZONS CORP. AND SUBSIDIARIES**

 

Index

 
| Part I  | Financial Information |                                                                                                     |
|---------|-----------------------|----------------------------------------------------------------------------------------------------------|
|    |                  |
|    | Item 1                | Consolidated Balance Sheets  March 31, 2004 (unaudited) and December 31, 2003                            | 3 |
|    |                  |                                                                                                     |   |
|    |                  | Consolidated  Statements of Operations  Three Months Ended March 31, 2004 and March 31, 2003 (unaudited) | 4 |
|    |                  |                                                                                                     |   |
|    |                  | Consolidated  Statements of Cash Flows  Three Months Ended March 31, 2004 and March 31, 2003 (unaudited) | 5 |
|    |                  |                                                                                                     |   |
|    |                  | Notes to  Consolidated Financial Statements                                                              | 6 |
|    |                  |                                                                                                     |   |
|    | Item  2               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations              | 20 |
|    |                  |                                                                                                     |   |
|    | Item  4               | Controls  and Procedures                                                                                 | 29 |
|    |                  |                                                                                                     |   |
| Part II | Other Information     | 30                                                                                                       |
|    |                  |                                                                                                     |   |
|    | Item 6                | Exhibits and Reports  on Form 8-K                                                                        | 30 |
|    |                  |                                                                                                     |   |
|    |                  | Signatures                                                                                               | 31 |
|         |                       |                                                                                                          |  |  |

 

2

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COMPUTER HORIZONS CORP. AND SUBSIDIARIES

CONSOLIDATEDBALANCE SHEETS

(dollars in thousands, except per share data)

 
|                                                                                                                                     |   | **March 31,  2004** |    | **December  31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                                                                                                                                     |   | **(unaudited)**     |    |                    |   |
| ASSETS                                                                                                                                   |   |                |    |                    |   |
| CURRENT ASSETS:                                                                                                                          |   |                |    |                    |   |
| Cash and cash equivalents                                                                                                                |   | $                   | 49,757  |                    | $      | 52,610 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $5,671 and $5,432 at March 31, 2004 and December 31,  2003, respectively |   | 50,882              |    | 48,295                  |   |
| Deferred income taxes                                                                                                                    |   | 4,137               |    | 4,514                   |   |
| Other                                                                                                                                    |   | 3,637               |    | 4,759                   |   |
| TOTAL CURRENT ASSETS                                                                                                                     |   | 108,413             |    | 110,178                 |   |
|                                                                                                                                     |   |                |    |                    |   |
| PROPERTY AND EQUIPMENT                                                                                                                   |   | 42,769              |    | 42,252                  |   |
| Less accumulated depreciation                                                                                                            |   | (34,265             | )       | (32,929                 | )      |
|                                                                                                                                     |   | 8,504               |    | 9,323                   |   |
|                                                                                                                                     |   |                |    |                    |   |
| OTHER ASSETS - NET:                                                                                                                      |   |                |    |                    |   |
| Goodwill                                                                                                                                 |   | 34,218              |    | 34,218                  |   |
| Intangibles                                                                                                                              |   | 2,200               |    | 2,408                   |   |
| Deferred income taxes                                                                                                                    |   | 13,977              |    | 13,624                  |   |
| Other                                                                                                                                    |   | 9,666               |    | 9,386                   |   |
| TOTAL OTHER ASSETS                                                                                                                       |   | 60,061              |    | 59,636                  |   |
|                                                                                                                                     |   |                |    |                    |   |
| TOTAL ASSETS                                                                                                                             |   | $                   | 176,978 |                    | $      | 179,137 |   |
|                                                                                                                                     |   |                |    |                    |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                |   |                |    |                    |   |
| CURRENT LIABILITIES:                                                                                                                     |   |                |    |                    |   |
| Accounts payable                                                                                                                         |   | $                   | 8,848   |                    | $      | 8,287 |   |
| Accrued payroll, payroll taxes and benefits                                                                                              |   | 4,441               |    | 4,436                   |   |
| Restructuring reserve                                                                                                                    |   | 2,152               |    | 2,620                   |   |
| Income taxes payable                                                                                                                     |   | 570                 |    | 1,243                   |   |
| Tax benefit reserve                                                                                                                      |   | —              |    | 19,600                  |   |
| Other accrued expenses                                                                                                                   |   | 5,535               |    | 7,572                   |   |
| TOTAL CURRENT LIABILITIES                                                                                                                |   | 21,546              |    | 43,758                  |   |
|                                                                                                                                     |   |                |    |                    |   |
| OTHER LIABILITIES                                                                                                                        |   | 5,008               |    | 4,635                   |   |
|                                                                                                                                     |   |                |    |                    |   |
| SHAREHOLDERS’ EQUITY:                                                                                                               |   |                |    |                    |   |
| Preferred stock, $.10 par; authorized and  unissued 200,000 shares, including 50,000 Series A                                            |   |                |    |                    |   |
| Common stock, $.10 par, authorized  100,000,000 shares; issued 33,153,107 shares at March 31, 2004 and December  31, 2003 respectively   |   | 3,315               |    | 3,315                   |   |
| Additional paid-in capital                                                                                                               |   | 152,808             |    | 133,046                 |   |
| Accumulated comprehensive loss                                                                                                           |   | (5,167              | )       | (4,589                  | )      |
| Retained earnings                                                                                                                        |   | 13,303              |    | 13,307                  |   |
|                                                                                                                                     |   | 164,259             |    | 145,079                 |   |
| Less shares held in treasury, at cost;  2,408,662 shares and 2,537,692 shares at March 31, 2004 and December 31,  2003, respectively     |   | (13,835             | )       | (14,335                 | )      |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                          |   | 150,424             |    | 130,744                 |   |
|                                                                                                                                     |   |                |    |                    |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                          |   | $                   | 176,978 |                    | $      | 179,137 |   |

 

3

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COMPUTER HORIZONS CORP. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Unaudited)

