** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

** **

**Washington, D.C. 20549**

** **

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**FORM 10-Q/A**

 

**(Amendment No. 3)**

 
| **ý****  ****Quarterly Report Under  Section 13 or 15(d)  of the Securities Exchange Act of 1934**                                                                                                                                                                            |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **for the quarterly period ended September 30,  2003**                                                                                                                                                                                                                                       |
| **or**                                                                                                                                                                                                                                                                                            |
| **o****  ****Transition Report  pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934**                                                                                                                                                                          |
| **for the transition period  from                     to                     ** |

 

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**Commission File Number 0-7282**

** **

**COMPUTER HORIZONS CORP.**

(Exact name of registrant as specified in its charter) 

 

| **New York**                                                                                                                | **13-2638902**                           |
|-----------------------------------------------------------------------------------------------------------------------------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                                                             | (I.R.S. Employer  Identification Number) |
| ** **                                                                                                                  | ** **                               |
| **49 Old Bloomfield Avenue, Mountain Lakes, New Jersey  07046-1495**                                                   |
| (Address of principal executive offices)            (Zip  code) |
|                                                                                                                        |
| Registrant’s telephone number, including area code **(973) 299-4000**                                             |
|                                                                                                                        |
| **Not Applicable**                                                                                                          |
| (Former name, former address and former fiscal year, if  changed since last report)                                         |

 

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

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

 

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

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

 

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

 

 

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**EXPLANATORY NOTE**

** **

The purpose of thisAmendment No. 3 on Form 10-Q/A to the Quarterly Report onForm 10-Q of Computer Horizons Corp the (“Company”). for the three monthsended September 30, 2003 as filed with the Securities and Exchange Commissionis to reflect the restatement of the Company’s consolidated financialstatements.

 

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

 

Theaggregate amount for all periods affected was an understatement of consultantcosts totaling $5,555,000, with an after-tax impact of $3,462,000 or $(0.12)per share.  The pre-tax, after tax andEPS effect of this non-cash charge for each period affected are shown below (dollarsinthousands, except per share data):

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

 

As part of management’sinvestigation of this accounting error, an extensive review of intercompanytransactions was completed.  As a result,other adjustments, not affecting operating results, were recorded.  These adjustments to the balance sheetcorrected an overstatement of accrued expenses and an understatement ofshareholders’ equity (specifically the overstatement of accumulatedcomprehensive loss).  The cumulativebalance sheet adjustments for the affected dates are as follows (in thousands):

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

 

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*Represents cumulativeeffect of all previous quarterly periods deemed not material on an individualquarter basis.

 

In addition, in thesecond quarter of 2003, the Company made a balance sheet correction resultingin an increase in shareholders’ equity and a decrease in accrued payroll of$41,000.

 

As a result of theCompany’s investigation into the causes of this accounting error, severalremediating actions have been or are in the process of being implemented toprevent future reoccurrence and are included in Part 1 - Item 4. Control andProcedures on this Amendment No. 3 of Form 10-Q/A.

 

The effects of thisrestatement on the consolidated balance sheet of the Company as atSeptember 30, 2003, and on the consolidated statements of operations andcondensed consolidated statements of cash flows for the three months and ninemonths ended September 30, 2003, are presented in Item 1 (RestatedFinancial Statements) and Item 2 (Restated Management’s Discussion andAnalysis of Financial Condition and Results of Operations) of Part I ofthis Amendment No. 2. Certain internal accounting control issuesidentified by management and related to the restatement are disclosed in Item 4of Part I of this Amendment No. 3. The Company’s Chief ExecutiveOfficer and Chief Financial Officer have also reissued their certificationsrequired by Sections 302 and 906 of the Sarbanes-Oxley Act.

 

The Company’srestatement of its financial statements for the year ended December 31,2003, is reflected in Amendment No. 3 on Form 10-K/A, filedconcurrently herewith, which amends its previously filed Form 10-KA forthe year ended December 31, 2003. The Company is also concurrently filingamendments on Forms 10-Q/A to its previously filed Forms 10-Q foreach of the periods ended June 30, 2003, March 31, 2004 and June 30, 2004to reflect the restatement of its financial statements for those periods.

 

Additional detailregarding the restatement is included in Note 2 of the Notes toConsolidated Financial Statements included in Part I — Item 1 of thisAmendment No. 3 on Form 10-Q/A.

 

Except asrequired to reflect the effects of the restatement, no attempt has been made inthis Amendment No. 3 to modify or update other disclosures presented inthe original report on Form 10-Q/A for the period ended September 30,2003. This Form 10-Q/A does not reflect events occurring after the filingof the original Form 10-Q or modify or update those disclosures affectedby subsequent events.

 

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**COMPUTER HORIZONS CORP. AND SUBSIDIARIES**

** **

Index

 
| **Part I Restated Financial Information** | ** **        |
|------------------------------------------------|-------------------|
| ** **                                     | ** **        |
|                                           | Item 1       | Consolidated Balance Sheets  September 30, 2003 (unaudited) and December 31, 2002 | 2 |
|                                           |              |   |   |
|                                           |              | Consolidated  Statements of Operations Three and Nine Months Ended September 30, 2003  and September 30, 2002 (unaudited) | 3 |
|                                           |              |   |   |
|                                           |              | Consolidated  Statements of Cash Flows Nine Months Ended September 30, 2003 and  September 30, 2002 (unaudited) | 4 |
|                                           |              |   |   |
|                                           |              | Notes to Consolidated Financial Statements | 5 |
|                                           |              |   |   |
|                                           | Item 2       | Restated  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 19 |
|                                           |              |   |   |
|                                           | Item 4       | Controls  and Procedures | 24 |
|                                           |              |   |   |
| Part II                                   | Other Information |   |
|                                           |              |   |   |
|                                           | Item 1       | Legal Proceedings | 25 |
|                                           |              |   |   |
|                                           | Item 6       | Exhibits and  Reports on Form 8-K | 26 |
|                                           |              |   |   |
|                                           |              | Signatures | 27 |

 

1

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PartI Financial InformationItem 1.COMPUTER HORIZONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS(dollars in thousands, except per share data) 
| ** **                                                                                                                                             | ** ** | **September 30, 2003** | ** ** | **December 31, 2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                             | ** ** | **(As restated note 2)**    | ** ** | ** **                 | ** ** |
| ** **                                                                                                                                             | ** ** | **(unaudited)**             | ** ** | ** **                 | ** ** |
| ASSETS                                                                                                                                                 |       |                        |       |                       |       |
| CURRENT ASSETS:                                                                                                                                        |       |                        |       |                       |       |
| Cash and cash equivalents                                                                                                                              |       | $                           | 50,748     |                       | $          | 59,769 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $8,207 and $7,696 at September 30, 2003 and December 31,  2002, respectively |       | 52,506                      |       | 56,616                     |       |
| Deferred income taxes                                                                                                                                  |       | 5,167                       |       | 4,557                      |       |
| Refundable income taxes                                                                                                                                |       | —                      |       | 19,051                     |       |
| Other                                                                                                                                                  |       | 5,557                       |       | 7,219                      |       |
|                                                                                                                                                   |       |                        |       |                       |       |
| TOTAL CURRENT ASSETS                                                                                                                                   |       | 113,978                     |       | 147,212                    |       |
|                                                                                                                                                   |       |                        |       |                       |       |
| PROPERTY AND EQUIPMENT                                                                                                                                 |       | 41,476                      |       | 37,643                     |       |
| Less accumulated depreciation                                                                                                                          |       | (31,357                     | )          | (26,626                    | )          |
|                                                                                                                                                   |       |                        |       |                       |       |
|                                                                                                                                                   |       | 10,119                      |       | 11,017                     |       |
|                                                                                                                                                   |       |                        |       |                       |       |
| OTHER ASSETS - NET:                                                                                                                               |       |                        |       |                       |       |
| Goodwill (Note 4)                                                                                                                                 |       | 33,551                      |       | 19,203                     |       |
| Intangibles (Note 4)                                                                                                                              |       | 2,966                       |       | —                     |       |
| Deferred income taxes                                                                                                                                  |       | 13,293                      |       | 8,020                      |       |
| Other                                                                                                                                                  |       | 11,267                      |       | 8,279                      |       |
|                                                                                                                                                   |       |                        |       |                       |       |
| TOTAL OTHER ASSETS                                                                                                                                     |       | 61,077                      |       | 35,502                     |       |
|                                                                                                                                                   |       |                        |       |                       |       |
| TOTAL ASSETS                                                                                                                                           |       | $                           | 185,174    |                       | $          | 193,731 |   |
|                                                                                                                                                   |       |                        |       |                       |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                              |       |                        |       |                       |       |
| CURRENT LIABILITIES:                                                                                                                                   |       |                        |       |                       |       |
| Accounts payable                                                                                                                                       |       | $                           | 10,836     |                       | $          | 10,830 |   |
| Accrued payroll, payroll taxes and benefits                                                                                                            |       | 6,243                       |       | 4,529                      |       |
| Restructuring reserve                                                                                                                                  |       | 3,028                       |       | 3,266                      |       |
| Income taxes payable                                                                                                                                   |       | 1,144                       |       | —                     |       |
| Tax benefit reserve                                                                                                                                    |       | 19,600                      |       | 19,600                     |       |
| Other accrued expenses                                                                                                                                 |       | 4,583                       |       | 3,408                      |       |
|                                                                                                                                                   |       |                        |       |                       |       |
| TOTAL CURRENT LIABILITIES                                                                                                                              |       | 45,434                      |       | 41,633                     |       |
|                                                                                                                                                   |       |                        |       |                       |       |
| OTHER LIABILITIES                                                                                                                                      |       | 6,488                       |       | 6,243                      |       |
|                                                                                                                                                   |       |                        |       |                       |       |
| SHAREHOLDERS’ EQUITY:                                                                                                                             |       |                        |       |                       |       |
| Preferred stock, $.10 par; authorized and  unissued 200,000 shares, including 50,000 Series A                                                     |       |                        |       |                       |       |
| Common stock, $.10 par, authorized  100,000,000 shares; issued 33,153,107 shares at September 30, 2003 and  December 31, 2002 respectively   |       | 3,315                       |       | 3,315                      |       |
| Additional paid-in capital                                                                                                                             |       | 133,162                     |       | 133,518                    |       |
| Accumulated comprehensive loss                                                                                                                         |       | (1,933                      | )          | (4,306                     | )          |
| Retained earnings                                                                                                                                      |       | 13,279                      |       | 28,255                     |       |
|                                                                                                                                                   |       |                        |       |                       |       |
|                                                                                                                                                   |       | 147,823                     |       | 160,782                    |       |
|                                                                                                                                                   |       |                        |       |                       |       |
| Less shares held in treasury, at cost;  2,586,344 shares and 2,660,667 shares at September 30, 2003 and  December 31, 2002, respectively     |       | (14,571                     | )          | (14,927                    | )          |
|                                                                                                                                                   |       |                        |       |                       |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                        |       | 133,252                     |       | 145,855                    |       |
|                                                                                                                                                   |       |                        |       |                       |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                        |       | $                           | 185,174    |                       | $          | 193,731 |   |

 

