**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q/A**

 

**(AmendmentNo. 2)**

 
| ý                                                                                                                                                                                                                                                         |   | **Quarterly  Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934**         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                     |
| **for the  quarterly period ended June 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                  ** |

 

**CommissionFile Number 0-7282**

 

**COMPUTER HORIZONS CORP.**

(Exact name of registrant as specified in itscharter)

 
| **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 areacode **(973) 299-4000**

 

**NotApplicable**(Former name, formeraddress and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding twelve months (orfor such shorter period that the registrant was required to file such reports)and (2) has been subject to such filing requirements for the past90 days.

 

Yes ý        No o

 

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

 

Yes ý        No o

 

As of August 11, 2003 the issuer had 30,472,840shares of common stock outstanding.

 

 

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**EXPLANATORY NOTE**

 

Thepurpose of this Amendment No. 2 on Form 10-Q/A to the QuarterlyReport on Form 10-Q of Computer Horizons Corp. (the “Company”) for thethree months ended June 30, 2003 as filed with the Securities and ExchangeCommission is to reflect the restatement of the Company’s consolidatedfinancial statements.

 

Subsequentto the issuance of its financial statements for the year ended December 31,2003, and in connection with an internal review of accounting processes andprocedures conducted in the third quarter of 2004, the Company discovered anerror pertaining to the incorrect adjustment of consulting costs relating tointercompany transactions between the Company and its Canadian subsidiary.  This error caused an understatement of consolidatedconsultant costs (i.e. direct costs) in the Company’s consolidated incomestatement and accrued payroll on the balance sheet.

 

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(dollars in thousands, 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      | ) |   |   |
|                                      |            |                   |            |                        |            |                    |            |                               |            |  |  |  |  |

 

Aspart of management’s investigation of this accounting error, an extensivereview 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).  Thecumulative balance sheet adjustments for the affected dates are as follows (inthousands):

 
| **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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*Representscumulative effect of all previous quarterly periods deemed not material on anindividual quarter basis.

 

Inaddition, in the second quarter of 2003, the Company made a balance sheetcorrection resulting in an increase in shareholders’ equity and a decrease inaccrued payroll of $41,000.

 

Asa result of the Company’s investigation into the causes of this accountingerror, several remediating actions have been or are in the process of beingimplemented to prevent future reoccurrence and are included in Part 1 - Item 4.Control and Procedures on this Amendment No. 2 of Form 10-Q/A.

 

Theeffects of this restatement on the consolidated balance sheet of the Company asof June 30, 2003, and on the consolidated statements of operations andcondensed consolidated statements of cash flows for the three months and sixmonths ended June 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 inItem 4 of Part I of this Amendment No. 2. The Company’s ChiefExecutive Officer and Chief Financial Officer have also reissued theircertifications required by Sections 302 and 906 of the Sarbanes-Oxley Act.

 

The Company’s restatement of its financialstatements for the year ended December 31, 2003, is reflected in AmendmentNo. 2 on Form 10-K/A, filed concurrently herewith, which amends itspreviously filed Form 10-KA for the year ended December 31, 2003. TheCompany is also concurrently filing amendments on Forms 10-Q/A to itspreviously filed Forms 10-Q for each of the periods ended September 30,2003, March 31, 2004 and June 30, 2004 to reflect the restatement ofits financial statements for those periods.

 

Additional detail regarding the restatement isincluded in Note 2 of the Notes to Consolidated Financial Statementsincluded in Part I — Item 1 of this Amendment No. 2 onForm 10-Q/A.

 

Except as required to reflect the effects of therestatement, no attempt has been made in this Amendment No. 2 to modify orupdate other disclosures presented in the original report on Form 10-Q/Afor the period ended June 30, 2003. This Form 10-Q/A does not reflectevents occurring after the filing of the original Form 10-Q or modify orupdate those disclosures affected by subsequent events.

 

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**COMPUTER HORIZONS CORP. AND SUBSIDIARIES**

 

**Index**

 
| Part I  | Restated Financial Information                                                                                            |   |
|---------|---------------------------------------------------------------------------------------------------------------------------|--------|
|    |                                                                                                                      |
| Item 1  | Consolidated Balance  Sheets  June 30, 2003 (unaudited) and December 31, 2002                                   | 3      |
|    |                                                                                                                      |   |
|    | Consolidated  Statements of Operations  Three and Six Months Ended June 30, 2003 and June 30, 2002  (unaudited) | 4      |
|    |                                                                                                                      |   |
|    | Consolidated  Statements of Cash Flows  Six Months Ended June 30, 2003 and June 30, 2002 (unaudited)            | 5      |
|    |                                                                                                                      |   |
|    | Notes to  Consolidated Financial Statements                                                                               | 6      |
|    |                                                                                                                      |   |
| Item  2 | Restated  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                     | 16     |
|    |                                                                                                                      |   |
| Item  4 | Controls  and Procedures                                                                                                  | 21     |
|    |                                                                                                                      |   |
| Part II | Other Information                                                                                                         |   |
|    |                                                                                                                      |
| Item 1  | Legal  Proceedings                                                                                                        | 22     |
|    |                                                                                                                      |   |
| Item  4 | Submission  of Matters to a Vote of Security Holders                                                                      | 22     |
|    |                                                                                                                      |   |
| Item  6 | Exhibits  and Reports on Form 8-K                                                                                         | 24     |
|    |                                                                                                                      |   |
|    | Signatures                                                                                                                | 25     |
|         |                                                                                                                           |        |  |

 

2

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**Part I. Financial Information**

**Item 1.**

**COMPUTER HORIZONS CORP. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(dollars in thousands, except per share data)**

 
| ** **                                                                                                                                        | ** ** | **June 30,  2003**   | ** ** | **December 31,  2002** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                        | ** ** | **(As restated, note 2)** | ** ** | ** **                  | ** ** |
| ** **                                                                                                                                        | ** ** | **(unaudited)**           | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                                            |       |                      |       |                        |       |
| CURRENT ASSETS:                                                                                                                                   |       |                      |       |                        |       |
| Cash and cash equivalents                                                                                                                         |       | $                         | 71,057     |                        | $          | 59,769 |   |
| Accounts receivable, net  of allowance for doubtful accounts of $8,320 and $7,696 at June 30, 2003  and December 31, 2002, respectively |       | 48,976                    |       | 56,616                      |       |
| Deferred income taxes                                                                                                                             |       | 5,867                     |       | 4,557                       |       |
| Refundable income taxes                                                                                                                           |       | —                    |       | 19,051                      |       |
| Other                                                                                                                                             |       | 5,588                     |       | 7,219                       |       |
| TOTAL CURRENT ASSETS                                                                                                                              |       | 131,488                   |       | 147,212                     |       |
| PROPERTY AND EQUIPMENT                                                                                                                            |       | 38,522                    |       | 37,643                      |       |
| Less accumulated  depreciation                                                                                                                    |       | (29,101                   | )          | (26,626                     | )          |
|                                                                                                                                              |       | 9,421                     |       | 11,017                      |       |
| OTHER ASSETS — NET:                                                                                                                          |       |                      |       |                        |       |
| Goodwill                                                                                                                                          |       | 19,590                    |       | 19,203                      |       |
| Deferred income taxes                                                                                                                             |       | 11,631                    |       | 8,020                       |       |
| Other                                                                                                                                             |       | 10,509                    |       | 8,279                       |       |
| TOTAL OTHER ASSETS                                                                                                                                |       | 41,730                    |       | 35,502                      |       |
| TOTAL ASSETS                                                                                                                                      |       | $                         | 182,639    |                        | $          | 193,731 |   |
|                                                                                                                                              |       |                      |       |                        |       |
| LIABILITIES AND SHAREHOLDERS’  EQUITY                                                                                                        |       |                      |       |                        |       |
| CURRENT LIABILITIES:                                                                                                                              |       |                      |       |                        |       |
| Accounts payable                                                                                                                                  |       | $                         | 7,722      |                        | $          | 10,830 |   |
| Accrued payroll, payroll  taxes and benefits                                                                                                      |       | 6,690                     |       | 4,529                       |       |
| Restructuring reserve                                                                                                                             |       | 3,877                     |       | 3,266                       |       |
| Income taxes payable                                                                                                                              |       | 706                       |       | —                      |       |
| Tax benefit reserve                                                                                                                               |       | 19,600                    |       | 19,600                      |       |
| Other accrued expenses                                                                                                                            |       | 2,246                     |       | 3,408                       |       |
| TOTAL CURRENT LIABILITIES                                                                                                                         |       | 40,841                    |       | 41,633                      |       |
| OTHER LIABILITIES                                                                                                                                 |       | 5,993                     |       | 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 June 30, 2003  and December 31, 2002 respectively   |       | 3,315                     |       | 3,315                       |       |
| Additional paid-in capital                                                                                                                        |       | 133,354                   |       | 133,518                     |       |
| Accumulated comprehensive  loss                                                                                                                   |       | (2,036                    | )          | (4,306                      | )          |
| Retained earnings                                                                                                                                 |       | 16,125                    |       | 28,255                      |       |
|                                                                                                                                              |       | 150,758                   |       | 160,782                     |       |
| Less shares held in  treasury, at cost; 2,696,434 shares and 2,660,667 shares at June 30,  2003 and December 31, 2002, respectively     |       | (14,953                   | )          | (14,927                     | )          |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                   |       | 135,805                   |       | 145,855                     |       |
| TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                  |       | $                         | 182,639    |                        | $          | 193,731 |   |

 

3

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**COMPUTER HORIZONS CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

