**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

** **

**Washington, D.C. 20549**

** **

----

** **

| ** ** | **FORM  10-Q** | *** *** |
|------------|----------------|--------------|

** **

**ý****        Quarterly Report UnderSection 13 or 15(d)**

**of the Securities Exchange Act of1934**

** **

**for the quarterly period ended September 30,2005**

** **

**or**

** **

**o****        Transition Report pursuantto Section 13 or 15(d)**

**of the Securities Exchange Act of1934**

** **

**for the transition period from           to            **

** **

----

** **

**Commission File Number 0-7282**

** **

**COMPUTER HORIZONS CORP.**

(Exact name of registrantas specified in its charter)

 

| **New  York**                                                                                                                            | **13-2638902**         |
|------------------------------------------------------------------------------------------------------------------------------------------|------------------------|
| (State or other  jurisdiction of                                                                                                         | (I.R.S. Employer       |
| incorporation or  organization)                                                                                                          | Identification Number) |
|                                                                                                                                     |                   |
|                                                                                                                                     |                   |
| **49 Old  Bloomfield Avenue, Mountain Lakes, New Jersey 07046-1495**                                                                     |
| (Address of principal  executive offices)              (Zip  code) |

 

Registrant’s telephonenumber, including area code   **(973) 299-4000**

**Not Applicable**

(Former name, formeraddress and former fiscal year, if

changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding twelve months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.

 

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

 

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

 

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

 

                Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

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

 

                As of November 7,2005 the issuer had 31,632,236 shares of common stock outstanding.

 

 

#####  

----

 

**COMPUTER HORIZONS CORP. ANDSUBSIDIARIES**

 

Index

 
| Part I  | Financial  Information |                                                                                                                                |
|---------|------------------------|-------------------------------------------------------------------------------------------------------------------------------------|
|    |                   |                                                                                                                                |   |
| Item 1  |                   | Financial Statements:                                                                                                               |   |
|    |                   |                                                                                                                                |   |
|    |                   | Consolidated Balance Sheets September 30,  2005 (unaudited) and December 31, 2004                                         |   |
|    |                   |                                                                                                                                |   |
|    |                   | Consolidated Statements of  Operations Three and Nine Months Ended September 30, 2005 and September 30,  2004 (unaudited) |   |
|    |                   |                                                                                                                                |   |
|    |                   | Consolidated Statements of  Cash Flows Nine Months Ended September 30, 2005 and September 30,  2004 (unaudited)           |   |
|    |                   |                                                                                                                                |   |
|    |                   | Notes to Consolidated  Financial Statements                                                                                         |   |
|    |                   |                                                                                                                                |   |
| Item 2  |                   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                         |   |
|    |                   |                                                                                                                                |   |
| Item 4  |                   | Controls and Procedures                                                                                                             |   |
|    |                   |                                                                                                                                |   |
| Part II | Other  Information     |                                                                                                                                |
|    |                   |                                                                                                                                |   |
| Item  4 |                   | Submission  of Matters to a Vote of Security Holders                                                                                |   |
|    |                   |                                                                                                                                |   |
| Item 6  |                   | Exhibits                                                                                                                            |   |
|    |                   |                                                                                                                                |   |
|    |                   | Signatures                                                                                                                          |   |

 

 

2

----

 

PART I.   FinancialInformation

 

Item 1.

 

**COMPUTER HORIZONS CORP. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

(dollars in thousands)

 
| ** **                                                                                                                                                                     | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **(unaudited)**             | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                                                                     |       |                        |       |                       |       |
| CURRENT ASSETS:                                                                                                                                                                |       |                        |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                     |       | $                           | 43,777     |                       | $          | 33,649 |   |
| Accounts  receivable, less allowance for doubtful accounts of $3,741 and $5,914 at September 30,  2005 and December 31, 2004, respectively                           |       | 54,553                      |       | 51,322                     |       |
| Deferred income  taxes                                                                                                                                                         |       | 603                         |       | 1,868                      |       |
| Refundable  income taxes                                                                                                                                                       |       | 6,105                       |       | 4,088                      |       |
| Other  receivables                                                                                                                                                             |       | 239                         |       | 1,443                      |       |
| Prepaid expenses  and other                                                                                                                                                    |       | 2,924                       |       | 4,107                      |       |
| TOTAL CURRENT  ASSETS                                                                                                                                                          |       | 108,201                     |       | 96,477                     |       |
|                                                                                                                                                                           |       |                        |       |                       |       |
| PROPERTY AND  EQUIPMENT                                                                                                                                                        |       | 45,141                      |       | 42,810                     |       |
| Less accumulated  depreciation                                                                                                                                                 |       | (39,767                     | )          | (36,815                    | )          |
| TOTAL PROPERTY  AND EQUIPMENT, NET                                                                                                                                             |       | 5,374                       |       | 5,995                      |       |
| OTHER ASSETS -  NET:                                                                                                                                                           |       |                        |       |                       |       |
| Goodwill                                                                                                                                                                       |       | 27,625                      |       | 27,625                     |       |
| Intangibles                                                                                                                                                                    |       | 2,170                       |       | 3,253                      |       |
| Deferred income  taxes                                                                                                                                                         |       | 18,862                      |       | 17,698                     |       |
| Other                                                                                                                                                                          |       | 8,449                       |       | 8,036                      |       |
| TOTAL OTHER  ASSETS                                                                                                                                                            |       | 57,106                      |       | 56,612                     |       |
|                                                                                                                                                                           |       |                        |       |                       |       |
| TOTAL ASSETS                                                                                                                                                                   |       | $                           | 170,681    |                       | $          | 159,084 |   |
|                                                                                                                                                                           |       |                        |       |                       |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                 |       |                        |       |                       |       |
| CURRENT  LIABILITIES:                                                                                                                                                          |       |                        |       |                       |       |
| Accounts payable                                                                                                                                                               |       | $                           | 27,092     |                       | $          | 7,615 |   |
| Accrued payroll,  payroll taxes and benefits                                                                                                                                   |       | 10,452                      |       | 8,489                      |       |
| Income taxes  payable                                                                                                                                                          |       | 1,623                       |       | 1,377                      |       |
| Restructuring  reserve                                                                                                                                                         |       | 1,271                       |       | 3,351                      |       |
| RGII contingency  payment                                                                                                                                                      |       | —                      |       | 1,851                      |       |
| Other accrued  expenses                                                                                                                                                        |       | 3,717                       |       | 4,912                      |       |
| TOTAL CURRENT  LIABILITIES                                                                                                                                                     |       | 44,155                      |       | 27,595                     |       |
|                                                                                                                                                                           |       |                        |       |                       |       |
| OTHER  LIABILITIES:                                                                                                                                                            |       |                        |       |                       |       |
| Deferred  compensation                                                                                                                                                         |       | 2,733                       |       | 2,633                      |       |
| Supplemental  executive retirement plan                                                                                                                                        |       | 2,240                       |       | 2,162                      |       |
| Other                                                                                                                                                                          |       | 917                         |       | 913                        |       |
| TOTAL  LIABILITIES                                                                                                                                                             |       | 50,045                      |       | 33,303                     |       |
|                                                                                                                                                                           |       |                        |       |                       |       |
| 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 33,158,105 and 33,153,805  shares at September 30, 2005 and December 31, 2004, respectively |       | 3,315                       |       | 3,315                      |       |
| Additional paid  in capital                                                                                                                                                    |       | 150,883                     |       | 151,281                    |       |
| Accumulated  other comprehensive loss                                                                                                                                          |       | (1,900                      | )          | (2,200                     | )          |
| Accumulated  deficit                                                                                                                                                           |       | (21,038                     | )          | (14,072                    | )          |
|                                                                                                                                                                           |       | 131,260                     |       | 138,324                    |       |
| Less shares held  in treasury, at cost; 1,589,754 and 2,060,011 shares at September 30,  2005 and December 31, 2004, respectively                                    |       | (10,624                     | )          | (12,543                    | )          |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                                                                                               |       | 120,636                     |       | 125,781                    |       |
|                                                                                                                                                                           |       |                        |       |                       |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                               |       | $                           | 170,681    |                       | $          | 159,084 |   |
|                                                                                                                                                                           |       |                        |       |                       |       |

 

The accompanying notes are an integral part of these statements.

 

 

3

----

 

**COMPUTER HORIZONS CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

(Unaudited)

(dollars in thousands, except per share data)

 

| ** **                                                         | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                         | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
| ** **                                                         | ** ** | ** **                  | ** ** | **% of revenue**            | ** ** | ** ** | ** ** | **% of revenue** | ** ** | ** ** | ** ** | **% of revenue** | ** ** | ** ** | ** ** | **% of revenue** | ** ** |
| REVENUES:                                                          |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                                         |       | $                           | 49,183     |                        | 73.0       | % | $ | 50,128 |   | 72.2 | % | $ | 148,504 |   | 73.1 | % | $ | 140,917 |   | 72.3 | % |
| Federal                                                            |       | 10,862                      |       | 16.1                        | %          | 13,267 |   | 19.1 | % | 33,805 |   | 16.7 | % | 36,692 |   | 18.8 | % |
| Chimes                                                             |       | 7,372                       |       | 10.9                        | %          | 6,002 |   | 8.7 | % | 20,747 |   | 10.2 | % | 17,284 |   | 8.9 | % |
| Total                                                              |       | 67,417                      |       | 100.0                       | %          | 69,397 |   | 100.0 | % | 203,056 |   | 100.0 | % | 194,893 |   | 100.0 | % |
|                                                               |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| COSTS AND  EXPENSES:                                               |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Direct costs                                                       |       | 45,639                      |       | 67.7                        | %          | 47,880 |   | 69.0 | % | 138,990 |   | 68.4 | % | 133,192 |   | 68.4 | % |
| Selling, general  & administrative                             |       | 22,983                      |       | 34.1                        | %          | 21,851 |   | 31.5 | % | 65,168 |   | 32.1 | % | 62,993 |   | 32.3 | % |
| Amortization of  intangibles                                       |       | 233                         |       | 0.4                         | %          | 484 |   | 0.7 | % | 847 |   | 0.4 | % | 1,212 |   | 0.6 | % |
| Restructuring  charges                                             |       | 574                         |       | 0.9                         | %          | — |   | — |   | 716 |   | 0.4 | % | — |   | — |   |
| Special charges /  (credits)                                       |       | 5,424                       |       | 8.0                         | %          | — |   | — |   | 4,492 |   | 2.2 | % | (939 | ) | -0.5 | % |
|                                                               |       | 74,853                      |       | 111.1                       | %          | 70,215 |   | 101.2 | % | 210,213 |   | 103.5 | % | 196,458 |   | 100.8 | % |
|                                                               |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INCOME/(LOSS)  FROM OPERATIONS                                     |       | (7,436                      | )          | -11.1                       | %          | (818 | ) | -1.2 | % | (7,157 | ) | -3.5 | % | (1,565 | ) | -0.8 | % |
|                                                               |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| OTHER  INCOME/(EXPENSE):                                           |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                                    |       | 263                         |       | 0.4                         | %          | 93 |   | 0.1 | % | 577 |   | 0.3 | % | 233 |   | 0.1 | % |
| Interest expense                                                   |       | (5                          | )          | 0.0                         | %          | — |   | — |   | (24 | ) | 0.0 | % | (28 | ) | 0.0 | % |
|                                                               |       | 258                         |       | 0.4                         | %          | 93 |   | 0.1 | % | 553 |   | 0.3 | % | 205 |   | 0.1 | % |
|                                                               |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INCOME/(LOSS)  BEFORE INCOME TAXES                                 |       | (7,178                      | )          | -10.7                       | %          | (725 | ) | -1.1 | % | (6,604 | ) | -3.2 | % | (1,360 | ) | -0.7 | % |
|                                                               |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INCOME  (TAXES)/BENEFIT:                                           |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current                                                            |       | (137                        | )          | -0.2                        | %          | (76 | ) | -0.1 | % | (260 | ) | -0.1 | % | (387 | ) | -0.2 | % |
| Deferred                                                           |       | (23                         | )          | 0.0                         | %          | 399 |   | 0.6 | % | (100 | ) | -0.1 | % | 867 |   | 0.4 | % |
|                                                               |       | (160                        | )          | -0.2                        | %          | 323 |   | 0.5 | % | (360 | ) | -0.2 | % | 480 |   | 0.2 | % |
|                                                               |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INCOME/(LOSS)  BEFORE MINORITY INTEREST                            |       | (7,338                      | )          | -10.9                       | %          | (402 | ) | -0.6 | % | (6,964 | ) | -3.4 | % | (880 | ) | -0.5 | % |
|                                                               |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Minority Interest                                                  |       | —                      |       | —                      |       | (58 | ) | -0.1 | % | — |   | — |   | (22 | ) | 0.0 | % |
|                                                               |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NET INCOME/(LOSS)                                                  |       | $                           | (7,338     | )                           | -10.9      | % | $ | (460 | ) | -0.7 | % | $ | (6,964 | ) | -3.4 | % | $ | (902 | ) | -0.5 | % |
|                                                               |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| LOSS PER SHARE -  BASIC AND DILUTED:                               |       | $                           | (0.23      | )                           |       |   | $ | (0.01 | ) |   |   | $ | (0.22 | ) |   |   | $ | (0.03 | ) |   |   |
|                                                               |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED |       | 31,375,000                  |       |                        |       | 30,931,000 |   |   |   | 31,280,000 |   |   |   | 30,806,000 |   |   |   |
|                                                               |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |

 

The accompanying notes are an integral part of these statements.