2

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COMPUTERHORIZONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited) (dollars in thousands, except per share data)

 
| ** **                                                                                            | ** ** | **THREE  MONTHS ENDED**      | ** ** | **NINE  MONTHS ENDED**       | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                            | ** ** | **September 30,  2003** | ** ** | **September 30,  2002** | ** ** | **September 30,  2003** | ** ** | **September 30,  2002** | ** ** |
|                                                                                                  |       | **(As restated  note 2)**    |       | ** **                   |       | **(As restated  note 2)** |   | ** ** |   |
|                                                                                                  |       |                         |       | **% of  revenue**            |       |   |   | **% of  revenue** |   |   |   | **% of  revenue** |   |   |   | **% of  revenue** |   |
| REVENUES:                                                                                             |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| IT Services                                                                                           |       | $                            | 32,235     |                         | 50.0       | % | $ | 49,127 |   | 66.8 | % | $ | 103,738 |   | 56.5 | % | $ | 157,800 |   | 68.6 | % |
| Solutions Group                                                                                       |       | 27,016                       |       | 41.9                         | %          | 20,151 |   | 27.4 | % | 65,308 |   | 35.6 | % | 60,294 |   | 26.2 | % |
| Chimes                                                                                                |       | 5,208                        |       | 8.1                          | %          | 4,296 |   | 5.8 | % | 14,499 |   | 7.9 | % | 12,017 |   | 5.2 | % |
|                                                                                                  |       | 64,459                       |       | 100.0                        | %          | 73,574 |   | 100.0 | % | 183,545 |   | 100.0 | % | 230,111 |   | 100.0 | % |
| COSTS AND  EXPENSES:                                                                                  |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Direct costs                                                                                          |       | 45,069                       |       | 69.9                         | %          | 52,865 |   | 71.9 | % | 131,336 |   | 71.6 | % | 167,627 |   | 72.8 | % |
| Selling, general  and administrative                                                                  |       | 20,494                       |       | 31.8                         | %          | 21,687 |   | 29.5 | % | 56,273 |   | 30.7 | % | 69,208 |   | 30.1 | % |
| Bad Debt Expense                                                                                      |       | 389                          |       | 0.6                          | %          | 660 |   | 0.9 | % | 4,252 |   | 2.3 | % | 2,050 |   | 0.9 | % |
| Restructuring  charge (Note 7)                                                                        |       | 787                          |       | 1.2                          | %          | — |   | 0.0 | % | 2,985 |   | 1.6 | % | — |   | 0.0 | % |
| Special charges  (Note 14)                                                                            |       | 800                          |       | 1.2                          | %          | — |   | 0.0 | % | 8,778 |   | 4.8 | % | — |   | 0.0 | % |
| Amortization of  Intangibles                                                                          |       | 526                          |       | 0.8                          | %          | — |   | 0.0 | % | 526 |   | 0.3 | % | — |   | 0.0 | % |
|                                                                                                  |       | 68,065                       |       | 105.6                        | %          | 75,212 |   | 102.3 | % | 204,150 |   | 111.2 | % | 238,885 |   | 103.8 | % |
| LOSS FROM  OPERATIONS                                                                                 |       | (3,606                       | )          | -5.6                         | %          | (1,638 | ) | -2.3 | % | (20,605 | ) | -11.2 | % | (8,774 | ) | -3.8 | % |
| OTHER INCOME /  (EXPENSE):                                                                            |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gain/(loss) on  sale of assets                                                                        |       | —                       |       | 0.0                          | %          | — |   | 0.0 | % | (273 | ) | -0.1 | % | 3,570 |   | 1.6 | % |
| Loss on  investments                                                                                  |       | —                       |       | 0.0                          | %          | — |   | 0.0 | % | — |   | 0.0 | % | (61 | ) | 0.0 | % |
| Interest income                                                                                       |       | 96                           |       | 0.1                          | %          | 252 |   | 0.3 | % | 372 |   | 0.2 | % | 725 |   | 0.3 | % |
| Interest expense                                                                                      |       | (18                          | )          | 0.0                          | %          | (5 | ) | 0.0 | % | (36 | ) | 0.0 | % | (168 | ) | -0.1 | % |
|                                                                                                  |       | 78                           |       | 0.1                          | %          | 247 |   | 0.3 | % | 63 |   | 0. | % | 4,066 |   | 1.8 | % |
| LOSS BEFORE  INCOME TAXES, CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE AND  MINORITY INTEREST |       | (3,528                       | )          | -5.5                         | %          | (1,391 | ) | -2.0 | % | (20,542 | ) | -11.2 | % | (4,708 | ) | -2.0 | % |
| INCOME TAXES/(BENEFIT):                                                                               |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current                                                                                               |       | 298                          |       | 0.5                          | %          | — |   | 0.0 | % | 298 |   | 0.2 | % | — |   | 0.0 | % |
| Deferred                                                                                              |       | (962                         | )          | -1.5                         | %          | (473 | ) | -0.6 | % | (5,883 | ) | -3.2 | % | (1,601 | ) | -0.7 | % |
|                                                                                                  |       | (664                         | )          | -1.0                         | %          | (473 | ) | -0.6 | % | (5,585 | ) | -3.0 | % | (1,601 | ) | -0.7 | % |
| LOSS BEFORE  CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE AND MINORITY INTEREST                |       | (2,864                       | )          | -4.4                         | %          | (918 | ) | -1.4 | % | (14,957 | ) | -8.2 | % | (3,107 | ) | -1.3 | % |
| Minority Interest                                                                                     |       | 21                           |       | 0.0                          | %          | — |   | 0.0 | % | (16 | ) | 0.0 | % | — |   | 0.0 | % |
| Cumulative effect  of change in accounting principle (Note 4)                                         |       | —                       |       | 0.0                          | %          | — |   | 0.0 | % | — |   | 0.0 | % | (29,861 | ) | -13.0 | % |
| NET LOSS                                                                                              |       | $                            | (2,843     | )                            | -4.4       | % | $ | (918 | ) | -1.4 | % | $ | (14,973 | ) | -8.2 | % | $ | (32,968 | ) | -14.3 | % |
| LOSS PER SHARE  (BASIC & DILUTED):                                                           |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Before Cumulative  Effect of Change in Accounting Principle and Minority Interest                     |       | $                            | (0.09      | )                            |       |   | $ | (0.03 | ) |   |   | $ | (0.49 | ) |   |   | $ | (0.10 | ) |   |   |
| Cumulative Effect  of Change in Accounting Principle                                                  |       | $                            | —     |                         |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | (0.95 | ) |   |   |
| Net Loss                                                                                              |       | $                            | (0.09      | )                            |       |   | $ | (0.03 | ) |   |   | $ | (0.49 | ) |   |   | $ | (1.05 | ) |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING:                                                       |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic &  Diluted                                                                             |       | 30,548,000                   |       |                         |       | 31,218,000 |   |   |   | 30,403,000 |   |   |   | 31,388,000 |   |   |   |

 

3

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COMPUTERHORIZONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited) (dollars in thousands)

 
| ** **                                                                       | ** ** | **Nine Months Ended**        | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                       | ** ** | **September 30,  2003** | ** ** | **September 30,  2002** | ** ** |
| ** **                                                                       | ** ** | **(As restated note 2)**     | ** ** | ** ** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                             |       |                         |       |   |   |
| Net loss                                                                         |       | $                            | (14,973    | ) | $ | (32,968 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                         |       |   |   |
| Deferred taxes                                                                   |       | (5,883                       | )          | 3,153 |   |
| Depreciation                                                                     |       | 3,836                        |       | 3,479 |   |
| Amortization of intangibles                                                      |       | 526                          |       | — |   |
| Provision for bad debts                                                          |       | 4,252                        |       | 2,050 |   |
| Loss/(Gain) on sale of assets                                                    |       | 273                          |       | (3,570 | ) |
| Write off of goodwill                                                            |       | —                       |       | 29,861 |   |
| Change in assets and liabilities, net of  acquisitions:                          |       |                         |       |   |   |
| Accounts receivable                                                              |       | 10,816                       |       | 17,185 |   |
| Other current assets                                                             |       | 1,741                        |       | (1,822 | ) |
| Assets held for sale                                                             |       | —                       |       | (1,929 | ) |
| Other assets                                                                     |       | (2,544                       | )          | 1,393 |   |
| Refundable income taxes                                                          |       | 19,051                       |       | 8,361 |   |
| Accrued payroll, payroll taxes and benefits                                      |       | 1,714                        |       | (2,121 | ) |
| Accounts payable                                                                 |       | (1,477                       | )          | (859 | ) |
| Income taxes payable                                                             |       | 934                          |       | — |   |
| Other accrued expenses                                                           |       | (1,389                       | )          | (513 | ) |
| Other liabilities                                                                |       | (347                         | )          | (775 | ) |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                        |       | 16,530                       |       | 20,925 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                             |       |                         |       |   |   |
| Purchases of furniture and equipment                                             |       | (1,683                       | )          | (2,455 | ) |
| Acquisitions, net of cash                                                        |       | (22,141                      | )          | — |   |
| Proceeds received from the sale of assets                                        |       | 149                          |       | 15,880 |   |
| Acquisition of intangibles                                                       |       | (566                         | )          | — |   |
| Acquisition of goodwill                                                          |       | (427                         | )          | — |   |
| NET CASH PROVIDED BY / (USED IN) INVESTING  ACTIVITIES                           |       | (24,668                      | )          | 13,425 |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                             |       |                         |       |   |   |
| Payment of notes payable                                                         |       | (2,636                       | )          | — |   |
| Notes payable - banks, net                                                  |       | —                       |       | (10,000 | ) |
| Stock options exercised                                                          |       | 939                          |       | 443 |   |
| Purchase of treasury shares                                                      |       | (1,230                       | )          | (4,357 | ) |
| Stock issued on employee stock purchase  plan                                    |       | 291                          |       | 948 |   |
| NET CASH USED IN FINANCING ACTIVITIES                                            |       | (2,636                       | )          | (12,966 | ) |
| Foreign currency losses                                                          |       | 1,753                        |       | (370 | ) |
| NET INCREASE/(DECREASE) IN CASH AND CASH  EQUIVALENTS                            |       | (9,021                       | )          | 21,014 |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  YEAR                                  |       | 59,769                       |       | 41,033 |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                       |       | $                            | 50,748     |   | $ | 62,047 |   |
| ** **                                                                       |       |                         |       |   |   |
| **Supplemental disclosure of cash flow  information:**                           |       |                         |       |   |   |
| Details of acquisition:                                                          |       |                         |       |   |   |
| Tangible assets acquired (including cash of  $347)                               |       | $                            | 13,083     |   | $ | — |   |
| Liabilities assumed                                                              |       | (7,442                       | )          | — |   |
| Goodwill                                                                         |       | 13,921                       |       | — |   |
| Intangibles                                                                      |       | 2,926                        |       | — |   |
| Cash paid                                                                        |       | 22,488                       |       | — |   |
| Less: Cash received in acquisition                                               |       | (347                         | )          | — |   |
| Net cash paid*                                                                   |       | $                            | 22,141     |   | $ | — |   |
|                                                                                  |            |                              |            |  |  |  |  |  |

 

----

*              Includes a $1.5 million notepayment

 

4

----

 

**COMPUTERHORIZONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

For the Periods September 30, 2003 andSeptember 30, 2002 

 

(unaudited)

 

**1.****             ****Basis ofPresentation**

** **

The consolidated balancesheet as of September 30, 2003, the consolidated statements of operationsfor the three and nine months ended September 30, 2003 andSeptember 30, 2002, respectively and the statement of cash flows for thenine months ended September 30, 2003 and 2002 have been prepared by theCompany without audit. In the opinion of management, all adjustments (whichinclude normal recurring adjustments) necessary to present fairly the financialposition, results of operations and cash flows at September 30, 2003 (andfor all periods presented) have been made.

 

Certain information andnote disclosures, normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America, which are not required for interim purposes, have been condensed oromitted. It is suggested that these consolidated financial statements be readin conjunction with the financial statements and notes thereto included in theAnnual Report on Form 10-K for the year ended December 31, 2002 filedby the Company. The results of operations for the periods endedSeptember 30, 2003 and 2002 are not necessarily indicative of theoperating results for the respective full years.

 

*Reclassifications*

* *

Certainreclassifications have been made to the 2002 comparative financial statementsto conform to the 2003 presentation.