**(dollars in thousands, except per share data)**

 
| ** **                                                                             | ** ** | **THREE MONTHS ENDED**    | ** ** | **SIX MONTHS ENDED**   | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------|------------|------------------------|------------|
| ** **                                                                             | ** ** | **June 30, 2003**    | ** ** | **June 30, 2002** | ** ** | **June 30, 2003** | ** ** | **June 30, 2002** | ** ** |
| ** **                                                                             | ** ** | **(As restated, note 2)** | ** ** | ** **             | ** ** | ** ** | ** ** | **(As restated, note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | ** **                | ** ** | **% of  revenue**      | ** ** | ** ** | ** ** | **% of  revenue** | ** ** | ** ** | ** ** | **% of  revenue** | ** ** | ** ** | ** ** | **% of  revenue** | ** ** |
| REVENUES:                                                                              |       |                      |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| IT Services                                                                            |       | $                         | 35,320     |                   | 60.0       | % | $ | 54,023 |   | 69.9 | % | $ | 71,503 |   | 60.0 | % | $ | 108,673 |   | 69.4 | % |
| Solutions Group                                                                        |       | 18,691                    |       | 31.8                   | %          | 19,472 |   | 25.2 | % | 38,292 |   | 32.2 | % | 40,143 |   | 25.6 | % |
| Chimes                                                                                 |       | 4,822                     |       | 8.2                    | %          | 3,823 |   | 4.9 | % | 9,291 |   | 7.8 | % | 7,721 |   | 4.9 | % |
|                                                                                   |       | 58,833                    |       | 100.0                  | %          | 77,318 |   | 100.0 | % | 119,086 |   | 100.0 | % | 156,537 |   | 100.0 | % |
| COSTS AND EXPENSES:                                                                    |       |                      |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Direct costs                                                                           |       | 43,494                    |       | 73.9                   | %          | 56,570 |   | 73.2 | % | 86,267 |   | 72.4 | % | 114,762 |   | 73.3 | % |
| Selling, general and administrative                                                    |       | 17,238                    |       | 29.3                   | %          | 21,724 |   | 28.1 | % | 35,779 |   | 30.0 | % | 47,521 |   | 30.3 | % |
| Bad Debt Expense                                                                       |       | 3,478                     |       | 5.9                    | %          | 728 |   | 0.9 | % | 3,863 |   | 3.2 | % | 1,390 |   | 0.9 | % |
| Restructuring charge                                                                   |       | 1,949                     |       | 3.3                    | %          | — |   | 0.0 | % | 2,198 |   | 1.8 | % | — |   | 0.0 | % |
| Special charges                                                                        |       | 7,978                     |       | 13.6                   | %          | — |   | 0.0 | % | 7,978 |   | 6.7 | % | — |   | 0.0 | % |
|                                                                                   |       | 74,137                    |       | 126.0                  | %          | 79,022 |   | 102.2 | % | 136,085 |   | 114.3 | % | 163,673 |   | 104.5 | % |
| LOSS FROM OPERATIONS                                                                   |       | (15,304                   | )          | -26.0                  | %          | (1,704 | ) | -2.2 | % | (16,999 | ) | -14.3 | % | (7,136 | ) | -4.5 | % |
| OTHER INCOME/(EXPENSE):                                                                |       |                      |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gain/(loss) on sale of assets                                                          |       | —                    |       | 0.0                    | %          | — |   | 0.0 | % | (273 | ) | -0.2 | % | 3,570 |   | 2.3 | % |
| Loss on investments                                                                    |       | —                    |       | 0.0                    | %          | — |   | 0.0 | % | — |   | 0.0 | % | (61 | ) | 0.0 | % |
| Interest income                                                                        |       | 102                       |       | 0.2                    | %          | 259 |   | 0.3 | % | 276 |   | 0.2 | % | 473 |   | 0.3 | % |
| Interest expense                                                                       |       | (12                       | )          | 0.0                    | %          | (4 | ) | 0.0 | % | (18 | ) | 0.0 | % | (163 | ) | -0.1 | % |
|                                                                                   |       | 90                        |       | 0.2                    | %          | 255 |   | 0.3 | % | (15 | ) | 0.0 | % | 3,819 |   | 2.5 | % |
| LOSS BEFORE INCOME TAXES                                                               |       | (15,214                   | )          | -25.9                  | %          | (1,449 | ) | -1.9 | % | (17,014 | ) | -14.3 | % | (3,317 | ) | -2.0 | % |
| INCOME TAX BENEFIT:                                                                    |       |                      |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred                                                                               |       | (4,381                    | )          | -7.4                   | %          | (493 | ) | -0.6 | % | (4,921 | ) | -4.1 | % | (1,128 | ) | -0.7 | % |
| LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING  PRINCIPLE AND MINORITY INTEREST |       | (10,833                   | )          | -18.4                  | %          | (956 | ) | -1.3 | % | (12,093 | ) | -10.2 | % | (2,189 | ) | -1.3 | % |
| Minority Interest                                                                      |       | (18                       | )          | 0.0                    | %          | — |   | 0.0 | % | (37 | ) | 0.0 | % | — |   | 0.0 | % |
| Cumulative effect of change in accounting principle  (Note 4)                     |       | —                    |       | 0.0                    | %          | — |   | 0.0 | % | — |   | 0.0 | % | (29,861 | ) | -19.1 | % |
| NET LOSS                                                                               |       | $                         | (10,851    | )                      | -18.4      | % | $ | (956 | ) | -1.3 | % | $ | (12,130 | ) | -10.2 | % | $ | (32,050 | ) | -20.4 | % |
| LOSS PER SHARE (BASIC & DILUTED):                                             |       |                      |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Before Cumulative Effect of Change in Accounting  Principle                            |       | $                         | (0.36      | )                      |       |   | $ | (0.03 | ) |   |   | $ | (0.40 | ) |   |   | $ | (0.07 | ) |   |   |
| Cumulative Effect of Change in Accounting Principle                                    |       | $                         | —     |                   |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | (0.95 | ) |   |   |
| Net Loss                                                                               |       | $                         | (0.36      | )                      |       |   | $ | (0.03 | ) |   |   | $ | (0.40 | ) |   |   | $ | (1.02 | ) |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:                                         |       |                      |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic & Diluted                                                                    |       | 30,292,000                |       |                   |       | 31,446,000 |   |   |   | 30,331,000 |   |   |   | 31,474,000 |   |   |   |

 

4

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**COMPUTER HORIZONS CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(dollars in thousands)**

 
| ** **                                                                       | ** ** | **Six Months Ended**      | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                       | ** ** | **June 30,  2003**   | ** ** | **June 30,  2002** | ** ** |
| ** **                                                                       | ** ** | **(As restated, note 2)** | ** ** | ** ** | ** ** |
| CASH FLOWS  FROM OPERATING ACTIVITIES                                            |       |                      |       |   |   |
| Net loss                                                                         |       | $                         | (12,130    | ) | $ | (32,050 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |       |                      |       |   |   |
| Deferred  taxes                                                                  |       | (4,921                    | )          | 3,626 |   |
| Depreciation                                                                     |       | 2,575                     |       | 2,333 |   |
| Provision  for bad debts                                                         |       | 3,863                     |       | 1,390 |   |
| 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                                                             |       | 4,677                     |       | 13,078 |   |
| Other  current assets                                                            |       | 1,631                     |       | (2,153 | ) |
| Assets held  for sale                                                            |       | —                    |       | (1,929 | ) |
| Other assets                                                                     |       | (3,130                    | )          | 1,201 |   |
| Refundable  income taxes                                                         |       | 19,051                    |       | 8,525 |   |
| Accrued  payroll, payroll taxes and benefits                                     |       | 2,161                     |       | (1,601 | ) |
| Accounts  payable                                                                |       | (3,108                    | )          | (2,737 | ) |
| Income taxes  payable                                                            |       | 706                       |       | — |   |
| Other  accrued expenses                                                          |       | (241                      | )          | 621 |   |
| Other  liabilities                                                               |       | (250                      | )          | 1,519 |   |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES                                       |       | 11,157                    |       | 18,114 |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES                                            |       |                      |       |   |   |
| Purchases of  furniture and equipment                                            |       | (979                      | )          | (2,089 | ) |
| Proceeds  received from the sale of assets                                       |       | 149                       |       | 15,880 |   |
| Acquisition  of assets                                                           |       | (387                      | )          | — |   |
| NET CASH  PROVIDED BY/(USED IN) INVESTING ACTIVITIES                             |       | (1,217                    | )          | 13,791 |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES                                            |       |                      |       |   |   |
| Notes  payable-banks, net                                                        |       | —                    |       | (10,000 | ) |
| Stock  options exercised                                                         |       | 847                       |       | 336 |   |
| Purchase of  treasury shares                                                     |       | (1,230                    | )          | (2,389 | ) |
| Stock issued  on employee stock purchase plan                                    |       | 193                       |       | 743 |   |
| NET CASH  USED IN FINANCING ACTIVITIES                                           |       | (190                      | )          | (11,310 | ) |
| Foreign  currency gains/(losses)                                                 |       | 1,538                     |       | (321 | ) |
|                                                                             |       |                      |       |   |   |
| NET INCREASE  IN CASH AND CASH EQUIVALENTS                                       |       | 11,288                    |       | 20,274 |   |
|                                                                             |       |                      |       |   |   |
| CASH AND  CASH EQUIVALENTS AT BEGINNING OF YEAR                                  |       | 59,769                    |       | 41,033 |   |
|                                                                             |       |                      |       |   |   |
| CASH AND  CASH EQUIVALENTS AT END OF PERIOD                                      |       | $                         | 71,057     |   | $ | 61,307 |   |

 

5

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**COMPUTERHORIZONS CORP.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

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

(unaudited)

 

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

 

The consolidated balance sheet as of June 30,2003, the consolidated statements of operations for the three and six monthsended June 30, 2003 and June 30, 2002, respectively and the statementof cash flows for the six months ended June 30, 2003 and 2002 have beenprepared by the Company without audit. In the opinion of management, alladjustments (which include normal recurring adjustments) necessary to presentfairly the financial position, results of operations and cash flows at June 30,2003 (and for all periods presented) have been made.

 

Certain information and note disclosures, normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America, which are notrequired for interim purpose, have been condensed or omitted. It is suggestedthat these consolidated financial statements be read in conjunction with thefinancial statements and notes thereto included in the Annual Report onForm 10-K for the year ended December 31, 2002 filed by the Company.The results of operations for the periods ended June 30, 2003 and 2002 arenot necessarily indicative of the operating results for the respective fullyears.

 

*Reclassifications*

 

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

 

2.                                       **Restatement of FinancialStatements**

 

Subsequentto the issuance of its financial statements for the year ended December 31,2003, and in connection with an internal review of accounting processes andprocedures conducted in the third quarter of 2004, the company discovered anerror pertaining to the incorrect adjustment of consulting costs relating tointercompany transactions between the Company and its Canadian subsidiary.  This error caused an understatement ofconsolidated consultant costs (i.e. direct costs) in the Company’s consolidatedincome statement and accrued payroll on the balance sheet.

 

As part of management’s investigationof this accounting error, an extensive review of intercompany transactions wascompleted.  As a result, otheradjustments, not affecting operating results, were recorded.  These adjustments to the balance sheetcorrected an overstatement of accrued expenses and an understatement ofshareholders’ equity (specifically the overstatement of accumulatedcomprehensive loss).  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 six monthsended June 30, 2003 as originally reported, to the corresponding amountson a restated basis after given effect to the adjustment described above.

 
| ** **                                                 | ** ** | **Three Months**        | ** ** | **Six Months**  | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-----------------|------------|
| **(In  thousands, except**                                 | ** ** | **Ended June 30,** | ** ** |
| **per share  data)**                                       | ** ** | **2003**                | ** ** | **2003**        | ** ** |
| ** **                                                 | ** ** | **(Unaudited)**         | ** ** | **(Unaudited)** | ** ** |
|                                                       |       |                    |       |            |       |
| Net loss as  originally reported                           |       | (9,530                  | )          | (10,809         | )          |
|                                                       |       |                    |       |            |       |
| Direct costs  adjustment (pretax)                          |       | 1,983                   |       | 1,983           |       |
|                                                       |       |                    |       |            |       |
| Income tax  benefit                                        |       | (662                    | )          | (662            | )          |
| Net loss as  restated                                      |       | (10,851                 | )          | (12,130         | )          |
|                                                       |       |                    |       |            |       |
| Loss per  share (Basic and Diluted) as originally reported |       | (0.31                   | )          | (0.36           | )          |
| Effect of  Direct Costs adjustment                         |       | (0.05                   | )          | (0.04           | )          |
| Loss per  share (Basic and Diluted) as restated            |       | (0.36                   | )          | (0.40           | )          |

 

Thepreviously reported results of operations for the three and six-month ended June 30,2003 as reported on Form 10Q with the Securities and Exchange Commission, havebeen amended to reflect the above adjustments. The results of such adjustments, as compared with the Company’s previouslyreported results for the three and six-month periods ended June 30, 2003,are set forth below.