 

4

----

 

**COMPUTER HORIZONS CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

(Unaudited)

(dollars in thousands)

 
| ** **                                                                                           | ** ** | **Nine Months Ended**       | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                           | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
|                                                                                                 |       |                        |       |   |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                            |       |                        |       |   |   |
| Net income/(loss)                                                                                    |       | $                           | (6,964     | ) | $ | (902 | ) |
| Adjustments to  reconcile net income/(loss) to net cash provided by/(used in) operating  activities: |       |                        |       |   |   |
| Deferred taxes                                                                                       |       | 101                         |       | (867 | ) |
| Depreciation                                                                                         |       | 2,901                       |       | 3,709 |   |
| Amortization of  intangibles                                                                         |       | 847                         |       | 1,212 |   |
| Provision for  bad debts                                                                             |       | 458                         |       | 982 |   |
| Gain on sale of  assets                                                                              |       | (327                        | )          | — |   |
|                                                                                                 |       |                        |       |   |   |
| Changes in  assets and liabilities, net of acquisitions:                                             |       |                        |       |   |   |
| Accounts  receivable                                                                                 |       | (3,689                      | )          | (4,470 | ) |
| Other  receivables                                                                                   |       | 1,204                       |       | (331 | )  |
| Prepaid expenses  and other current assets                                                           |       | 1,182                       |       | 848 |   |
| Other assets                                                                                         |       | (412                        | )          | (499 | ) |
| Refundable  income taxes                                                                             |       | (2,017                      | )          | (3,534 | ) |
| Accrued payroll,  payroll taxes and benefits                                                         |       | 1,963                       |       | 997 |   |
| Accounts payable                                                                                     |       | 19,477                      |       | 169 |   |
| Income taxes  payable                                                                                |       | 246                         |       | 2,154 |   |
| RGII contingency  payment                                                                            |       | (1,851                      | )          | (631 | )  |
| Other accrued  expenses and restructuring reserve                                                    |       | (3,192                      | )          | (3,186 | ) |
| Deferred  compensation                                                                               |       | 100                         |       | 428 |   |
| Supplemental  executive retirement plan                                                              |       | 78                          |       | 360 |   |
| Other  liabilities                                                                                   |       | 3                           |       | 304 |   |
|                                                                                                 |       |                        |       |   |   |
| **NET  CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES**                                             |       | 10,108                      |       | (3,257 | ) |
|                                                                                                 |       |                        |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                            |       |                        |       |   |   |
| Proceeds from  sale of assets                                                                        |       | 564                         |       | — |   |
| Purchases of  furniture and equipment                                                                |       | (2,279                      | )          | (1,352 | ) |
| Acquisitions,  net of cash acquired                                                                  |       | —                      |       | (14,710 | ) |
| **NET  CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES**                                             |       | (1,715                      | )          | (16,062 | ) |
|                                                                                                 |       |                        |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                            |       |                        |       |   |   |
| Stock options  exercised                                                                             |       | 1,001                       |       | 619 |   |
| Stock issued on employee  stock purchase plan                                                        |       | 518                         |       | 301 |   |
| **NET  CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES**                                             |       | 1,519                       |       | 920 |   |
|                                                                                                 |       |                        |       |   |   |
| Foreign currency  gains/(losses)                                                                     |       | 216                         |       | 32 |   |
|                                                                                                 |       |                        |       |   |   |
| **NET  INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS**                                            |       | 10,128                      |       | (18,367 | ) |
| ** **                                                                                           |       |                        |       |   |   |
| **CASH  AND CASH EQUIVALENTS AT BEGINNING OF YEAR**                                                  |       | 33,649                      |       | 52,610 |   |
| ** **                                                                                           |       |                        |       |   |   |
| **CASH  AND CASH EQUIVALENTS AT END OF PERIOD**                                                      |       | $                           | 43,777     |   | $ | 34,243 |   |
|                                                                                                 |       |                        |       |   |   |

Non CashActivities:

 

During the firstquarter of 2004, the Company recorded a reduction in tax benefit

reserves and anincrease in additional paid-in capital of $19.9 million.

 

 

The accompanying notes are an integral part of these statements.

 

5

----

 

**COMPUTER HORIZONS CORP.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

For the Periods Ended September 30,2005 and September 30, 2004

(unaudited)

 

**1.       Basis of Presentation**

 

The consolidated balance sheet as of September 30, 2005, theconsolidated statements of operations for the three and nine months ended September 30,2005 and September 30, 2004, respectively, and the statement of cash flowsfor the nine months ended September 30, 2005 and 2004 have been preparedby 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 September 30,2005 (and for all periods presented) have been made.

 

Certain information and note disclosures, normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America, which are not required forinterim purpose, have been condensed or omitted.  It is suggested thatthese consolidated financial statements be read in conjunction with thefinancial statements and notes thereto included in the Annual Report on Form10-K for the year ended December 31, 2004 filed by the Company.  Theresults of operations for the periods ended September 30, 2005 and 2004are not necessarily indicative of the operating results for the respective fullyears.

 

Certain reclassifications have been made to the 2004 financialstatements to conform to the 2005 presentation.

 

**2.       Recent Accounting Pronouncements**

 

In March 2004, the Financial Accounting Standards Board (FASB)Emerging Issues Task Force (EITF) released Issue No. 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments”(EITF 03-1).  EITF 03-1 provides guidance for determining whetherimpairment for certain debt and equity investments is other-than-temporary andthe measurement of an impaired loss. The recognition and measurementrequirements of EITF 03-1 were initially effective for reporting periodsbeginning after June 15, 2004. In September 2004, the FASB Staffissued FASB Staff Position (FSP) EITF 03-1-1 that delayed the effective datefor certain measurement and recognition guidance contained in EITF 03-1. TheFSP requires that entities continue to apply previously existing “other-than-temporary”guidance until a final consensus is reached. Management does not anticipatethat issuance of a final consensus will materially impact the Company’sfinancial condition or results of operations.

 

In December 2004, the FASB issued Statement of Financial AccountingStandard No. 123 (revised 2004), “Share-Based Payment” (FAS 123R). FAS 123R requires that compensation cost be recognized for new awards of equityinstruments and unvested awards on the adoption date.  The SEC amended theeffective dates of FAS 123R for public companies in April 2005, whichallows registrants to implement FAS 123R at the beginning of their next fiscalyear, instead of the next interim period, that begins after June 15,2005.  The SEC also issued Staff Accounting Bulletin 107, “Share-BasedPayment” (SAB 107), in April 2005, which provides the views of the SECstaff regarding certain aspects of the application of FAS 123R.  SAB 107assists issuers in their initial implementation of FAS 123R and indicates thatthe staff’s understanding that, particularly in the period of initialimplementation, issuers may reasonably arrive at different estimates and optionvaluations in applying FAS 123R.  We expect the adoption of this statementwill have a material effect on the Company’s financial statements, but wecannot reasonably estimate the impact of the adoption because certainassumptions used in the calculation of the value of share-based payments maychange in 2005.

 

In December 2004, the FASB issued Statement of FinancialAccounting Standard No. 153, “Exchanges of Nonmonetary Assets” (FAS 153) - an amendmentof Accounting Principles Board Opinion No. 29 (Opinion 29).  Theguidance in Opinion 29, “Accounting for Nonmonetary Transactions” is based onthe underlying principle that the measurement of exchanges of nonmonetaryassets should be based on the fair value of the assets exchanged. However, Opinion 29 included certain exceptions to that principle, including arequirement that exchanges of similar productive assets should be recorded atthe carrying amount of the asset relinquished.  FAS153 eliminates thatexception and replaces it with a general exception for exchanges of nonmonetaryassets that lack commercial substance.  Only nonmonetary exchanges inwhich an entity’s future cash flows are expected to significantly change as aresult of the exchange will be considered to have commercial substance. FAS 153 must be applied to nonmonetary asset exchanges occurring in fiscalperiods beginning after June 15, 2005.  The adoption of this statementdid not have a material impact on the Company’s financial statements.

 

In May 2005, the FASB issued Statement of Financial Accounting StandardNo. 154, “Accounting Changes and Error Corrections” (FAS 154) , which changesthe accounting and reporting requirements for the change in an accountingprinciple.  Accounting Principles Board Opinion 20, “Accounting Changes”(Opinion 20), which is superseded by FAS 154, required that most voluntarychanges in accounting principle be recognized by including the cumulativeeffect of changing to the new accounting principle as a component of net incomein the period of the change.  FAS 154 instead requires retrospectiveapplication to prior periods’ financial statements of changes in an accountingprinciple, unless it is impracticable to do so.  FAS 154 differentiatesbetween “retrospective application” and “restatement”.   “Retrospectiveapplication” is defined as the application of a different accounting principleto prior accounting periods as if that principle had always been used or as theadjustment of previously issued financial statements to reflect a change in thereporting entity.  In contrast, restatement is defined as the revising ofpreviously issued financial statements to reflect the correction of an error. If it is impracticable to determine the period-specific effects of anaccounting change on one or more individual prior periods presented, but thecumulative effect to all prior periods can be determined, the new accountingprinciple should be applied to assets and liabilities balances as of thebeginning 

 

6

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of the earliest period for which retrospective application ispracticable.  In addition, a corresponding adjustment should be made tothe opening balance of retained earnings (or other appropriate components ofequity or net assets in the statement of financial position) for that periodrather than being reported in an income statement.  If it is impracticableto determine the cumulative effect of applying a change in accounting principleto any prior period, the new accounting principle should be applied as if itwere adopted prospectively from the earliest date practicable.  FAS 154also requires retrospective application to changes required by a new accountingpronouncement in the unusual instance that the pronouncement does not includespecific transition provisions.  If a pronouncement includes specifictransition provisions, those provisions should be followed.  FAS 154limits the retrospective application of a change in accounting principle to thedirect effects of the change.  Indirect effects of a change in accountingprinciple, such as a change in nondiscretionary profit-sharing paymentsresulting from an accounting change, should be recognized in the period of thechange.  FAS 154 also requires that a change in depreciation,amortization, or depletion method for long-lived, nonfinancial assets beaccounted for as a change in accounting estimate effected by a change inaccounting principle.  The guidance contained in Opinion 20 for reportingthe corrections of errors in previously issued financial statements, andchanges in accounting estimates is carried forward to FAS 154 without change. Additionally, FAS 154 carries forward the guidance in Opinion 20 requiringjustification of a change in accounting principle on the basis ofpreferability.  FAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005.  The Company does not anticipate that the adoption of this statementwill have a material impact on the Company’s financial statements.