 

**2.****             ****Restatement ofFinancial Statements**

 

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

 

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

 

Thefollowing schedule reconciles net loss for the three months and nine monthsended September 30, 2003 as originally reported, to the corresponding amountson a restated basis after given effect to the adjustment described above.

 
| ** **                                                 | ** ** | **Three Months**        | ** ** | **Nine Months**     | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|---------------------|------------|
| **(In thousands, except**                                  | ** ** | **Ended September 30,** | ** ** |
| **per share data)**                                        | ** ** | **2003**                | ** ** | **2003**            | ** ** |
| ** **                                                 | ** ** | **(unaudited)**         | ** ** | **(unaudited****)** | ** ** |
|                                                       |       |                    |       |                |       |
| Net loss as originally reported                            |       | (2,450                  | )          | (13,259             | )          |
|                                                       |       |                    |       |                |       |
| Direct costs adjustment (pretax)                           |       | 663                     |       | 2,646               |       |
|                                                       |       |                    |       |                |       |
| Income tax benefit                                         |       | (270                    | )          | (932                | )          |
| Net loss as restated                                       |       | (2,843                  | )          | (14,973             | )          |
|                                                       |       |                    |       |                |       |
| Loss per share (basic and diluted) as  originally reported |       | (0.08                   | )          | (0.44               | )          |
| Effect of Direct Costs adjustment                          |       | (0.01                   | )          | (0.05               | )          |
| Loss per share (basic and diluted) as  restated            |       | (0.09                   | )          | (0.49               | )          |

 

Thepreviously reported results of operations for the three and nine month endedSeptember 30, 2003 as reported on Form 10Q with the Securities and ExchangeCommission, have been amended to reflect the above adjustments.  The results of such adjustments, as comparedwith the Company’s previously reported results for the three and nine-monthperiods ended September 30, 2003, are set forth below.

 
| **(In thousands, except  per share data)** | ** ** | **Three Months ended  September 30, 2003** | ** ** | **Three Months ended  September 30, 2003** | ** ** | **Nine Months ended  September 30, 2003** | ** ** | **Nine Months ended  September 30, 2003** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **(unaudited)**                            | ** ** | **(unaudited)**                            | ** ** | **(unaudited)**                           | ** ** | **(unaudited)**                           | ** ** |
| ** **                                 | ** ** | **As Originally Reported**                 | ** ** | **As Restated**                            | ** ** | **As Originally Reported**                | ** ** | **As Restated**                           | ** ** |
|                                       |       |                                       |       |                                       |       |                                      |       |                                      |       |
| Revenue                                    |       |                                       |       |                                       |       |                                      |       |                                      |       |
| IT Services                                |       | 32,235                                     |       | 32,235                                     |       | 103,738                                   |       | 103,738                                   |       |
| Solutions Group                            |       | 27,016                                     |       | 27,016                                     |       | 65,308                                    |       | 65,308                                    |       |
| Chimes                                     |       | 5,208                                      |       | 5,208                                      |       | 14,499                                    |       | 14,499                                    |       |
|                                       |       | 64,459                                     |       | 64,459                                     |       | 183,545                                   |       | 183,545                                   |       |
|                                       |       |                                       |       |                                       |       |                                      |       |                                      |       |
| Cost and expenses                          |       |                                       |       |                                       |       |                                      |       |                                      |       |
| Direct costs                               |       | 44,406                                     |       | 45,069                                     |       | 128,690                                   |       | 131,336                                   |       |
| Selling, general and administrative        |       | 20,494                                     |       | 20,494                                     |       | 56,273                                    |       | 56,273                                    |       |
| Bad debt expense                           |       | 389                                        |       | 389                                        |       | 4,252                                     |       | 4,252                                     |       |
| Restructuring charge                       |       | 787                                        |       | 787                                        |       | 2,985                                     |       | 2,985                                     |       |
| Special charges                            |       | 800                                        |       | 800                                        |       | 8,778                                     |       | 8,778                                     |       |
| Amortization of intangibles                |       | 526                                        |       | 526                                        |       | 526                                       |       | 526                                       |       |
|                                       |       | 67,402                                     |       | 68,065                                     |       | 201,504                                   |       | 204,150                                   |       |
|                                       |       |                                       |       |                                       |       |                                      |       |                                      |       |
| Loss from Operations                       |       | (2,943                                     | )          | (3,606                                     | )          | (17,959                                   | )          | (20,605                                   | )          |
|                                       |       |                                       |       |                                       |       |                                      |       |                                      |       |
| Other income/expenses                      |       |                                       |       |                                       |       |                                      |       |                                      |       |
| Gain/(loss) on sale of assets              |       | —                                     |       | —                                     |       | (273                                      | )          | (273                                      | )          |
| Interest income                            |       | 96                                         |       | 96                                         |       | 372                                       |       | 372                                       |       |
| Interest expense                           |       | (18                                        | )          | (18                                        | )          | (36                                       | )          | (36                                       | )          |
|                                       |       | 78                                         |       | 78                                         |       | 63                                        |       | 63                                        |       |
|                                       |       |                                       |       |                                       |       |                                      |       |                                      |       |
| Loss before income taxes                   |       | (2,865                                     | )          | (3,528                                     | )          | (17,896                                   | )          | (20,542                                   | )          |
| Income tax benefit                         |       | (394                                       | )          | (664                                       | )          | (4,653                                    | )          | (5,585                                    | )          |
| Net loss before minority interest          |       | (2,471                                     | )          | (2,864                                     | )          | (13,243                                   | )          | (14,957                                   | )          |
| Minority Interest                          |       | 21                                         |       | 21                                         |       | (16                                       | )          | (16                                       | )          |
| Net loss                                   |       | (2,450                                     | )          | (2,843                                     | )          | (13,259                                   | )          | (14,973                                   | )          |
| Basic earnings and diluted per share       |       | (0.08                                      | )          | (0.09                                      | )          | (0.44                                     | )          | (0.49                                     | )          |

 

The following table setsforth the effects of the restatement adjustments discussed above on theconsolidated balance sheets at September 30, 2003.

 
| ** **                                                                                                  | ** ** | **September 30,**            | ** ** | **September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------|------------|
| ** **                                                                                                  | ** ** | **2003**                     | ** ** | **2003**          | ** ** |
| ** **                                                                                                  | ** ** | **(As originally reported)** | ** ** | **(As restated)** | ** ** |
| ** **                                                                                                  | ** ** | **(unaudited)**              | ** ** | **(unaudited)**   | ** ** |
| ASSETS                                                                                                      |       |                         |       |              |       |
| CURRENT ASSETS:                                                                                             |       |                         |       |              |       |
| Cash and cash equivalents                                                                                   |       | $                            | 50,748     |              | $          | 50,748 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $8,207 September 30, 2003              |       | 52,506                       |       | 52,506            |       |
| Deferred income taxes                                                                                       |       | 5,167                        |       | 5,167             |       |
| Refundable income taxes                                                                                     |       | —                       |       | —            |       |
| Other                                                                                                       |       | 5,557                        |       | 5,557             |       |
|                                                                                                        |       |                         |       |              |       |
| TOTAL CURRENT ASSETS                                                                                        |       | 113,978                      |       | 113,978           |       |
|                                                                                                        |       |                         |       |              |       |
| PROPERTY AND EQUIPMENT                                                                                      |       | 41,476                       |       | 41,476            |       |
| Less accumulated depreciation                                                                               |       | (31,357                      | )          | (31,357           | )          |
|                                                                                                        |       |                         |       |              |       |
|                                                                                                        |       | 10,119                       |       | 10,119            |       |
|                                                                                                        |       |                         |       |              |       |
| OTHER ASSETS - NET:                                                                                    |       |                         |       |              |       |
| Goodwill (Note 4)                                                                                      |       | 33,551                       |       | 33,551            |       |
| Intangibles (Note 4)                                                                                   |       | 2,966                        |       | 2,966             |       |
| Deferred income taxes                                                                                       |       | 12,361                       |       | 13,293            |       |
| Other                                                                                                       |       | 11,267                       |       | 11,267            |       |
|                                                                                                        |       |                         |       |              |       |
| TOTAL OTHER ASSETS                                                                                          |       | 60,145                       |       | 61,077            |       |
|                                                                                                        |       |                         |       |              |       |
| TOTAL ASSETS                                                                                                |       | $                            | 184,242    |              | $          | 185,174 |   |
|                                                                                                        |       |                         |       |              |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                   |       |                         |       |              |       |
| CURRENT LIABILITIES:                                                                                        |       |                         |       |              |       |
| Accounts payable                                                                                            |       | $                            | 10,836     |              | $          | 10,836 |   |
| Accrued payroll, payroll taxes and benefits                                                                 |       | 3,636                        |       | 6,243             |       |
| Restructuring reserve                                                                                       |       | 3,028                        |       | 3,028             |       |
| Income taxes payable                                                                                        |       | 1,144                        |       | 1,144             |       |
| Tax benefit reserve                                                                                         |       | 19,600                       |       | 19,600            |       |
| Other accrued expenses                                                                                      |       | 5,932                        |       | 4,583             |       |
|                                                                                                        |       |                         |       |              |       |
| TOTAL CURRENT LIABILITIES                                                                                   |       | 44,176                       |       | 45,434            |       |
|                                                                                                        |       |                         |       |              |       |
| OTHER LIABILITIES                                                                                           |       | 6,488                        |       | 6,488             |       |
|                                                                                                        |       |                         |       |              |       |
| SHAREHOLDERS’ EQUITY:                                                                                  |       |                         |       |              |       |
| Preferred stock, $.10 par; authorized and  unissued 200,000 shares, including 50,000 Series A          |       |                         |       |              |       |
| Common stock, $.10 par, authorized  100,000,000 shares; issued 33,153,107 shares at September 30, 2003 |       | 3,315                        |       | 3,315             |       |
| Additional paid-in capital                                                                                  |       | 133,162                      |       | 133,162           |       |
| Accumulated comprehensive loss                                                                              |       | (3,324                       | )          | (1,933            | )          |
| Retained earnings                                                                                           |       | 14,996                       |       | 13,279            |       |
|                                                                                                        |       |                         |       |              |       |
|                                                                                                        |       | 148,149                      |       | 147,823           |       |
|                                                                                                        |       |                         |       |              |       |
| Less shares held in treasury, at cost;  2,586,344 shares at September 30, 2003                         |       | (14,571                      | )          | (14,571           | )          |
|                                                                                                        |       |                         |       |              |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                             |       | 133,578                      |       | 133,252           |       |
|                                                                                                        |       |                         |       |              |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                             |       | $                            | 184,242    |              | $          | 185,174 |   |

 

**3.****             ****RecentAccounting Pronouncements**

** **

In June 2001, theFinancial Accounting Standards Board approved the issuance of SFASNo. 141, “Business Combinations” and in July 2001, SFAS 142, “Goodwilland Other Intangible Assets.” The new standards require that all businesscombinations initiated after June 30, 2001 must be accounted for under thepurchase method. In addition, all intangible assets acquired that are obtainedthrough contractual or legal right, or are capable of being separately sold,transferred, licensed, rented or exchanged shall be recognized as an assetapart from goodwill. Goodwill and intangibles with indefinite lives will nolonger be subject to amortization, but will be subject to at least an annualassessment for impairment by applying a fair value based test. The Companyadopted SFAS 142 as of January 1, 2002 and in compliance with thisnew regulation has discontinued the amortization of goodwill. For the effect ofthis statement on the Company see Note 3.

 

In November 2002,the EITF reached a consensus on Issue No. 00-21, “Accounting for RevenueArrangements with Multiple Deliverables.” This Issue provides guidance on whenand how to separate elements of an arrangement that may involve the delivery orperformance of multiple products, services and rights to use assets intoseparate units of accounting. The guidance in the consensus is effective forrevenue arrangements entered into in fiscal periods ending afterDecember 15, 2003. The transition provision allows either prospectiveapplication or a cumulative effect adjustment upon adoption. The effect of theadoption of this statement was immaterial to the Company.

 

In December 2002,the Financial Accounting Standards Board approved the issuance of SFASNo. 148, “Accounting for Stock-Based Compensation—Translation andDisclosure.” This statement amends FASB Statement No. 123, “Accounting forStock-Based Compensation,” to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation. In addition, this Statement amended the disclosurerequirements of Statement

 

5

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123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodsused on reported results. The Company adopted the disclosure provisions as ofDecember 31, 2002.