 
| **(In  thousands, except**            | ** ** | **Three Months ended**     | ** ** | **Three Months ended** | ** ** | **Six Months ended**       | ** ** | **Six Months ended**   | ** ** |
|---------------------------------------|------------|----------------------------|------------|------------------------|------------|----------------------------|------------|------------------------|------------|
| **per share  data)**                  | ** ** | **June 30, 2003**     | ** ** | **June 30, 2003** | ** ** | **June 30, 2003**     | ** ** | **June 30, 2003** | ** ** |
| ** **                            | ** ** | **(unaudited)**            | ** ** | **(unaudited)**        | ** ** | **(unaudited)**            | ** ** | **(unaudited)**        | ** ** |
| ** **                            | ** ** | **As Originally Reported** | ** ** | **As Restated**        | ** ** | **As Originally Reported** | ** ** | **As Restated**        | ** ** |
|                                  |       |                       |       |                   |       |                       |       |                   |       |
| Revenue                               |       |                       |       |                   |       |                       |       |                   |       |
| IT Services                           |       | 35,320                     |       | 35,320                 |       | 71,503                     |       | 71,503                 |       |
| Solutions  Group                      |       | 18,691                     |       | 18,691                 |       | 38,292                     |       | 38,292                 |       |
| Chimes                                |       | 4,822                      |       | 4,822                  |       | 9,291                      |       | 9,291                  |       |
|                                  |       | 58,833                     |       | 58,833                 |       | 119,086                    |       | 119,086                |       |
|                                  |       |                       |       |                   |       |                       |       |                   |       |
| Cost and  expenses                    |       |                       |       |                   |       |                       |       |                   |       |
| Direct costs                          |       | 41,511                     |       | 43,494                 |       | 84,284                     |       | 86,267                 |       |
| Selling,  general and administrative  |       | 17,238                     |       | 17,238                 |       | 35,779                     |       | 35,779                 |       |
| Bad debt  expense                     |       | 3,478                      |       | 3,478                  |       | 3,863                      |       | 3,863                  |       |
| Restructuring  charge                 |       | 1,949                      |       | 1,949                  |       | 2,198                      |       | 2,198                  |       |
| Special  charges                      |       | 7,978                      |       | 7,978                  |       | 7,978                      |       | 7,978                  |       |
|                                  |       | 72,154                     |       | 74,137                 |       | 134,102                    |       | 136,085                |       |
|                                  |       |                       |       |                   |       |                       |       |                   |       |
| Loss from  Operations                 |       | (13,321                    | )          | (15,304                | )          | (15,016                    | )          | (16,999                | )          |
|                                  |       |                       |       |                   |       |                       |       |                   |       |
| Other  income/expenses                |       |                       |       |                   |       |                       |       |                   |       |
| Gain/(loss)  on sale of assets        |       | —                     |       | —                 |       | (273                       | )          | (273                   | )          |
| Interest  income                      |       | 102                        |       | 102                    |       | 276                        |       | 276                    |       |
| Interest  expense                     |       | (12                        | )          | (12                    | )          | (18                        | )          | (18                    | )          |
|                                  |       | 90                         |       | 90                     |       | (15                        | )          | (15                    | )          |
|                                  |       |                       |       |                   |       |                       |       |                   |       |
| Loss before  income taxes             |       | (13,231                    | )          | (15,214                | )          | (15,031                    | )          | (17,014                | )          |
| Income tax  benefit                   |       | (3,719                     | )          | (4,381                 | )          | (4,259                     | )          | (4,921                 | )          |
| Net loss  before minority interest    |       | (9,512                     | )          | (10,833                | )          | (10,772                    | )          | (12,093                | )          |
| Minority  Interest                    |       | (18                        | )          | (18                    | )          | (37                        | )          | (37                    | )          |
| Net loss                              |       | (9,530                     | )          | (10,851                | )          | (10,809                    | )          | (12,130                | )          |
| Basic  earnings and diluted per share |       | (0.31                      | )          | (0.36                  | )          | (0.36                      | )          | (0.40                  | )          |

 

Thefollowing table sets forth the effects of the restatement adjustments discussedabove on the consolidated balance sheets at June 30, 2003.

 
| ** **                                                                                              | ** ** | **June 30,**             | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------|------------|
| ** **                                                                                              | ** ** | **2003**                      | ** ** | **2003**          | ** ** |
| ** **                                                                                              | ** ** | **(As originally  reported)** | ** ** | **(As restated)** | ** ** |
| ** **                                                                                              | ** ** | **(unaudited)**               | ** ** | **(unaudited)**   | ** ** |
| ASSETS                                                                                                  |       |                          |       |              |       |
| CURRENT  ASSETS:                                                                                        |       |                          |       |              |       |
| Cash and  cash equivalents                                                                              |       | $                             | 71,057     |              | $          | 71,057 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $8,320 at June 30,  2003           |       | 48,976                        |       | 48,976            |       |
| Deferred  income taxes                                                                                  |       | 5,867                         |       | 5,867             |       |
| Refundable  income taxes                                                                                |       | —                        |       | —            |       |
| Other                                                                                                   |       | 5,588                         |       | 5,588             |       |
| TOTAL  CURRENT ASSETS                                                                                   |       | 131,488                       |       | 131,488           |       |
|                                                                                                    |       |                          |       |              |       |
| PROPERTY AND  EQUIPMENT                                                                                 |       | 38,522                        |       | 38,522            |       |
| Less  accumulated depreciation                                                                          |       | (29,101                       | )          | (29,101           | )          |
|                                                                                                    |       | 9,421                         |       | 9,421             |       |
|                                                                                                    |       |                          |       |              |       |
| OTHER ASSETS  — NET:                                                                               |       |                          |       |              |       |
| Goodwill                                                                                                |       | 19,590                        |       | 19,590            |       |
| Deferred  income taxes                                                                                  |       | 10,969                        |       | 11,631            |       |
| Other                                                                                                   |       | 10,509                        |       | 10,509            |       |
| TOTAL OTHER  ASSETS                                                                                     |       | 41,068                        |       | 41,730            |       |
| TOTAL ASSETS                                                                                            |       | $                             | 181,977    |              | $          | 182,639 |   |
|                                                                                                    |       |                          |       |              |       |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                              |       |                          |       |              |       |
| CURRENT  LIABILITIES:                                                                                   |       |                          |       |              |       |
| Accounts  payable                                                                                       |       | $                             | 7,722      |              | $          | 7,722 |   |
| Accrued  payroll, payroll taxes and benefits                                                            |       | 4,748                         |       | 6,690             |       |
| Restructuring  reserve                                                                                  |       | 3,877                         |       | 3,877             |       |
| Income taxes  payable                                                                                   |       | 706                           |       | 706               |       |
| Tax benefit  reserve                                                                                    |       | 19,600                        |       | 19,600            |       |
| Other  accrued expenses                                                                                 |       | 3,621                         |       | 2,246             |       |
| TOTAL  CURRENT LIABILITIES                                                                              |       | 40,274                        |       | 40,841            |       |
| OTHER  LIABILITIES                                                                                      |       | 5,993                         |       | 5,993             |       |
|                                                                                                    |       |                          |       |              |       |
| 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 June 30,  2003 |       | 3,315                         |       | 3,315             |       |
| Additional  paid-in capital                                                                             |       | 133,354                       |       | 133,354           |       |
| Accumulated  comprehensive loss                                                                         |       | (3,452                        | )          | (2,036            | )          |
| Retained  earnings                                                                                      |       | 17,446                        |       | 16,125            |       |
|                                                                                                    |       | 150,663                       |       | 150,758           |       |
| Less shares  held in treasury, at cost; 2,696,434 shares shares at June 30, 2003                   |       | (14,953                       | )          | (14,953           | )          |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                        |       | 135,710                       |       | 135,805           |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                        |       | $                             | 181,977    |              | $          | 182,639 |   |

 

**3.****                                     ****Recent AccountingPronouncements**

 

In June 2001, the Financial AccountingStandards Board approved the issuance of SFAS No. 141, “BusinessCombinations” and in July 2001, SFAS 142, “Goodwill and OtherIntangible Assets.” The new standards require that all business combinationsinitiated after June 30, 2001 must be accounted for under the purchasemethod. In addition, all intangible assets acquired that are obtained throughcontractual or legal right, or are capable of being separately sold,transferred, licensed, rented or exchanged shall be recognized as an assetapart from goodwill. Goodwill 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 consensuson Issue No. 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables.” This Issue provides guidance on when and how to separateelements of an arrangement that may involve the delivery or performance ofmultiple products, services and rights to use assets into separate units ofaccounting. The guidance in the consensus is effective for revenue arrangementsentered into in fiscal periods beginning after June 15, 2003. Thetransition provision allows either prospective application or a cumulativeeffect adjustment upon adoption. The Company is currently evaluating the impactof this statement to the Company.

 

In December 2002, the Financial AccountingStandards Board approved the issuance of SFAS No. 148, “Accounting forStock-Based Compensation—Translation and Disclosure.” This statement amendsFASB Statement No. 123, “Accounting for Stock-Based Compensation,” toprovide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition, this Statement amended the disclosure requirements of

 

6

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Statement123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the methods used on reported results. The Company adopted thedisclosure provisions as of December 31, 2002.

 

The exercise price per share on all options grantedmay not be less than the fair value at the date of the option grant. TheCompany applies Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” as modified by FIN 44, “Accounting for CertainTransactions Involving Stock Compensation,” in accounting for stock-basedemployee compensation, whereby no compensation cost had been recognized for theplans. The Company expects to continue following the guidance under APB 25 forstock based compensation to employees. Had compensation cost for the plans beendetermined based on the fair value of the options at the grant dates and beenconsistent with the method of SFAS No. 123, the Company’s net loss andloss per share would have been increased to the pro forma amounts indicatedbelow:

 
| ** **          | ** **                                                                                                                                    | **Three Months Ended**   | ** ** | **Six Months Ended**    | ** ** |
|---------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------------------------|------------|-------------------------|------------|
| ** **          | ** **                                                                                                                                    | **June 30,  2003**  | ** ** | **June 30,  2002** | ** ** | **June 30,  2003** | ** ** | **June 30,  2002** | ** ** |
| ** **          | ** **                                                                                                                                    | **(As restated note 2)** | ** ** | ** **              | ** ** | **(As restated note 2)** | ** ** | ** ** | ** ** |
| Net loss            | As reported                                                                                                                                   |                     | $          | (10,851                 | )          | $ | (956 | ) | $ | (12,130 | ) | $ | (32,050 | ) |
|                | Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |                     | (403       | )                       | (1,066     | ) | (1,387 | ) | (2,985 | ) |
|                | Pro forma                                                                                                                                     |                     | $          | (11,254                 | )          | $ | (2,022 | ) | $ | (13,517 | ) | $ | (35,035 | ) |
| Earnings per  share |                                                                                                                                          |                     |       |                    |       |   |   |   |   |   |
| Basic               | As reported                                                                                                                                   |                     | $          | (0.36                   | )          | $ | (0.03 | ) | $ | (0.40 | ) | $ | (1.02 | ) |
|                | Pro forma                                                                                                                                     |                     | (0.37      | )                       | (0.06      | ) | (0.45 | ) | (1.11 | ) |
| Diluted             | As reported                                                                                                                                   |                     | $          | (0.36                   | )          | $ | (0.03 | ) | $ | (0.40 | ) | $ | (1.02 | ) |
|                | Pro forma                                                                                                                                     |                     | (0.37      | )                       | (0.06      | ) | (0.45 | ) | (1.11 | ) |

 

Effective on January 1, 2003 the Companyadopted Financial Accounting Standards Board No. 146, “Accounting for Exitor Disposal Activities,” (“SFAS 146”), which supersedes Emerging IssuesTask Force Issue No. 94-3, “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).” The new standards require that a liability for a costassociated with an exit or disposal activity, including costs related toterminating a contract that is not a capital lease and the termination benefitsthat employees who are involuntarily terminated receive under the terms of aone-time benefit arrangement that is not ongoing or an individualdeferred-compensation contract, be recognized when the liability is incurred.Previously, under Issue No. 94-3, a liability for an exit cost wasrecognized at the date of an entity’s commitment to an exit plan, which may notnecessarily meet the definition of a liability. SFAS 146 is effective forexit or disposal activities of the Company that are initiated after December 31,2002. The Company adopted SFAS 146 as of January 1, 2003 (SeeNote 6).