 

 

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

 

In December 2002, the FASB approved the issuance of Statement ofFinancial Accounting Standard No. 148, “Accounting for Stock-BasedCompensation – Translation and Disclosure” (FAS 148).  This statementamends Statement of Financial Accounting Standard No. 123, “Accounting forStock-Based Compensation,” to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation.  In addition, this FAS 148 amended the disclosurerequirements of FAS 123 to require prominent disclosures in both annual andinterim financial statements about the method of accounting for stock-basedcompensation and the effect of the methods used on reported results. TheCompany adopted disclosure provisions as of December 31, 2002.

 

The exercise price per share on all options granted may not be lessthan the fair value at the date of the option grant.  The Company appliesAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (APB 25), as modified by FASB Interpretations 44 , “Accountingfor Certain Transactions Involving Stock Compensation,” (FIN 44) in accountingfor stock-based employee compensation, whereby no compensation cost had beenrecognized for the plans.  The Company expects to continue following theguidance under APB 25 for stock-based compensation to employees.  Hadcompensation cost for the plans been determined based on the fair value of theoptions at the grant dates and been consistent with the method of FAS 123, theCompany’s net income/(loss) and earnings/(loss) per share would have beenincreased to the pro forma amounts indicated below:

 
| ** **                                | ** **                                                                                                                                     | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|-------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------|------------|-----------------------------|------------|
| **(in thousands, except per share data)** | ** **                                                                                                                                     | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
| Net income/(loss)                         | As reported                                                                                                                                    |                        | $          | (7,338                      | )          | $ | (460 | ) | $ | (6,964 | ) | $ | (902 | ) |
|                                      | Deduct : Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |                        | (169       | )                           | (199       | ) | (700 | ) | (1,456 | ) |
|                                      |                                                                                                                                           |                        |       |                        |       |   |   |   |   |   |
|                                      | Pro forma                                                                                                                                      |                        | $          | (7,507                      | )          | $ | (659 | ) | $ | (7,664 | ) | $ | (2,358 | ) |
|                                      |                                                                                                                                           |                        |       |                        |       |   |   |   |   |   |
| Loss per share                            |                                                                                                                                           |                        |       |                        |       |   |   |   |   |   |
| Basic and Diluted                         | As reported                                                                                                                                    |                        | $          | (0.23                       | )          | $ | (0.01 | ) | $ | (0.22 | ) | $ | (0.03 | ) |
|                                      | Pro forma                                                                                                                                      |                        | $          | (0.24                       | )          | $ | (0.02 | ) | $ | (0.25 | ) | $ | (0.08 | ) |

 

 

**4.       Cash**

 

Included in cash and cash equivalents at September 30, 2005 and December 31,2004 is restricted cash of $204,000 and $191,000, respectively. Restricted cash represents funds received by Chimes and held in client-specificbank accounts, to be used to make payments to vendors of the applicable client.Cash and cash equivalents at September 30, 2005 and December 31, 2004also include approximately $21.1 million and $2.1 million, respectively, ofcash to be disbursed to Chimes vendors in accordance with the client paymentterms.

 

7

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**5.       Loss Per Share**

 

The computation of diluted loss per share excludes all options becausethey are antidilutive.  As of September 30, 2005 there were 2,081,973and 2,117,187 excluded options, respectively, for the third quarter and ninemonths ended September 30, 2005, with exercise prices between $3.65 and $16.375and $3.56 and $16.375 respectively, per share.

 

There were 268,472 excluded options for the third quarter and ninemonths ended September 30, 2004, with exercise prices between $4.40 and$26.63 per share.

 

**6.       Segment Information**

 

During the fourth quarter of 2004, the Company completed arestructuring initiative whereby the Company’s business model has beenrealigned, effective January 1, 2005, around its three distinct segmentsof clients : Commercial, Federal Government and Vendor Management Services(Chimes).  As a result of the business realignment, the Company hasreclassified the prior year amounts in order to provide a basis for comparison,conforming to our new lines of business.  Income/(loss) before incometaxes/ (benefit) consists of income/(loss) before income taxes, excludinginterest income, interest expense, restructuring charges, specialcharges/(credits), and amortization of intangibles.  These exclusionstotal expense of $5,973,000 and $391,000 for the quarter ended September 30,2005 and 2004, respectively, and expense of $5,502,000 and $68,000 for the ninemonths of September 30, 2005 and 2004, respectively (see reconciliation ofsegment income/(loss) before income taxes/(benefit) to consolidatedincome/(loss) before income taxes/(benefit)).  Corporate services,consisting of general and administrative services, are provided to the segmentsfrom a centralized location.  Such costs are allocated to the applicablesegments receiving corporate services based on revenue.

 

8

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| ** **                                               | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(dollars in thousands)**                               | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
| Revenues :                                               |       |                        |       |                        |       |   |   |   |   |
| Commercial                                               |       | $                           | 49,183     |                        | $          | 50,128 |   | $ | 148,504 |   | $ | 140,917 |   |
| Federal                                                  |       | 10,862                      |       | 13,267                      |       | 33,805 |   | 36,692 |   |
| Chimes                                                   |       | 7,372                       |       | 6,002                       |       | 20,747 |   | 17,284 |   |
| Total Revenues                                           |       | $                           | 67,417     |                        | $          | 69,397 |   | $ | 203,056 |   | $ | 194,893 |   |
|                                                     |       |                        |       |                        |       |   |   |   |   |
| Gross Profit :                                           |       |                        |       |                        |       |   |   |   |   |
| Commercial                                               |       | $                           | 9,590      |                        | $          | 9,625 |   | $ | 28,316 |   | $ | 28,668 |   |
| Federal                                                  |       | 5,029                       |       | 6,237                       |       | 15,723 |   | 16,755 |   |
| Chimes                                                   |       | 7,159                       |       | 5,655                       |       | 20,027 |   | 16,278 |   |
| Total Gross  Profit                                      |       | $                           | 21,778     |                        | $          | 21,517 |   | $ | 64,066 |   | $ | 61,701 |   |
| %                                                        |       | 32.3                        | %          | 31.0                        | %          | 31.6 | % | 31.7 | % |
|                                                     |       |                        |       |                        |       |   |   |   |   |
| Operating Income  :                                      |       |                        |       |                        |       |   |   |   |   |
| Commercial                                               |       | $                           | 2,425      |                        | $          | 1,632 |   | $ | 7,337 |   | $ | 6,964 |   |
| Federal                                                  |       | 896                         |       | 2,005                       |       | 3,352 |   | 5,245 |   |
| Chimes                                                   |       | 1,420                       |       | 395                         |       | 4,216 |   | 1,217 |   |
| Total Operating  Income                                  |       | $                           | 4,741      |                        | $          | 4,032 |   | $ | 14,905 |   | $ | 13,426 |   |
| %                                                        |       | 7.0                         | %          | 5.8                         | %          | 7.3 | % | 6.9 | % |
|                                                     |       |                        |       |                        |       |   |   |   |   |
| Corporate  Allocation :                                  |       |                        |       |                        |       |   |   |   |   |
| Commercial                                               |       | $                           | 4,685      |                        | $          | 3,493 |   | $ | 12,693 |   | $ | 11,763 |   |
| Federal                                                  |       | 479                         |       | 417                         |       | 1,330 |   | 1,384 |   |
| Chimes                                                   |       | 782                         |       | 456                         |       | 1,984 |   | 1,571 |   |
| Total Corporate  Allocation                              |       | $                           | 5,946      |                        | $          | 4,366 |   | $ | 16,007 |   | $ | 14,718 |   |
| %                                                        |       | 8.8                         | %          | 6.3                         | %          | 7.8 | % | 7.6 | % |
|                                                     |       |                        |       |                        |       |   |   |   |   |
| Total Income /  (Loss) before Income Taxes / (Benefit) : |       |                        |       |                        |       |   |   |   |   |
| Commercial                                               |       | $                           | (2,260     | )                           | $          | (1,861 | ) | $ | (5,356 | ) | $ | (4,799 | ) |
| Federal                                                  |       | 417                         |       | 1,588                       |       | 2,022 |   | 3,861 |   |
| Chimes                                                   |       | 638                         |       | (61                         | )          | 2,232 |   | (354 | ) |
| Total Income /  (Loss) before Income Taxes / (Benefit)   |       | $                      | (1,205     | )                           | $     | (334 | ) | $  | (1,102 | ) | $  | (1,292 | ) |
| %                                                        |       | -1.8                        | %          | -0.5                        | %          | -0.5 | % | -0.7 | % |
|                                                     |       |                        |       |                        |       |   |   |   |   |

 

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

 
| ** **                                                   | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(dollars in thousands)**                                   | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
| Total segment income/(loss) before income  taxes/(benefit) : |       | $                           | (1,205     | )                           | $          | (334 | ) | $ | (1,102 | ) | $ | (1,292 | ) |
|                                                         |       |                        |       |                        |       |   |   |   |   |
| Adjustments :                                                |       |                        |       |                        |       |   |   |   |   |
| Restructuring  charges                                       |       | (574                        | )          | —                      |       | (716 | ) | — |   |
| Special (charges)  / credits                                 |       | (5,424                      | )          | —                      |       | (4,492 | ) | 939 |   |
| Amortization of  intangibles                                 |       | (233                        | )          | (484                        | )          | (847 | ) | (1,212 | ) |
| Net interest  income                                         |       | 258                         |       | 93                          |       | 553 |   | 205 |   |
| Total  adjustments                                           |       | (5,973                      | )          | (391                        | )          | (5,502 | ) | (68 | ) |
|                                                         |       |                        |       |                        |       |   |   |   |   |
| Consolidated income/(loss) before income  taxes/(benefit)    |       | $                           | (7,178     | )                           | $          | (725 | ) | $ | (6,604 | ) | $ | (1,360 | ) |

 

9

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**7.       Restructuring Charges**

 

During the third quarter of 2005, the Company recorded restructuringcharges approximating $0.6 million, pertaining to the closing/consolidation ofoffice space in the United States. The lease obligation is calculated based oncurrent rent commitments, less a calculated sublease amount.

 
| **(dollars in thousands)** | ** ** | **Remaining at  December 31, 2004** | ** ** | **Recorded** | ** ** | **Paid** | ** ** | **Remaining at  Sept. 30, 2005** | ** ** |
|----------------------------|------------|------------------------------------------|------------|--------------|------------|----------|------------|---------------------------------------|------------|
|                       |       |                                     |       |         |       |     |       |                                  |       |
| Lease Obligations :        |       |                                     |       |         |       |     |       |                                  |       |
| United States              |       | $                                        | —     |         | $          | 574      |       | $                                     | —     |   | $ | 574 |   |
|                            |            |                                          |            |              |            |          |            |                                       |            |  |  |  |  |

 

 

During the fourth quarter of 2004, in connection with the Company’sbusiness model realignment, the Company recorded a restructuring charge ofapproximately $2.9 million comprised of approximately $2.8 million in severancecosts and $0.1 million in lease obligation costs.  The lease obligation of$0.1 million is calculated based on current rent commitments less a calculatedsublease amount.

 
| **(dollars in thousands)** | ** ** | **Remaining at  December 31, 2004** | ** ** | **Paid** | ** ** | **Currency  Translation *** | ** ** | **Remaining at  Sept. 30, 2005** | ** ** |
|----------------------------|------------|------------------------------------------|------------|----------|------------|-----------------------------|------------|---------------------------------------|------------|
|                       |       |                                     |       |     |       |                        |       |                                  |       |
| Severance :                |       |                                     |       |     |       |                        |       |                                  |       |
| Canada                     |       | $                                        | 535        |     | $          | (345                        | )          | —                                |       | $ | 190 |   |
| United States              |       | 1,902                                    |       | (1,783   | )          | —                      |       | 119                                   |       |
| Total Severance            |       | $                                        | 2,437      |     | $          | (2,128                      | )          | —                                |       | $ | 309 |   |
|                       |       |                                     |       |     |       |                        |       |                                  |       |
| Lease Obligations :        |       |                                     |       |     |       |                        |       |                                  |       |
| United States              |       | $                                        | 110        |     | $          | (102                        | )          | —                                |       | $ | 8 |   |
|                       |       |                                     |       |     |       |                        |       |                                  |       |
| Total                      |       | $                                        | 2,547      |     | $          | (2,230                      | )          | $                                     | —     |   | $ | 317 |   |
|                            |            |                                          |            |          |            |                             |            |                                       |            |  |  |  |  |