(dollars in thousands, except per share data)

 
|                                                  |   | **THREE  MONTHS ENDED** |   |
|-------------------------------------------------------|--------|-------------------------|--------|
|                                                  |   | **March 31,  2004**     |   | **March 31,  2003** |   |
|                                                  |   |                    |   | **% of  revenue** |   |   |   | **% of  revenue** |   |
| REVENUES:                                             |   |                    |   |   |   |   |   |   |   |
| IT Services                                           |   | $                       | 29,804 |   | 49.9 | % | $ | 36,183 |   | 60.1 | % |
| Solutions Group                                       |   | 24,549                  |   | 41.1 | % | 19,601 |   | 32.5 | % |
| Chimes                                                |   | 5,353                   |   | 9.0 | % | 4,469 |   | 7.4 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
|                                                  |   | 59,706                  |   | 100.0 | % | 60,253 |   | 100.0 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
| COSTS AND EXPENSES:                                   |   |                    |   |   |   |   |   |   |   |
| Direct costs                                          |   | 39,941                  |   | 66.9 | % | 42,773 |   | 71.0 | % |
| Selling, general and administrative                   |   | 19,587                  |   | 32.8 | % | 18,926 |   | 31.4 | % |
| Amortization of intangibles                           |   | 208                     |   | 0.3 | % | — |   | 0.0 | % |
| Restructuring charges                                 |   | —                  |   | 0.0 | % | 249 |   | 0.4 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
|                                                  |   | 59,736                  |   | 100.1 | % | 61,948 |   | 102.8 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
| LOSS FROM OPERATIONS                                  |   | (30                     | )      | -0.1 | % | (1,695 | ) | -2.8 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
| OTHER INCOME / (EXPENSE):                             |   |                    |   |   |   |   |   |   |   |
| Loss on sale of assets                                |   | —                  |   | 0.0 | % | (273 | ) | -0.5 | % |
| Interest income                                       |   | 93                      |   | 0.2 | % | 174 |   | 0.3 | % |
| Interest expense                                      |   | (10                     | )      | 0.0 | % | (6 | ) | 0.0 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
|                                                  |   | 83                      |   | 0.1 | % | (105 | ) | -0.2 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
| INCOME/(LOSS) BEFORE INCOME TAXES  (BENEFIT)/EXPENSE: |   | 53                      |   | 0.1 | % | (1,800 | ) | -3.0 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
| INCOME TAXES/(BENEFIT)                                |   |                    |   |   |   |   |   |   |   |
| Current                                               |   | 24                      |   | 0.0 | % | — |   | 0.0 | % |
| Deferred                                              |   | 24                      |   | 0.0 | % | (540 | ) | -0.9 | % |
|                                                  |   | 48                      |   | 0.0 | % | (540 | ) | -0.9 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
| INCOME/(LOSS) BEFORE MINORITY INTEREST                |   | 5                       |   | 0.0 | % | (1,260 | ) | -2.1 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
| Minority Interest                                     |   | (9                      | )      | 0.0 | % | (19 | ) | 0.0 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
| NET LOSS                                              |   | $                       | (4     | ) | 0.0 | % | $ | (1,279 | ) | -2.1 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
| LOSS PER SHARE (BASIC & DILUTED):                 |   |                    |   |   |   |   |   |   |   |
|                                                  |   |                    |   |   |   |   |   |   |   |
| Net Loss                                              |   | $                       | 0.00   |   |   |   | $ | 0.04 |   |   |   |
|                                                  |   |                    |   |   |   |   |   |   |   |
| WEIGHTED AVERAGE NUMBER OF                            |   |                    |   |   |   |   |   |   |   |
| SHARES OUTSTANDING:                                   |   |                    |   |   |   |   |   |   |   |
| Basic & Diluted                                   |   | 30,676,000              |   |   |   | 30,369,000 |   |   |   |

 

4

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COMPUTER HORIZONS CORP. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

(dollars inthousands)

 
|                                                                             |   | **Three  Months Ended** |       |
|----------------------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                             |   | **March 31,  2004**     |       | **March 31,  2003** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                             |   |                    |       |   |   |
| Net loss                                                                         |   | $                       | (4         | ) | $ | (1,279 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |                    |       |   |   |
| Deferred taxes                                                                   |   | 24                      |       | (540 | ) |
| Depreciation                                                                     |   | 1,316                   |       | 1,299 |   |
| Amortization of intangibles                                                      |   | 208                     |       | — |   |
| Provision for bad debts                                                          |   | 390                     |       | 385 |   |
| Loss on sale of assets                                                           |   | —                  |       | 273 |   |
|                                                                             |   |                    |       |   |   |
| Change in assets and liabilities, net of  acquisitions:                          |   |                    |       |   |   |
| Accounts receivable                                                              |   | (2,977                  | )          | (629 | ) |
| Other current assets                                                             |   | 1,122                   |       | 1,071 |   |
| Other assets                                                                     |   | (280                    | )          | (2,842 | ) |
| Refundable income taxes                                                          |   | —                  |       | 19,051 |   |
| Accrued payroll, payroll taxes and benefits                                      |   | 5                       |       | (225 | ) |
| Accounts payable                                                                 |   | 561                     |       | (2,963 | ) |
| Income taxes payable                                                             |   | (673                    | )          | 624 |   |
| Other accrued expenses                                                           |   | (2,177                  | )          | (1,255 | ) |
| Other liabilities                                                                |   | 373                     |       | (409 | ) |
|                                                                             |   |                    |       |   |   |
| NET CASH PROVIDED/ (USED) BY OPERATING  ACTIVITIES                               |   | (2,112                  | )          | 12,561 |   |
|                                                                             |   |                    |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                             |   |                    | ** ** |   | ** ** |
| Purchases of furniture and equipment                                             |   | (497                    | )          | (820 | ) |
| Proceeds received from the sale of assets                                        |   | —                  |       | 149 |   |
| Changes in goodwill                                                              |   | —                  |       | (387 | ) |
| NET CASH (USED) IN INVESTING ACTIVITIES                                          |   | (497                    | )          | (1,058 | ) |
|                                                                             |   |                    |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                             |   |                    |       |   |   |
| Stock options exercised                                                          |   | 262                     |       | 11 |   |
| Purchase of treasury shares                                                      |   | —                  |       | (875 | ) |
| Stock issued on employee stock purchase  plan                                    |   | 146                     |       | — |   |
| NET CASH PROVIDED BY/(USED) IN FINANCING  ACTIVITIES                             |   | 408                     |       | (864 | ) |
|                                                                             |   |                    |       |   |   |
| Foreign currency losses                                                          |   | (652                    | )          | (14 | ) |
|                                                                             |   |                    |       |   |   |
| NET (DECREASE)/INCREASE IN CASH AND CASH  EQUIVALENTS                            |   | (2,853                  | )          | 10,625 |   |
|                                                                             |   |                    |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  YEAR                                  |   | 52,610                  |       | 59,769 |   |
|                                                                             |   |                    |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                       |   | $                       | 49,757     |   | $ | 70,394 |   |

 

Non Cash Activities:

 

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

 

5

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**COMPUTERHORIZONS CORP. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

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

(unaudited)

 

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

 

The consolidated balancesheets as of March 31, 2004, the consolidated statements of operations for thethree months ended March 31, 2004 and March 31, 2003, respectively, and thestatement of cash flows for the three months ended March 31, 2004 and 2003 havebeen prepared by the Company without audit. In the opinion of management, all adjustments (which include normalrecurring adjustments) necessary to present fairly the financial position,results of operations and cash flows at March 31, 2004 (and for all periods presented)have been made.

