**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

**ý****   QuarterlyReport Under Section 13 or 15(d)**

**of the Securities Exchange Act of 1934**

 

**for thequarterly period ended June 30, 2005**

 

**or**

 

**o****   TransitionReport pursuant to Section 13 or 15(d)**

**of the Securities Exchange Act of 1934**

 

**for thetransition period from              to               **

 

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**CommissionFile Number 0-7282**

 

**COMPUTER HORIZONS CORP.**

(Exact name of registrantas specified in its charter)

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

 

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

 

**NotApplicable**

(Former name, formeraddress and former fiscal year, if

changed since lastreport)

 

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

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

 

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

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

 

As of August 5, 2005 the issuer had 31,332,390 shares of commonstock outstanding.

 

**COMPUTERHORIZONS CORP. AND SUBSIDIARIES**

 

 

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Index

 
| Part  I   Financial Information |                                                                                                                     |
|------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|                                           |                                                                                                                     |   |
| Item 1                                         | Consolidated Balance Sheets  June 30, 2005 (unaudited) and December 31, 2004                                   |   |
|                                           |                                                                                                                     |   |
|                                           | Consolidated  Statements of Operations Three and Six Months Ended June 30, 2005 and  June 30, 2004 (unaudited) |   |
|                                           |                                                                                                                     |   |
|                                           | Consolidated  Statements of Cash Flows Six Months Ended June 30, 2005 and  June 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  and Reports on Form 8-K                                                                                        |   |
|                                           |                                                                                                                     |   |
|                                           | Signatures                                                                                                               |   |

 

2

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PART I. Financial Information

 

Item 1.

**COMPUTERHORIZONS CORP. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

(dollars inthousands)

 
| ** **                                                                                                                                            | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                                                            | ** ** | **(unaudited)**    | ** ** | ** **             | ** ** |
| **ASSETS**                                                                                                                                            |       |               |       |                   |       |
| CURRENT ASSETS:                                                                                                                                       |       |               |       |                   |       |
| Cash and cash  equivalents                                                                                                                            |       | $                  | 35,854     |                   | $          | 33,649 |   |
| Accounts  receivable, less allowance for doubtful accounts of $3,650 and $5,914 at June  30, 2005 and December 31, 2004, respectively                 |       | 51,109             |       | 51,322                 |       |
| Deferred income taxes                                                                                                                                 |       | 603                |       | 1,868                  |       |
| Refundable  income taxes                                                                                                                              |       | 4,878              |       | 4,088                  |       |
| Other                                                                                                                                                 |       | 3,590              |       | 5,550                  |       |
| TOTAL CURRENT  ASSETS                                                                                                                                 |       | 96,034             |       | 96,477                 |       |
|                                                                                                                                                  |       |               |       |                   |       |
| PROPERTY AND  EQUIPMENT                                                                                                                               |       | 44,280             |       | 42,810                 |       |
| Less accumulated  depreciation                                                                                                                        |       | (38,809            | )          | (36,815                | )          |
| TOTAL PROPERTY  AND EQUIPMENT, NET                                                                                                                    |       | 5,471              |       | 5,995                  |       |
| OTHER ASSETS -  NET:                                                                                                                                  |       |               |       |                   |       |
| Goodwill                                                                                                                                              |       | 27,625             |       | 27,625                 |       |
| Deferred merger  costs                                                                                                                                |       | 2,426              |       | —                 |       |
| Intangibles                                                                                                                                           |       | 2,403              |       | 3,253                  |       |
| Deferred income  taxes                                                                                                                                |       | 18,887             |       | 17,698                 |       |
| Other                                                                                                                                                 |       | 8,077              |       | 8,036                  |       |
| TOTAL OTHER  ASSETS                                                                                                                                   |       | 59,418             |       | 56,612                 |       |
|                                                                                                                                                  |       |               |       |                   |       |
| TOTAL ASSETS                                                                                                                                          |       | $                  | 160,923    |                   | $          | 159,084 |   |
|                                                                                                                                                  |       |               |       |                   |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                        |       |               |       |                   |       |
| CURRENT  LIABILITIES:                                                                                                                                 |       |               |       |                   |       |
| Accounts payable                                                                                                                                      |       | $                  | 15,208     |                   | $          | 7,615 |   |
| Accrued payroll,  payroll taxes and benefits                                                                                                          |       | 8,743              |       | 8,489                  |       |
| Income taxes  payable                                                                                                                                 |       | 1,484              |       | 1,377                  |       |
| Restructuring  reserve                                                                                                                                |       | 837                |       | 3,351                  |       |
| RGII contingency  payment                                                                                                                             |       | —             |       | 1,851                  |       |
| Other accrued  expenses                                                                                                                               |       | 2,923              |       | 4,912                  |       |
| TOTAL CURRENT  LIABILITIES                                                                                                                            |       | 29,195             |       | 27,595                 |       |
|                                                                                                                                                  |       |               |       |                   |       |
| OTHER  LIABILITIES:                                                                                                                                   |       |               |       |                   |       |
| Deferred  compensation                                                                                                                                |       | 2,617              |       | 2,633                  |       |
| Supplemental  executive retirement plan                                                                                                               |       | 2,205              |       | 2,162                  |       |
| Other                                                                                                                                                 |       | 784                |       | 913                    |       |
| TOTAL  LIABILITIES                                                                                                                                    |       | 34,801             |       | 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 June 30, 2005 and December 31, 2004, respectively |       | 3,315              |       | 3,315                  |       |
| Additional paid  in capital                                                                                                                           |       | 151,043            |       | 151,281                |       |
| Accumulated  other comprehensive loss                                                                                                                 |       | (2,764             | )          | (2,200                 | )          |
| Accumulated  deficit                                                                                                                                  |       | (13,699            | )          | (14,072                | )          |
|                                                                                                                                                  |       | 137,895            |       | 138,324                |       |
| Less shares held  in treasury, at cost; 1,886,307 and 2,060,011 shares at June 30, 2005 and  December 31, 2004, respectively                          |       | (11,773            | )          | (12,543                | )          |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                                                                      |       | 126,122            |       | 125,781                |       |
|                                                                                                                                                  |       |               |       |                   |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                      |       | $                  | 160,923    |                   | $          | 159,084 |   |