 

In January 2003, the FASB issued FinancialInterpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN46”), which addresses consolidation by business enterprises of variableinterest entities (VIEs). The accounting provisions and disclosure requirementsof FIN 46 are effective immediately for VIEs created after January 31,2003, and are effective for reporting periods beginning after June 15,2003, for VIEs created prior to February 1, 2003. The Company is currentlyevaluating the impact of this statement to the Company.

 

7

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**4.****                                     ****Adoption of FAS 142**

 

During the quarter ended June 30, 2002, theCompany completed the initial valuation of the carrying value of goodwillexisting at January 1, 2002. As a result a non-cash charge of$29.9 million, or $(0.95) per share was retroactively recorded as thecumulative effect of an accounting change in the six months ended June 30,2002 statement of operations. For the year ended December 31, 2002 theCompany completed a second valuation of the carrying value of the remaininggoodwill and it was determined that no further impairment had occurred. Thechanges in the carrying amount of goodwill for the six months ended June 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                |       | 387                 |       | —          |       | —        |       | —     |       | 387              |       |
| Balance as  of June 30, 2003     |       | $                   | 19,590     |            | $          | —        |       | $          | —     |             | $          | — |   | $ | 19,590 |   |

 

The reporting units are equal to, or one levelbelow, reportable segments. The Company engaged independent valuationconsultants to assist with the transitional goodwill and annual impairmenttests.

 

The fair value of each of the reporting units wascalculated using the following approaches: (i) market approach and(ii) income approach. Under the market approach, value is estimated bycomparing the performance fundamentals relating to similar public companies’stock prices. Multiples are then developed of the value of the publicly tradedstock to various measures and are then applied to each reporting unit toestimate the value of its equity. Under the income approach, value wasdetermined using the present value of the projected future cash flows to begenerated by the reporting unit.

 

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

 

8

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The following pro forma table shows the effect ofthe cumulative effect of change in accounting principle on the Company’s netloss as follows (in 000’s, except per share data):

 
| ** **                                                           | ** ** | **Three Months Ended**    | ** ** | **Six Months Ended**    | ** ** |
|----------------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                                           | ** ** | **June 30,  2003**   | ** ** | **June 30,  2002** | ** ** | **June 30,  2003** | ** ** | **June 30,  2002** | ** ** |
| ** **                                                           | ** ** | **(As restated, note 2)** | ** ** | ** **              | ** ** | **(As restated, note 2)** | ** ** | ** ** | ** ** |
| Reported Net  Loss                                                   |       | $                         | (10,851    | )                       | $          | (956 | ) | $ | (12,130 | ) | $ | (32,050 | ) |
| Cumulative  Effect of Change in Accounting Principle                 |       | —                    |       | —                  |       | — |   | 29,861 |   |
| Adjusted Net  Loss                                                   |       | $                         | (10,851    | )                       | $          | (956 | ) | $ | (12,130 | ) | $ | (2,189 | ) |
| Reported  Loss per Share:                                            |       |                      |       |                    |       |   |   |   |   |
| Basic &  Diluted                                                 |       | $                         | (0.36      | )                       | $          | (0.03 | ) | $ | (0.40 | ) | $ | (1.02 | ) |
| Adjustment  for Cumulative Effect of Change in Accounting Principle: |       |                      |       |                    |       |   |   |   |   |
| Basic &  Diluted                                                 |       | —                    |       | —                  |       | — |   | 0.95 |   |
| Adjusted  Loss per Share:                                            |       |                      |       |                    |       |   |   |   |   |
| Basic &  Diluted                                                 |       | $                         | (0.36      | )                       | $          | (0.03 | ) | $ | (0.40 | ) | $ | (0.07 | ) |

 

**5.****                                     ****Earnings Per Share**

 

The computation of diluted earnings per shareexcludes options with exercise prices greater than the average market price.During 2003, there were 268,246 excluded options with exercise prices between $4.00and $26.63 per share at June 30. During 2002, there were 5,742,048excluded options outstanding at June 30, 2002 with exercise prices between$2.02 and $26.63 per share.

 

**6.****                                     ****Segment Information**

 

The Company has identified three business segments:IT Services, the Solutions Group and Chimes, Inc. The IT Services divisionprovides highly skilled software professionals to augment the internalinformation management staffs of major corporations. IT Services is primarilystaffing augmentation. The Solutions division provides enterprise applicationservices, e-business solutions, customized Web development and Web enablementof strategic applications, Customer Relationship Management (CRM), networkservices, strategic outsourcing and managed resourcing as well as software andrelational database products, up to the time of sale, March 25, 2002, ofPrinceton Softech Inc. In the segment information chart below, amountspertaining to Princeton Softech Inc. for the six months ended June 30,2002, are included and total: revenues of $2.9 million, gross profit of$2.4 million and an operating loss of $1.9 million.Chimes, Inc., a wholly-owned subsidiary of CHC, provides workforceprocurement and management services to Global 2000 companies which, accordingto Forbes magazine, represent the biggest and most important companies, asmeasured by sales, profits, assets and market value. Operating loss consists ofloss before income taxes, excluding interest income, interest expense,gain/(loss) on the sale of assets, restructuring charges, special charges, thewrite-off of a terminated project and net loss on investments. These exclusionstotal expense of $12.9 million and income of $255,000 for the secondquarter of 2003 and 2002, respectively and expense of $13.3 million andincome of $3.8 million for the first six months of June 30, 2003 and2002 **,**respectively (seereconciliation of segments operating loss to consolidated loss before incometaxes). Corporate services,

 

9

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consistingof general and administrative services are provided to the segments from acentralized location. Such costs are allocated to the segments based onrevenue.

 
| ** **                    | ** ** | **Three Months Ended**    | ** ** | **Six Months Ended**    | ** ** |
|-------------------------------|------------|---------------------------|------------|-------------------------|------------|
| **(in 000’s)**           | ** ** | **June 30,  2003**   | ** ** | **June 30,  2002** | ** ** | **June 30,  2003** | ** ** | **June 30,  2002** | ** ** |
| ** **                    | ** ** | **(As restated, note 2)** | ** ** | ** **              | ** ** | **(As restated, note 2)** | ** ** | ** ** | ** ** |
| *Revenue:*                    |       |                      |       |                    |       |   |   |   |   |
| IT Services                   |       | $                         | 35,320     |                    | $          | 54,023 |   | $ | 71,503 |   | $ | 108,673 |   |
| Solutions  Group              |       | 18,691                    |       | 19,472                  |       | 38,292 |   | 40,143 |   |
| Chimes                        |       | 4,822                     |       | 3,823                   |       | 9,291 |   | 7,721 |   |
| TOTAL                         |       | $                         | 58,833     |                    | $          | 77,318 |   | $ | 119,086 |   | $ | 156,537 |   |
| *Gross  Margin:*              |       |                      |       |                    |       |   |   |   |   |
| IT Services                   |       | $                         | 7,079      |                    | $          | 10,992 |   | $ | 14,249 |   | $ | 21,556 |   |
| Solutions  Group              |       | 3,810                     |       | 6,197                   |       | 10,016 |   | 13,604 |   |
| Chimes                        |       | 4,450                     |       | 3,559                   |       | 8,554 |   | 6,615 |   |
| TOTAL                         |       | $                         | 15,339     |                    | $          | 20,748 |   | $ | 32,819 |   | $ | 41,775 |   |
| *Operating  income / (loss):* |       |                      |       |                    |       |   |   |   |   |
| IT Services                   |       | $                         | (672       | )                       | $          | (215 | ) | $ | (1,861 | ) | $ | (1,250 | ) |
| Solutions  Group              |       | (540                      | )          | 1,043                   |       | 1,150 |   | (862 | ) |
| Chimes                        |       | (1,101                    | )          | (2,532                  | )          | (3,048 | ) | (5,024 | ) |
| TOTAL                         |       | $                         | (2,313     | )                       | $          | (1,704 | ) | $ | (3,759 | ) | $ | (7,136 | ) |
| *Assets:*                     |       |                      |       |                    |       |   |   |   |   |
| IT Services                   |       |                      |       |                    |       | $ | 32,304 |   | $ | 48,197 |   |
| Solutions  Group              |       |                      |       |                    |       | 39,770 |   | 43,449 |   |
| Chimes                        |       |                      |       |                    |       | 12,703 |   | 12,235 |   |
| Corporate  and other          |       |                      |       |                    |       | 97,862 |   | 107,560 |   |
| TOTAL                         |       |                      |       |                    |       | $ | 182,639 |   | $ | 211,441 |   |

 

*Reconciliation of Segments Operating Loss toConsolidated Loss Before Income Taxes:*

 
| ** **                              | ** ** | **Three Months Ended**    | ** ** | **Six Months Ended**    | ** ** |
|-----------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **June 30,  2003**   | ** ** | **June 30,  2002** | ** ** | **June 30,  2003** | ** ** | **June 30,  2002** | ** ** |
| ** **                              | ** ** | **(As restated, note 2)** | ** ** | ** **              | ** ** | **(As restated, note 2)** | ** ** | ** ** | ** ** |
| Total  Segments Operating Loss          |       | $                         | (2,313     | )                       | $          | (1,704 | ) | $ | (3,759 | ) | $ | (7,136 | ) |
| Adjustments:                            |       |                      |       |                    |       |   |   |   |   |
| Interest  Income                        |       | 90                        |       | 255                     |       | 258 |   | 310 |   |
| Gain/(loss)  on sale of assets          |       | —                    |       | —                  |       | (273 | ) | 3,570 |   |
| Restructuring  charges                  |       | (1,949                    | )          | —                  |       | (2,198 | ) | — |   |
| Special  charges                        |       | (7,978                    | )          | —                  |       | (7,978 | ) | — |   |
| Write-off of  terminated project        |       | (3,064                    | )          | —                  |       | (3,064 | ) | — |   |
| Net loss on  investments                |       | —                    |       | —                  |       | — |   | (61 | ) |
| Total  Adjustments:                     |       | (12,901                   | )          | 255                     |       | (13,255 | ) | 3,819 |   |
| Consolidated  Loss Before Income Taxes: |       | $                         | (15,214    | )                       | $          | (1,449 | ) | $ | (17,014 | ) | $ | (3,317 | ) |

 

10

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**7.****                                     ****Restructuring Charges**

 

During the second quarter of 2003, the Companyevaluated the geographic area in Canada and decided to close facilities and govirtual in the smaller Canadian markets. After the buildings were entirelyclosed, the Company recorded a restructuring charge of approximately$1.9 million relating to the consolidating and closing of certainfacilities in the Canadian subsidiary. This $1.9 million expense wascalculated based on current rent commitments less a calculated sublease amountbased on current market conditions. The provision includes an accrual relatingto the future costs associated with continuing rent on six properties, five ofwhich are in Canada, with rents continuing through 2004, 2006 and 2007. Theclosing of these offices resulted in the termination of 20 employees with aseverance charge of $697,000. As of June 30, 2003, $372,000 had been paidin severance to the terminated employees.