 

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

 

**2.****             ****Recent Accounting Pronouncements**

 

In January 2003, the FASBissued Financial Interpretation No. 46, “Consolidation of Variable InterestEntities” (“FIN 46”), which addresses consolidation by business enterprises ofvariable interest entities (VIEs).  Theaccounting provisions and disclosure requirements of FIN 46 are effective immediatelyfor VIEs created after January 31, 2003, and are effective for the Company’sfiscal period ending March 31, 2004, for VIEs created prior to February 1,2003.  In December 2003, the FASBpublished a revision to FIN 46 (“FIN 46R”) to clarify some of the provisions ofthe interpretation and to defer the effective date of implementation forcertain entities.  Under the guidance ofFIN 46R, public companies that have interests in VIE’s that are commonlyreferred to as special purpose entities are required to apply the provisions ofFIN 46R for periods ending after December 15, 2003.  A public company that does not have any interests in specialpurpose entities but does have a variable interest in a VIE created beforeFebruary 1, 2003, must apply the provisions of FIN 46R by the end of the firstinterim or annual reporting period ending after March 14, 2004.  During the quarter ended March 31, 2004 theCompany adopted the provisions of FIN 46R. Adoption of FIN46R did not have a material effect on the Company’sfinancial statements.

 

6

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**3.****             ****Accounting for Stock Based Compensation**

 

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

 

The exercise price per share on all optionsgranted may not be less than the fair value at the date of the optiongrant.  The Company applies AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees,” asmodified by FIN 44, “Accounting for Certain Transactions Involving StockCompensation,” in accounting for stock-based employee compensation, whereby nocompensation cost had been recognized for the plans.  The Company expects to continue following the guidance under APB25 for stock based compensation to employees. Had compensation cost for the plans been determined based on the fairvalue of the options at the grant dates and been consistent with the method ofSFAS No. 123, the Company’s net loss and loss per share would have beenincreased to the pro forma amounts indicated below:

 
|               |   |                                                                                                                                         |   | **March 31,  2004**                        |   | **March 31,  2003** |   |
|--------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|---------------------|--------|
|               |   |                                                                                                                                         |   | **(in  thousands, except per share data)** |   |
|               |   |                                                                                                                                         |   |                                       |   |                |   |
| Net loss           |   | As reported                                                                                                                                  |   | $                                          | (4     | )                   | $      | (1,279 | ) |
|               |   | Deduct: Total stock-based employee compensation expense determined  under fair value based method for all awards, net of related tax effects |   | (724                                       | )      | (828                | )      |
|               |   |                                                                                                                                         |   |                                       |   |                |   |
|               |   | Pro forma                                                                                                                                    |   | $                                          | (728   | )                   | $      | (2,107 | ) |
|               |   |                                                                                                                                         |   |                                       |   |                |   |
| Earnings per share |   |                                                                                                                                         |   |                                       |   |                |   |
| Basic and diluted  |   | As reported                                                                                                                                  |   | $                                          | 0.00   |                | $      | (0.04 | ) |
|               |   | Pro forma                                                                                                                                    |   | (0.02                                      | )      | (0.07               | )      |

 

7

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4.               **Restricted Cash**

 

Included in cash and cash equivalents at March 31,2004 and December 31, 2003 is restricted cash of approximately $2.6 million and$2.2 million respectively.  Restrictedcash represents funds received by Chimes and held in client-specific bankaccounts, to be used to make payments to vendors of the applicable client.

 

8

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5.               **Earnings Per Share**

 

The computation of diluted earnings per share excludes all options sincetheir inclusion would be anti-dilutive. During the three months ended March 31, 2004, 3,802,000 options wereexcluded.  During the three months endedMarch 31, 2003, 2,902,602 options were excluded.

 

6.               **Segment Information**

 

The Companyhas identified three business segments: IT Services, the Solutions Group andChimes, Inc.  The IT Services divisionprovides highly skilled software professionals to augment the internalinformation management staffs of major corporations.  IT Services is primarily staffing augmentation.  The Solutions division provides enterpriseapplication services, e-business solutions, customized Web development and Webenablement of strategic applications, Customer Relationship Management (CRM),network services, strategic outsourcing and managed resourcing. Chimes, Inc., awholly-owned subsidiary of CHC, provides workforce procurement and managementservices to Global 2000 companies which, according to Forbes magazine,represents the biggest and most important companies, as measured by sales,profits, assets and market value. Income/(loss) before income taxes/ (benefit)consists of income/(loss) before income taxes, excluding interest income,interest expense, gain/(loss) on the sale of assets, restructuring charges,minority interest, and amortization of intangibles.  These exclusions total expense of $0.1 million and expense of$0.4 million at March 31, 2004 and 2003, respectively (see reconciliation ofsegment income/(loss) before income taxes/(benefit) to consolidatedincome/(loss) before income taxes/(benefit)). Corporate services, consisting of general and administrative servicesare provided to the segments from a centralized location.  Such costs are allocated to the applicablesegments receiving Corporate services based on revenue.

 

9

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** **
|                                           |   | **Three  Months Ended** |    |
|------------------------------------------------|--------|-------------------------|---------|
| **(in 000’s)**                            |   | **March 31,  2004**     |    | **March 31,  2003** |   |
|                                           |   |                    |    |   |   |
| *Revenue:*                                     |   |                    |    |   |   |
| IT Services                                    |   | $                       | 29,804  |   | $ | 36,183 |   |
| Solutions Group                                |   | 24,549                  |    | 19,601 |   |
| Chimes                                         |   | 5,353                   |    | 4,469 |   |
| TOTAL                                          |   | $                       | 59,706  |   | $ | 60,253 |   |
|                                           |   |                    |    |   |   |
| *Gross Margin:*                                |   |                    |    |   |   |
| IT Services                                    |   | $                       | 6,057   |   | $ | 7,170 |   |
| Solutions Group                                |   | 8,648                   |    | 6,206 |   |
| Chimes                                         |   | 5,061                   |    | 4,104 |   |
| TOTAL                                          |   | $                       | 19,766  |   | $ | 17,480 |   |
|                                           |   |                    |    |   |   |
| *Operating income / (loss):*                   |   |                    |    |   |   |
| IT Services                                    |   | $                       | 2,041   |   | $ | 1,886 |   |
| Solutions Group                                |   | 2,901                   |    | 3,355 |   |
| Chimes                                         |   | 94                      |    | (1,567 | ) |
| TOTAL                                          |   | $                       | 5,036   |   | $ | 3,674 |   |
|                                           |   |                    |    |   |   |
| *Corporate Allocation:*                        |   |                    |    |   |   |
| IT Services                                    |   | $                       | 2,888   |   | $ | 3,075 |   |
| Solutions Group                                |   | 1,451                   |    | 1,665 |   |
| Chimes                                         |   | 519                     |    | 380 |   |
| TOTAL                                          |   | $                       | 4,858   |   | $ | 5,120 |   |
|                                           |   |                    |    |   |   |
| *Income/(loss) before income taxes/(benefit):* |   |                    |    |   |   |
| IT Services                                    |   | $                       | (847    | ) | $ | (1,189 | ) |
| Solutions Group                                |   | 1,450                   |    | 1,689  |   |
| Chimes                                         |   | (425                    | )       | (1,947 | ) |
| TOTAL                                          |   | $                       | 178     |   | $ | (1,446 | ) |
|                                           |   |                    |    |   |   |
| *Assets:*                                      |   |                    |    |   |   |
| IT Services                                    |   | $                       | 22,927  |   | $ | 33,884 |   |
| Solutions Group                                |   | 85,082                  |    | 44,710 |   |
| Chimes                                         |   | 15,118                  |    | 11,733 |   |
| Corporate and other                            |   | 53,851                  |    | 97,441 |   |
| TOTAL                                          |   | $                       | 176,978 |   | $ | 187,768 |   |