 

During 2003, the Company recorded restructuring charges ofapproximately $3.3 million relating to the closing of several offices in theUnited States, Canada and the United Kingdom, including the related severancecosts.  The severance costs approximated $1.5 million and the future leaseobligation costs (less a calculated sublease amount), including office closureexpenses, approximated $1.8 million.

 
| **(dollars in thousands)** | ** ** | **Remaining at December 31, 2004** | ** ** | **Paid** | ** ** | **Currency Translation*** | ** ** | **Remaining at Sept. 30, 2005** | ** ** |
|----------------------------|------------|-----------------------------------------|------------|----------|------------|---------------------------|------------|--------------------------------------|------------|
|                       |       |                                    |       |     |       |                      |       |                                 |       |
| Severance :                |       |                                    |       |     |       |                      |       |                                 |       |
| United Kingdom             |       | $                                       | 50         |     | $          | —                    |       | $                                    | (3         | ) | $ | 47 |   |
|                       |       |                                    |       |     |       |                      |       |                                 |       |
| Lease Obligations :        |       |                                    |       |     |       |                      |       |                                 |       |
| United Kingdom             |       | $                                       | 123        |     | $          | (20                       | )          | $                                    | (8         | ) | $ | 95 |   |
| Canada                     |       | 319                                     |       | (111     | )          | —                    |       | 208                                  |       |
| Total Lease Obligations    |       | $                                       | 442        |     | $          | (131                      | )          | $                                    | (8         | ) | $ | 303 |   |
|                       |       |                                    |       |     |       |                      |       |                                 |       |
| General Office Closure :   |       |                                    |       |     |       |                      |       |                                 |       |
| United Kingdom             |       | $                                       | 45         |     | $          | (12                       | )          | $                                    | (3         | ) | $ | 30 |   |
|                       |       |                                    |       |     |       |                      |       |                                 |       |
| Total                      |       | $                                       | 537        |     | $          | (143                      | )          | $                                    | (14        | ) | $ | 380 |   |

 

----

* Recorded balances change due to fluctuations in exchange rates

 

 

10

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During 2002, the Company recorded restructuring charges approximating$2.8 million, primarily pertaining to office closings. In the second quarter of2005, the Company recorded an additional charge pertaining to sublease incomewhich did not materialize as estimated in the initial 2002 restructuringcharge.

 
| **(dollars in thousands)** | ** ** | **Remaining at December 31, 2004** | ** ** | **Recorded** | ** ** | **Paid** | ** ** | **Remaining at Sept. 30, 2005** | ** ** |
|----------------------------|------------|-----------------------------------------|------------|--------------|------------|----------|------------|--------------------------------------|------------|
|                       |       |                                    |       |         |       |     |       |                                 |       |
| Lease Obligations :   |       |                                    |       |         |       |     |       |                                 |       |
| United States              |       | $                                       | 267        |         | $          | 142      |       | $                                    | (409       | ) | $ | — |   |
|                            |            |                                         |            |              |            |          |            |                                      |            |  |  |  |  |

 

 

**8.       Shareholders’ Equity**

 

| ** **                                       | ** ** | **Nine Months Ended Sept. 30, 2005** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                       | ** ** | **Amount**                                | ** ** | **Shares** | ** ** |
|                                             |       | **(dollars in thousands)**                |       |   |   |
| Balance at beginning of period                   |       | $                                         | 125,781    |   | 31,093,794 |   |
| Net loss                                         |       | (6,964                                    | )          |   |   |
| Proceeds upon exercise of stock options and ESPP |       | 1,519                                     |       | 474,557 |   |
| Other comprehensive income                       |       | 300                                       |       |   |   |
|                                             |       | $                                         | 120,636    |   | 31,568,351 |   |

 

 

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

 

Statement of Financial Accounting Standards No. 130, “ReportingComprehensive Income” (FAS 130), requires that items defined as othercomprehensive income/ (loss), such as foreign currency translation adjustmentsand unrealized gains and losses, be separately classified in the financialstatements and that the accumulated balance of other comprehensive income/(loss) be reported separately from retained earnings and additional paid-incapital in the equity section of the balance sheet. The components ofcomprehensive loss for the three and nine months ended September 30, 2005and September 30, 2004 are as follows:

 
| ** **                                  | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(dollars in thousands)**                  | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
| Comprehensive income/(loss) :               |       |                        |       |                        |       |   |   |   |   |
|                                        |       |                        |       |                        |       |   |   |   |   |
| Net income/(loss)                           |       | $                           | (7,338     | )                           | $          | (460 | ) | $ | (6,964 | ) | $ | (902 | ) |
| Other comprehensive income/(loss) -         |       |                        |       |                        |       |   |   |   |   |
| Foreign currency  adjustment                |       | 636                         |       | 397                         |       | 216 |   | 32 |   |
| Unrealized  gain/(loss) on SERP investments |       | 228                         |       | (102                        | )          | 84 |   | (52 | ) |
| Comprehensive income/(loss)                 |       | $                           | (6,474     | )                           | $          | (165 | ) | $ | (6,664 | ) | $ | (922 | ) |

 

11

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The accumulated balances related to each component of othercomprehensive income (loss) for the nine months ended September 30, 2005and September 30, 2004 were as follows:

 

| **(dollars in thousands)**              | ** ** | **Foreign Currency Translation** | ** ** | **Unrealized Gain/(Loss) on Investments** | ** ** | **Accumulated Other Comprehensive Loss** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|
| Balance at December 31, 2004       |       | $                                | (936       | )                                              | $          | (1,264                                   | )          | $ | (2,200 | ) |
| Accumulated comprehensive income/(loss) |       | 216                              |       | 84                                             |       | 300                                      |       |
| Balance at September 30, 2005      |       | $                                | (720       | )                                              | $          | (1,180                                   | )          | $ | (1,900 | ) |
|                                    |       |                             |       |                                           |       |                                     |       |
| Balance at December 31, 2003       |       | $                                | (1,200     | )                                              | $          | (1,589                                   | )          | $ | (2,789 | ) |
| Accumulated comprehensive income/(loss) |       | 32                               |       | (52                                            | )          | (20                                      | )          |
| Balance at September 30, 2004      |       | $                                | (1,168     | )                                              | $          | (1,641                                   | )          | $ | (2,809 | ) |

 

See “Subsequent Events” footnote No.17 for impact of “Change of ControlPayments” on the unrealized gain/(loss) on investments.

 

**10.    Purchase of Treasury Stock**

 

In April of 2001, the Board of Directors approved the repurchasein the open market of up to 10% of its common shares outstanding, orapproximately 3.2 million shares.  The Company did not repurchaseshares of its common stock during the nine months ended September 30, 2005and September 30, 2004, respectively. As of September 30, 2005, theremaining authorization for repurchase is approximately 93,000 shares.

 

**11.    Asset-Based Lending Facility**

 

The Company has a $40 million line of credit facility with availabilitybased primarily on eligible customer receivables.  The interest rate isLIBOR plus 2.75% based on unpaid principal.  The borrowing base lessoutstanding loans must equal or exceed $5.0 million.  As of September 30,2005, the Company had no outstanding loan balance against the facility. Based on the Company’s eligible client receivables and cash balances, $16.6million was available for borrowing as of September 30, 2005.  Thefee for the unused portion of the line of credit is 0.375% per annum charged tothe Company monthly.  This charge was approximately $83,000 and $77,500for the nine month periods ended September 30, 2005 and 2004,respectively.  This line of credit includes covenants relating to themaintenance of cash balances and minimum availability, in addition to providingfor limitations on incurring obligations and spending limits on capitalexpenditures.  The Company did not satisfy this covenant for the quarterended March 31, 2004.  A waiver was received from the lendinginstitution for the quarter ended March 31, 2004 along with an amendmentto the loan agreement lowering the three-month average minimum collectionscovenant to $10 million.  As of September 30, 2005, the Company was incompliance with the covenant.  This credit facility was scheduled toexpire in July 2005. However, on July 1, 2005, the Company signed aone-year extension of the facility, which will remain in effect untilJuly 2006.

 

**12.    Income Taxes**

 

*Tax Benefit Reserve*

 

On March 9, 2002, the Job Creation and Worker Assistance Act of2002 (the “Act”) was enacted into law.  This Act contains many economicand tax incentives, including the extension of the carryback period for lossesarising in years ending during 2001 and 2002 to five years from the previoustwo year carryback rule.  As a result of the Act, the Company’s tax refundclaim of approximately $10 million at December 31, 2001, which wasreceived in April 2002, was increased to approximately $30million.  The additional refund amount of $20 million was received inJanuary 2003.

 

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

 

In December 2003, the Internal Revenue Service examined theCompany’s Federal income tax returns for the years ended December 31, 2001and 2000, along with its Federal refund claims for the calendar years 1996through 1999.  The additional refund amount received in January 2003was shown as a liability until the audit was completed.  During the firstquarter of 2004, the Internal Revenue Service and the Joint Committee onTaxation completed their examination of the Company’s Federal income taxreturns and Federal refund claims, and 

 

12

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accepted them without change.  Accordingly, the tax benefit wasrecorded as a decrease in tax benefit reserves of $19.6 million, a decrease inother tax reserves of $0.3 million, and an increase in additional paid-incapital of $19.9 million. There was no charge or credit to income.  TheCompany did not record deferred tax assets for the tax benefits being carriedforward due to remaining uncertainties.  It is anticipated that a deferredtax asset, net of an appropriate valuation allowance, will be recorded when itis probable that the tax benefit will be realized.  The tax benefit willbe reflected as an increase in additional paid-in capital.

 

*Deferred Tax Asset*

 

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

 

The Company has significant deferred tax assets resulting from netoperating loss carryforwards, capital loss carryforwards, and deductibletemporary differences that may reduce taxable income in future periods. The Company has provided full valuation allowances on the future tax benefitsrelated to capital losses, foreign net operating losses, and most state netoperating losses.  The Company believes that the valuation allowance isappropriate because these deferred tax assets have relatively shortcarryforward periods or relate to taxing jurisdictions which do not allow thefiling of consolidated tax returns.  The Company expects to continue tomaintain a valuation allowance on these deferred tax assets until an appropriatelevel of profitability is sustained in the applicable taxing jurisdictions, orstrategies are developed that would enable the Company to conclude that it ismore likely than not that a portion of these deferred tax assets will berealized.

 

The Company believes that it is more likely than not that the netremaining deferred tax assets of $19.5 million at September 30, 2005 willbe realized, based upon forecasted taxable income and tax planning strategies. Although the Company has experienced operating losses in past years, theCompany experienced improved operational performance (excluding specialcharges/(credits)) in the first nine months of 2005 resulting from the Company’srealignment initiatives completed in the fourth quarter of 2004, and continuedimprovement in the operating results of its Chimes subsidiary.  Althoughthe Company experienced non-operating losses in the third quarter of 2005,primarily due to special charges related to the proposed merger and proxycontests, the Company anticipates operating profits before special charges inthe fourth quarter of 2005 and thereafter.  The minimum average annualtaxable income required to realize the deferred tax assets over the 20-year netoperating loss carryforward period is approximately $2.9 million. In addition,the Company is considering various alternative strategies which may includesuch matters as the sale of certain business units, acquisitions, mergers orspin-offs.

 

Current Federal and state tax laws impose restrictions on the utilizationof net operating loss carryforwards and other deferred tax assets following anownership change as provided in Section 382 of the Internal RevenueCode.  If the Company were to undergo a Section 382 ownership change,the deferred tax assets may be subject to an annual limitation which may limitthe Company’s ability to utilize the deferred tax assets.