 
| ** **               | ** ** | **Recorded** | ** ** | **Paid** | ** ** | **Remaining at  June 30,  2003** | ** ** |
|--------------------------|------------|--------------|------------|----------|------------|---------------------------------------|------------|
| Lease  Obligations:      |       |         |       |     |       |                                  |       |
| Canada                   |       | $            | 1,100      |     | $          | (24                                   | )          | $ | 1,076 |   |
| United  States           |       | 36           |       | (16      | )          | 20                                    |       |
| Total Lease  Obligations |       | $            | 1,136      |     | $          | (40                                   | )          | $ | 1,096 |   |
| Severance:               |       |         |       |     |       |                                  |       |
| Canada                   |       | $            | 358        |     | $          | (33                                   | )          | $ | 325 |   |
| United  States           |       | 197          |       | (197     | )          | —                                |       |
| United  Kingdom          |       | 142          |       | (142     | )          | —                                |       |
| Total  Severance:        |       | $            | 697        |     | $          | (372                                  | )          | $ | 325 |   |
| General  Office Closure: |       |         |       |     |       |                                  |       |
| Canada                   |       | $            | 116        |     | $          | (2                                    | )          | $ | 114 |   |
| Total                    |       | $            | 1,949      |     | $          | (414                                  | )          | $ | 1,535 |   |

 

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

 
| ** **          | ** ** | **Remaining at  December 31,  2002** | ** ** | **Paid** | ** ** | **Reversed** | ** ** | **Remaining at  June 30,  2003** | ** ** |
|---------------------|------------|-------------------------------------------|------------|----------|------------|--------------|------------|---------------------------------------|------------|
| Lease  Obligations: |       |                                      |       |     |       |         |       |                                  |       |
| United  States      |       | $                                         | 2,483      |     | $          | (695         | )          | $                                     | (25        | ) | $ | 1,763 |   |
|                     |            |                                           |            |          |            |              |            |                                       |            |  |  |  |  |

 

During the fourth quarter of 2001, the Companyrecorded a restructuring charge of $410,000 pertaining to 2001 office closings.In addition, during the second quarter of 2001, the Company recorded anadditional $5.5 million in restructuring expense to reduce the carryingamount of eB Networks to the estimated net realizable value.

 

11

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During the fourth quarter of 2000, the Companyrecorded restructuring charges of $43.9 million. The Company’srestructuring plan included the offering for sale of four businesses acquiredbetween 1998 and 1999, including Princeton Softech, Inc., SELECT SoftwareTools division (“Select”), eB Networks and CHC International, Ltd(formerly Spargo Consulting PLC). In addition, restructuring charges includedthe shutdown of Enterprise Solutions Group (“ESG”) which was acquired in 1998,the closing of seven offices and the site reduction of two other IT Servicesoffices.

 

At December 31, 2000, the Company recorded awrite-down of goodwill of $7.2 million for the shutdown of ESG. Inaddition, a non-cash charge writing down goodwill of $26 million andpurchased software of $6.9 million was recorded, in the fourth quarter of2000, in connection with the write-down of assets held for sale to realizablevalue. The closing of IT Services’ and Solutions’ offices resulted in thetermination of 90 employees with a severance charge of $1.3 million. As ofJune 30, 2003, $1,164,000 had been paid in severance to the terminatedemployees. The balance remaining at June 30, 2003 includes continuing renton six properties terminating in 2003, 2004 and 2005.

 
| ** **          | ** ** | **Remaining at  Dec. 31,  2002** | ** ** | **Paid** | ** ** | **Remaining at  June 30,  2003** | ** ** |
|---------------------|------------|----------------------------------|------------|----------|------------|---------------------------------------|------------|
| Severance:          |       |                             |       |     |       |                                  |       |
| United  States      |       | $                                | 1          |     | $          | (1                                    | )          | $ | — |   |
| Lease  Obligations: |       |                             |       |     |       |                                  |       |
| United  States      |       | $                                | 294        |     | $          | (114                                  | )          | $ | 180 |   |
| Total               |       | $                                | 295        |     | $          | (115                                  | )          | $ | 180 |   |

 

During the fourth quarter of 2001, the Companyrecorded a restructuring charge adjustment of $638,000 pertaining to thetermination, by the sublessee, of the sublease contracts for closed officesincluded in the 1999 restructure charge.

 

During the third quarter of 1999, the Companyrecorded a restructuring charge of $6.4 million primarily related to theconsolidating and closing of certain facilities, generally used for Year 2000and other legacy related services, as well as attendant reduction of relatedstaff levels.

 

During the second quarter of 2000, the Companyrecorded a restructuring credit of $2.4 million. This credit resultedprimarily from the earlier than expected occupancy of two abandoned propertiesthat were part of the 1999 restructuring reserve and the reversal of an overaccrual of employee severance benefits due to terminated employees in theUnited Kingdom and Canada. The remaining balance at June 30, 2003 includescontinuing rent on one property with the lease terminating in 2005.

 
| ** **          | ** ** | **Remaining at  Dec. 31,  2002** | ** ** | **Paid** | ** ** | **Remaining at  June 30,  2003** | ** ** |
|---------------------|------------|----------------------------------|------------|----------|------------|---------------------------------------|------------|
| Lease  Obligations: |       |                             |       |     |       |                                  |       |
| United  States      |       | $                                | 488        |     | $          | (89                                   | )          | $ | 399 |   |
|                     |            |                                  |            |          |            |                                       |            |  |  |  |

 

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

 

Statement of Financial Accounting StandardsNo. 130, Reporting Comprehensive Income (“SFAS No.130”), requires thatitems defined as other comprehensive income/(loss), such as foreign currencytranslation adjustments, be separately classified in the financial statementsand that the accumulated balance of other comprehensive income/(loss) bereported separately from retained earnings and

 

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additionalpaid-in capital in the equity section of the balance sheet. The componentsof comprehensive loss for the three and six months ended June 30, 2003 andJune 30, 2002 are as follows:

 
| ** **                                                          | ** ** | **Three Months Ended**     | ** ** | **Six Months Ended**    | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                                                          | ** ** | **June 30,  2003**    | ** ** | **June 30,  2002** | ** ** | **June 30,  2003** | ** ** | **June 30,  2002** | ** ** |
| ** **                                                          | ** ** | **(As restated,  note 2)** | ** ** | ** **              | ** ** | **(As restated,  note 2)** | ** ** | ** ** | ** ** |
| Comprehensive  Loss:                                                |       |                       |       |                    |       |   |   |   |   |
| Net Loss                                                            |       | $                          | (10,851    | )                       | $          | (956 | ) | $ | (12,130 | ) | $ | (32,050 | ) |
| Other  comprehensive income/(loss)—foreign currency adjustment |       | 1,553                      |       | 80                      |       | 1,539 |   | (322 | ) |
| Unrealized  gain on SERP investments                                |       | 943                        |       | —                  |       | 733 |   | — |   |
| Comprehensive  Loss                                                 |       | $                          | (8,355     | )                       | $          | (876 | ) | $ | (9,858 | ) | $ | (32,372 | ) |

 

**9.****                                     ****Purchase of Westfield-India**

 

On January 31, 2003, the Company acquired theIT Solutions operations of Global Business Technology Solutions (GBTS), fromAlea (Bermuda) Limited, a member of the Alea Group of companies and WestfieldServices, Inc., a subsidiary of Westfield Financial Corporation for$400,000. The outsourcing facility and its IT professionals are located inChenni (Madras), India. This transaction was accounted for as a purchase.

 

**10.****                              ****Sale of Subsidiaries**

 

On February 14, 2003, the Company sold thebusiness and net assets of Computer Horizons e-Solutions (Europe) Limited, (“SolutionsUK”) to Systems Associates Limited for 92,822 British Sterling Pounds(approximately US$ 145,500). The loss from the transaction was $273,000.

 

On March 25, 2002, the Company sold the netassets of Princeton Softech to Apax Partners, Inc. and LLR Partners, forcash of $16 million, including amounts held in escrow of$1.5 million. The gain from the transaction was initially estimated as$3.6 million and was adjusted in the fourth quarter of 2002 to$3.2 million due to a purchase price adjustment. During the second quarterof 2003, the Company received approximately $748,000 of the escrow. The resultsof operations are included in the consolidated financial statements through February 28,2002 within the Solutions group.

 

On April 17, 2001, the Company sold the SELECTSoftware Tools division “Select” of Princeton Softech to Aonix, a member of theGores Technology Group, for approximately $895,000 including $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.

 

**11.****                              ****Purchase of Treasury Stock**

 

In April of 2001, the Board of Directorsapproved the repurchase in the open market of up to 10% of its common sharesoutstanding, or approximately 3.2 million shares. As of the filing of thisreport, the Company had repurchased, in the open market, 3,114,900 shares ofits stock at an average price of $3.47 per share for an aggregate purchaseamount of $10.8 million. As of June 30, 2003 the remainingauthorization for repurchase is approximately 93,000 shares.

 

**12.****                              ****Asset-Based Lending Facility**

 

On July 31, 2001, amended February 14,2003, the Company entered into a secured asset-based lending facility thatreplaced its two unsecured discretionary lines of credit. This new line ofcredit is a

 

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three-year,$40 million facility with availability based primarily on eligiblecustomer receivables. The interest rate for the first ninety days from closingwas Prime plus 0.5%, thereafter the rate was LIBOR plus 2.75% based on theunpaid principal. The borrowing base less outstanding loans must equal orexceed $17.5 million. At the time of closing there was a $170,000commitment fee paid to the agent. As of June 30, 2003, the Company had nooutstanding loan balance against the facility. Based on the Company’s eligiblecustomer receivables and cash balances, $15.9 million was available forborrowing as of June 30, 2003. The fee for the unused portion of the lineof credit is 0.375% per annum charged to the Company monthly. This charge wasapproximately $62,000 and $68,000 for the six-month periods ended June 30,2003 and 2002, respectively. This line of credit includes covenants relating tothe maintenance of cash balances and providing for limitations on incurring obligationsand spending limits on capital expenditures.

 

**13.****                              ****Tax Benefit Reserve**

 

On March 9, 2002, the Job Creation and WorkerAssistance Act of 2002 (the “Act”) was enacted into law. This Act containedmany economic and tax incentives, including the extension of the carrybackperiod for losses arising in years ending during 2001 and 2002 to five yearsfrom the previous two year carryback rule. As a result, the Company’s taxrefund claim of approximately $10 million at December 31, 2001 wasincreased to approximately $30 million. The additional refund amount of$20 million was received in January 2003.

 

During 1998, the Company completed a businesscombination which, for financial statement purposes, has been accounted for asa pooling-of-interests. For income tax purposes the Company believes thetransaction qualifies as a taxable purchase that gives rise to future taxdeductions. Upon the sale of the acquired business in 2001, these deductionswere recognized for tax purposes. The tax benefit of $19.6 millionrelating to the part of these deductions that was carried back to prior yearswas included in refundable income taxes in 2002. Since the tax structure of thetransaction is subject to determination by the tax authorities, the Company hasrecorded a reserve for the tax benefits resulting from the carryback and hasnot recorded deferred tax assets for the tax benefits being carried forward.When resolved, the Company will record a deferred tax asset for the part of thetax benefits being carried forward and a tax benefit for the portion that wascarried back, net of an appropriate valuation allowance. The tax benefit willbe reflected as an increase in additional paid-in capital. Any adjustments tothe valuation allowance will be charged or credited to income.

 

The Internal Revenue Service is currently examiningthe Company’s federal income tax returns for the years ended December 31,2001 and 2000, along with its federal refund claims for the calendar years 1996through 1999. The additional refund amount received in January 2003 isshown as a liability until the audit is completed.