 

10

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

 
|                                                                  |   | **Three  Months Ended** |   |
|-----------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                  |   | **March 31,  2004**     |   | **March 31,  2003** |   |
| Total Segments Income/(Loss) before Income  Taxes/(Benefit)           |   | $                       | 178    |   | $ | (1,446 | ) |
|                                                                  |   |                    |   |   |   |
| Adjustments:                                                          |   |                    |   |   |   |
|                                                                  |   |                    |   |   |   |
| Interest income, net                                                  |   | 83                      |   | 168 |   |
|                                                                  |   |                    |   |   |   |
| Gain/(loss) on sale of assets                                         |   | —                  |   | (273 | ) |
|                                                                  |   |                    |   |   |   |
| Restructuring charges                                                 |   |                    |   | (249 | ) |
|                                                                  |   |                    |   |   |   |
| Amortization of intangibles                                           |   | (208                    | )      | — |   |
|                                                                  |   |                    |   |   |   |
| Total Adjustments:                                                    |   | $                       | (125   | ) | $ | (354 | ) |
| Consolidated income/(loss) before income  taxes and minority interest |   | $                       | 53     |   | $ | (1,800 | ) |

 

7.               **Restructuring Charges**

 

Duringthe fourth quarter of 2003, the Company recorded a restructuring charge ofapproximately $329,000 relating to the closing of one office in the US and therelated severance.  The Company decidedto continue business in this area through virtual offices and thereforerecorded the charge after the building was closed.  The lease obligation of $90,000 was calculated based on currentrent commitments less a calculated sublease amount based on current marketconditions.

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

 

11

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Duringthe third quarter of 2003, the Company recorded a restructuring charge ofapproximately $787,000 relating to the closing of Chimes (UK) Ltd. andseverance charges related to US operations. The Company decided to continue business in this geographic area througha third party and therefore recorded the charge after the building wasclosed.  The provision includes anaccrual relating to the future costs associated with continuing rent on thisproperty in the United Kingdom.  Theclosing of this office resulted in a severance charge of $305,000.

 

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

 

Duringthe second quarter of 2003, the Company evaluated the geographic area in Canadaand decided to close facilities and go virtual in the smaller Canadianmarkets.  After the buildings wereentirely closed, the Company recorded a restructuring charge of approximately$1.7 million relating to the consolidating and closing of these facilities inthe Canadian subsidiary.  The $1.3million expense for lease obligations was calculated based on current rentcommitments less a calculated sublease amount based on current marketconditions.  The entire provision of$1.3 million included an accrual relating to the future costs associated withcontinuing rent on six properties, five of which are in Canada, with rentscontinuing through 2004, 2006 and 2007.

 

12

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

 

Duringthe fourth quarter of 2002, the Company recorded a restructuring charge of $2.8million pertaining to 2002 office closings. During the second quarter of 2003, half of the rent for one officeclosing was reversed after the rent was negotiated at a lower rate for half thebuilding.  During the fourth quarter of2003, the Company made an additional adjustment to the reserve for four of theproperties due to sublease.

 

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

 

|               |   | **Remaining  December 31,  2002** |   | **Paid** |   | **Remaining  at  March 31, 2003** |   |
|--------------------|--------|-----------------------------------|--------|----------|--------|-----------------------------------|--------|
| Lease Obligations: |   |                              |   |     |   |                              |   |
| United States      |   | $                                 | 2,483  |     | $      | (355                              | )      | $ | 2,128 |   |
|                    |        |                                   |        |          |        |                                   |        |  |  |  |

 

13

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Atthe end of 2003, the Company had $78,000 of five lease obligations remainingfrom the restructure expense recorded in 2001. Of the five lease obligations, four remain and the balance as of March31, 2004 was $41,000.

** **

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

 

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

 

At the end of 2003 theCompany had $308,000 of one lease obligation remaining on the restructureexpense recorded in 2000 with the lease terminating in 2005.  The balance remaining at March 31, 2004 was$262,000.

 

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

 

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

 

14

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

 

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

 
|                                                                  |   | **Three  Months Ended** |       |
|-----------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                  |   | **March 31,  2004**     | ** ** | **March 31,  2003** | ** ** |
|                                                                  |   |                    |       |   |   |
| Comprehensive Loss:                                                   |   |                    |       |   |   |
|                                                                  |   |                    |       |   |   |
| Net Loss                                                              |   | $                       | (4         | ) | $ | (1,279 | ) |
| Other comprehensive  income/(loss) – Foreign currency adjustment |   | (652                    | )          | (14 | ) |
| Unrealized gain/(loss) on SERP investments                            |   | 74                      |       | (210 | ) |
| Comprehensive Loss                                                    |   | $                       | (582       | ) | $ | (1,503 | ) |

 

9.               **Acquisitions**

 

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

 

OnJuly 8, 2003, the Company acquired all of the stock of privately-held RGIITechnologies, Inc. (“RGII”).  TheCompany purchased RGII because acquiring a platform company in the Federalgovernment IT Services marketplace has been a long-term priority for theCompany.  The purchase price ofapproximately $22.1 million included an up-front cash payment, acquisitionexpenses, working capital adjustment and the payoff of a note payable of $1.5million.  In addition, the seller may beentitled to contingent payments based on RGII’s performance against profitabilityobjectives over the next three years. The contingent payments are evidenced by a contingent note with a facevalue of $10 million that is payable over three years, only if performanceobjectives are met.  These financialperformance objectives are based on earnings before interest and taxes (“EBIT”)targets totaling $19.8 million over a three year period.  There are no minimum or maximum paymentobligations under the terms of the contingent note. The contingent payment willbe reduced on a dollar-for-dollar basis for financial performance below EBITtargets, and increased by 29 cents ($0.29) for each dollar exceeding EBITtargets.  The Company made a payment of$631,000 during the first quarter of 2004. The Company also entered into employment agreements with the formershareholder and employees of RGII and has agreed to issue an aggregate of600,000 options to purchase shares of Computer Horizons stock over a three yearperiod.