 

The exercise price pershare on all options granted may not be less than the fair value at the date ofthe option grant. The Company applies Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees,” as modified by FIN 44,“Accounting for Certain Transactions Involving Stock Compensation,” inaccounting for stock-based employee compensation, whereby no compensation costhad been recognized for the plans. The Company expects to continue followingthe guidance under APB 25 for stock based compensation to employees. Hadcompensation cost for the plans been determined based on the fair value of theoptions at the grant dates and been consistent with the method of SFASNo. 123, the Company’s net loss and loss per share would have beenincreased to the pro forma amounts indicated below: 

 
| ** **         | ** **                                                                                                                                    | **Three Months Ended**      | ** ** | **Nine Months Ended**             | ** ** |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------|------------|-----------------------------------|------------|
| ** **         | ** **                                                                                                                                    | **September 30, 2003** | ** ** | **September 30, 2002 ** | ** ** | **September 30, 2003   ** | ** ** | **September 30, 2002** | ** ** |
| ** **         | ** **                                                                                                                                    | **(As restated note 2)**    | ** ** | ** **                        | ** ** | **(As restated note 2)** | ** ** | ** ** | ** ** |
| Net loss           | As reported                                                                                                                                   |                        | $          | (2,843                            | )          | $ | (918 | ) | $ | (14,973 | ) | $ | (32,968 | ) |
|               |                                                                                                                                          |                        |       |                              |       |   |   |   |   |   |
|               | Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects |                        | (438       | )                                 | (882       | ) | (1,746 | ) | (3,693 | ) |
|               | Pro forma                                                                                                                                     |                        | $          | (3,281                            | )          | $ | (1,800 | ) | $ | (16,719 | ) | $ | (36,661 | ) |
| Earnings per share |                                                                                                                                          |                        |       |                              |       |   |   |   |   |
| Basic              | As reported                                                                                                                                   |                        | $          | (0.09                             | )          | $ | (0.03 | ) | $ | (0.49 | ) | $ | (1.05 | ) |
|               | Pro forma                                                                                                                                     |                        | (0.11      | )                                 | (0.06      | ) | (0.55 | ) | (1.17 | ) |
| Diluted            | As reported                                                                                                                                   |                        | $          | (0.09                             | )          | $ | (0.03 | ) | $ | (0.49 | ) | $ | (1.05 | ) |
|               | Pro forma                                                                                                                                     |                        | (0.11      | )                                 | (0.06      | ) | (0.55 | ) | (1.17 | ) |

 

Effective onJanuary 1, 2003 the Company adopted Financial Accounting Standards BoardNo. 146, “Accounting for Exit or Disposal Activities,” (“SFAS 146”),which supersedes Emerging Issues Task Force Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).” The newstandards require that a liability for a cost associated with an exit ordisposal activity, including costs related to terminating a contract that isnot a capital lease and the termination benefits that employees who areinvoluntarily terminated receive under the terms of a one-time benefitarrangement that is not ongoing or an individual deferred-compensationcontract, be recognized when the liability is incurred. Previously, under IssueNo. 94-3, a liability for an exit cost was recognized at the date of anentity’s commitment to an exit plan, which may not necessarily meet thedefinition of a liability. SFAS 146 is effective for exit or disposalactivities of the Company that are initiated after December 31, 2002. TheCompany adopted SFAS 146 as of January 1, 2003 (See Note 6).

 

In May 2003, theFASB issued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity.” It establishesclassification and measurement standards for three types of freestandingfinancial instruments that have characteristics of both liabilities and equity.Instruments within the scope of SFAS 150 must be classified as liabilitieswithin the Company’s financial statements. The provisions of SFAS No. 150are effective for (1) instruments entered into or 

 

6

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modified afterMay 31, 2003 and (2) pre-existing instruments as of July 1,2003. SFAS 150 is not expected to have a material effect on the Company’sfinancial statements.

 

In January 2003,the FASB issued Financial Interpretation No. 46, “Consolidation ofVariable Interest Entities” (“FIN 46”), which addresses consolidation bybusiness enterprises of variable interest entities (VIEs). The accountingprovisions and disclosure requirements of FIN 46 are effective immediately forVIEs created after January 31, 2003, and are effective for reportingperiods ending after December 15, 2003, for VIEs created prior toFebruary 1, 2003. Although the Company is still evaluating the impact ofFIN 46, it is not expected to have a material effect on the Company’s financialstatements.

 

**3.****             ****Adoption ofFAS 142**

** **

*IntangibleAssets*

* *

Intangible assets are theresult of the acquisition of certain assets and operations of RGII and theacquisition of the Xpress software from Commerce One. During the third quarterof 2003, the Company completed a purchase price allocation review and accordingto SFAS No. 142, assessed the useful lives of its acquired intangibleassets.

 

The following table summarizesthe acquired intangible assets, the remaining components and the accumulatedamortization as of September 30, 2003 (in thousands): 

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

 

Intangible assets are beingamortized over periods ranging from six months to seven years, based on theestimated useful lives. The amortization expense on these intangible assets forthe three and nine months ended September 30, 2003 was $526,000. Theestimated remaining amortization expense for each year ending December 31,is as follows (in thousands): 

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

 

*Goodwill*

* *

During the quarter endedJune 30, 2002, the Company completed the initial valuation of the carryingvalue of goodwill existing at January 1, 2002. As a result a non-cashcharge of $29.9 million, or $(0.95) per share was retroactively recordedas the cumulative effect of an accounting change in the six months endedJune 30, 2002 statement of operations. For the year endedDecember 31, 2002 the Company completed a second valuation of the carrying

 

7

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value of the remaining goodwilland it was determined that no further impairment had occurred. The changes inthe carrying amount of goodwill for the nine months ended September 30,2003, are as follows: 

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

 

----

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

 

The reporting units are equalto, or one level below, reportable segments. The Company engaged independentvaluation consultants to assist with the transitional goodwill and annualimpairment tests.

 

As of December 31, 2002,the fair value of each of the reporting units was calculated using thefollowing approaches: (i) market approach and (ii) income approach.Under the market approach, value is estimated by comparing the performancefundamentals relating to similar public companies’ stock prices. Multiples arethen developed of the value of the publicly traded stock to various measuresand are then applied to each reporting unit to estimate the value of itsequity. Under the income approach, value was determined using the present valueof the projected future cash flows to be generated by the reporting unit.

 

The fair value conclusion ofthe reporting units reflects an appropriately weighted value of the marketmultiple approach and the income approach discussed above. An asset approachwas not used because the asset approach is most relevant for liquidationapproaches, investment company valuations and asset rich company valuations(i.e. real estate entities) and was not deemed relevant for manufacturing andservice company going-concern valuations. When either the income approach orthe market approach was used, each indicated value of the Solutions entity’sequity exceeds the carrying value of the Solutions entity by at least$15 million. Since each of the two approaches yielded values far in excessof carrying value, any weighting of the two approaches or either approach usedalone results in the same conclusion, that the goodwill was not impaired. Whenthe other entities were tested, both approaches yielded an indicated valuewhich was far below the carrying value of those entity’s equity, therefore theentire amount of goodwill was written off. As a result, a loss of$29.9 million was recognized in June 2002 and recorded as acumulative effect of change in accounting principle in the accompanyingConsolidated Statements of Operations. There was no income tax effect on theimpairment charge as approximately $19 million of the charge related togoodwill in foreign tax jurisdictions where the Company believes it is morelikely than not that future taxable income in these jurisdictions will not besufficient to realize the related income tax benefits associated with thecharge. The remaining $11 million of the charge was related primarily togoodwill that was acquired prior to the ability to deduct goodwill for taxpurposes.

 

8

----

 

The following pro formatable shows the effect of the cumulative effect of change in accountingprinciple on the Company’s net loss as follows (in thousands, except per sharedata): 

 
| ** **                                                           | ** ** | **Three Months Ended**       | ** ** | **Nine Months Ended**        | ** ** |
|----------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                           | ** ** | **September 30,  2003** | ** ** | **September 30,  2002** | ** ** | **September 30,  2003** | ** ** | **September 30,  2002** | ** ** |
|                                                                 |       | **(As restated note 2)**     |       |                         |       | **(As restated note 2)** |   |   |   |
| Reported Net Loss                                                    |       | $                            | (2,843     | )                            | $          | (918 | ) | $ | (14,973 | ) | $ | (32,968 | ) |
| Cumulative Effect of Change in Accounting  Principle                 |       | —                       |       | —                       |       | — |   | 29,861 |   |
| Adjusted Net Loss                                                    |       | $                            | (2,843     | )                            | $          | (918 | ) | $ | (14,973 | ) | $ | (3,107 | ) |
| Reported Loss per Share:                                             |       |                         |       |                         |       |   |   |   |   |
| Basic & Diluted                                             |       | $                            | (0.09      | )                            | $          | (0.03 | ) | $ | (0.49 | ) | $ | (1.05 | ) |
| Adjustment for Cumulative Effect of Change  in Accounting Principle: |       |                         |       |                         |       |   |   |   |   |
| Basic & Diluted                                             |       | —                       |       | —                       |       | — |   | 0.95 |   |
| Adjusted Loss per Share:                                             |       |                         |       |                         |       |   |   |   |   |
| Basic & Diluted                                             |       | $                            | (0.09      | )                            | $          | (0.03 | ) | $ | (0.49 | ) | $ | (0.10 | ) |

** **

**4.****             ****Earnings PerShare**

** **

The computation ofdiluted earnings per share excludes options with exercise prices greater thanthe average market price. As of September 30, 2003, there were 275,138 and285,263 excluded options, respectively, for the third quarter and the firstnine months ended September 30, 2003, with exercise prices between $4.40and $26.63 and $4.00 and $26.63, respectively, per share. There were 3,096,126and 5,743,813 excluded options, respectively, for the third quarter and thefirst nine months ended September 30, 2002, outstanding at September 30,2002 with exercise prices between $4.40 and $26.63 and $2.02 and $26.63,respectively, per share.

 

**5.****             ****SegmentInformation**

** **

The Company hasidentified three business segments: IT Services, the Solutions Group andChimes, Inc. The IT Services division provides highly skilled softwareprofessionals to augment the internal information management staffs of majorcorporations. IT Services is primarily staffing augmentation. The Solutionsdivision provides enterprise application services, e-business solutions, customizedWeb development and Web enablement of strategic applications, CustomerRelationship Management (CRM), network services, strategic outsourcing andmanaged resourcing as well as software and relational database products, up tothe time of sale, March 25, 2002, of Princeton Softech Inc. In thesegment information chart below, amounts pertaining to PrincetonSoftech Inc. for the nine months ended September 30, 2002, areincluded and total: revenues of $2.9 million, gross profit of $2.4 millionand an operating loss of $1.9 million. Chimes, Inc., a wholly-ownedsubsidiary of CHC, provides workforce procurement and management services toGlobal 2000 companies, which, according to Forbes magazine, represent thebiggest and most important companies, as measured by sales, profits, assets andmarket value. Loss before income tax benefit consists of loss before incometaxes, excluding interest income, interest expense, gain/(loss) on the sale ofassets, restructuring charges, special charges, the write-off of a terminatedproject, minority interest, amortization of intangibles, and

 

9

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net loss on investments.These exclusions total expense of $2.0 million and income of $247,000 forthe quarter ended September 30, 2003 and 2002, respectively and expense of$15.3 million and income of $4.1 million for the first nine monthsended September 30, 2003 and 2002, respectively (see reconciliation ofsegments operating loss to consolidated loss before income taxes). Corporate services,consisting of general and administrative services are provided to the segmentsfrom a centralized location. Such costs are allocated to the applicablesegments based on revenue. 