 

 

**13.    Rescission Offer**

 

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

 

Consequently, the Company made a rescission offer, effectiveJuly 27, 2004, to all those persons who purchased shares of common stockpursuant to the Employee Stock Purchase Plan during the affected periods. The rescission offer was made pursuant to a registration statement filed underthe Securities Act and pursuant to applicable state securities laws.  Inthis rescission offer, the Company offered to repurchase the shares, subject toour rescission offer, for the price paid per share plus interest from the dateof purchase until the rescission offer expires, at the current statutory rateper year mandated by the state in which the shares were purchased.  Therescission offer expired on August 27, 2004, with no individuals acceptingthe rescission offer.

 

 

**14.    Special Items**

 

Income from operations for the third quarter and nine months ended September 30,2005 includes the following special charges/(credits), which have been combinedon a separate line for presentation purposes:

 

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| ** **                         | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(dollars in thousands)**         | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
| Bad debt  recovery                 |       | $                           | —     |                        | $          | — |   | $ | (675 | ) | $ | — |   |
| Gain on sale of  assets            |       | —                      |       | —                      |       | (327 | ) | — |   |
| Merger and proxy  contest expenses |       | 5,424                       |       | —                      |       | 5,494 |   | — |   |
| Insurance refund                   |       | —                      |       | —                      |       | — |   | (939 | ) |
|                               |       | $                           | 5,424      |                        | $          | — |   | $ | 4,492 |   | $ | (939 | ) |

 

Merger and proxy contest expenses approximate $5.4 million in the thirdquarter of 2005 and pertain to: a) costs related to the proposed merger of theCompany with Analysts International Corporation, a Minnesota corporation (“Analysts’),primarily for legal and financial advisory services (the merger was notconsummated, resulting in all related costs being expensed in the third quarter2005); and b) proxy contest expenses pertaining to both the proposed merger andthe replacement of the Company’s Board of Directors (approved by theshareholders in October 2005), comprised primarily of legal and proxysolicitation costs.

 

 

**15.    Legal Matters**

 

In July 2005, the Company received notification that a former financialadvisor to the Company was asserting a claim for at least $1.75 million inamounts allegedly owed to it in connection with the proposed merger withAnalysts International Corporation. Because the proposed merger was notconsummated, the basis for the claim no longer exists. The Company is involvedin other various and routine litigation matters, which arise through the normalcourse of business.  Management believes that the resolution of thesematters will not have a material adverse effect on the Company’s financialposition or results of operations.

 

 

**16.    Termination of Proposed Merger**

 

As previously reported, in April, 2005, the Company, JV Merger Corp., aMinnesota corporation and a wholly-owned subsidiary of the Company (the “Sub”),and Analysts, entered into an Agreement and Plan of Merger (the “MergerAgreement”), pursuant to which, among other things, subject to satisfaction orwaiver of applicable conditions, Sub would have been merged with and intoAnalysts (the “Merger”) and each issued and outstanding share of common stock,par value $.10 per share, of Analysts (other than shares held of record by theCompany, Sub, Analysts and any of their subsidiaries) would have been convertedinto the right to receive 1.15 fully paid and non-assessable shares of theCompany’s common stock, par value $.10 per share (the “Merger Consideration”).Completion of the Merger was subject to several conditions, including approvalby the shareholders of each company and, on September 2, 2005, the Companyheld a Special Meeting of its Shareholders for the purpose of voting on theproposals related to the proposed merger. The Company’s shareholders voted notto approve the proposals related to the proposed merger and, as such, theproposed merger was not consummated. Please see Part II, Item 4. Submission ofMatters to a Vote of Security Holders for a description of each matter votedupon at the special meeting and the results of the voting on such matters. Dueto the failure of the condition of shareholder approval, the Merger Agreementwas terminated subsequent to the Special Meeting of Shareholders.

 

 

**17.    Subsequent Events**

 

*Special Meeting of Shareholders*

 

On July 22, 2005, a group comprised of Crescendo Partners II, L.P.,Series R, Crescendo Investments II, LLC, Eric Rosenfeld, F. Annette ScottFlorida Trust, Richard L. Scott Florida Trust, Scott Family Florida PartnershipTrust, Richard L. Scott , Stephen T. Braun and The Computer Horizons Full ValueCommittee (collectively, the “Full Value Committee”), filed a Statement onSchedule 13D (the “Schedule 13D”) with the SEC disclosing their opposition tothe Company’s previously announced proposed merger with Analysts and theirintention to solicit the Company’s shareholders to vote against the Company’sproposals in furtherance of the proposed merger. The Schedule 13D furtherdisclosed the Full Value Committee’s intention to call a special meeting of theCompany’s shareholders in order to remove up to all of the Company’s existingdirectors and to replace them with the Full Value Committee’s own slate ofdirector nominees. As previously reported, at the Company’s Special Meeting ofShareholders held on September 2, 2005, the Company’s shareholders votednot to approve the proposals related to the proposed merger and, as such, theproposed merger was not consummated.

 

On July 27, 2005, the Company received from the Full Value Committee arequest that a special meeting of the shareholders of the Company be called forthe following purposes: (i) to remove all of the existing directors serving onthe Company’s board of directors without cause, (ii) to fix the number ofmembers comprising the board at five, and (iii) to elect five director nomineesselected by the Full Value Committee.

 

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This second Special Meeting of Shareholders took place on October 11,2005. At the Special Meeting, the Company’s shareholders voted (i) to removeall of the existing directors serving on the Company’s board of directorswithout cause, (ii) to fix the number of members comprising the board at five,and (iii) to elect the five director nominees selected by the Full ValueCommittee, specifically: Messrs. Eric Rosenfeld, Karl L. Meyer, Robert F.Walters, Frank J. Tanki, and Willem van Rijn. The proposals and results of thevoting are as follows:

 
|   | 1. |   | To remove all of the existing directors serving on  the Company’s board of directors without cause: |
|--------|----|--------|----------------------------------------------------------------------------------------------------------|

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 15,561,343 |       | 5,642,343   |       | 2,150,655   |       |

 

 
|   | 2. |   | To fix the number of members comprising the board at  five: |
|--------|----|--------|-------------------------------------------------------------|

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 15,488,116 |       | 5,704,625   |       | 2,161,599   |       |

 

 
|   | 3. |   | To elect the following five director nominees: Eric  Rosenfeld, Karl L. Meyer, Robert F. Walters, Frank J. Tanki and Willem van  Rijn: |
|--------|----|--------|----------------------------------------------------------------------------------------------------------------------------------------|

 
| ** **        | ** ** | **For**    | ** ** | **Withhold** | ** ** |
|-------------------|------------|------------|------------|--------------|------------|
| Eric Rosenfeld    |       | 15,550,674 |       | 7,803,666    |       |
| Karl L. Meyer     |       | 15,489,370 |       | 7,864,970    |       |
| Robert F. Walters |       | 15,547,723 |       | 7,806,617    |       |
| Frank J. Tanki    |       | 15,542,718 |       | 7,811,622    |       |
| Willem van Rijn   |       | 15,547,018 |       | 7,807,322    |       |
|              |       |       |       |         |       |

 

Since all proposals before the meeting were non-discretionary, therewere no broker non-votes as to any proposal. Since the Special Meeting, Mr.Eric Rosenfeld has been named non-executive Chairman of the Company and theCompany’s Board of Directors named Dennis J. Conroy, President and Chief ExecutiveOfficer, and Brian A. Delle Donne, Executive Vice President and Chief OperatingOfficer.  Mr. Conroy replaces William J. Murphy as President and ChiefExecutive Officer.

 

*Change of Control Payments*

 

In 1995, the Company instituted a Supplemental Executive RetirementPlan (“SERP”), entitling key executives to receive lump-sum retirement paymentsupon reaching age 65. The SERP is non-qualified, with life insurance policiespurchased by the Company to assist in the funding of the amounts payable. TheSERP expense is charged to operations during the service lives of the members. TheSERP contains a change of control provision whereby, in the event of a changeof control (as defined in the Plan), all retirement benefits immediately vestand become payable within five (5) business days.

 

On October 18, 2005, as a consequence of the removal of the Company’s thenexisting Board of Directors without cause and the election of the new Board ofDirectors, a change of control was deemed to have occurred under the Company’sSERP. Accordingly, change of control payments totaling $10.9 million were paidon October 25, 2005, including $10.3 million to the SERP participants and $0.6million to a key executive, per the terms of the related employment agreement. Asof September 30, 2005, the recorded accrual for the SERP paymentsapproximated $2.2 million, resulting in a charge of approximately $8.7 million,which will be recorded in the fourth quarter of 2005. In addition, as of September 30,2005, the Company had unrealized losses on the applicable SERP investmentstotaling $1.2 million. This loss will be recognized in the fourth quarter of2005 as a result of the sale of these investments.

 

On October 18, 2005, the Company’s Board of Directors appointed a new Presidentand CEO. As a result, in accordance with his employment agreement, the formerCEO was paid severance in the amount of $895,000, along with his deferredcompensation funds, which approximated $381,000.

 

*Vesting of Stock Options*

 

Under the Company’s various equity incentive plans, as a result of the October2005 change of control as defined in each plan, approximately 704,000 ofoutstanding unvested stock options vested and became immediately exercisable.

 

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**Item 2.**

**MANAGEMENT’S DISCUSSION ANDANALYSIS OF**

**FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

For the Periods Ended September 30,2005 and September 30, 2004

 

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

 

**Overview**

 

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

 

Effective January 1, 2005, the Company began reporting by its realignedoperating segments : Commercial, Federal Government and Vendor Management Services(Chimes.).  As a result of the business realignment, the Company hasreclassified the prior year amounts in order to provide a basis for comparison,conforming to our new lines of business.

 

The Company had revenues for the quarter ended September 30, 2005of $67.4 million, a three percent decrease from the comparable period in 2004. For the nine months ended September 30, 2005, revenues totaled $203.1million, compared to $194.9 million in the comparable period of 2004.  Netloss for the third quarter of 2005 totaled $7.3 million, or ($0.23) per share,compared with a net loss of $460,000, or ($0.01) per share, in the comparableperiod of 2004.  Net loss for the nine months ended September 30, 2005totaled $7.0 million, or ($0.22) per share, compared with a net loss of $902,000,or ($0.03) per share, in the comparable nine month period of 2004.  Net lossfor the nine months ended September 30, 2005 includes specialcharges/(credits) totaling $4.5 million related to merger-related expenses andproxy contest costs (partially offset by a bad debt recovery and gain on saleof assets), a restructuring charge of $716,000 and an $847,000 chargepertaining to the amortization of intangibles.  The net loss for the firstnine months of 2004 includes a one-time credit of $939,000 relating to aninsurance refund, and a $1,212,000 charge pertaining to the amortization ofintangibles.

 

Management continues to focus on maintaining a strong balance sheet,with approximately $43.8 million in cash and cash equivalents (including $21.1million of Chimes vendor cash) at September 30, 2005, along with $64.0million in working capital and no debt outstanding at the end of the quarter.

 

On April 1, 2004, the Company’s subsidiary, RGII, acquiredAutomated Information Management, Inc. (AIM), a Federal government IT servicescompany, for approximately $15.8 million in cash.  The acquisition of AIMis directly linked to the Company’s strategy of expanding its presence in the Federalgovernment IT market and pursuing bolt-on expansions to its RGII subsidiary.

 

**Recent Developments**

 

*Termination of Proposed Merger*

 

As previously reported, in April, 2005, the Company, JV Merger Corp., aMinnesota corporation and a wholly-owned subsidiary of the Company (the “Sub”),and Analysts International Corporation, a Minnesota corporation (“Analysts”),entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuantto which, among other things, subject to satisfaction or waiver of applicableconditions, Sub would have been merged with and into Analysts (the “Merger”)and each issued and outstanding share of common stock, par value $.10 per share,of Analysts (other than shares held of record by the Company, Sub, Analysts andany of their subsidiaries) would have been converted into the right to receive1.15 fully paid and non-assessable shares of the Company’s common stock, parvalue $.10 per share (the “Merger Consideration”). Completion of the Merger wassubject to several conditions, including approval by the shareholders of eachcompany and, on September 2, 2005, the Company held a Special Meeting ofits Shareholders for the purpose of voting on the proposals related to theproposed merger. The Company’s shareholders voted not to approve the proposalsrelated to the proposed merger and, as such, the proposed merger was notconsummated. Please see Part II, Item 4. Submission of Matters to a Vote ofSecurity Holders for a description of each matter voted upon at the specialmeeting and the results of the voting on such matters. Due to the failure ofthe condition of shareholder approval, the Merger Agreement was terminatedsubsequent to the Special Meeting of Shareholders.