 

15

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TheCompany completed the allocation of the purchase price to assets andliabilities acquired utilizing outside valuation consultants to assist in thisprocess.

 

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

 

10.         **Sale ofSubsidiary**

 

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

 

11.         **Purchase ofTreasury Stock**

 

InApril of 2001, the Board of Directors approved the repurchase in the openmarket of up to 10% of its common shares outstanding, or approximately 3.2million shares.  As of March 31, 2004,the remaining authorization for repurchase is approximately 93,000 shares.

 

12.         **Asset-BasedLending Facility**

 

The Company has a $40 million line of credit facilitywith availability based primarily on eligible customer receivables.  The interest rate is LIBOR plus 2.75% basedon unpaid principal.  The borrowing baseless outstanding loans must equal or exceed $17.5 million.  As of March 31, 2004, theCompany had no outstanding loan balance against the facility.  Based on the Company’s eligible customerreceivables and cash balances, $18.5 million was available for borrowing as ofMarch 31, 2004.  The fee for the unusedportion of the line of credit is 0.375% per annum charged to the Companymonthly. This charge was approximately $26,000 and $42,000 for the three-monthperiods ended March, 2004 and 2003, respectively.  This line of credit includes covenants relating to themaintenance of cash balances and providing for limitations on incurringobligations and spending limits on capital expenditures.  This line of credit includes convenantsrelating to the maintenance of cash balances and providing for limitations onrecurring obligations and spending limits on capital expenditures.  One convenant pertains to minimum cashcollections over a three month period. The Company did not satisfy this convenant for the quarter ending March31, 2004.  A waiver was received fromthe lending institution for the quarter ended March 31, 2004, along with anamendment to the loan agreement lowering the three month average minimum cashcollections covenant to $10 million. This facility is scheduled to expire in July 2004 and the Companyintends to enter into a new asset-based lending facility prior to expiration.

 

16

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13.         **Tax BenefitReserve**

 

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

 

During 1998, the Companycompleted a business combination which, for financial statement purposes, wasaccounted 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 the acquired business in 2001, these deductionswere recognized for tax purposes.  Thetax benefit of $19.6 million relating to the part of these deductions that wascarried back to prior years was included in refundable income taxes in2002.  Since the tax structure of thetransaction was subject to review by the tax authorities, the Company recordeda reserve for the tax benefits resulting from the carryback and did not recorddeferred tax assets for the tax benefits being carried forward. The Companyintended that upon conclusion of review of the relevant tax returns by theauthorities, it would record a deferred tax asset for the part of the taxbenefits being carried forward and a tax benefit for the portion that wascarried back, net of an appropriate valuation allowance. The tax benefit wouldbe reflected as an increase in additional paid-in capital.  Any adjustments to the valuation allowancewould be charged or credited to income.

 

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

 

17

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14.         **Rescission Offer**

 

From April 2001through January 2003, the sale of shares of the Company’s common stock pursuantto the Employee Stock Purchase Plan were not exempt from registration orqualification under federal securities laws. As a result, the Company may have failed to comply with the registrationor qualification requirements of federal and applicable state securities lawsbecause the Company did not register or qualify these stock issuances undereither federal or applicable state securities laws.

 

As a result theCompany intends to make a rescission offer to all those persons who purchasedshares of common stock pursuant to the Employee Stock Purchase Plan during theaffected periods.  The rescission offerwill be made pursuant to a registration statement filed under the SecuritiesAct and pursuant to applicable state securities laws.  In this rescission offer, the Company is offering to repurchasethe shares subject to our rescission offer for the price paid per share plusinterest from the date of purchase until the rescission offer expires, at thecurrent statutory rate per year mandated by the state in which the shares werepurchased.  The rescission offer willexpire approximately 30 days after the effective date of the registrationstatement.  Assuming all of the sharessubject to the rescission offer (approximately 659,000) are tendered in therescission offer, the aggregate purchase price, excluding interest is estimatedto be approximately $1.8 million.  Thiscontingency payment is considered remote by the Company as the current price ofthe stock is above the price at which the shares would be repurchased.

 

15.         **Aquent/Legal Matters**

 

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

 

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

 

Eachof the legal proceedings described above were settled and dismissed as a resultof a settlement agreement between the Company and Aquent LLC entered into onDecember 12, 2003.  As part of thesettlement, the Company agreed to modify its June 30, 2003 by-law agreementregarding special meeting procedures by, among other things, reducing from 75to 50 minimum number of days between the time a 10 percent or more shareholderrequests a special meeting of shareholders and the date of that meeting.  In addition, Aquent entered into astandstill agreement pursuant to which, for a period of one year, it agreed notto request a special meeting of Computer Horizons’ shareholders for any purpose,or nominate anyone to serve as a member of CHC’s Board of Directors, or engagein any proxy solicitation of Computer Horizons’ shareholders.

 

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

 

18

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16.         **SubsequentEvents**

 

OnApril 1, 2004, the Company's subsidiary, RGII Technologies, Inc., closed on itsacquisition of Automated Information Management Inc. (AIM), a federalgovernment IT Services company with 2003 revenues of approximately $18.5million.  The all-cash transactiontotaled approximately $15.7 million, including a working capitaladjustment.  The acquisition of AIM isdirectly linked to the Company’s strategy of expanding its presence in thefederal government IT market and pursuing bolt on expansions for its RGIIsubsidiary.

 

19

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

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

 

Thefollowing detailed discussion and analysis of the Company’s financial conditionand results of operations should be read in conjunction with the December 31,2003 financial statements and related notes included in the Company’s Form 10Kand the Financial Statements and notes included elsewhere in this Form 10Q.

 

**Overview**

 

ComputerHorizons Corp., (“CHC” or the “Company”), is a strategic solutions and humancapital management company with more than thirty-six years of experience,specifically in information technology. The Company’s clients are primarily Global 2000 companies, serviced byover 20 offices in the United States, Canada, and India.

 

TheCompany recorded revenues for the quarter ending March 31, 2004 of $59.7million, a one percent decline from the comparable period in 2003.  This decline is comprised of significantrevenue growth in our Solutions business due to the July 2003 acquisition ofRGII, partially offset by revenue reductions in our commercial (non-federal)solutions business.  Also contributingto the one percent revenue decline is reduced IT Services (staff augmentation)revenue due to a continued decrease in demand for temporary technology workersand the trend of companies to outsource technology jobs offshore.

 

Theloss from operations in the first quarter of 2004 totaled $30,000, including$208,000 of amortization expense related to intangibles.  This compares to a loss from operations ofapproximately $1.7 million for the first quarter of 2003, which includedrestructuring charges of $249,000.

 

Managementcontinues to focus on maintaining a strong balance sheet, with approximately$50 million in cash at March 31, 2004, along with $87 million in workingcapital and no debt outstanding.