 

The accompanying notes are an integral part of these statements.

 

3

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**COMPUTERHORIZONS CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(Unaudited)

(dollars inthousands, except per share data)

 
| ** **                                               | ** ** | **THREE  MONTHS ENDED** | ** ** | **SIX  MONTHS ENDED** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **June 30,  2005**      | ** ** | **June 30,  2004**    | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
| ** **                                               | ** ** | ** **              | ** ** | **% of  revenue**     | ** ** | ** ** | ** ** | **% of  revenue** | ** ** | ** ** | ** ** | **% of  revenue** | ** ** | ** ** | ** ** | **% of  revenue** | ** ** |
| REVENUES:                                                |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                               |       | $                       | 50,650     |                  | 73.3       | % | $ | 46,006 |   | 69.9 | % | $ | 99,321 |   | 73.2 | % | $ | 90,789 |   | 72.3 | % |
| Federal                                                  |       | 11,404                  |       | 16.5                  | %          | 13,855 |   | 21.1 | % | 22,943 |   | 16.9 | % | 23,425 |   | 18.7 | % |
| Chimes                                                   |       | 7,012                   |       | 10.2                  | %          | 5,929 |   | 9.0 | % | 13,375 |   | 9.9 | % | 11,282 |   | 9.0 | % |
| Total                                                    |       | 69,066                  |       | 100.0                 | %          | 65,790 |   | 100.0 | % | 135,639 |   | 100.0 | % | 125,496 |   | 100.0 | % |
|                                                     |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| COSTS AND  EXPENSES:                                     |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Direct costs                                             |       | 47,763                  |       | 69.2                  | %          | 44,507 |   | 67.7 | % | 93,351 |   | 68.8 | % | 85,312 |   | 68.0 | % |
| Selling, general  & administrative                   |       | 21,208                  |       | 30.7                  | %          | 21,554 |   | 32.8 | % | 42,185 |   | 31.1 | % | 41,142 |   | 32.8 | % |
| Amortization of  intangibles                             |       | 264                     |       | 0.4                   | %          | 520 |   | 0.8 | % | 614 |   | 0.5 | % | 728 |   | 0.6 | % |
| Special charges /  (credits)                             |       | (115                    | )          | -0.2                  | %          | (939 | ) | -1.4 | % | (790 | ) | -0.6 | % | (939 | ) | -0.7 | % |
|                                                     |       | 69,120                  |       | 100.1                 | %          | 65,642 |   | 99.8 | % | 135,360 |   | 99.8 | % | 126,243 |   | 100.6 | % |
|                                                     |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INCOME/(LOSS)  FROM OPERATIONS                           |       | (54                     | )          | -0.1                  | %          | 148 |   | 0.2 | % | 279 |   | 0.2 | % | (747 | ) | -0.6 | % |
|                                                     |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| OTHER  INCOME/(EXPENSE):                                 |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                          |       | 134                     |       | 0.2                   | %          | 47 |   | 0.1 | % | 314 |   | 0.2 | % | 140 |   | 0.1 | % |
| Interest expense                                         |       | (14                     | )          | 0.0                   | %          | (18 | ) | 0.0 | % | (19 | ) | 0.0 | % | (28 | ) | 0.0 | % |
|                                                     |       | 120                     |       | 0.2                   | %          | 29 |   | 0.0 | % | 295 |   | 0.2 | % | 112 |   | 0.1 | % |
|                                                     |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INCOME/(LOSS)  BEFORE INCOME TAXES                       |       | 66                      |       | 0.1                   | %          | 177 |   | 0.3 | % | 574 |   | 0.4 | % | (635 | ) | -0.5 | % |
|                                                     |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INCOME  (TAXES)/BENEFIT:                                 |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current                                                  |       | —                  |       | 0.0                   | %          | (186 | ) | -0.3 | % | (124 | ) | -0.1 | % | (311 | ) | -0.2 | % |
| Deferred                                                 |       | (22                     | )          | 0.0                   | %          | 89 |   | 0.1 | % | (76 | ) | -0.1 | % | 468 |   | 0.4 | % |
|                                                     |       | (22                     | )          | 0.0                   | %          | (97 | ) | -0.1 | % | (200 | ) | -0.1 | % | 157 |   | 0.1 | % |
|                                                     |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INCOME/(LOSS)  BEFORE MINORITY INTEREST                  |       | 44                      |       | 0.1                   | %          | 80 |   | 0.1 | % | 374 |   | 0.3 | % | (478 | ) | -0.4 | % |
|                                                     |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Minority Interest                                        |       | —                  |       | 0.0                   | %          | 45 |   | 0.1 | % | — |   | 0.0 | % | 36 |   | 0.0 | % |
|                                                     |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NET INCOME/(LOSS)                                        |       | $                       | 44         |                  | 0.1        | % | $ | 125 |   | 0.2 | % | $ | 374 |   | 0.3 | % | $ | (442 | ) | -0.4 | % |
|                                                     |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| EARNINGS/(LOSS)  PER SHARE - BASIC:                      |       | $                       | 0.00       |                  |       |   | $ | 0.00 |   |   |   | $ | 0.01 |   |   |   | $ | (0.01 | ) |   |   |
|                                                     |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING - BASIC   |       | 31,272,000              |       |                  |       | 30,810,000 |   |   |   | 31,232,000 |   |   |   | 30,743,000 |   |   |   |
|                                                     |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| EARNINGS/(LOSS)  PER SHARE - DILUTED:                    |       | $                       | 0.00       |                  |       |   | $ | 0.00 |   |   |   | $ | 0.01 |   |   |   | $ | (0.01 | ) |   |   |
|                                                     |       |                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING - DILUTED |       | 31,451,000              |       |                  |       | 31,215,000 |   |   |   | 31,488,000 |   |   |   | 30,743,000 |   |   |   |