 

**14.****                              ****Special Items**

 

During the second quarter of 2003, the Companyincurred special charges of $8.0 million consisting of $3.7 millionfor the separation package of the former CEO and $4.3 million pertainingto expenses related to the unilateral acquisition proposal and activities ofAquent. The separation package of the former CEO, included a $3.5 millionseverance payment and $200,000 in continued medical coverage. The $4.3 millionexpense related to the unilateral acquisition proposal and activities of AquentLLC was primarily attributable to approximately $2.3 million of legalfees, $1.0 million in financial advisor fees and $1.0 million ofproxy solicitation and other fees. As management considers these special itemsto be infrequent and material in nature, the Company has reported the expenseson a separate line for full disclosure purposes, however, the amounts arereported within operating income. The Company also incurred a restructuringexpense of $1.9 million relating primarily to the closing of facilities inCanada. In addition, the Company voluntarily terminated a sub-contract withATEB, a privately held company, for financial reasons and recorded a write-offof approximately

 

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$3.1 milliondue to the uncertainty of the realization of the receivable. ATEB was theprimary contractor to develop a new pharmacy system for Royal Ahold. TheCompany is continuing recovery efforts for this receivable.

 

**15.****                              ****Subsequent Events**

 

On July 8, 2003, the Company acquired all ofthe stock of privately-held RGII Technologies, Inc. (“RGII”). The purchaseprice included an up-front cash payment of approximately $19 millionincluding the $18 million purchase price and $913,000 working capitaladjustment. In addition, the seller may be entitled to contingent paymentsbased on RGII’s performance against profitability objectives over the nextthree years. The contingent payments are evidenced by a contingent note with aface value of $10 million that is payable over three years, only ifcertain financial performance objectives are met. These financial performanceobjectives are based on earnings before interest and taxes, (“EBIT”) targetstotaling $19.8 million over a three-year period. There are no minimum ormaximum payment obligations under the terms of the contingent note, whereby thecontingent payment will be reduced on a dollar for dollar basis for financialperformance below EBIT targets and increased by 29 cents ($0.29) for eachdollar exceeding EBIT targets. Additionally, the Company paid two note payablesof $1.5 million and $644,000 and a line of credit payment of$2.0 million. The Company also entered into employment agreements with theformer shareholder and key employees of RGII and have agreed to issue over athree-year period an aggregate of 600,000 options to purchase shares ofComputer Horizons stock. The Company is in process of finalizing the allocationof the purchase price to assets and liabilities acquired and has engagedvaluation consultants to assist in this process. Audited historical financialstatements of RGII together with applicable pro forma financial informationwill be filed with the SEC by mid-September 2003.

 

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

 

On April 15, 2003, the Company received anunsolicited proposal from Aquent, LLC, a privately held professional servicesfirm, to acquire all of the outstanding common stock of the Company for $5.00per share in cash, subject to a number of conditions. On May 2, 2003, theBoard of Directors announced that after a thorough review, the Aquent purportedoffer was inadequate and not in the best interest of all of its shareholders.

 

These matters are continuing and the ultimateoutcome is uncertain. For a more complete description of these activities,please see Part II, Item 1—Legal Proceedings of this Form 10-Qfiling.

 

**17.****                              ****Rescission Offer**

 

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

 

As a result the Company intends to make a rescissionoffer to all those persons who purchased shares of common stock pursuant to theEmployee Stock Purchase Plan during the affected periods. The rescission offerwill be made pursuant to a registration statement filed under the SecuritiesAct and pursuant to applicable state securities laws. In this rescission offer,the Company is offering to repurchase the shares subject to our rescissionoffer for the price paid per share plus interest from the date of purchaseuntil the rescission offer expires, at the current statutory rate per yearmandated by the state in which the shares were purchased. The rescission offerwill expire approximately 30 days after the effective date of theregistration statement. Assuming all of the shares subject to the rescissionoffer (approximately 659,000) are tendered in the rescission offer, theaggregate purchase price, excluding interest is estimated to be approximately$1.8 million. This contingency payment is considered remote by the Companyas the current price of the stock is above the price at which the shares wouldbe repurchased.

 

15

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**Item 2.**

 

**RESTATED****MANAGEMENT’SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**For thePeriods Ended June 30, 2003 and June 30, 2002**

 

**FORWARD-LOOKING STATEMENTS**

 

The following section should be read inconjunction with our consolidated financial statements and related notesappearing in this Form 10Q/A.  Statementsincluded in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations and elsewhere in this document that do not relate topresent or historical conditions are “forward-looking statements” within themeaning of that term in Section 27A of the Securities Act of 1933, asamended, and in Section 21F of the Securities Exchange Act of 1934, as amended.Additional oral or written forward-looking statements may be made by theCompany from time to time, and such statements may be included in documentsthat are filed with the Securities and Exchange Commission (SEC). Suchforward-looking statements involve risks and uncertainties that could causeresults or outcomes to differ materially from those expressed in suchforward-looking statements. Forward-looking statements may include, withoutlimitation, statements relating to the Company’s plans, strategies, objectives,expectations and intentions and are intended to be made pursuant to the safeharbor provisions of the Private Securities Litigation Reform Act of 1995.Words such as “believes,” “forecasts,” “intends,” “possible,” “expects,” “estimates,”“anticipates,” or “plans” and similar expressions are intended to identifyforward-looking statements. Among the important factors on which suchstatements are based are assumptions concerning the anticipated growth of theinformation technology industry, the continued need of current and prospectivecustomers for the Company’s services, the availability of qualifiedprofessional staff, and price and wage inflation.

 

TheManagement’s Discussion and Analysis of Financial Condition and Results of Operationsset forth in this Item 2 has been restated to reflect certain adjustments tothe Company’s consolidated financial statements for 2003 as previously reportedin the Company’s Form 10-Q for the quarters June 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.

 

Subsequentto the issuance of its financial statements for the year ended December 31,2003, and in connection with an internal review of accounting processes andprocedures conducted in the third quarter of 2004, the company discovered anerror pertaining to the incorrect adjustment of consulting costs relating tointercompany transactions between the Company and its Canadian subsidiary.  This error caused an understatement ofconsolidated consultant costs (i.e. direct costs) in the Company’s consolidatedincome statement and accrued payroll on the balance sheet.

 

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(dollars in thousands, 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 2004        |       | 2,159             |       | 1,255                  |       | (0.05              | )          | (0.02                        | )          |
| Total  Restatement Impact          |       | $                 | 5,555      |                   | $          | 3,462              |       | $                            | (0.12      | ) |   |   |
|                                    |            |                   |            |                        |            |                    |            |                              |            |  |  |  |  |

 

Aspart of management’s investigation of this accounting error, an extensivereview 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).  Thecumulative balance sheet adjustments for the affected dates are as follows (inthousands):

 
| **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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*Representscumulative effect of all previous quarterly periods deemed not material on anindividual quarter basis.

 

Inaddition, in the second quarter of 2003, the Company made a balance sheetcorrection resulting in an increase in shareholders’ equity and a decrease inaccrued payroll of $41,000.

 

Additionaldetail with respect to the impact of the restatement on the Company’s resultsof operations is reported in Note 2 of the notes to the Consolidated FinancialStatements included in Part I - Item 1 of this Amendment No. 2 of Form 10-Q/A.

 

**RESULTS OF OPERATIONS**

 

*Revenues.*    Revenues decreased to$58.8 million in the second quarter of 2003 from $77.3 million in thesecond quarter of 2002, a decrease of $18.5 million or 23.9%. Revenuesdecreased to $119.1 million in the first six months of 2003 from$156.5 million in the first six months of 2002, a decrease of$37.4 million or 23.9%.

 

Solutions Group revenues decreased to$18.7 million in the second quarter of 2003 from $19.5 million in thesecond quarter of 2002, a decrease of $800,000 or 4.1%. The decrease inSolutions Group revenues is the net result of a reduction in average bill ratesof approximately 18%, offset by an increase of 17% in consultant headcount.Solutions Group revenues decreased to $38.3 million in the first sixmonths of 2003 from $40.1 million in the first six months of 2002, adecrease of $1.8 million or 4.5%. The decrease in Solutions Group revenuesis primarily attributable to the revenue decline experienced by a business unitheld for sale, Princeton Softech, Inc., which was sold by the Company on March 25,2002. For the first six months of 2002, Princeton Softech, Inc. revenuestotaled $2.9 million, with a gross profit of $2.4 million, SG&Aexpenses of $4.3 million, totaling a $1.9 million operating loss.Solutions Group revenues, excluding the operations of the business units heldfor sale, increased by $1.1 million or 3.0% for the first six months of2003. This increase is attributable to a 17% increase in consultant headcount,offset by a 16% reduction in average bill rates.

 

IT Services revenues decreased to $35.3 millionin the second quarter of 2003 from $54.0 million in the second quarter of2002, a decrease of $18.7 million or 34.6%. IT Services revenues decreasedto $71.5 million in the first half of 2003 from $108.7 million in thefirst half of 2002, a decrease of $37.2 million or 34.2% which isattributable to the softness in the IT Staffing business. The decrease in ITServices revenue for the quarter and the first six months, is the result ofcontinued decreases in the demand for temporary technology workers, the trendof companies to outsource technology jobs offshore, the impact of pricingdecreases by customers and the lagging economy. For the first six months, ITServices consultant average headcount decreased by 22%, accounting forapproximately $24 million of the revenue decrease. The balance of thedecrease in revenue (approximately

 

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$13 million)is attributable to a reduction in average bill rates. The Company does notanticipate any growth during the remainder of 2003 in IT Services headcountlevels unless IT spending increases.

 

Chimes revenue increased to $4.8 million in thesecond quarter of 2003 from $3.8 million in the second quarter of 2002, anincrease of $1.0 million, or 26.3%. Chimes revenue, for the first six monthsof 2003, increased to $9.3 million from $7.7 million, an increase of$1.6 million or 20.8% for the comparable period of 2002. This increase inChimes revenue for the first six months of 2003, is primarily due to a decreasein revenue from existing customers (due to a decrease in managed spend) ofapproximately $600,000, offset by an increase of approximately$2.2 million in revenue from new customers in this segment.

 

*Direct Costs.*    Direct costsdecreased to $43.5 million and $86.3 million in the second quarterand first half of 2003, respectively, from $56.6 million and$114.8 million in the comparable periods of 2002. Gross margin, revenuesless direct costs, decreased to 26.1% in the second quarter of 2003 from 26.8%in the same period of 2002. Gross margin increased to 27.6% in the first sixmonths of 2003 from 26.7% in the same period of 2002.

 

Excluding the asset held for sale, PrincetonSoftech, Inc., in the first six months of 2002, direct costs decreased to$86.3 million in the first half of 2003 from $114.3 million in thesame period of 2002. Gross margin increased to 27.6% in the first six months of2003 from 25.2% in the comparable period of 2002.

 

The Company’s gross margin improvement is primarilyattributable to the change in the revenue mix among the Company’s businesssegments. Chimes and the Solutions Group are higher gross margin businessesthan the Company’s IT Services segment. For the first six months of 2003,Chimes and Solutions Group revenue totaled 40.0% of consolidated revenue,compared to 30.6% of consolidated revenue for the comparable period in 2002.

 

*Selling, General andAdministrative.*    Selling,general and administrative expenses increased to $30.6 million and$49.8 million in the second quarter and first half of 2003, respectively,from $22.5 million and $48.9 million in the comparable periods of2002. As a percentage of revenue, the Company’s SG&A expenses were 52.1%and 41.8% in the second quarter and first half of 2003, respectively; anincrease from 29.0% and 31.2% in the comparable periods of 2002. The increasein the second quarter of 2003 SG&A expenses included a special charge of$8.0 million, or 13.6% of revenue, consisting of $3.7 million for theseparation package of the former CEO and $4.3 million pertaining toexpenses related to the unilateral proposal and activities of Aquent, LLC,restructuring charges of $1.9 million, or 3.3% of revenue, for terminatedleases ($1.1 million), severance ($697,000) and general office closureexpense ($116,000) relating primarily to the closing of facilities in Canada.In addition, 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. This increase was partially offset by a decrease attributable tocost reductions in all segments, with approximately $735,000 from rent savingsand the balance primarily related to staff reduction and personnel costs. Theexpenses in the first half of 2003 included an additional restructure expenseof $249,000 in severance and the expenses in the first half of 2002 includedassets held for sale (Princeton Softech, Inc.) of $4.3 million, or7.3% of revenue.