 

OnApril 1, 2004, the Company's subsidiary, RGII Technologies, Inc., acquiredAutomated Information Management, Inc. (AIM), a federal government IT Servicescompany for approximately $15.7 million in 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.

 

Althoughthe first quarter of 2004 showed an approximate breakeven earnings per share,the level of business activity in the IT market remains uncertain.  This uncertainty significantly reducedrevenues (specifically revenues in IT Services) from the comparable quarter in2003.  The Company cannot predict whenthis uncertainty will subside or when the level of business activity in the ITmarket will improve.

 

**Forward-looking statements**

 

Statementsincluded in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations and elsewhere in this document that do not relate topresent or historical conditions are “forward-looking statements” within themeaning of that term in Section 27A of the Securities Act of 1933, as amended,and in Section 21F of the Securities Exchange Act of 1934, as amended.  Additional oral or written forward-lookingstatements may be made by the Company from time to time, and such statements maybe included in documents that are filed with the Securities and ExchangeCommission (SEC).  Such forward-lookingstatements involve risks and uncertainties that could cause results or outcomesto differ materially from those expressed in such forward-lookingstatements.  Forward-looking statementsmay include, without limitation, statements relating to the Company’s plans,strategies, objectives, expectations and intentions and are intended to be madepursuant to the safe harbor provisions of the Private Securities LitigationReform Act of 1995.  Words such as“believes,” “forecasts,” “intends,” “possible,” “expects,” estimates,”“anticipates,” or “plans” and similar expressions” are intended to identifyforward-looking statements.  Among theimportant factors on which such statements are based are assumptions concerningthe anticipated growth of the information technology industry, the continuedneed of current and prospective customers for the Company’s services, theavailability of qualified professional staff, and price and wage inflation.

 

20

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## **Revenue Generating Activities**

## ** **

Themajority of the Company’s revenues are derived from professional servicesrendered in the information technology sector.

 

TheCompany operates its business in three basic segments, IT Services, theSolutions Group and Chimes, Inc.  Thedistinctions between the IT Services and Solutions Group segments primarilyrelate to the management and supervision of services performed and relatedgross margins.  Chimes, Inc., a wholly-ownedsubsidiary of CHC, provides workforce procurement and management services toGlobal 2000 companies.

 

TheIT Services business consists of providing technology consultants to largeorganizations on a temporary hire basis. The consultant work is supervised andmanaged by the customer. For the quarter ended March 31,2004, this segmentrepresented approximately 50% of total revenues. The IT Services business tendsto be a lower risk, lower gross margin business with very competitive pricing.

 

TheSolutions Group, tends to be a higher margin, higher risk business, due to thefact that the Company is responsible for project deliverables and otherconditions contained in statements of work and/or contracts with customers.Virtually all projects performed by the Solutions Group are IT related andconsist of practices such as application development, outsourcing arrangements,government services, Health Insurance Portability and Accountability Act, orHIPAA, services, technology training and managed services.   Forthe quarter ended March 31, 2004, the Solutions Group (excluding Chimes)accounted for 41% of consolidated revenues.

 

TheCompany’s customer relationships are memorialized in a master agreement, whichaddress the terms and conditions which define the client engagement.  Depending on the service to be performed forthe client, either a task order (in the case of a Staffing engagement) or aStatement of Work (“SOW”) (in the case of a Solutions engagement) is generated.The SOW is signed by both the Company and the customer.  In general, no Solutions work is done unlessthere is a SOW because the SOW provides the technical details of the work to bedone.  The SOW, although falling underthe corresponding master agreement, is a stand-alone binding contractualdocument, typically outlining the project objectives, describing the personnelwho will work on the project, describing phases of the project, the timeframesfor work performance, and the rate of compensation, on a time and materialsbasis.  In the event that the parametersof the project expand or otherwise change, a Project Change Request isimplemented, to memorialize whatever change has occurred to the deliverables,personnel and or time/materials.  Themaster agreements, in conjunction with the SOW’s, are written to define, withas much detail as possible, the client relationship and all aspects of the workto be performed for the client.  Withregard to revenues expected in future periods, each SOW has a defined term orsets forth the anticipated length of a project.  Where a client engagement is on-going, like certain “Help Desk”type services, the master agreements would still have a term length, but wouldrecite that the agreement was renewable. Generally Solutions engagements are for a year or less.  Staffing engagements can and do last formore than a year, with variations in the number of consultants being providedat any given time.  Staffing engagementsare generally cancelable by clients with a two to four week notice period.

 

Chimes,Inc. is a human capital management solution that, through the use ofproprietary software and processes, manages the temporary workforce of largeorganizations. During the quarter ended March 31, 2004, Chimes accounted forapproximately 9.0% of total revenues.

 

## **Critical Accounting Policies**

## ** **

Themost critical accounting policies used in the preparation of the Company’sfinancial statements are related to revenue recognition, the evaluation of thebad debt reserve, the valuation of goodwill and the valuation of the deferredtax asset.

 

21

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Revenue Recognition

 

Approximately94% and 93% of consolidated revenue in the quarter ended March 31, 2004 andMarch 31, 2003, respectively, was derived from time-and-material contracts.

 

Forthe IT Services division revenues are recognized as services are performedunder time-and material contracts. Under a typical time and materials billing arrangement, our customersare billed on a regularly scheduled basis, such as biweekly or monthly.  At the end of each accounting period,revenue is estimated and accrued for services performed since the last billingcycle.  These unbilled amounts arebilled the following month.

 

TheSolutions Group recognizes revenue either on a time and material basis or on afixed fee basis, however, principally on a time and material basis. Forfixed-fee contracts, revenue is recognized on the basis of the estimatedpercentage of completion based on costs incurred relative to total estimatedcosts.  Each fixed fee contract hasdifferent terms, milestones and deliverables. The milestones and deliverables primarily relate to the work to beperformed and the timing of the billing. At the end of each reporting period an assessment of revenue recognizedon the percentage of completion and milestones achieved criteria is made.  If it becomes apparent that estimated costwill be exceeded or required milestones or deliverables will not have beenobtained, an adjustment will be made. The cumulative effect of revisions in estimated revenues and costs arerecognized in the period in which the facts that give rise to the impact of anyrevisions become known.

 

Unbilledaccounts receivable, in the IT Services and Solutions Group, represent amountsrecognized as revenue based on services performed in advance of customerbillings principally on a time-and- material basis.  At the end of each accounting period, revenue is accrued forservices performed since the last billing cycle.  These unbilled amounts are billed the following month.  Costs and estimated earnings in excess ofbillings on fixed fee contracts arise when percentage of completion accountingis used.  Such amounts are billed atspecific dates or at contract completion.