 
| ** **                                 | ** ** | **Three Months Ended**       | ** ** | **Nine Months Ended**        | ** ** |
|--------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **(in 000’s)**                        | ** ** | **September 30,  2003** | ** ** | **September 30,  2002** | ** ** | **September 30,  2003** | ** ** | **September 30,  2002** | ** ** |
|                                       |       | **(As restated  note 2)**    |       |                         |       | **(As restated  note 2)** |   |   |   |
| *Revenue:*                                 |       |                         |       |                         |       |   |   |   |   |
| IT Services                                |       | $                            | 32,235     |                         | $          | 49,127 |   | $ | 103,738 |   | $ | 157,800 |   |
| Solutions Group                            |       | 27,016                       |       | 20,151                       |       | 65,308 |   | 60,294 |   |
| Chimes                                     |       | 5,208                        |       | 4,296                        |       | 14,499 |   | 12,017 |   |
| TOTAL                                      |       | $                            | 64,459     |                         | $          | 73,574 |   | $ | 183,545 |   | $ | 230,111 |   |
| *Gross Margin:*                            |       |                         |       |                         |       |   |   |   |   |
| IT Services                                |       | $                            | 6,514      |                         | $          | 10,441 |   | $ | 20,763 |   | $ | 31,997 |   |
| Solutions Group                            |       | 7,993                        |       | 6,361                        |       | 18,009 |   | 19,965 |   |
| Chimes                                     |       | 4,882                        |       | 3,907                        |       | 13,436 |   | 10,522 |   |
| TOTAL                                      |       | $                            | 19,389     |                         | $          | 20,709 |   | $ | 52,208 |   | $ | 62,484 |   |
| *Operating income / (loss):*               |       |                         |       |                         |       |   |   |   |   |
| IT Services                                |       | $                            | 1,975      |                         | $          | 4,110 |   | $ | 6,150 |   | $ | 11,512 |   |
| Solutions Group                            |       | 2,143                        |       | 2,252                        |       | 6,525 |   | 4,586 |   |
| Chimes                                     |       | (113                         | )          | (1,682                       | )          | (2,377 | ) | (6,091 | ) |
| TOTAL                                      |       | $                            | 4,005      |                         | $          | 4,680 |   | $ | 10,298 |   | $ | 10,007 |   |
| *Corporate Allocation:*                    |       |                         |       |                         |       |   |   |   |   |
| IT Services                                |       | $                            | 3,213      |                         | $          | 4,219 |   | $ | 9,249 |   | $ | 12,871 |   |
| Solutions Group                            |       | 1,767                        |       | 1,730                        |       | 4,999 |   | 4,927 |   |
| Chimes                                     |       | 519                          |       | 369                          |       | 1,303 |   | 984 |   |
| TOTAL                                      |       | $                            | 5,499      |                         | $          | 6,318 |   | $ | 15,551 |   | $ | 18,782 |   |
| *Income/(loss) before income tax benefit:* |       |                         |       |                         |       |   |   |   |   |
| IT Services                                |       | $                            | (1,238     | )                            | $          | (109 | ) | $ | (3,099 | ) | $ | (1,359 | ) |
| Solutions Group                            |       | 376                          |       | 522                          |       | 1,526 |   | (341 | ) |
| Chimes                                     |       | (632                         | )          | (2,051                       | )          | (3,680 | ) | (7,075 | ) |
| TOTAL                                      |       | $                            | (1,494     | )                            | $          | (1,638 | ) | $ | (5,253 | ) | $ | (8,775 | ) |
| *Assets:*                                  |       |                         |       |                         |       |   |   |   |   |
| IT Services                                |       |                         |       |                         |       | $ | 27,057 |   | $ | 43,579 |   |
| Solutions Group                            |       |                         |       |                         |       | 67,176 |   | 43,370 |   |
| Chimes                                     |       |                         |       |                         |       | 15,625 |   | 20,285 |   |
| Corporate and other                        |       |                         |       |                         |       | 75,316 |   | 99,515 |   |
| TOTAL                                      |       |                         |       |                         |       | $ | 185,174 |   | $ | 206,749 |   |
|                                            |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |

 

10

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*Reconciliation of Segment Loss before Income Tax Benefit toConsolidated Loss Before Income Tax Benefit:*

 
| ** **                                                                                                        | ** ** | **Three Months Ended**       | ** ** | **Nine Months Ended**        | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                                        | ** ** | **September 30,  2003** | ** ** | **September 30,  2002** | ** ** | **September 30,  2003** | ** ** | **September 30,  2002** | ** ** |
| ** **                                                                                                        | ** ** | **(As restated note 2)**     | ** ** | ** **                   | ** ** | **(As restated note 2)** | ** ** | ** ** | ** ** |
| Total Segments Loss before Income Tax  Benefit                                                                    |       | $                            | (1,494     | )                            | $          | (1,638 | ) | $ | (5,253 | ) | $ | (8,775 | ) |
| Adjustments:                                                                                                      |       |                         |       |                         |       |   |   |   |   |
| Interest income, net                                                                                              |       | 78                           |       | 247                          |       | 336 |   | 558 |   |
| Gain/(loss) on sale of assets                                                                                     |       | —                       |       | —                       |       | (273 | ) | 3,570 |   |
| Restructuring charges                                                                                             |       | (787                         | )          | —                       |       | (2,985 | ) | — |   |
| Amortization of intangibles                                                                                       |       | (526                         | )          | —                       |       | (526 | ) | — |   |
| Special charges                                                                                                   |       | (800                         | )          | —                       |       | (8,778 | ) | — |   |
| Write-off of terminated project                                                                                   |       | —                       |       | —                       |       | (3,064 | ) | — |   |
| Net loss on investments                                                                                           |       | —                       |       | —                       |       | — |   | (61 | ) |
| Total Adjustments:                                                                                                |       | $                            | (2,035     | )                            | $          | (247 | ) | (15,290 | ) | 4,067 |   |
| Consolidated loss before income taxes,  cumulative effect of change in accounting principle and minority interest |       | $                            | (3,529     | )                            | $          | (1,391 | ) | $ | (20,543 | ) | $ | (4,708 | ) |

** **

**6.****             ****RestructuringCharges**

** **

During the third quarterof 2003, the Company recorded a restructuring charge of approximately $787,000relating to the closing of Chimes (UK) Ltd. and severance charges relatedto US operations. The Company decided to continue business in this geographicarea via a third party and therefore recorded the charge after the building wasclosed. The provision includes an accrual relating to the future costsassociated with continuing rent on this property in the United Kingdom. Theclosing of this office resulted in a severance charge of $247,000. As ofSeptember 30, 2003, $203,000 had been paid in severance to terminatedemployees. 

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

 

During the secondquarter of 2003, the Company evaluated the geographic area in Canada anddecided to close facilities and go virtual in the smaller Canadian markets.After the buildings were entirely closed, the Company recorded a restructuringcharge of approximately $1.9 million relating to the consolidating andclosing of these facilities in the Canadian subsidiary. This $1.9 millionexpense was calculated based on current rent commitments less a calculatedsublease amount based on current market conditions. The provision included anaccrual relating to the future costs associated with

 

11

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continuing rent on sixproperties, five of which are in Canada, with rents continuing through 2004,2006 and 2007. The closing of these offices resulted in the termination of 20employees with a severance charge of $697,000. As of September 30, 2003,$524,000 had been paid in severance to the terminated employees. 

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

 

During the fourthquarter of 2002, the Company recorded a restructuring charge of$2.8 million pertaining to 2002 office closings. During the second quarterof 2003, half of the rent for one office closing was reversed after the rentwas negotiated at a lower rate for half the building. 

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

 

At the end of 2002, theCompany had $295,000 of five lease obligations remaining from the restructureexpense recorded in 2001. Of the five lease obligations, four remain and thebalance as of September 30, 2003 was $141,000. 

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

 

12

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At the end of 2002 theCompany had $488,000 of one lease obligation remaining on the restructureexpense recorded in 2000 with the lease terminating in 2005. The balanceremaining at September 30, 2003 was $355,000. 

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

** **

**7.****             ****ComprehensiveIncome / (Loss)**

** **

Statement of FinancialAccounting Standards No. 130, Reporting Comprehensive Income (“SFAS No.130”),requires that items defined as other comprehensive income/(loss), such asforeign currency translation adjustments, be separately classified in thefinancial statements and that the accumulated balance of other comprehensiveincome/(loss) be reported separately from retained earnings and additionalpaid-in capital in the equity section of the balance sheet. The components ofcomprehensive loss for the three and nine months ended September 30, 2003and September 30, 2002 are as follows: 

 
| ** **                                                            | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                            | ** ** | **September 30, 2003** | ** ** | **September 30, 2002** | ** ** | **September 30, 2003** | ** ** | **September 30, 2002** | ** ** |
| ** **                                                            | ** ** | **(As restated note 2)**    | ** ** | ** **                  | ** ** | **(As restated note 2)** | ** ** | ** ** | ** ** |
| Comprehensive Loss:                                                   |       |                        |       |                        |       |   |   |   |   |
| Net Loss                                                              |       | $                           | (2,843     | )                           | $          | (918 | ) | $ | (14,973 | ) | $ | (32,968 | ) |
| Other comprehensive income/(loss) -  Foreign currency adjustment |       | 214                         |       | (48                         | )          | 1,753 |   | (370 | ) |
| Unrealized gain/(loss) on SERP investments                            |       | (112                        | )          | —                      |       | 621 |   | — |   |
| Comprehensive Loss                                                    |       | $                           | (2,741     | )                           | $          | (966 | ) | $ | (12,599 | ) | $ | (33,338 | ) |

** **

**8.****             ****Acquisitions**

** **

On September 12,2003, the Company acquired, from Commerce One, the Xpress solution, a suite ofsoftware and services designed to rapidly facilitate product datasynchronization between trading partners. The purchase price of the softwarewas $566,000, recorded as intangible assets, and is being amortized over athree year period.

 

On July 8, 2003,the Company acquired all of the stock of privately-held RGIITechnologies, Inc. (“RGII”). The Company purchased RGII because acquiringa platform company in the Federal government IT Services marketplace has been along-term priority for the Company. The purchase price was approximately$22.1 million including an up-front cash payment, acquisition expenses,working capital adjustment and the payoff of a note payable of$1.5 million. In addition the Company paid off a RGII $665,000 note andline of credit of approximately $2 million. In addition, the seller may beentitled to contingent payments based on RGII’s performance againstprofitability objectives over the next three years. The contingent payments areevidenced by a contingent note with a face value of $10 million that ispayable over three years, only if certain financial performance objectives aremet. These financial performance objectives are based on earnings beforeinterest and taxes (“EBIT”) targets totaling $19.8 million over athree-year period. There are no minimum or maximum payments obligations underthe terms of the contingent note, whereby the contingent payment will bereduced 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 also entered into employment agreements with the formershareholder and key employees of RGII and have agreed to issue an aggregate of600,000 options to purchase shares of Computer Horizons stock over a three yearperiod.

 

13

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The Company completedthe allocation of the purchase price to assets and liabilities acquiredutilizing outside valuation consultants to assist in this process. Auditedhistorical financial statements of RGII together with applicable pro forma financialinformation were filed with the SEC on September 19, 2003.

 

The allocation of thepurchase price to assets acquired and liabilities assumed was as follows (inthousands): 

 

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

 

Purchased intangiblestotaling $2.9 million included unfunded backlog, funded backlog, softwareand non compete agreements. $13.9 million was recorded as goodwill.

 

The acquisition will betreated as a purchase of assets for tax purposes. Accordingly, goodwill will besubject to amortization for tax purposes over fifteen years.

 

Pro Forma Results

 

Effective July 1,2003, the results of RGII’s operations have been included in the consolidatedfinancial statements of the Company. The following unaudited pro formafinancial information presents the combined results of operations of theCompany and RGII as if the acquisition had occurred as of the beginning of theperiods presented. The revenues and results of operations included in thefollowing pro forma unaudited consolidated condensed statement of operations isnot considered necessarily

 

14

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indicative of theresults of operations for the periods specified had the transaction actuallybeen completed at the beginning of the period. 

 
| ** **                                                                          | ** ** | **Actual**                                  | ** ** | **Pro Forma (in thousands)**               | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                          | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
| ** **                                                                          | ** ** | **2003**                                    | ** ** | **2002**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                |       | **(As restated,  note 2)**                  |       |                                       |       | **(As restated,  note 2)** |   |   |   |
| Revenues:                                                                           |       |                                        |       |                                       |       |   |   |   |   |
| IT Services                                                                         |       | $                                           | 32,235     |                                       | $          | 49,127 |   | $ | 103,738 |   | $ | 157,800 |   |
| Solutions Group                                                                     |       | 27,016                                      |       | 28,499                                     |       | 84,173 |   | 83,931 |   |
| Chimes                                                                              |       | 5,208                                       |       | 4,296                                      |       | 14,499 |   | 12,017 |   |
| Total                                                                               |       | 64,459                                      |       | 81,922                                     |       | 202,410 |   | 253,748 |   |
| Loss before minority interest and change in  accounting principle                   |       | (2,864                                      | )          | (236                                       | )          | (14,671 | ) | (1,762 | ) |
| Minority interest                                                                   |       | 21                                          |       | —                                     |       | (16 | ) | — |   |
| Cumulative effect of change in accounting  principle                                |       | —                                      |       | —                                     |       | — |   | (29,861 | ) |
| Net loss                                                                            |       | $                                           | (2,843     | )                                          | $          | (236 | ) | $ | (14,687 | ) | $ | (31,623 | ) |
| Loss per share — (basic &  diluted):                                  |       |                                        |       |                                       |       |   |   |   |   |
| Net loss                                                                            |       | $                                           | (0.09      | )                                          | $          | (0.01 | ) | $ | (0.48 | ) | $ | (1.01 | ) |
| Weighted average number of shares  outstanding — basic & diluted |       | 30,548,000                                  |       | 31,218,000                                 |       | 30,403,000 |   | 31,388,000 |   |

 

The unaudited pro formafinancial information above reflects the following adjustments to thehistorical consolidated financial statements for the nine months endedSeptember 30, 2003: $1.0 million amortization expense on purchasedintangible assets, elimination of acquisition related costs of$1.8 million, $55,000 reduction of interest income for cash considerationpaid less interest expense reduction pertaining to RGII debt and $66,000adjustment to taxes to record income taxes for RGII as if it was a C-Corporationand to record income tax effect of pro forma adjustments.