 

*Special Meeting of Shareholders*

 

On July 22, 2005, a group comprised of Crescendo Partners II, L.P.,Series R, Crescendo Investments II, LLC, Eric Rosenfeld, F. Annette ScottFlorida Trust, Richard L. Scott Florida Trust, Scott Family Florida PartnershipTrust, Richard L. Scott , Stephen T. Braun and The Computer Horizons Full ValueCommittee (collectively, the “Full Value Committee”), filed a Statement onSchedule 13D (the “Schedule 13D”) with the SEC disclosing their opposition tothe Company’s previously announced proposed merger with Analysts and theirintention to solicit the Company’s shareholders to vote against the Company’sproposals in furtherance of the proposed merger. The Schedule 13D furtherdisclosed the Full Value Committee’s intention to call a special meeting of theCompany’s shareholders in order to remove up to all of the Company’s existingdirectors and to replace them with the Full Value Committee’s own slate ofdirector nominees. As previously 

 

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reported, at the Company’s Special Meeting of Shareholders held on September 2,2005, the Company’s shareholders voted not to approve the proposals related tothe proposed merger and, as such, the proposed merger was not consummated.

 

On July 27, 2005, the Company received from the Full Value Committee arequest that a special meeting of the shareholders of the Company be called forthe following purposes: (i) to remove all of the existing directors serving onthe Company’s board of directors without cause, (ii) to fix the number ofmembers comprising the board at five, and (iii) to elect five director nomineesselected by the Full Value Committee.

 

This second Special Meeting of Shareholders took place on October 11, 2005.At the Special Meeting, the Company’s shareholders voted (i) to remove all ofthe existing directors serving on the Company’s board of directors withoutcause, (ii) to fix the number of members comprising the board at five, and (iii)to elect the five director nominees selected by the Full Value Committee,specifically: Messrs. Eric Rosenfeld, Karl L. Meyer, Robert F. Walters, FrankJ. Tanki, and Willem van Rijn.

 

Since the Special Meeting, Mr. Eric Rosenfeld has been namednon-executive Chairman of the Company and the Company’s Board of Directorsnamed Dennis J. Conroy, President and Chief Executive Officer, and Brian A.Delle Donne, Executive Vice President and Chief Operating Officer.  Mr.Conroy replaces William J. Murphy as President and Chief Executive Officer.

 

*Change of Control Payments*

 

In 1995, the Company instituted a Supplemental Executive RetirementPlan (“SERP”), entitling key executives to receive lump-sum retirement paymentsupon reaching age 65. The SERP is non-qualified, with life insurance policiespurchased by the Company to assist in the funding of the amounts payable. TheSERP expense is charged to operations during the service lives of the members. TheSERP contains a change of control provision whereby, in the event of a changeof control (as defined in the Plan), all retirement benefits immediately vestand become payable within five (5) business days.

 

On October 18, 2005, as a consequence of the removal of the Company’s thenexisting Board of Directors without cause and the election of the new Board ofDirectors, a change of control was deemed to have occurred under the Company’sSERP. Accordingly, change of control payments totaling $10.9 million were paidon October 25, 2005, including $10.3 million to the SERP participants and $0.6million to a key executive, per the terms of the related employment agreement. Asof September 30, 2005, the recorded accrual for the SERP paymentsapproximated $2.2 million, resulting in a charge of approximately $8.7 million,which will be recorded in the fourth quarter of 2005. In addition, as of September 30,2005, the Company had unrealized losses on the applicable SERP investmentstotaling $1.2 million. This loss will be recognized in the fourth quarter of2005 as a result of the sale of these investments.

 

On October 18, 2005, the Company’s Board of Directors appointed a newPresident and CEO. As a result, in accordance with his employment agreement,the former CEO was paid severance in the amount of $895,000, along with hisdeferred compensation funds, which approximated $381,000.

 

*Vesting of Stock Options*

 

Under the Company’s various equity incentive plans, as a result of theOctober 2005 change of control as defined in each plan, approximately 704,000of outstanding unvested stock options vested and became immediatelyexercisable.

 

**FORWARD-LOOKING STATEMENTS**

 

This report contains forward-looking statements within the meaning ofthe safe harbor provisions of the Private Securities Litigation Reform Act of1995. In some cases, forward-looking statements can be identified by words suchas “believe,” “expect,” “anticipate,” “plan,” “potential,” “continue” orsimilar expressions. Forward-looking statements also include the assumptionsunderlying or relating to any of the foregoing statements. Such forward-lookingstatements are based upon current expectations and beliefs and are subject to anumber of factors and uncertainties that could cause actual results to differmaterially from those described in the forward-looking statements including,but not limited to, risks associated with unforeseen technical difficulties,the ability to meet customer requirements, market acceptance of serviceofferings, changes in technology and standards, the ability to complete costreduction initiatives, dependencies on certain technologies, delays, marketacceptance and competition, as well as other risks described from time to timein the Company's filings with the Securities and Exchange Commission, pressreleases and other communications. All forward-looking statements included inthis report are based on information available to the Company on the datehereof. The Company undertakes no obligation (and expressly disclaims any suchobligation) to update forward-looking statements made in this report to reflectevents or circumstances after the date of this report or to update reasons whyactual results would differ from those anticipated in such forward-lookingstatements.

 

**Additional Information and Where to Find It**

 

The Management’s Discussion and Analysis of Financial Condition andResults of Operations set forth in this Item 2 has been changed to reflect therealigned operating segments : Commercial, Federal Government and VendorManagement Services (Chimes) for 2004, as previously reported in the Company’sForm 10-Q for the quarter ended September 30, 2004.

 

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**Revenue Generating Activities**

 

The majority of the Company’s revenues are derived from professionalservices rendered in the information technology sector. EffectiveJanuary 1, 2005, the Company realigned its business operations into threesegments : Commercial, Federal Government and Vendor Management Services(Chimes).

 

The Commercial business consists of providing technology consultants tolarge organizations on a temporary hire basis and is classified in two generalcategories, staff augmentation and solutions work.  For the quarter ended September 30,2005, this segment represented approximately 73% of total revenues, including $34.7million of staff augmentation revenue and $14.5 million of commercial solutionsrevenue.  For the nine months ended September 30, 2005, this segmentrepresented approximately 73% of total revenues, including $106.6 million ofstaff augmentation revenue and $41.9 million of commercial solutions revenue.

 

For staff augmentation assignments, the consultant work is supervisedand managed by the customer. Staff augmentation tends to be a lower risk, lowergross margin business with very competitive pricing.  The Company’ssolutions work tends to be higher margin, higher risk business, due to the factthat the Company is responsible for project deliverables and other conditionscontained in statements of work and/or contracts with clients.  Virtuallyall projects performed by the commercial solutions group are IT related andconsist of practices such as application development, outsourcing arrangements,government services, Health Insurance Portability and Accountability Act (“HIPAA”)services, technology training and managed services.

 

The Company’s customer relationships are memorialized in masteragreements which address the terms and conditions which define the clientengagement.  Depending on the service to be performed for the client,either a task order (in the case of a Staffing engagement) or a Statement ofWork (“SOW”) (in the case of a Solutions engagement) is generated. The SOW issigned by both the Company and the customer.  In general, no Solutionswork is done unless there is a SOW because the SOW provides the technical detailsof the work to be done.  The SOW, although falling under the correspondingmaster agreement, is a stand-alone binding contractual document, typicallyoutlining the project objectives, describing the personnel who will work on theproject, describing phases of the project, the timeframes for work performance,and the rate of compensation, on a time and materials basis.  In the eventthat the parameters of the project expand or otherwise change, a Project ChangeRequest is implemented to memorialize whatever change has occurred to thedeliverables, personnel and/or time/materials.  The master agreements, inconjunction with the SOWs, are written to define, with as much detail aspossible, the client relationship and all aspects of the work to be performed forthe client.  With regard to revenues expected in future periods, each SOWhas a defined term or sets forth the anticipated length of a project. Where a client engagement is on-going, like certain “Help Desk” type services,the master agreements would still have a term length, but would recite that theagreement was renewable.  Generally, commercial solutions engagements arefor a year or less.  Staff augmentation engagements can and do last formore than a year, with variations in the number of consultants being providedat any given time.  Staffing engagements are generally cancelable byclients with a two to four week notice period.

 

The Federal Government segment consists primarily of solutions typeassignments, whereby the Company is responsible for project deliverables andother conditions contained in SOWs and/or contracts with the FederalGovernment.  Federal Government engagements generally have a duration ofseveral years, contingent upon the Federal Government exercising annual optionsto continue work.   For the quarter and nine months ended September 30,2005, the Federal Government segment accounted for approximately 16% and 17%,respectively, of consolidated revenues.

 

Chimes, Inc. is a human capital management solution that, throughthe use of proprietary software and processes, manages the temporary workforceof large organizations. For the quarter and nine months ended September 30,2005, Chimes accounted for approximately 11% and 10%, respectively, of totalrevenues.

 

**Critical Accounting Policies**

 

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

 

**Revenue Recognition**

 

Approximately 96% of consolidated revenue in the quarter ended September 30,2005 and September 30, 2004 was derived from time-and-materials contracts.

 

The Company recognizes revenues either on a time-and-materials basis oron a fixed fee basis.  Under a typical time-and-materials billingarrangement, our customers are billed on a regularly scheduled basis, such asbiweekly or monthly.  At the end of each accounting period, revenue isestimated and accrued for services performed since the last billingcycle.  These unbilled amounts are billed the following month.

 

For fixed fee contracts, revenue is recognized on the basis of theestimated percentage of completion.  Each fixed fee contract has differentterms, milestones and deliverables.  The milestones and deliverablesprimarily relate to the work to be performed and the timing of the 

 

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billing.  At the end of each reporting period an assessment ofrevenue recognized on the percentage of completion and milestones achievedcriteria is made.  If it becomes apparent that estimated cost will beexceeded or required milestones or deliverables will not have been obtained, anadjustment to revenue and/or costs will be made.  The cumulative effect ofrevisions in estimated revenues and costs are recognized in the period in whichthe facts that give rise to the impact of any revisions become known.

 

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

 

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

 

Evaluation of Bad Debt Reserve

 

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

 

Goodwill

 

As of December 31, 2004 and 2003, the fair value of each of thereporting units was calculated using the following approaches (i) marketapproach and (ii) income approach.  The reporting units are equal to,or one level below, reportable segments.  Under the market approach, valueis estimated by comparing the performance fundamentals relating to similarpublic companies’ stock prices.  Multiples are then developed of the valueof the publicly traded stock to various measures and are then applied to eachreporting unit to estimate the value of its equity.  Under the incomeapproach, value was determined using the present value of the projected futurecash flows to be generated by the reporting unit.

 

The fair value conclusion of the reporting units reflects anappropriately weighted value of the market multiple approach and the incomeapproach 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.

 

For the year ended December 31, 2004, using an evaluation preparedby an independent appraisal firm, the Company reassessed the carrying value ofgoodwill associated with its Solutions Group.  Because of a reduction inprojected future cash flows in the Commercial Solutions business unit,primarily resulting from significant revenue declines in 2004, the Companydetermined that goodwill was impaired and recorded a non-cash charge of $20.3million, related to the write-off of the Commercial Solutions goodwill. There was no income tax effect on the impairment charge as the related goodwillwas primarily attributable to acquisitions which yielded no tax basis for theCompany. The remaining Solutions Group goodwill of $27.6 million, as of December 31,2004, is associated with the Company’s Federal Government practice.  As ofDecember 31, 2004, the indicated fair value of the Federal Governmentreporting unit exceeded the carrying value.  As a result, the Companyconcluded that the goodwill of approximately $27.6 million is not impaired.