 

TheCompany’s Chimes subsidiary recognizes revenue on a transaction fee basis.  The Chimes service offering aggregates thesuppliers of temporary workers to the customer and renders one invoice to thecustomer.  Upon payment from thecustomer, Chimes deducts a transaction fee and remits the balance of the clientpayment to the applicable vendor. Chimes recognizes only their fee for the service, not the aggregatebilling to the customer.  The grossamount of the customer invoicing is not considered revenue or receivable toChimes because there is no earnings process for the gross amount and bycontract terms, Chimes is not obligated to pay the vendor until paid by thecustomer.

 

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*Evaluation of BadDebt Reserve*

 

The Company determines itsallowance by considering a number of factors, including the length of timetrade accounts receivable are past due, the Company’s previous loss history,the customer’s current ability to pay its obligation to the Company and thecondition of the general economy and the industry as a whole.  The Company writes off accounts receivablewhen they become uncollectible, and payments subsequently received on suchreceivables are credited to the allowance for doubtful accounts.

 

*Goodwill*

 

Duringthe quarter ended June 30, 2002, the Company completed the initial valuation ofthe carrying value of goodwill existing at January 1, 2002.  As a result, a non-cash charge of $29.9million, or $(0.96) per share was retroactively recorded as the cumulativeeffect of an accounting change in the six months ended June 30, 2002 statementof operations.  For the years endedDecember 31, 2003 and 2002, the Company completed valuations of the carryingvalue of the remaining goodwill and it was determined that no impairment hadoccurred at either date.

 

As ofDecember 31, 2003 and 2002, the fair value of each of the reporting units wascalculated using the following approaches (i) market approach and (ii) incomeapproach.  Under the market approach,value is estimated by comparing the performance fundamentals relating tosimilar public companies’ stock prices. Multiples are then developed of the value of the publicly traded stockto various measures and are then applied to each reporting unit to estimate thevalue of its equity.  Under the income approach,value was determined using the present value of the projected future cash flowsto be generated by the reporting unit.

 

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

 

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*Valuation of the Deferred Tax Asset*

 

TheCompany 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 to operating losscarryforwards.  Deferred tax assets arereduced by a valuation allowance if, based on available evidence, it is morelikely than not that some portion or all of the deferred tax assets will not berealized.  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

 

**RESULTS OFOPERATIONS**

 

*Revenues*.  Revenues decreased to $59.7million in the first quarter of 2004 from $60.3 million in the first quarter of2003, a decrease of $0.6 million or 1.0%.

 

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

 

IT Services revenuesdecreased to $29.8 million in the first quarter of 2004 from $36.2 million inthe first quarter of 2003, a decrease of $6.4 million or 17.6%.  For the first quarter of 2004, IT Servicesconsultant average headcount decreased by approximately 16%, accounting forapproximately $5.9 million of the revenue decrease.  The balance of the decrease in revenue (approximately $0.5million) is attributable to a reduction in average bill rates.  The decrease in IT Services revenue for thefirst quarter 2004, is the result of continued decreases in the demand fortemporary technology workers, the trend of companies to outsource technologyjobs offshore and the impact of pricing decreases by customers.

 

Chimes revenue increased to$5.4 million in the first quarter of 2004 from $4.5 million in the firstquarter of 2003, an increase of $900,000, or 19.8%.   This increase in Chimes revenue is due to an increase ofapproximately $ 0.6 million in revenue from new customers and $0.3 million fromexisting customers in this segment.

 

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*Direct Costs*.  Direct costs decreased to$39.9 million in the first quarter of 2004 from $42.8 million in the first quarter of 2003.  Consolidated gross margin, revenues lessdirect costs, increased to 33.1% in the first quarter of 2004 from 29.0% in thesame period of 2003. In the Company’s Solutions Group, gross profit totaled$8.6 million, or 35.2%,compared to $6.2 million, or 31.7%, for the firstquarter of 2003.  This increase isprimarily attributable to the RGII acquisition. IT Services gross margins forthe first quarter of 2004 were 20.3%, which approximates the gross margin forthe comparable period of 2003.  Chimesgross margins approximated 94.5% in the first quarter of 2004, compared to91.8% in 2003, due to improved leveraging of direct costs.

 

The Company’s consolidatedgross margin improvement is primarily attributable to the change in the revenuemix among the Company’s business segments. Chimes and the Solutions Group are higher gross margin businesses thanthe Company’s IT Services segment.  Forthe quarter ended March 31, 2004, Chimes and Solutions Group revenue totaledapproximately 50% of consolidated revenue, compared to approximately 40% of consolidatedrevenue for the comparable period in 2003.

 

*Costs and Expenses*.  Selling, general andadministrative expenses increased to $19.6 million in the first quarter of 2004from $18.9 million in the first quarter of 2003, an increase of $700,000 or 3.7%.  As a percentage of revenue, the Company’sSG&A expenses increased to 32.8% in the first quarter of 2004 from 31.4% inthe comparable period of 2003.   Thispercentage increase in expenses is primarily attributable to the acquisition ofRGII in July 2003.

 

*Loss from Operations*.  TheCompany’s loss from operations totaled $30,000 in the first quarter of 2004,including amortization expense totaling $208,000.  This represents an improvement from the $1.7 million loss in thefirst quarter of 2003 which includes restructuring charges of $249,000.

 

The composition of theoperating profit for the quarter ending March 31, 2004, excluding amortizationexpense, of $178,000 included a loss of $847,000 in IT Services, income of$1.45 million in the Solutions Group and a loss of $425,000 in Chimes.

 

*Other Income/(Expense)*. Other income totaled $83,000 in the first quarter of 2004 compared toexpenses of $105,000 in the same period of 2003.  This decrease in other income was primarily the result of theloss on sale of assets in 2003 of $273,000.

 

*Provision for Income Taxes*.  Theeffective tax rate for Federal, state and local income taxes was a tax expenseof 90.6% for the first quarter of 2004 and a tax benefit of 30% for the firstquarter of 2003.  The increase in theeffective tax rate was primarily attributable to valuation allowances recordedfor certain federal, state, and foreign net operating losses.

 

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*Net Loss*.  Net loss for the firstquarter of 2004 was $4,000, or $0 .00 earnings per basic and diluted share,compared to net loss of $1.3 million, or $0.04 loss per diluted share for thefirst quarter of 2003.  The effect ofrestructuring charges and the loss on sale of assets amounted to $0.01 loss pershare, net of taxes, in the first quarter of 2003.

 

**Liquidity and Capital Resources**

 

Computer Horizons hashistorically financed its operations through cash generated from operations,borrowings against bank lines of credit and the public sale of its commonstock.  At March 31, 2004, the Companyhad approximately $87 million in working capital, of which $50 million was cashand cash equivalents.  At March 31,2004, the Company had a current ratio position of 5.0 to 1.

 

Net cash used by operatingactivities in the first three months of 2004 was $2.1 million, primarilyattributable to an increase of accounts receivable of $3.0 million, a decreasein accrued expenses, partially offset by depreciation expense (non-cash),totaling $1.3 million, included in net loss.