 

On January 31,2003, the Company acquired the IT Solutions operations of Global BusinessTechnology Solutions (GBTS), from Alea (Bermuda) Limited, a member of the AleaGroup of companies and Westfield Services, Inc., a subsidiary of WestfieldFinancial Corporation for $400,000. The outsourcing facility and its ITprofessionals are located in Chenni (Madras), India. This transaction wasaccounted for as a purchase and the entire purchase price was allocated togoodwill. Pro forma information has not been presented as the amounts are notmaterial.

 

**9.****             ****Sale ofSubsidiaries**

** **

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 fromthe transaction was $273,000.

 

On March 25, 2002,the Company sold the net assets of Princeton Softech to ApaxPartners, Inc. and LLR Partners, for cash of $16 million, includingamounts held in escrow of $1.5 million. The gain from the transaction wasinitially estimated as $3.6 million and was adjusted in the fourth quarterof 2002 to $3.2 million due to a purchase price adjustment. During thesecond quarter of 2003, the Company received approximately $748,000 of theescrow. The results of operations are included in the consolidated financialstatements through February 28, 2002 within the Solutions group.

 

On April 17, 2001,the Company sold the SELECT Software Tools division “Select” of PrincetonSoftech to Aonix, a member of the Gores Technology Group, for approximately$895,000 including

 

15

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$545,000 of cashreceived and a note receivable of $350,000, subsequently written off with thesale of Princeton Softech on March 25, 2002. This sale included all thesoftware assets and intellectual property rights of Select and was sold at bookvalue. The results of operations are included in the consolidated financialstatements through April 17, 2001 within the Solutions group.

 

**10.****      ****Purchase of Treasury Stock**

** **

In April of 2001, theBoard of Directors approved the repurchase in the open market of up to 10% ofits common shares outstanding, or approximately 3.2 million shares. As ofthe filing of this report, the Company had repurchased, in the open market,3,114,900 shares of its stock at an average price of $3.47 per share for anaggregate purchase amount of $10.8 million. There were no stockrepurchases during the third quarter and as of September 30, 2003 theremaining authorization for repurchase is approximately 93,000 shares.

 

**11.****      ****Asset-Based Lending Facility**

** **

On July 31, 2001,amended February 14, 2003, the Company entered into a secured asset-basedlending facility that replaced its two unsecured discretionary lines of credit.This new line of credit is a three-year, $40 million facility withavailability based primarily on eligible customer receivables. The interestrate for the first ninety days from closing was Prime plus 0.5%, thereafter therate was LIBOR plus 2.75% based on the unpaid principal. The borrowing baseless outstanding loans must equal or exceed $17.5 million. At the time ofclosing there was a $170,000 commitment fee paid to the agent. As ofSeptember 30, 2003, the Company had no outstanding loan balance againstthe facility. Based on the Company’s eligible customer receivables and cashbalances, $16.3 million was available for borrowing as ofSeptember 30, 2003. The fee for the unused portion of the line of creditis 0.375% per annum charged to the Company monthly. This charge wasapproximately $84,000 and $104,000 for the nine-month periods endedSeptember 30, 2003 and 2002, respectively. This line of credit includescovenants relating to the maintenance of cash balances and providing forlimitations on incurring obligations and spending limits on capitalexpenditures.

 

**12.****      ****Tax Benefit Reserve**

** **

On March 9, 2002,the Job Creation and Worker Assistance Act of 2002 (the “Act”) was enacted intolaw. This Act contained many economic and tax incentives, including theextension of the carryback period for losses arising in years ending during2001 and 2002 to five years from the previous two year carryback rule. As aresult, the Company’s tax refund claim of approximately $10 million atDecember 31, 2001 was increased to approximately $30 million. Theadditional refund amount of $20 million was received in January 2003.

 

During 1998, the Companycompleted a business combination, which, for financial statement purposes, hasbeen accounted for as a pooling-of-interests. For income tax purposes theCompany believes the transaction qualifies as a taxable purchase that givesrise to future tax deductions. Upon the sale of the acquired business in 2001,these deductions were recognized for tax purposes. The tax benefit of$19.6 million relating to the part of these deductions that was carriedback to prior years was included in refundable income taxes in 2002. Since thetax structure of the transaction is subject to determination by the taxauthorities, the Company has recorded a reserve for the tax benefits resultingfrom the carryback and has not recorded deferred tax assets for the taxbenefits being carried forward. When resolved, the Company will record adeferred tax asset for the part of the tax benefits being carried forward and atax benefit for the portion that was carried back, net of an appropriatevaluation allowance. The tax benefit will be reflected as an increase inadditional paid-in capital. Any adjustments to the valuation allowance will becharged or credited to income.

 

16

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The Internal RevenueService is currently examining the Company’s federal income tax returns for theyears ended December 31, 2001 and 2000, along with its federal refundclaims for the calendar years 1996 through 1999. The additional refund amountreceived in January 2003 is shown as a liability until the audit iscompleted.

 

**13.****      ****Special Items**

** **

For the three monthsended September 30, 2003, the Company incurred special charges of $800,000related to the unilateral acquisition proposal and activities of Aquent LLC.The Company also incurred a restructuring expense of $787,000 relatingprimarily to the closing of facilities in the United Kingdom. During the firstnine months of 2003, the Company incurred special charges of $8.8 millionconsisting primarily of a severance package for the former CEO and expensesrelated to Aquent LLC. The separation package of the former CEO, included a$3.5 million severance payment and $200,000 in continued medical coverage.In addition, a $5.1 million expense pertaining to the unilateralacquisition proposal and activities of Aquent LLC was recorded. This expense isprimarily attributable to approximately $3.0 million of legal fees,$1.0 million in financial advisor fees and $1.0 million of proxysolicitation and other fees. As management considers these special items to beinfrequent and material in nature, the Company has reported the expenses on aseparate line for full disclosure purposes, however, the amounts are reportedwithin operating income. The Company also incurred a restructuring expense of$3.0 million for the nine months ended September 30, 2003 relatingprimarily to the closing of facilities in Canada and the United Kingdom. Inaddition, the Company voluntarily terminated a sub-contract with ATEB, aprivately held company, for financial reasons and recorded a write-off ofapproximately $3.1 million due to the uncertainty of the realization ofthe receivable. ATEB was the primary contractor to develop a new pharmacysystem for Royal Ahold. The Company is continuing recovery efforts for thisreceivable.

 

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

** **

From April 2001through January 2003, the sale of shares of the Company’s common stockpursuant to the Employee Stock Purchase Plan were not exempt from registrationor qualification under federal securities laws. As a result, the Company mayhave failed to comply with the registration or qualification requirements offederal and applicable state securities laws because the Company did notregister or qualify these stock issuances under either federal or applicablestate securities laws.

 

As a result the Companyintends to make a rescission offer to all those persons who purchased shares ofcommon stock pursuant to the Employee Stock Purchase Plan during the affectedperiods. The rescission offer will be made pursuant to a registration statementfiled under the Securities Act and pursuant to applicable state securitieslaws. In this rescission offer, the Company is offering to repurchase theshares subject to our rescission offer for the price paid per share plusinterest from the date of purchase until the rescission offer expires, at thecurrent statutory rate per year mandated by the state in which the shares werepurchased. The rescission offer will expire approximately 30 days afterthe effective date of the registration statement. Assuming all of 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. This contingency payment is consideredremote by the Company as the current price of the stock is above the price atwhich the shares would be repurchased.

 

**16.****      ****Aquent/Legal Matters**

** **

On April 29, 2003,the Company filed an action in the United States District Court for theDistrict of New Jersey (the “New Jersey action”) 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) to invalidate

 

17

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any proxies secured byAquent through the use of unlawful proxy solicitation materials; and(iii) to require Aquent to disseminate corrective disclosure that not onlyamended the false and misleading proxy materials but also advised CHC shareholdershow Aquent’s solicitations had violated the securities laws. The court heldthat Aquent’s proxy materials were false and misleading but invalidated noproxies and permitted Aquent to limit corrective disclosure to new textenclosed with the old proxy materials, which contained the false and misleadingstatements. On May 30, 2003, the Company filed a Notice of Appeal to theUnited States Court of Appeals for the Third Circuit, contending, among otherthings, that the corrective disclosure ordered by the United States DistrictCourt was inadequate and not in compliance with federal securities laws. OnOctober 15, 2003, the Company filed its appellate papers.

 

On May 27, 2003,the Company brought an action in the Supreme Court of the State of New York,New York County (the “New York action”), seeking an order invalidating votesfor directors Karl Meyer and Robert Trevisani cast at the Annual Meeting bystockholders of record who sold their shares between the record date and thedate of the Annual Meeting. The court in the New York action denied temporaryrestraints but on June 11, 2003, deferred ruling on the Company’sapplication for preliminary injunctive relief pending discovery and trial. Thematter has been scheduled for a hearing on December 15, 2003.

 

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

 

On or aboutJuly 15, 2003, Aquent filed an Order to Show Cause in the New Jerseyaction, challenging an amendment to the Company’s by-laws adopted by the Boardof Directors on June 30, 2003. The by-law amendment specifies(a) that any request for a special meeting of shareholders must set a datefor the meeting not fewer than seventy-five (75) nor more than ninety(90) days after the date on which the request is received; (b) thatany such request shall be ineffective, and any special meeting cancelled, ifthe shareholder(s) who sign the request is/are not the holder(s) of thebeneficial interest of 10% or more of the Company’s issued and outstandingshares on each of the following dates: the date such request is mailed; therecord date for the meeting (to be fixed by the Board within five business daysafter the receipt of the request); and the date of the meeting; and(c) that any such request for a special meeting shall be or becomeineffective, and any meeting called or noticed pursuant thereto shall becancelled, if such request of any solicitation therefore is not made incompliance with applicable law. The court took testimony in the New Jerseyaction on August 7, 2003 and directed the parties to submit additionalbriefs on the issues. The matter has been fully briefed and submitted and ispending before the court.

 

18

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| **Item 2.** | **RESTATED MANAGEMENT****’S  DISCUSSION AND ANALYSIS OF      FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------|

** **

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

 

**FORWARD-LOOKING STATEMENTS**

** **

The following sectionshould be read in conjunction with our consolidated financial statements andrelated notes appearing in this Form 10Q/A. Statements included in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and elsewhere in this documentthat do not relate to present or historical conditions are “forward-lookingstatements” within the meaning of that term in Section 27A of theSecurities Act of 1933, as amended, and in Section 21F of the Securities ExchangeAct of 1934, as amended. Additional oral or written forward-looking statementsmay be made by the Company from time to time, and such statements may beincluded in documents that are filed with the Securities and ExchangeCommission (SEC). Such forward-looking statements involve risks anduncertainties that could cause results or outcomes to differ materially fromthose expressed in such forward-looking statements. 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 areintended to identify forward-looking statements. Among the important factors onwhich such statements are based are assumptions concerning the anticipatedgrowth of the information technology industry, the continued need of currentand prospective customers for the Company’s services, the availability ofqualified professional staff, and price and wage inflation.

 

The Management’sDiscussion and Analysis of Financial Condition and Results of Operations setforth in this Item 2 has been restated to reflect certain adjustments to theCompany’s, consolidated financial statements for 2003 as previously reported inthe Company’s Form 10-Q for the quarters September 30, 2003, as amended and2002.  Details of the adjustments areshown below and address all quarterly periods affected by the adjustments,which include the quarterly periods ending June 30 2003 through June 30, 2004.

 

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

 

Theaggregate amount for all periods affected was an understatement of consultantcosts totaling $5,555,000, with an after-tax impact of $3,462,000 or $(0.12)per share.  The pre-tax, after tax andEPS effect of this non-cash charge for each period affected are shown below (dollarsinthousands, except per share data):

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

 

As part of management’sinvestigation of this accounting error, an extensive review of intercompanytransactions was completed.  As a result,other adjustments, not affecting operating results, were recorded.  These adjustments to the balance sheetcorrected an overstatement of accrued expenses and an understatement ofshareholders’ equity (specifically the overstatement of accumulatedcomprehensive loss).  The cumulative balancesheet adjustments for the affected dates are as follows (in thousands):

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

 

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*Represents cumulativeeffect of all previous quarterly periods deemed not material on an individualquarter basis.