 

*Loss from Operations.*    The Company’s lossfrom operations totaled $15.3 million in the second quarter of 2003, adecline of $13.6 million, from a loss of $1.7 million in the secondquarter of 2002. Operating margins were a loss of 26.0% in the second quarterof 2003 as compared to a loss of 2.2% in the second quarter of 2002. Thisincrease in the loss from operations in 2003 included a special charge of$8.0 million, or 13.6% of revenue, consisting of $3.7 million for theseparation package of the former CEO and $4.3 million pertaining toexpenses related to the unilateral proposal and activities of Aquent,

 

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restructuringcharges of $1.9 million, or 3.3% of revenue, relating primarily to theclosing of facilities in Canada and a special bad debt charge of approximately$3.1 million, or 5.2% of revenue, due to the write-off of a terminatedcontract with a customer for financial reasons. The composition of theoperating loss, excluding the special items in 2003, included a loss of$672,000 in IT Services, loss of $540,000 in the Solutions Group and a loss of$1.1 million in Chimes. This compares to the operating loss of$1.7 million in the second quarter of 2002, consisting of a loss of$215,000 in IT Services, profit of $1.0 million in the Solutions Group anda loss of $2.5 million in Chimes.

 

The Company’s loss from operations totaled$17.0 million in the first six months of 2003, a decline of$9.9 million, from a loss of $7.1 million in the comparable period of2002. The increase in the loss from operations in 2003 was due to a specialcharge of $8.0 million, or 6.7% of revenue, consisting of$3.7 million for the separation package of the former CEO and$4.3 million pertaining to expenses related to the unilateral proposal andactivities of Aquent, restructuring charges of $2.2 million, or 1.8% ofrevenue, relating primarily to the closing of facilities in Canada and aspecial bad debt charge of $3.1 million, or 2.6% 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 1.2% ofrevenue. The composition of the 2003 operating loss, excluding the specialitems noted above, included a loss of $1.9 million in IT Services, profitof $1.1 million in the Solutions Group and a loss of $3.0 million inChimes. This compares to the operating loss of $5.2 million in the firsthalf of 2002 (Excluding operations of Princeton Softech, Inc.), consistingof a loss of $1.4 million in IT Services, profit of $1.2 million inthe Solutions Group and a loss of $5.0 million in Chimes.

 

*Other Income/(Expense).*    Other income was$90,000 in the second quarter of 2003, compared to other income of $255,000 inthe comparable period of 2002. This decrease of other income during the secondquarter of 2003 was due to decreased interest income primarily resulting fromlower interest rates on cash investments. Other expense was $15,000 in thefirst six months of 2003, compared to other income of $3.8 million in thecomparable period of 2002. This difference was due to the gain on the sale ofPrinceton Softech in 2002 totaling $3.6 million, and a decrease ininterest income in 2003 of approximately $200,000 as a result of lower interestrates.

 

*Provision for Income Taxes.*    The effective tax ratesfor Federal, state and local income taxes were 29% for the second quarter andfirst six months of 2003 compared with 34% for the comparable periods of 2002.The decrease in the effective tax rates was primarily attributable to valuationallowances recorded for state and foreign net operating loss carryovers.

 

*Net Loss.*    Net loss for thesecond quarter of 2003 was $10.8 million, or $0.36 loss per diluted share,compared to net loss of $956,000, or $0.03 loss per diluted share for thesecond quarter of 2002, an increase of $9.8 million. The effect of specialcharges, restructuring charges and the write-off of a terminated projectamounted to $0.31 loss per share, net of taxes, in the second quarter of 2003.For the first half of 2003, the net loss was $12.1 million, or $0.40 lossper diluted share, compared to a net loss of $32.1 million, or $1.02 lossper diluted share for the first half of 2002. The net loss in the first half of2002 includes a charge for the cumulative effect of change in accountingprinciple of $29.9 million, or $0.95 per share, net of taxes, andoperations of assets held for sale and the gain on sale of assets whichamounted to $1.1 million, or $0.03 loss per share, net of taxes.

 

**Liquidity and Capital Resources**

 

At June 30, 2003, the Company had approximately$91 million in working capital, of which $71.1 million was cash andcash equivalents.

 

Net cash provided by operating activities in the firstsix months of 2003 was $11.2 million, consisting primarily of the taxrefund received.

 

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Net cash used in investing activities in the firstsix months of 2003 was $1.2 million, consisting primarily of capitalexpenditures and the purchase of Westfield-India.

 

Net cash used in financing activities in the firstsix months of 2003 was $190,000 primarily consisting of the repurchase oftreasury shares. In April of 2001, the Board of Directors approved therepurchase in the open market of up to 10% of its common shares outstanding, orapproximately 3.2 million shares. As of the filing of this report, theCompany had repurchased, in the open market, 3,114,900 shares of its stock atan average price of $3.47 per share for an aggregate purchase amount of$10.8 million. As of June 30, 2003, the remaining authorization forrepurchase is approximately 93,000 shares.

 

At June 30, 2003, the Company had a currentratio position of 3.2 to 1. The Company believes that its cash and cashequivalents, available borrowings and internally generated funds will besufficient to meet its working capital needs through the next year.

 

On July 31, 2001, amended February 14,2003, the Company entered into a secured asset-based lending facility thatreplaced its two unsecured discretionary lines of credit. This new line ofcredit is a three-year, $40 million facility with availability basedprimarily on eligible customer receivables. The interest rate for the firstninety days from closing was Prime plus 0.5%, thereafter the rate was LIBORplus 2.75% based on the unpaid principal. The borrowing base less outstandingloans must equal or exceed $17.5 million. At the time of closing there wasa $170,000 commitment fee paid to the agent. As of June 30, 2003, theCompany had no outstanding loan balance against the facility. Based on theCompany’s eligible customer receivables and cash balances, $15.9 millionwas available for borrowing as of June 30, 2003. The fee for the unusedportion of the line of credit is 0.375% per annum charged to the Companymonthly. This charge was approximately $62,000 and $68,000 for the six-monthperiods ended June 30, 2003 and 2002, respectively. This line of creditincludes covenants relating to the maintenance of cash balances and providingfor limitations on incurring obligations and spending limits on capitalexpenditures.

 

**Subsequent Events**

 

On July 8, 2003, the Company acquired all ofthe stock of privately-held RGII Technologies, Inc. (“RGII”). The purchaseprice included an up-front cash payment of approximately $19 millionincluding the $18 million purchase price and $913,000 working capitaladjustment. In addition, the seller may be entitled to contingent paymentsbased on RGII’s performance against profitability objectives over the nextthree years. The contingent payments are evidenced by a contingent note with aface value of $10 million that is payable over three years, only ifcertain financial performance objectives are met. These financial performanceobjectives are based on earnings before interest and taxes, (“EBIT”) targetstotaling $19.8 million over a three-year period. There are no minimum ormaximum payment obligations under the terms of the contingent note, whereby thecontingent payment will be reduced on a dollar for dollar basis for financialperformance below EBIT targets and increased by 29 cents ($0.29) for eachdollar exceeding EBIT targets. Additionally, the Company paid two note payablesof $1.5 million and $644,000 and a line of credit payment of$2.0 million. The Company also entered into employment agreements with theformer shareholder and employees of RGII and has agreed to issue over athree-year period an aggregate of 600,000 options to purchase shares ofComputer Horizons stock. The Company is in process of finalizing the allocationof the purchase price to assets and liabilities acquired and has engagedvaluation consultants to assist in this process. Audited historical financialstatements of RGII together with applicable pro forma financial informationwill be filed with the SEC by mid-September 2003.

 

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**Contractual Obligations and Commercial Commitments**

 

The Company does not utilize off balance sheetfinancing other than operating lease arrangements for office premises andrelated equipment. Leases are short term in nature and non-capital. Thefollowing table summarizes all commitments under contractual obligations as of June 30,2003:

 
| ** **              | ** ** | **Obligation Due**  | ** ** |
|-------------------------|------------|---------------------|------------|
| ** **              | ** ** | **Total Amount**    | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **Over 5 Years** | ** ** |
| ** **              | ** ** | **(in 000’s)** | ** ** |
| Operating  leases       |       | $                   | 10,663     |   | $ | 3,995 |   | $ | 5,481 |   | $ | 1,173 |   | $ | 14 |   |
| Other  long-term        |       | 5,993               |       | 942 |   | — |   | — |   | 5,051 |   |
| Total Cash  Obligations |       | $                   | 16,656     |   | $ | 4,937 |   | $ | 5,481 |   | $ | 1,173 |   | $ | 5,065 |   |

 

**Recent Accounting Pronouncements**

 

In June 2001, the Financial AccountingStandards Board approved the issuance of SFAS No. 141, “BusinessCombinations” and in July 2001, SFAS 142, “Goodwill and OtherIntangible Assets.” The new standards require that all business combinationsinitiated after June 30, 2001 must be accounted for under the purchasemethod. In addition, all intangible assets acquired that are obtained throughcontractual or legal right, or are capable of being separately sold,transferred, licensed, rented or exchanged shall be recognized as an assetapart from goodwill. Goodwill 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 this newregulation has discontinued the amortization of goodwill. For the effect ofthis statement on the Company see Note 3.

 

In November 2002, the EITF reached a consensuson Issue No. 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables.” This Issue provides guidance on when and how to separateelements of an arrangement that may involve the delivery or performance ofmultiple products, services and rights to use assets into separate units ofaccounting. The guidance in the consensus is effective for revenue arrangementsentered into in fiscal periods beginning after June 15, 2003. Thetransition provision allows either prospective application or a cumulativeeffect adjustment upon adoption. The Company is currently evaluating the impactof this statement to the Company.

 

In December 2002, the Financial AccountingStandards Board approved the issuance of SFAS No. 148, “Accounting forStock-Based Compensation—Translation and Disclosure.” This statement amendsFASB Statement No. 123, “Accounting for Stock-Based Compensation,” toprovide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition, this Statement amended the disclosure requirements of Statement 123to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the methods used on reported results. The Company adopted thedisclosure provisions as of December 31, 2002.

 

The exercise price per share on all options grantedmay not be less than the fair value at the date of the option grant. TheCompany applies Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” as modified by FIN 44, “Accounting for CertainTransactions Involving Stock Compensation,” in accounting for stock-basedemployee compensation, whereby no compensation cost had been recognized for theplans. The Company expects to continue following the guidance under APB 25 forstock based compensation to employees and has therefore included the disclosurerequirements of FASB 148 in the accompanying financial statements.

 

Effective on January 1, 2003 the Companyadopted Financial Accounting Standards Board No. 146, “Accounting for Exitor Disposal Activities,” (“SFAS 146”), which supersedes Emerging Issues

 

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TaskForce Issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” The new standards require that a liabilityfor a cost associated with an exit or disposal activity, including costsrelated to terminating a contract that is not a capital lease and thetermination benefits that employees who are involuntarily terminated receiveunder the terms of a one-time benefit arrangement that is not ongoing or anindividual deferred-compensation contract, be recognized when the liability isincurred. Previously, under Issue No. 94-3, a liability for an exit costwas recognized at the date of an entity’s commitment to an exit plan, which maynot necessarily meet the definition of a liability. SFAS 146 is effectivefor exit or disposal activities of the Company that are initiated after December 31,2002. The Company adopted SFAS 146 as of January 1, 2003 (SeeNote 6).