 

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

 

The decrease in accruedexpenses from December 31, 2003 of approximately $2.2 million is attributableto payments made in the first quarter of 2004 against year-end accruals,including the RGII contingent payment of $631,000 and other legal and auditfees.

 

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

 

Net cash provided infinancing activities in the first three months of 2004 was $0.4 millionprimarily consisting of shares issued pursuant to the employee stock option andstock purchase plans.

 

The Company has a $40 million line of credit facilitywith availability based primarily on eligible customer receivables.  The interest rate is LIBOR plus 2.75% basedon unpaid principal.  The borrowing baseless outstanding loans must equal or exceed $17.5 million.  As of March 31, 2004, theCompany had no outstanding loan balance against the facility.  Based on the Company’s eligible customerreceivables and cash balances, $18.5 million was available for borrowing as of March31, 2004.  The fee for the unusedportion of the line of credit is 0.375% per annum charged to the Companymonthly. This charge was approximately $26,000 and $42,000 for the three-monthperiods ended March, 2004 and 2003, respectively.  This line of credit includes convenants relating to themaintenance of cash balances and providing for limitations on recurringobligations and spending limits on capital expenditures.  One convenant pertains to minimum cash collectionsover a three month period.  The Companydid not satisfy this convenant for the quarter ending March 31, 2004.  A waiver was received from the lendinginstitution for the quarter ended March 31, 2004, along with an amendment tothe loan agreement lowering the three month average minimum cash collectionscovenant to $ 10 million.  This facilityis scheduled to expire in July 2004 and the Company to enter into a newasset-based lending facility prior to expiration.

 

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As a result of the Company’sacquisition of RGII, the seller of RGII may be entitled to contingent paymentsbased on RGII’s performance against profitability objectives over the nextthree years.  The contingent payments are evidenced by a contingent notewith a face value of $10 million that is payable over three years, only ifcertain financial performance objectives are met.  These financialperformance objectives are based on earnings before interest and taxes (“EBIT”)targets totaling $19.8 million over a three-year period.  There are nominimum or maximum payment obligations under the terms of the contingent note.The contingent payment will be reduced on a dollar for dollar basis forfinancial performance below EBIT targets and increased by 29 cents ($0.29) foreach dollar exceeding EBIT targets.  The payments, if the applicable EBITtargets are met, will be due as follows:  2003 payment of $1.7 million,2004 payment of $3.3 million, 2005 payment of $3.3 million, and 2006 payment of$1.7 million.  These payments will be reduced or increased based on actualEBIT performance. On February 24, 2004 a payment was made for the firstsix-month installment of approximately $631,000, pertaining to this contingentnote.

 

During the first quarter of 2004,the Company recorded a non-cash reduction in tax benefit reserves and anincrease in additional paid-in capital of $19.9 million.

 

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

 

The Company believes that its cash and cashequivalents, available borrowings and internally generated funds will besufficient to meet its working capital needs through the next year.

 

**ContractualObligations and Commercial Commitments**

 

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

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

 

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**RecentAccounting Pronouncements**

 

In January 2003, the FASBissued Financial Interpretation No. 46, “Consolidation of Variable InterestEntities” (“FIN 46”), which addresses consolidation by business enterprises ofvariable interest entities (VIEs).  Theaccounting provisions and disclosure requirements of FIN 46 are effectiveimmediately for VIEs created after January 31, 2003, and are effective for theCompany’s fiscal period ending March 31, 2004, for VIEs created prior toFebruary 1, 2003.  In December 2003, theFASB published a revision to FIN 46 (“FIN 46R”) to clarify some of theprovisions of the interpretation and to defer the effective date ofimplementation for certain entities. Under the guidance of FIN 46R, public companies that have interests inVIE’s that are commonly referred to as special purpose entities are required toapply the provisions of FIN 46R for periods ending after December 15,2003.  A public company that does nothave any interests in special purpose entities but does have a variableinterest in a VIE created before February 1, 2003, must apply the provisions ofFIN 46R by the end of the first interim or annual reporting period ending afterMarch 14, 2004.  During the quarterended March 31, 2004 the Company adopted the provisions of FIN 46R.  Adoption of FIN46R did not have a materialeffect on the Company’s financial statements.

 

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Item 4.             Control and Procedures

 

DisclosureControls and Procedures

 

TheCompany’s CEO and CFO have evaluated the effectiveness of the Company’sdisclosure controls and procedures (as such term is defined in Rules 13a-15(e)under the Securities Exchange Act of 1934, as amended) as of the end of theperiod covered by this report.  Basedupon such evaluation, the Company’s Chief Executive Officer and Chief FinancialOfficer have concluded that, as of the end of the period, the Company’sdisclosure controls and procedures are effective in recording, processing,summarizing and reporting, on a timely basis, information required to bedisclosed by the Company in the reports that it files or submits under theSecurities Exchange Act of 1934, as amended.

 

InternalControls over Financial Reporting

 

Therehave not been any changes in the Company’s internal controls over financialreporting (as such term is defined in Rules 13a-15(f) under the SecuritiesExchange Act of 1934, as amended) during the fiscal quarter to which thisreport 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

 

Item6.             Exhibitsand 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*

 

Areport on Form 8-K was filed on March 24, 2004 reporting that the InternalRevenue Service and the Joint Committee of Taxation have completed theirexamination of the Company’s 2001 federal income tax return and federal refundclaims, and have accepted them without change. Accordingly, the reserves,consisting primarily of the tax benefit reserve of $19.6 million, are no longerrequired.  The release of thesereserves, shown as current liabilities at December 31, 2003, resulted in anincrease in working capital for the first quarter of 2004, along withadditional paid-in-capital.

 

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Signatures

 

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

 

 
|   |         | COMPUTER HORIZONS CORP.                     |                        |
|--------|--------------|---------------------------------------------|-----------------------------|
|   |         |                                        | (Registrant)                |
|   |         |                                        |
|   |         |                                        |
| DATE:  | May 10, 2004 |                                        | /s/  William J. Murphy |   |
|   |         | William J. Murphy,  President, CEO          |
|   |         | (Principal Executive  Officer) and Director |
|   |         |                                        |
|   |         |                                        |
| DATE:  | May 10, 2004 |                                        | /s/ Michael J. Shea         |   |
|   |         | Michael J. Shea,                            |
|   |         | Vice President and CFO                      |
|   |         | (Principal Financial  Officer)              |
|   |         |                                        |
|   |         |                                        |
| DATE:  | May 10, 2004 |                                        | /s/ Kristin Evins           |   |
|   |         | Kristin Evins,                              |
|   |         | Controller                                  |
|   |         | (Principal Accounting  Officer)             |
|        |              |                                             |                             |  |  |  |  |  |

 

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