 

In addition, in thesecond quarter of 2003, the Company made a balance sheet correction resultingin an increase in shareholders’ equity and a decrease in accrued payroll of$41,000.

 

Additional detail withrespect to the impact of the restatement on the Company’s results of operationsis reported in Note 2 of the notes to the Consolidated Financial Statementincluded in Part I Item 1 of this Amendment No. 3 of Form 10QA.

 

**RESULTS OF OPERATIONS**

** **

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

 

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

 

Excluding the revenue ofthe business unit held for sale, Princeton Softech, Inc., in the ninemonths of 2002, Solutions Group revenues increased $7.9 million or 13.8%to $65.3 million.

 

IT Services revenuesdecreased to $32.2 million in the third quarter of 2003 from$49.1 million in the third quarter of 2002, a decrease of$16.9 million or 34.4%. For the third quarter of 2003, IT Servicesconsultant average headcount decreased by 22.1%, accounting for approximately$10.9 million of the revenue decrease. The balance of the decrease inrevenue (approximately $6 million) is attributable to a reduction inaverage bill rates. IT Services revenues decreased to $103.7 million inthe first nine months of 2003 from $157.8 million in the first nine monthsof 2002, a decrease of $54.1 million or 34.3%, which is attributable tothe softness in the IT Staffing business. The decrease in IT Services revenuefor the quarter and the first nine months of 2003, is the result of continueddecreases in the demand for temporary technology workers, the trend ofcompanies to outsource technology jobs offshore, the impact of pricingdecreases by customers and the lagging economy.

 

For the first nine monthsof 2003, IT Services consultant average headcount decreased by 23.8%,accounting for approximately $38 million of the revenue decrease. Thebalance of the decrease in

 

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revenue (approximately$16 million) is attributable to a reduction in average bill rates. TheCompany does not anticipate any growth during the remainder of 2003 in ITServices headcount levels.

 

Chimes revenue increasedto $5.2 million in the third quarter of 2003 from $4.3 million in thethird quarter of 2002, an increase of $900,000, or 20.9%. Chimes revenue, forthe first nine months of 2003, increased to $14.5 million from$12.0 million, an increase of $2.5 million or 20.8% from thecomparable period of 2002. This increase in Chimes revenue, for the first ninemonths of 2003, is primarily due to an increase of approximately$2.5 million in revenue from new customers in this segment.

 

*Direct Costs*.    Direct costs decreased to $45.1 million and $131.3 million in the third quarterand first nine months of 2003, respectively, from $52.9 million and $167.6million in the comparable periods of 2002. Consolidated gross margin, revenues less direct costs, increased to30.1% and 28.4% in the third quarter and nine months ended September 30, 2003from 28.1% and 27.2% in the same periods of 2002.  In the Company’s Solutions Group, gross profittotaled $8.0 million, or 29.6% as a result of the RGII acquisition.  Without RGII, gross profit declinedapproximately $2.4 million during the third quarter of 2003 and declined 25.0%from 33.1% for the nine months ended September 30, 2003 and 2002, respectively.  These declines were a result of lowerutilization rates in the Healthcare Practice and higher direct costs in theEducation division.  Gross margin in theCompany’s IT Services segment decreased to 20.2% and 20.0% from 21.3% and 20.3%for the third quarter and first nine months ended September 30, 2003 and 2002,respectively.  The decrease isattributable to a reduction in staff utilization (billable hours/availablehours) in the third quarter of 2003, primarily resulting from the Northeastblackout.  Gross margin in the Company’sChimes segment increased to 93.7% and 92.7% from 90.9% and 87.6% for the thirdquarter and first nine months ended September 30, 2003 and 2002, respectively,due to the increase in revenue from new customers at a higher gross margin.

 

Excluding the asset heldfor sale, Princeton Softech, Inc., in the first nine months of 2002,direct costs decreased to $131.3 million in the first nine months of 2003from $167.6 million in the same period of 2002. Gross margin in the firstnine months of 2002 was 26.4%.

 

The Company’sconsolidated gross margins improvement is primarily attributable to the changein the revenue mix, including RGII, among the Company’s business segments.Chimes and the Solutions Group are higher gross margin businesses than theCompany’s IT Services segment. For the quarter ended September 30, 2003,Chimes and Solutions Group revenue totaled 50% of consolidated revenue,compared to 33.2% of consolidated revenue for the comparable period in 2002.For the first nine months of 2003, Chimes and Solutions Group revenue totaled43.5% of consolidated revenue, compared to 31.4% of consolidated revenue forthe comparable period in 2002.

 

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

 

SG&A expenseincreased to $72.3 million or 39.4% of revenue in the first nine months of2003 from $71.3 million or 31.0% of revenue for the comparable period of2002. The expenses in 2003 included special charges of $8.8 million or4.8% of revenue, consisting of $3.7 million for the separation package ofthe former CEO and $5.1 million pertaining to expenses related to theunilateral acquisition proposal and activities of Aquent LLC, restructuringcharges of $3.0 million, or 1.6% of revenue, for terminated leases($1.3 million), severance ($1.4 million) and general office closureexpense ($288,000) relating primarily to the closing of facilities in Canadaand the United Kingdom. In addition, the Company voluntarily terminated asub-contract with ATEB, a privately held company, for financial reasons andrecorded a write-off of approximately $3.1 million due to the uncertaintyof the realization of the receivable. ATEB was the primary contractor todevelop a new pharmacy system for Royal Ahold. The Company is continuingrecovery efforts for this receivable. The expenses in 2002 included assets heldfor sale (Princeton Softech, Inc.) of $4.3 million. Without thesespecial items in 2003 and 2002, SG&A expenses would have decreased to$57.4 million in the first nine months of 2003 from $67.0 million inthe comparable periods of 2002. This decrease in SG&A expenses wasprimarily

 

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attributable to costreductions in all segments, with approximately $2 million from rentsavings and the balance primarily related to staff reduction and personnelcosts.

 

*Loss from Operations.*    The Company’s loss from operationstotaled $3.6 million in the third quarter of 2003, an increase to the lossof $2.0 million, from a loss of $1.6 million in the third quarter of2002. Operating margins were a loss of 5.6% in the third quarter of 2003 ascompared to a loss of 2.3% in the third quarter of 2002. This increase in theloss from operations in 2003 included a special charge of $800,000 or 1.2% ofrevenue, the entire amount related to the unilateral acquisition proposal andactivities of Aquent LLC. In addition, the Company incurred restructuringcharges of $787,000, or 1.2% of revenue, relating primarily to the closing offacilities in the United Kingdom and amortization of intangibles of $526,000,or 0.8% of revenue. The composition of the operating loss, excluding specialitems in 2003, included a loss of $1.2 million in IT Services, profit of$376,000 in the Solutions Group and a loss of $632,000 in Chimes. This comparesto the operating loss of $1.6 million in the third quarter of 2002,consisting of a loss of $109,000 in IT Services, profit of $522,000 in theSolutions Group and a loss of $2.0 million in Chimes. Operating margins,excluding these special items, were a loss of 2.3% in the third quarter of 2003as compared to a loss of 2.2% in the third quarter of 2002.

 

The Company’s loss fromoperations totaled $20.6 million in the first nine months of 2003, anincrease of $11.8 million, from a loss of $8.8 million in thecomparable period of 2002. The loss from operations in 2003 included a specialcharge of $8.8 million, or 4.8%, consisting of $3.7 million for theseparation package of the former CEO and $5.1 million pertaining toexpenses related to the unilateral acquisition proposal and activities ofAquent LLC, restructuring charges of $3.0 million, or 1.6% of revenue,relating primarily to the closing of facilities in Canada and the UnitedKingdom, amortization of intangibles of $526,000, or 0.3% of revenue and aspecial bad debt charge of $3.1 million, or 1.7% of revenue due to thewrite-off of a terminated contract with a customer for financial reasons. Theloss from operations in 2002 included the loss from operations of the assetheld for sale, Princeton Softech, Inc., of $1.9 million, or 1.1% ofrevenue. The composition of the 2003 operating loss, excluding the specialitems noted above included a loss of $3.1 million in IT Services, profitof $1.5 million in the Solutions Group and a loss of $3.7 million inChimes. This compares to the operating loss of $6.8 million, excludingoperations of Princeton Softech, in the first nine months of 2002, consistingof a loss of $1.4 million in IT Services, income of $1.7 million inthe Solutions Group and a loss of $7.1 million in Chimes. Operatingmargins, excluding all special items, were a loss of 2.9% in the first ninemonths of 2003 as compared to a loss of 3.0% in the comparable period of 2002.

 

*Other Income/(Expense).*    Other income was $78,000 in the thirdquarter of 2003, compared to other income of $247,000 in the comparable periodof 2002. This decrease of other income during the third quarter of 2003 was dueto decreased interest income primarily resulting from lower interest rates oncash investments. Other income was $63,000 in the first nine months of 2003,compared to other income of $4.1 million in the comparable period of 2002.This difference was primarily due to the gain on the sale of Princeton Softechin 2002.

 

*Provision for Income Taxes.*    Theeffective tax rates for Federal, state and local income taxes were 19% and 27%for the third quarter and first nine months of 2003, respectively, comparedwith 34% for the comparable periods of 2002. The decrease in the effective taxrates was primarily attributable to valuation allowances recorded for state andforeign net operating loss carryovers.

 

*Net Loss.*    Net loss for the third quarter of2003 was $2.8 million, or $0.09 loss per diluted share, compared to netloss of $918,000, or $0.03 loss per diluted share for the third quarter of 2002,an increased loss of $1.9 million. The effect of special charges,restructuring charges and amortization of intangibles amounted to $0.06 lossper share, net of taxes, in the third quarter of 2003. For the first ninemonths of 2003, the net loss was $15.0 million, or $0.49 loss per dilutedshare, compared to a net loss of $33.0 million, or $1.05 loss per dilutedshare for the first nine months of 2002. The net loss in the first nine monthsof 2002 includes a charge for the cumulative effect of change in accounting

 

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principle of$29.9 million, or $0.95 per share, net of taxes, and operations of assetsheld for sale and the gain on sale of assets, which amounted to$1.1 million, or $0.03 loss per share, net of taxes.

 

**Liquidity and Capital Resources**

** **

At September 30,2003, the Company had approximately $68.5 million in working capital, ofwhich $50.7 million was cash and cash equivalents.

 

Net cash provided byoperating activities in the first nine months of 2003 was $16.5 million,consisting primarily of the tax refund received and a reduction in clientaccounts receivable.

 

Net cash used ininvesting activities in the first nine months of 2003 was $24.7 million,consisting primarily of the purchase of RGII.

 

Net cash used infinancing activities in the first nine months of 2003 was $2.6 million,consisting of the payment of the notes for the acquisition of RGII. In April of2001, the Board of Directors approved the repurchase in the open market of upto 10% of its common shares outstanding, or approximately 3.2 millionshares. As of the date of filing of this report, the Company had repurchased,in the open market, 3,114,900 shares of its stock at an average price of $3.47per share for an aggregate purchase amount of $10.8 million. There were nostock repurchases during the third quarter and as of September 30, 2003,the remaining authorization for repurchase is approximately 93,000 shares.

 

At September 30,2003, the Company had a current ratio position of 2.5 to 1. The Companybelieves that its cash and cash equivalents, available borrowings andinternally generated funds will be sufficient to meet its working capital needsthrough the next year.

 

On July 31, 2001,amended February 14, 2003, the Company entered into a secured asset-basedlending facility that replaced its two unsecured discretionary lines of credit.This new line of credit is a three-year, $40 million facility withavailability based primarily on eligible customer receivables. The interest ratefor the first ninety days from closing was Prime plus 0.5%, thereafter the ratewas LIBOR plus 2.75% based on the unpaid principal. The borrowing base lessoutstanding loans must equal or exceed $17.5 million. At the time ofclosing there was a $170,000 commitment fee paid to the agent.