 

In January 2003, the FASB issued FinancialInterpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN46”), which addresses consolidation by business enterprises of variableinterest entities (VIEs). The accounting provisions and disclosure requirementsof FIN 46 are effective immediately for VIEs created after January 31,2003, and are effective for reporting periods beginning after June 15,2003, for VIEs created prior to February 1, 2003. The Company is currentlyevaluating the impact of this statement to the Company.

 

**Item 4.    Controls and Procedures**

 

 

DisclosureControls and Procedures

 

The Company maintains controls and proceduresdesigned to ensure that information required to be disclosed by us in thereports filed under the Securities Exchange Act of 1934, is recorded,processed, summarized and reported within the time periods specified by theSEC. Disclosure controls are also designed with the objective of ensuring thatthis information is accumulated and communicated to our management, includingour chief executive officer and chief financial officer, as appropriate toallow timely decisions regarding required disclosure.

 

On October 7, 2004, our audit committee wasadvised by management that, based on an internal review of accounting processesand procedures, management had discovered an accounting error pertaining to theincorrect adjustment of consulting costs relating to intercompany transactionsbetween the Company and its Canadian subsidiary.  This error caused an understatement ofconsolidated consultant costs (i.e. direct costs) in the Company’s consolidatedincome statement and an under accrual of consolidated accrued payroll on thebalance 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.

 

Aspart of management’s investigation of this accounting error, an extensivereview 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 the discovery of this error, on October 26,2004, management and the Audit Committee were informed by the Company’sindependent accountants of certain matters involving internal controls that theCompany’s auditors consider material weaknesses.  The first material weakness principallyfocused on the Company’s quarterly consolidation process, includingintercompany transactions relating to the Company’s Canadian subsidiary, whichwere incorrectly recorded over the five fiscal quarters ending June 30,2004.  This resulted in an understatementof consolidated consultant costs (direct cost) and an under accrual ofconsolidated accrued payroll in each period and for the year ended December 31,2003.  The second material weaknessprincipally focused on the fact that certain accounts were not properly reconciled,resulting in adjustments to accounts including accrued expenses and shareholders’equity (not affecting operating results) to be recorded on the consolidatedbalance sheet.

 

During management’s evaluation of internal controlsrelated to the previously noted accounting error, certain deficiencies wereidentified, including a complicated design of intercompany accounts whichincreased the potential for error, staff turnover in the accounting department,the incorrect recording of intercompany transactions by an accounting clerk andthe failure to detect these incorrect transactions during management’s reviewand approval process.

 

As a result of these deficiencies, the followingactions were taken, or will be taken, to prevent future reoccurrence:

 

•                  Managementwill implement an improved intercompany transaction process, including foreigncurrency translation and financial reporting/consolidation procedures, whichwill be documented, with all key controls identified.

•                  Allintercompany elimination entries will require two levels of approval(Accounting Manager and Controller), as opposed to the previous one level ofapproval.

•                  Monthly,the Corporate Controller will review and approve all intercompany eliminationentries to ensure amounts are properly recorded.

•                  Canadianintercompany accounts, which currently record all receivable and payableactivity in the same balance sheet account, will be divided into twointercompany accounts – one to record only intercompany invoicing transactions,one to record other (funding) transactions. This will allow better tracking of intercompany transactions and moreeasily highlight incorrect entries, if any.

•                  Amore detailed review of gross margins by line of business will be completed bythe Controller (and reviewed by the CFO) on a quarterly basis.

•                  Additionaltraining (internal and external) will be provided to all General Accountingpersonnel with an emphasis on Consolidation accounting.

•                  InternalAudit will conduct a review of intercompany transactions and the consolidationprocess during the fourth quarter of 2004 to ensure that newly designedcontrols are functioning properly.

 

Managementand the Audit Committee intend to closely monitor the implementation of theremediation actions noted above and are prepared to take additional measureswhere necessary to strengthen internal controls and procedures to meet theinternal control reporting requirements of Section 404 of theSarbanes-Oxley Act and the rules adopted thereunder.  Other than the foregoing initiatives, sincethe date of management’s evaluation, there have been no material changes in ourdisclosure controls and procedures, including our internal controls overfinancial reporting, which have materially affected, or are reasonably likelyto materially affect, our disclosure controls and procedures, including ourinternal controls over financial reporting.

 

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**PART II****    Other Information**

 

**Item1.    Legal Proceedings**

 

On April 29, 2003, the Company filed an actionin the United States District Court for the District of New Jersey (the “NewJersey action”) against Aquent LLC, seeking (i) to enjoin Aquent fromdisseminating false and misleading proxy materials and press releases insupport of its two nominees for director positions in connection with theCompany’s May 14, 2003 Annual Meeting; (ii) to invalidate any proxiessecured by Aquent 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 CHCshareholders how Aquent’s solicitations had violated the securities laws. Thecourt held that Aquent’s proxy materials contained statements that werematerial and misleading. However, the court did not invalidate any proxies andpermitted Aquent to disseminate a supplement with new text along with the oldproxy materials, which contained the misleading statements. On May 30,2003, the Company filed a Notice of Appeal to the United States Court ofAppeals for the Third Circuit, contending, among other things, that thecorrective disclosure ordered by the United States District Court wasinadequate and not in compliance with federal securities laws.

 

On May 27, 2003, the Company brought an actionin the Supreme Court of the State of New York, New York County (the “New Yorkaction”), seeking an order invalidating votes for directors Karl Meyer andRobert Trevisani cast at the Annual Meeting by stockholders of record who soldtheir shares between the record date and the date of the Annual Meeting. Thecourt in the New York action denied temporary restraints but on June 11,2003, deferred ruling on the Company’s application for preliminary injunctiverelief pending discovery and trial.

 

On or about June 2, 2003, Aquent filed acounterclaim in the New Jersey action against the Company and William J.Murphy, the Company’s President and Chief Executive Officer, alleging breachesof fiduciary duty and seeking to enjoin the Company from delaying thecontinuation of the Annual Meeting—at which the certified election resultswould be accepted—or otherwise interfering with the seating of the newlyelected directors. Aquent also sought attorneys’ fees and costs. On or about June 20,2003, Aquent filed an amended counterclaim in the New Jersey action, allegingbreach of the duty of care and the duty of loyalty, waste of corporate assets,and violation of the proxy rules under Section 14(a) of the SecuritiesExchange Act of 1934 and seeks attorneys’ fees and costs. The Company has filedan answer denying Aquent’s allegations.

 

On or about July 15, 2003, Aquent filed anOrder to Show Cause in the New Jersey action, challenging an amendment to theCompany’s by-laws the Board of Directors adopted on June 30, 2003. Theby-law amendment specifies (a) that any request for a special meeting ofshareholders must set a date for the meeting not fewer than seventy-five(75) nor more than ninety (90) days after the date on which therequest is received; (b) that any such request shall be ineffective, andany special meeting cancelled, if the shareholder(s) who sign the requestis/are not the holder(s) of the beneficial interest of 10% or more of theCompany’s issued and outstanding shares on each of the following dates: thedate such request is mailed; the record date for the meeting (to be fixed bythe Board within five business days after the receipt of the request); and thedate of the meeting; and (c) that any such request for a special meetingshall be or become ineffective, and any meeting called or noticed pursuantthereto shall be cancelled, if such request or any solicitation therefore isnot made in compliance with applicable law. The court took testimony in the NewJersey action on August 7, 2003 and has directed the parties to submitadditional briefs on the issues.

 

**Item 4.    Submission of Matters to aVote of Security Holders**

 

On May 14, 2003, the Company held its AnnualMeeting of Stockholders.

 

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(1)

The following directors were elected to serve on theCompany’s Board of Directors.

 

| ** **           | ** ** | **For**    | ** ** | **Withhold** | ** ** |
|----------------------|------------|------------|------------|--------------|------------|
| William J.  Murphy   |       | 18,227,321 |       | 279,928      |       |
| William M.  Duncan   |       | 17,944,557 |       | 673,379      |       |
| Earl L.  Mason       |       | 17,883,186 |       | 734,750      |       |
| William J.  Marino   |       | 17,707,502 |       | 910,434      |       |
| Karl L.  Meyer       |       | 9,159,186  |       | 40,698       |       |
| Robert A.  Trevisani |       | 9,159,186  |       | 40,698       |       |

 

(2)

The appointment of Grant Thornton LLP as independentauditors of the Company for fiscal year 2003 was ratified.

 

| For:     |   | 9,203,247 |   |
|----------|--------|-----------|--------|
| Against: |   | 273,664   |   |
| Abstain: |   | 52,671    |   |

 

(3)

The Company’s 1991 Director’s Stock Option Plan wasamended to extend the term of the plan to March 4, 2007.

 

| For:     |   | 8,544,720 |   |
|----------|--------|-----------|--------|
| Against: |   | 928,617   |   |
| Abstain: |   | 56,245    |   |

(4)

The issuance of 903,404 shares of the Company’scommon stock previously issued under the Company’s Employee Stock Purchase Planwas ratified and the Company’s Employee Stock Purchase Plan was amended toreserve an additional 3,500,000 shares (inclusive of the 903,404 shares) of theCompany’s common stock under such Employee Stock Purchase Plan.

 

| For:     |   | 8,674,014 |   |
|----------|--------|-----------|--------|
| Against: |   | 772,096   |   |
| Abstain: |   | 83,472    |   |

 

(5)

The Company’s By-Laws were amended to authorizespecial meetings to be called by persons who own, individually or in theaggregate, 10% or more of the Company’s outstanding common stock.

 

 

| For:     |   | 13,050,936 |   |
|----------|--------|------------|--------|
| Against: |   | 4,501,170  |   |
| Abstain: |   | 73,443     |   |

 

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**Item 6.    Exhibits and Reports onForm 8-K**

a)

Exhibits

 
| 31.1 |   | — |   | CEO Certification required by Rule 13a-14(a)/15d-14(a) under the  Securities Exchange Act of 1934.                                            |
|------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | — |   | CFO Certification required by Rule 13a-14(a)/15d-14(a) under the  Securities Exchange Act of 1934.                                            |
| 32.1 |   | — |   | CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes — Oxley Act of 2002. |
| 32.2 |   | — |   | CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes — Oxley Act of 2002. |

 

b)

Reports on Form 8-K

 

A report on Form 8-K was filed on June 30,2003, reporting that on June 30, 2003 the Board of Directors of ComputerHorizons Corp. approved the addition of Article I, Section 3A as anamendment to the Company’s By-Laws.

 

A report on Form 8-K was filed on June 4,2003, reporting the issuance of a press release stating that it reconvened itsannual meeting and seated a slate of six directors, consisting of fourincumbent directors and two directors proposed by a dissident shareholder. TheCompany also announced that it was moving ahead on legal proceedingschallenging the outcome of the annual meeting vote and that the shareholdershad approved an amendment to its by-laws so as to permit shareholders holding10% or more of the Company’s independent auditors; approved an amendment to theCompany’s 1991 Directors Stock Option Plan; ratified the issuance of 903,404Company shares under the Company’s Employee Stock Purchase Plan and approved afurther amendment thereto to reserve an additional 3,500,000 shares (inclusiveof the 903,404 shares).

 

A report on Form 8-K was filed on April 30,2003, reporting the issuance of a press release reporting the financial resultsof Computer Horizons for its first fiscal quarter.

 

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**Signatures**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly 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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