 

Valuation of Deferred Tax Assets

 

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

 

The Company has significant deferred tax assets resulting from netoperating loss carryforwards, capital loss carryforwards, and deductibletemporary differences that may reduce taxable income in future periods. The Company has provided full valuation allowances on the future tax benefitsrelated to capital losses, foreign net operating losses, and most state netoperating losses.  The Company believes that the valuation allowance isappropriate because these deferred tax assets have relatively shortcarryforward periods or relate to taxing jurisdictions which do not allow thefiling of consolidated tax returns.  The Company expects to continue tomaintain a valuation allowance on these deferred tax assets until anappropriate level of profitability is sustained in the applicable taxingjurisdictions, or strategies are developed that would enable the Company toconclude that it is more likely than not that a portion of these deferred taxassets will be realized.

 

The Company believes that it is more likely than not that the netremaining deferred tax assets of $19.5 million at September 30, 2005 willbe realized, based upon forecasted taxable income and tax planningstrategies.  Although the Company has experienced operating losses in pastyears, the Company experienced improved operational performance (excludingspecial charges/(credits)) in the first nine months of 2005 resulting from theCompany’s realignment initiatives completed in the fourth quarter of 2004, andcontinued improvement in the operating results of its Chimes subsidiary. Although the Company experienced non-operating losses in the third quarter of2005, primarily due to special charges related to the proposed merger and proxycontests, the Company anticipates operating profits before special charges inthe fourth quarter of 2005 and thereafter.  The minimum average annualtaxable income required to realize the deferred tax assets over the 20-year netoperating loss carryforward period is approximately $2.9 million. In addition,the Company is considering various alternative strategies which may includesuch matters as the sale of certain business units, acquisitions, mergers or spin-offs.

 

Current Federal and state tax laws impose restrictions on theutilization of net operating loss carryforwards and other deferred tax assetsfollowing an ownership change as provided in Section 382 of the InternalRevenue Code. If the Company were to undergo a Section 382 ownership change,the deferred tax assets may be subject to an annual limitation which may limitthe Company's ability to utilize the deferred tax assets.

 

**RESULTS OF OPERATIONS**

 

*Revenues*.  Consolidated revenuesdecreased to $67.4 million in the third quarter of 2005 from $69.4 million inthe third quarter of 2004, a decrease of $2.0 million or 3%. Revenues increased to $203.1 million in the first nine months of 2005 from $194.9million in the first nine months of 2004, an increase of $8.2 million or 4%.

 

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Commercial Group revenues decreased to $49.2 million in the thirdquarter of 2005 from $50.1 million in the third quarter of 2004, a decrease of$0.9 million or 2%. Commercial Group revenues, for the first nine months of2005, increased to $148.5 million from $140.9 million in the first nine monthsof 2004, an increase of $7.6 million or 5%. The year-over-year decrease in theCommercial Group revenues for the third quarter of 2005 is primarilyattributable to a decrease in average consultant headcount of approximately 1%,along with a slight decline (1%) in average bill rates in comparison to thethird quarter of 2004.

 

Federal Government Group revenues (comprised of RGII and AIM) decreasedto $10.9 million in the third quarter of 2005 from $13.3 million in the thirdquarter of 2004, a net decrease of approximately $2.4 million or 18%.  FederalGovernment Group revenues, for the first nine months of 2005, decreased to $33.8million from $36.7 million in the first nine months of 2004, an decrease of $2.9million or 8%. The year-over-year decrease is attributable to the transition ofrestricted contracts, customer/agency budget cuts and delays in funding.

 

Chimes revenues increased to $7.4 million in the third quarter of 2005from $6.0 million in the third quarter of 2004, an increase of $1.4 million, or23%.  Chimes revenues, for the first nine months of 2005, increased to $20.7million from $17.3 million in the first nine months of 2004, an increase of $3.4million or 20%. This increase in Chimes revenue for the first nine months of2005 is due to an increase of approximately $1.3 million in revenue from newcustomers and $2.1 million from existing customers in this segment.

 

*Direct Costs and Gross Margins*. Direct costs were $45.6 million and $139.0 million in the third quarter andfirst nine months of 2005, respectively, and $47.9 million and $133.2 millionin the third quarter and first nine months of 2004, respectively.  Grossmargin, revenues less direct costs, increased to 32.3% in the thirdquarter of 2005 from 31.0% in the same period of 2004.  Gross margin remainedstable at 31.6% in the first nine months of 2005 and in the same period of2004. In the Company’s Commercial Group, gross profit totaled $28.3 million, or19.1% for the nine months ending September 30, 2005 compared to $28.7million, or 20.3% in the comparable prior year period. This decrease isprimarily attributable to gross margin reductions in the Staff Augmentationbusiness to approximately 17.5% in the first nine months of 2005, down from19.1% in the first nine months of 2004, which is due to continued pressure onaverage bill rates within this business. The Federal Government Group grossmargins for the nine months ended September 30, 2005 were $15.7 million,or 46.5%, compared to $16.8 million, or 45.7% for the comparable period of 2004. Chimes gross margins totaled $20.0 million, or 96.5% for the nine months ended September 30,2005, compared to $16.3 million, or 94.2% in 2004, due to improved leveragingof direct costs.

 

*Costs and Expenses*. Selling, general and administrative expenses were $23.0 million and $65.2 millionin the third quarter and first nine months of 2005, respectively, compared to $21.9million and $63.0 million in the comparable periods of 2004.  The increasefor the first nine months of 2005 from the first nine months of 2004 wasprimarily due to the acquisition of AIM in April 2004 and additionaldelivery/development costs in Chimes of approximately $0.8 million. As apercentage of revenue, the Company’s SG&A expenses were 34.1% and 32.1%in the third quarter and first nine months of 2005, respectively; as comparedto 31.5% and 32.3% in the comparable periods of 2004. The thirdquarter 2005 increase is primarily attributable to additional corporate costs,including internal costs related to the proposed merger with AnalystsInternational and expenses pertaining to SAS # 70 certifications obtainedduring the third quarter.

 

*Income / (Loss) from Operation*. The Company’s loss from operations totaled $7.4 million in the third quarter of2005, including special charges related to the proposed merger and proxycontests totaling $5.4 million, a restructuring charge of $574,000 and a$233,000 charge pertaining to the amortization of intangibles. This compares toa loss from operations of $818,000 in the third quarter of 2004, which includesamortization expense totaling $484,000. The composition of the operating lossfor the quarter ended September 30, 2005, excluding special charges,restructuring charges and amortization expense included a loss of $2.3 millionin the Commercial Group, income of $417,000 in the Federal Government Group andincome of $638,000 in Chimes.  For the comparable quarter of 2004, theCommercial Group had a loss of $1.9 million, the Federal Group had an income ofapproximately $1.6 million and Chimes had a loss of $61,000.

 

The Company’s loss from operations totaled $7.2 million in the first ninemonths of 2005, including special merger-related and proxy contest expensestotaling $5.5 million, partially offset by special credits of approximately $1million (primarily from a bad debt recovery and gain on sale of assets), arestructuring charge of $716,000 and an $847,000 charge pertaining to theamortization of intangibles.  This compares to a loss from operations of $1.6million in the first nine months of 2004, which includes amortization expensetotaling $1.2 million and a special credit (insurance refund) of $939,000. Thecomposition of the operating loss for the first nine months of 2005, excluding specialcharges, restructuring charges and amortization expense included a loss of $5.4million in the Commercial Group, income of $2.0 million in the FederalGovernment Group and income of $2.2 million in Chimes.  For the comparablenine month period of 2004, the Commercial Group had a loss of $4.8 million, theFederal Group had an income of approximately $3.9 million and Chimes had a lossof $354,000.

 

*Other Income/(Expense)*. Other income (primarily net interest income) totaled $258,000 in the thirdquarter of 2005, compared to $93,000 in the third quarter of 2004. Other incomefor the first nine months of 2005 approximated $553,000, compared to $205,000for the first nine months of 2004.

 

*Provision for Income Taxes*. The effective tax rates for Federal, state and local income taxes were taxexpense of 2% for the third quarter of 2005 and 5% for the first nine months of2005, primarily due to valuation allowances recorded in this period, comparedwith tax benefits of 45% for the third quarter of 2004 and 35% for thefirst nine months of 2004 (due to losses incurred in this period).

 

*Net Income / (Loss)*.  Thenet loss for the third quarter of 2005 was $7.3 million, or ($0.23) loss per basicand diluted share, compared to a net loss of $460,000, or ($0.01) per basic anddiluted share for the third quarter of 2004. The effect of special charges/credits, restructuring 

 

20

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and amortization expenses amounted to ($0.19) loss per share in the thirdquarter of 2005.  The third quarter of 2004 net loss included amortizationexpense of $(0.01) per share. For the first nine months of 2005, net loss was $7.0million or ($0.22) loss per basic and diluted share, compared to a net loss of$902,000, or $(0.03) per share for the first nine months of 2004.

 

**Liquidity and Capital Resources**

 

Computer Horizons has historically financed its operations through cashgenerated from operations, borrowings against bank lines of credit and thepublic sale of its common stock. At September 30, 2005, the Company hadapproximately $64.0 million in working capital, of which $43.8 million was cashand cash equivalents. Cash and cash equivalents at September 30, 2005 and December 31,2004 includes approximately $21.1 million and $2.1 million of cash,respectively, to be disbursed to Chimes vendors in accordance with the clientpayment terms. At September 30, 2005, the Company had a current ratioposition of 2.5 to 1.

 

Net cash provided by operating activities in the first nine months of2005 was $10.1 million, primarily attributable to depreciation, amortizationand other non-cash expenses and increases in accounts payable (primarily Chimesvendor payments), partially offset by the Company’s net loss, a reduction inaccrued expenses and an increase in accounts receivable.

 

Net accounts receivable increased $3.3 million to $54.6 million at September 30,2005 from $51.3 million at December 31, 2004.  Accounts receivabledays sales outstanding (“DSO”) were 73 days at September 30, 2005 comparedto 71 days at September 30, 2004 and 68 days at December 31, 2004. DSOs are expected to approximate the current level during the remainder of2005.  All client receivable collectibility and billing issues identifiedby management have been adequately reserved. For the period ended September 30,2005, there were no significant changes in credit terms, credit policies orcollection efforts.

 

Net cash used in investing activities in the first nine months of 2005was $1.7 million, consisting primarily of capital expenditures totaling $2.3million partially offset by proceeds from sale of assets of $0.6 million.

 

Net cash provided by financing activities in the first nine months of2005 was $1.5 million, primarily consisting of shares issued pursuant to theemployee stock option plan and employee stock purchase plan.

 

The Company has a $40 million line of credit facility with availabilitybased primarily on eligible customer receivables.  The interest rate isLIBOR plus 2.75% based on unpaid principal.  The borrowing base lessoutstanding loans must equal or exceed $5.0 million.  As of September 30,2005, the Company had no outstanding loan balance against the facility. Based on the Company’s eligible client receivables and cash balances, $16.6million was available for borrowing as of September 30, 2005.  Thefee for the unused portion of the line of credit is 0.375% per annum charged tothe Company monthly.  This charge was approximately $83,000 and $77,500for the nine month periods ended September 30, 2005 and 2004,respectively.  This line of credit includes covenants relating to themaintenance of cash balances and minimum availability, in addition to providingfor limitations on incurring obligations and spending limits on capitalexpenditures.  The Company did not satisfy this covenant for the quarterended March 31, 2004.  A waiver was received from the lendinginstitution for the quarter ended March 31, 2004 along with an amendmentto the credit facility lowering the three-month average minimum collectionscovenant to $10 million.  As of September 30, 2005, the Company wasin compliance with the covenant. This credit facility was scheduled to expirein July 2005. However, on July 1, 2005, the Company signed a one-yearextension of the facility, which will remain in effect until July 2006.