 

As of September 30,2003, the Company had no outstanding loan balance against the facility. Basedon the Company’s eligible customer receivables and cash balances,$16.3 million was available for borrowing as of September 30, 2003.The fee for the unused portion of the line of credit is 0.375% per annumcharged to the Company monthly. This charge was approximately $84,000 and$104,000 for the nine month periods ended September 30, 2003 and 2002,respectively. This line of credit includes covenants relating to themaintenance of cash balances and providing for limitations on incurringobligations and spending limits on capital expenditures.

 

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 areevidenced by a contingent note with a face value of $10 million that is payableover three years, only if certain financial performance objectives aremet.  These financial performanceobjectives are based on earnings before interest and taxes, (“EBIT”) targetstotaling $19.8 million over a three-year period.  There are no minimum or maximum paymentobligations under the terms of the contingent note, whereby the contingentpayment will be reduced on a dollar for dollar basis for financial performancebelow EBIT targets and increased by 29 cents ($0.29) for each dollar exceedingEBIT targets.  The payments, if the applicableEBIT targets are met, will be due as follows: 2004 payment of $1.7 million,2005 payment of $3.3, 2006 payment of $5 million.  These payments will be reduced or increasedbased on actual EBIT performance.

 

**Contractual Obligations and Commercial Commitments**

** **

The Company does notutilize off balance sheet financing other than operating lease arrangements foroffice premises and related equipment. Leases are short term in nature andnon-capital. The following table summarizes all commitments under contractualobligations as of September 30, 2003: 

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

 

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**Recent Accounting Pronouncements**

** **

In June 2001, theFinancial Accounting Standards Board approved the issuance of SFASNo. 141, “Business Combinations” and in July 2001, SFAS 142, “Goodwilland Other Intangible Assets.” The new standards require that all businesscombinations initiated after June 30, 2001 must be accounted for under thepurchase method. In addition, all intangible assets acquired that are obtainedthrough contractual or legal right, or are capable of being separately sold,transferred, licensed, rented or exchanged shall be recognized as an assetapart from goodwill. Goodwill and intangibles with indefinite lives will nolonger be subject to amortization, but will be subject to at least an annualassessment for impairment by applying a fair value based test. The Companyadopted SFAS 142 as of January 1, 2002 and in compliance with thisnew regulation has discontinued the amortization of goodwill. For the effect ofthis statement on the Company see Note 3.

 

In November 2002,the EITF reached a consensus on Issue No. 00-21, “Accounting for RevenueArrangements with Multiple Deliverables.” This Issue provides guidance on whenand how to separate elements of an arrangement that may involve the delivery orperformance of multiple products, services and rights to use assets intoseparate units of accounting. The guidance in the consensus is effective forrevenue arrangements entered into in fiscal periods ending afterDecember 15, 2003. The transition provision allows either prospectiveapplication or a cumulative effect adjustment upon adoption. The effect of theadoption of this statement was immaterial to the Company.

 

In December 2002,the Financial Accounting Standards Board approved the issuance of SFASNo. 148, “Accounting for Stock-Based Compensation - Translation andDisclosure.” This statement amends FASB Statement No. 123, “Accounting forStock-Based Compensation,” to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation. In addition, this Statement amended the disclosurerequirements of Statement 123 to require prominent disclosures in both annualand interim financial statements about the method of accounting for stock-basedemployee compensation and the effect of the methods used on reported results.The Company adopted the disclosure provisions as of December 31, 2002.

 

The exercise price pershare on all options granted may not be less than the fair value at the date ofthe option grant. The Company applies Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees,” as modified by FIN 44,“Accounting for Certain Transactions Involving Stock Compensation,” inaccounting for stock-based employee compensation, whereby no compensation costhad been recognized for the plans. The Company expects to continue followingthe guidance under APB 25 for stock based compensation to employees and hastherefore included the disclosure requirements of FASB 148 in the accompanyingfinancial statements.

 

Effective onJanuary 1, 2003 the Company adopted Financial Accounting Standards BoardNo. 146, “Accounting for Exit or Disposal Activities,” (“SFAS 146”),which supersedes Emerging Issues Task Force Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).” The newstandards require that a liability for a cost associated with an exit ordisposal activity, including costs related to terminating a contract that isnot a capital lease and the termination benefits that employees who areinvoluntarily terminated receive under the terms of a one-time benefitarrangement that is not ongoing or an individual deferred-compensationcontract, be recognized when the liability is incurred. Previously, under IssueNo. 94-3, a liability for an exit cost was recognized at the date of anentity’s commitment to an exit plan, which may not necessarily meet thedefinition of a liability. SFAS 146 is effective for exit or disposalactivities of the Company that are initiated after December 31, 2002. TheCompany adopted SFAS 146 as of January 1, 2003 (See Note 6).

 

In May 2003, theFASB issued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity.” It establishesclassification and measurement standards for three types of freestandingfinancial instruments that have characteristics of both liabilities and

 

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equity. Instrumentswithin the scope of SFAS 150 must be classified as liabilities within theCompany’s financial statements. The provisions of SFAS No. 150 areeffective for (1) instruments entered into or modified after May 31,2003 and (2) pre-existing instruments as of July 1, 2003.SFAS 150 is not expected to have a material effect on the Company’sfinancial statements.

 

In January 2003,the FASB issued Financial Interpretation No. 46, “Consolidation ofVariable Interest Entities” (“FIN 46”), which addresses consolidation bybusiness enterprises of variable interest entities (VIEs). The accountingprovisions and disclosure requirements of FIN 46 are effective immediately forVIEs created after January 31, 2003, and are effective for reportingperiods ending after December 15, 2003, for VIEs created prior toFebruary 1, 2003. Although the Company is still evaluating the impact ofFIN 46, it is not expected to have a material effect on the Company’s financialstatements.

 

Item 4.    Controls and Procedures

 

Disclosure Controls andProcedures

 

The Company maintainscontrols and procedures designed to ensure that information required to bedisclosed by us in the reports filed under the Securities Exchange Act of 1934,is recorded, processed, summarized and reported within the time periodsspecified by the SEC. Disclosure controls are also designed with the objectiveof ensuring that this information is accumulated and communicated to ourmanagement, including our chief executive officer and chief financial officer,as appropriate to allow timely decisions regarding required disclosure.

 

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

 

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

 

As part of management’sinvestigation of this accounting error, an extensive review of  intercompany transactions was completed.  As a result, other adjustments, not affectingoperating results, were recorded.  Theseadjustments to the balance sheet corrected an overstatement of accrued expensesand an understatement of shareholders’ equity (specifically the overstatementof accumulated comprehensive loss).

 

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

 

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

 

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

 

•                  Management will implement an improved intercompanytransaction process, including foreign currency translation and financialreporting/consolidation procedures, which will be documented, with all keycontrols identified.

•                  All intercompany elimination entries will require two levelsof approval (Accounting Manager and Controller), as opposed to the previous onelevel of approval.

•                  Monthly, the Corporate Controller will review and approve allintercompany elimination entries to ensure amounts are properly recorded.

•                  Canadian intercompany accounts, which currently record allreceivable and payable activity in the same balance sheet account, will bedivided into two intercompany accounts – one to record only intercompanyinvoicing transactions, one to record other (funding) transactions.  This will allow better tracking ofintercompany transactions and more easily highlight incorrect entries, if any.

•                  A more detailed review of gross margins by line of businesswill be completed by the Controller (and reviewed by the CFO) on a quarterlybasis.

•                  Additional training (internal and external) will be providedto all General Accounting personnel with an emphasis on Consolidationaccounting.

•                  Internal Audit will conduct a review of intercompanytransactions and the consolidation process during the fourth quarter of 2004 toensure that newly designed controls are functioning properly.

 

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

 

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PART II Other Information

 

Item 1.*Legal Proceedings*

* *

On April 29, 2003,the Company filed an action in the United States District Court for theDistrict of New Jersey (the “New Jersey action”) 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) to invalidate any proxies secured by Aquent through the use ofunlawful proxy solicitation materials; and (iii) to require Aquent todisseminate corrective disclosure that not only amended the false andmisleading proxy materials but also advised CHC shareholders how Aquent’ssolicitations had violated the securities laws. The court held that Aquent’sproxy materials were false and misleading but invalidated no proxies andpermitted Aquent to limit corrective disclosure to new text enclosed with theold proxy materials, which contained the false and misleading statements. OnMay 30, 2003, the Company filed a Notice of Appeal to the United StatesCourt of Appeals for the Third Circuit, contending, among other things, thatthe corrective disclosure ordered by the United States District Court wasinadequate and not in compliance with federal securities laws. OnOctober 15, 2003, the Company filed its appellate papers.

 

On May 27, 2003,the Company brought an action in the Supreme Court of the State of New York,New York County (the “New York action”), seeking an order invalidating votesfor directors Karl Meyer and Robert Trevisani cast at the Annual Meeting bystockholders of record who sold their shares between the record date and thedate of the Annual Meeting. The court in the New York action denied temporaryrestraints but on June 11, 2003, deferred ruling on the Company’sapplication for preliminary injunctive relief pending discovery and trial. Thematter has been scheduled for a hearing on December 15, 2003.

 

On or about June 2,2003, Aquent filed a counterclaim in the New Jersey action against the Companyand William J. Murphy, the Company’s President and Chief Executive Officer,alleging breach of fiduciary duty and seeking to enjoin the Company fromdelaying the continuation of the Annual Meeting—at which the certified electionresults would be accepted—or otherwise interfering with the seating of theAquent nominees. Aquent also sought attorneys’ fees and costs. On or aboutJune 20, 2003, Aquent filed an amended counterclaim in the New Jerseyaction, alleging breach of the duty of care and the duty of loyalty, waste ofcorporate assets, and violation of the proxy rules under Section 14(a) ofthe Securities Exchange Act of 1934. The amended counterclaim sought,essentially, to enjoin the Company from challenging the election of the Aquentnominees, and it sought attorneys’ fees and costs. The Company has filed ananswer denying Aquent’s allegations.

 

On or aboutJuly 15, 2003, Aquent filed an Order to Show Cause in the New Jerseyaction, challenging an amendment to the Company’s by-laws adopted by the Boardof Directors on June 30, 2003. The by-law amendment specifies(a) that any request for a special meeting of shareholders must set a datefor the meeting not fewer than seventy-five (75) nor more than ninety(90) days after the date on which the request is received; (b) thatany such request shall be ineffective, and any special meeting cancelled, ifthe shareholder(s) who sign the request is/are not the holder(s) of thebeneficial interest of 10% or more of the Company’s issued and outstandingshares on each of the following dates: the date such request is mailed; therecord date for the meeting (to be fixed by the Board within five business daysafter the receipt of the request); and the date of the meeting; and(c) that any such request for a special meeting shall be or becomeineffective, and any meeting called or noticed pursuant thereto shall becancelled, if such request of any solicitation therefore is not made incompliance with applicable law. The court took testimony in the New Jerseyaction on August 7, 2003 and directed the parties to submit additionalbriefs on the issues. The matter has been fully briefed and submitted and ispending before the court.

 

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Item 6.*Exhibitsand Reports on Form 8-K*

* *

a)*Exhibits*

* *

10.1—Employment agreementbetween Computer Horizons Corp. and Kristin Evins.*

 

31.1—CEO Certificationrequired by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of1934.

 

31.2—CFO Certificationrequired by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of1934.

 

32.1—CEO Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

 

32.2—CFO Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

 

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*Previously filed.

 

b)*Reports on Form 8-K*

* *

A report on Form 8-K/A wasfiled on September 19, 2003 to provide the financial statements and proforma financial information of RGII.

 

A report on Form 8-K wasfiled on July 30, 2003, reporting the issuance of a press releasereporting the financial results of Computer Horizons for its second fiscalquarter.

 

A report on Form 8-K wasfiled July 23, 2003 reporting that on July 8, 2003, pursuant to aStock Purchase Agreement by and among Computer Horizons Corp., RGIITechnologies, Inc. and Kathryn B. Freeland, Computer Horizons Corp.purchased all of the issued and outstanding capital stock of RGII.

 

A report on Form 8-K wasfiled on July 9, 2003, reporting the issuance of a press releaseannouncing the completion of the acquisition of RGII Technologies, Inc.

 

A report on Form 8-K wasfiled on July 1, 2003, reporting the issuance of a press releaseannouncing that its Board of Directors unanimously appointed Earl L. Mason asChairman of the Board at a meeting held on June 27, 2003.

 

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Signatures

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized. 

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

 

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