 

Pursuant to the terms of the Company’s acquisition of RGII, the sellerof RGII may be entitled to contingent payments based on RGII’s performanceagainst profitability objectives over three years.  The contingentpayments are evidenced by a contingent note with a face value of $10 millionthat is payable over three years only if certain financial performanceobjectives are met.  These financial performance objectives are based onearnings before interest and taxes (“EBIT”) targets totaling $19.8 million overa three-year period. The $10 million contingent note is collateralized by theassets of RGII. There are no minimum or maximum payment obligations under theterms of the contingent note. The contingent payment will be reduced on adollar for dollar basis for financial performance below EBIT targets andincreased by 29 cents ($0.29) for each dollar exceeding EBIT targets.  InFebruary 2004, a payment was made for the first six-month installment ofapproximately $631,000, pertaining to this contingent note.  InFebruary 2005, a payment of approximately $1.8 million was maderepresenting the second installment of the contingent note.  Futurepayments, if the applicable EBIT targets are met, will be due asfollows: 2005 payment of $3.3 million and 2006 payment of $4.3million. If applicable EBIT targets are not met, future payments will bereduced or may result in a partial or total repayment to the Company ofprevious contingent payments.

 

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

 

On October 18, 2005, as a consequence of the removal of the Company’s thenexisting Board of Directors without cause and the election of the new Board ofDirectors, a change of control was deemed to have occurred under the Company'sSERP. Accordingly, change of control payments totaling $10.9 million were paidon October 25, 2005, including $10.3 million to the SERP participants and $0.6million to a key executive, per the terms of the related employment agreement. Asof September 30, 2005, the recorded accrual for the SERP paymentsapproximated $2.2 million, resulting in a charge of approximately $8.7 million,which will be recorded in the fourth quarter of 2005. In addition, as of September 30,2005, the Company had unrealized losses on the applicable SERP investmentstotaling $1.2 million. This loss will be recognized in the fourth quarter of2005 as a result of the sale of these investments.

 

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On October 18, 2005, the Company’s Board of Directors appointed a newPresident and CEO for the Company. As a result, per his employment agreement,the former CEO was paid severance in the amount of $895,000, along with hisdeferred compensation funds, which approximated $381,000.

 

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

 

**Contractual Obligations and Commercial Commitments**

 

The Company does not utilize off balance sheet financing other thanoperating lease arrangements for office premises and related equipment. The following table summarizes all commitments under contractual obligations asof September 30, 2005:

 
| ** **                   | ** ** | **Obligation Due** | ** ** |
|------------------------------|------------|--------------------|------------|
| **(dollars in thousands)**   | ** ** | **Total Amount**   | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **Over 5 Years** | ** ** |
| Operating Leases             |       | $                  | 8,771      |   | $ | 5,479 |   | $ | 3,075 |   | $ | 217 |   | $ | — |   |
| RGII Contingent Notes*       |       | 7,596              |       | 3,300 |   | 4,296 |   | — |   | — |   |
| Deferred Compensation        |       | 2,732              |       | 6 |   | 16 |   | 465 |   | 2,245 |   |
| Supplemental Retirement Plan |       | 9,750              |       | — |   | 250 |   | 1,000 |   | 8,500 |   |
| Other                        |       | 912                |       | 912 |   | — |   | — |   | — |   |
| Total Cash Obligations       |       | $                  | 29,761     |   | $ | 9,697 |   | $ | 7,637 |   | $ | 1,682 |   | $ | 10,745 |   |

 

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* Obligation if applicable EBIT targets are met.

 

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**Recent Accounting Pronouncements**

 

In March 2004, the Financial Accounting Standards Board (FASB)Emerging Issues Task Force (EITF) released Issue No. 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments”(EITF 03-1).  EITF 03-1 provides guidance for determining whetherimpairment for certain debt and equity investments is other-than-temporary andthe measurement of an impaired loss. The recognition and measurementrequirements of EITF 03-1 were initially effective for reporting periodsbeginning after June 15, 2004. In September 2004, the FASB Staffissued FASB Staff Position (FSP) EITF 03-1-1 that delayed the effective datefor certain measurement and recognition guidance contained in EITF 03-1. TheFSP requires that entities continue to apply previously existing “other-than-temporary”guidance until a final consensus is reached. Management does not anticipatethat issuance of a final consensus will materially impact the Company’sfinancial condition or results of operations.

 

In December 2004, the FASB issued Statement of FinancialAccounting Standard No. 123 (revised 2004), “Share-Based Payment” (FAS123R).  FAS 123R requires that compensation cost be recognized for newawards of equity instruments and unvested awards on the adoption date. The SEC amended the effective dates of FAS 123R for public companies inApril 2005, which allows registrants to implement FAS 123R at thebeginning of their next fiscal year, instead of the next interim period, thatbegins after June 15, 2005.  The SEC also issued Staff AccountingBulletin 107, “Share-Based Payment” (SAB 107), in April 2005, whichprovides the views of the SEC staff regarding certain aspects of theapplication of FAS 123R.  SAB 107 assists issuers in their initialimplementation of FAS 123R and indicates that the staff’s understanding that,particularly in the period of initial implementation, issuers may reasonablyarrive at different estimates and option valuations in applying FAS 123R. We expect the adoption of this statement will have a material effect on theCompany’s financial statements, but we cannot reasonably estimate the impact ofthe adoption because certain assumptions used in the calculation of the valueof share-based payments may change in 2005.

 

In December 2004, the FASB issued Statement of FinancialAccounting Standard No. 153, “Exchanges of Nonmonetary Assets” (FAS 153) - anamendment of Accounting Principles Board Opinion No. 29 (Opinion 29). The guidance in Opinion 29, “Accounting for Nonmonetary Transactions” is basedon the underlying principle that the measurement of exchanges of nonmonetaryassets should be based on the fair value of the assets exchanged. However, Opinion 29 included certain exceptions to that principle, including arequirement that exchanges of similar productive assets should be recorded atthe carrying amount of the asset relinquished.  FAS153 eliminates thatexception and replaces it with a general exception for exchanges of nonmonetaryassets that lack commercial substance.  Only nonmonetary exchanges inwhich an entity’s future cash flows are expected to significantly change as aresult of the exchange will be considered to have commercial substance. FAS 153 must be applied to nonmonetary asset exchanges occurring in fiscalperiods beginning after June 15, 2005.  The adoption of thisstatement did not have a material impact on the Company’s financial conditionor results of operations.

 

In May 2005, the FASB issued Statement of Financial Accounting StandardNo. 154, “Accounting Changes and Error Corrections” (FAS 154) , which changesthe accounting and reporting requirements for the change in an accountingprinciple.  Accounting Principles Board Opinion 20, “Accounting Changes”(Opinion 20), which is superseded by FAS 154, required that most voluntarychanges in accounting principle be recognized by including the cumulativeeffect of changing to the new accounting principle as a component of net incomein the period of the change.  FAS 154 instead requires retrospectiveapplication to prior periods’ financial statements of changes in an accountingprinciple, unless it is impracticable to do so.  FAS 154 differentiatesbetween “retrospective application” and “restatement”.   “Retrospectiveapplication” is defined as the application of a different accounting principleto prior accounting periods as if that principle had always been used or as theadjustment of previously issued financial statements to reflect a change in thereporting entity.  In contrast, restatement is defined as the revising ofpreviously issued financial statements to reflect the correction of an error. If it is impracticable to determine the period-specific effects of anaccounting change on one or more individual prior periods presented, but thecumulative effect to all prior periods can be determined, the new accountingprinciple should be applied to assets and liabilities balances as of thebeginning of the earliest period for which retrospective application ispracticable.  In addition, a corresponding adjustment should be made tothe opening balance of retained earnings (or other appropriate components ofequity or net assets in the statement of financial position) for that periodrather than being reported in an income statement.  If it is impracticableto determine the cumulative effect of applying a change in accounting principleto any prior period, the new accounting principle should be applied as if itwere adopted prospectively from the earliest date practicable.  FAS 154also requires retrospective application to changes required by a new accountingpronouncement in the unusual instance that the pronouncement does not includespecific transition provisions.  If a pronouncement includes specifictransition provisions, those provisions should be followed.  FAS 154limits the retrospective application of a change in accounting principle to thedirect effects of the change.  Indirect effects of a change in accountingprinciple, such as a change in nondiscretionary profit-sharing paymentsresulting from an accounting change, should be recognized in the period of thechange.  FAS 154 also requires that a change in depreciation,amortization, or depletion method for long-lived, nonfinancial assets beaccounted for as a change in accounting estimate effected by a change inaccounting principle.  The guidance contained in Opinion 20 for reportingthe corrections of errors in previously issued financial statements, andchanges in accounting estimates is carried forward to FAS 154 without change. Additionally, FAS 154 carries forward the guidance in Opinion 20 requiringjustification of a change in accounting principle on the basis ofpreferability.  FAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005.  The Company does not anticipate that the adoption of this statementwill have a material impact on the Company’s financial condition or results ofoperations.

 

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Item 4.    Controls and Procedures

 

Disclosure Controls and Procedures

 

The Company’s CEO and CFO have evaluated the effectiveness of theCompany’s disclosure controls and procedures (as such term is defined inRules 13a-15(e) under the Securities Exchange Act of 1934, as amended)as of the end of the period covered by this report.  Based upon suchevaluation, the Company’s Chief Executive Officer and Chief Financial Officerhave concluded that, as of the end of the period, the Company’s disclosurecontrols and procedures are effective in recording, processing, summarizing andreporting, on a timely basis, information required to be disclosed by theCompany in the reports that it files or submits under the Securities ExchangeAct of 1934, as amended.

 

Internal Controls over Financial Reporting

 

There have not been any changes in the Company’s internal controls overfinancial reporting (as such term is defined in Rules 13a-15(f) and15d-15e under the Securities Exchange Act of 1934, as amended) during theperiod to which this report relates that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Because of the inherent limitationsin all control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within acompany have been detected.

 

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PART II - Other Information

 

Item 4.    Submission of Matters to a Vote of SecurityHolders

 

On September 2, 2005, the Company held a Special Meeting of Shareholdersto vote on proposals relating to its proposed merger with AnalystsInternational Corporation. The proposals and results of the voting were asfollows:

 
| 1) |   | The vote on a proposal to approve the issuance of  shares of the Company’s stock in connection with the merger of Analysts International  Corporation, was as follows: |
|----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 10,794,429 |       | 14,225,244  |       | 44,072      |       |

 

 
| 2) |   | The vote on a proposal to approve any motion to  adjourn or postpone the special meeting to permit the further solicitation of  votes, was as follows: |
|----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 8,007,884 |       | 15,046,775  |       | 2,009,086   |       |

 

 
| 3) |   | The vote on a proposal to approve the amendment and  restatement of the certificate of incorporation to change the name of the  Company to International Horizons Group, Inc., was as follows: |
|----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 10,781,619 |       | 14,216,632  |       | 65,494      |       |

 

 

Since all of the proposals before the meeting were non-discretionary,there were no broker non-votes to any proposal.

 

Item 6.

 

Exhibits

 

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

 

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

 

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

 

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

 

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*Filed herewith

 

 

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Signatures

 

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

 

 

|   |             | COMPUTER HORIZONS CORP.                                         |
|--------|------------------|-----------------------------------------------------------------|
|   |             | (Registrant)                                                    |
|   |             |                                                            |
|   |             |                                                            |
| DATE:  | November 8, 2005 |                                                            | /s/  Dennis Conroy |
|   |             |                                                            | Dennis Conroy, President and CEO |
|   |             |                                                            | (Principal Executive Officer) |
|   |             |                                                            |   |
|   |             |                                                            |   |
| DATE:  | November 8, 2005 |                                                            | /s/ Michael J. Shea |
|   |             | Michael J. Shea,                                                |
|   |             | Vice President and CFO                                          |
|   |             | (Principal Financial Officer and Principal  Accounting Officer) |
|   |             |                                                            |
|   |             |                                                            |
|   |             |                                                            |
|   |             |                                                            |
|   |             |                                                            |

 

 

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