 

The accompanying notes are an integral part of these statements.

 

4

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**COMPUTERHORIZONS CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(Unaudited)

(dollars inthousands)

 
| ** **                                                                                           | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                           | ** ** | **June 30, 2005**    | ** ** | **June 30, 2004** | ** ** |
|                                                                                                 |       |                 |       |   |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                            |       |                 |       |   |   |
| Net  income/(loss)                                                                                   |       | $                    | 374        |   | $ | (442 | ) |
| Adjustments to  reconcile net income/(loss) to net cash provided by/(used in) operating  activities: |       |                 |       |   |   |
| Deferred taxes                                                                                       |       | 76                   |       | (468 | ) |
| Depreciation                                                                                         |       | 2,046                |       | 2,591 |   |
| Amortization of  intangibles                                                                         |       | 614                  |       | 728 |   |
| Provision for  bad debts                                                                             |       | 388                  |       | 745 |   |
| Gain on sale of  assets                                                                              |       | (327                 | )          | — |   |
|                                                                                                 |       |                 |       |   |   |
| Changes in  assets and liabilities, net of acquisitions:                                             |       |                 |       |   |   |
| Accounts  receivable                                                                                 |       | (175                 | )          | (3,649 | ) |
| Other current  assets                                                                                |       | 1,959                |       | 590 |   |
| Other assets                                                                                         |       | (40                  | )          | (382 | ) |
| Refundable  income taxes/benefit reserve                                                             |       | (790                 | )          | — |   |
| Accrued payroll,  payroll taxes and benefits                                                         |       | 254                  |       | 854 |   |
| Accounts payable                                                                                     |       | 7,593                |       | 1,337 |   |
| Income taxes  payable                                                                                |       | 107                  |       | (897 | ) |
| RGII contingency  payment                                                                            |       | (1,851               | )          | — |   |
| Other accrued  expenses and restructuring reserve                                                    |       | (4,502               | )          | (2,427 | ) |
| Deferred  compensation                                                                               |       | (2                   | )          | 185 |   |
| Supplemental  executive retirement plan                                                              |       | (115                 | )          | 240 |   |
| Other  liabilities                                                                                   |       | (131                 | )          | 341 |   |
| **NET  CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES**                                             |       | 5,478                |       | (654 | ) |
|                                                                                                 |       |                 |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                            |       |                 |       |   |   |
| Deferred merger  costs                                                                               |       | (2,426               | )          | — |   |
| Proceeds from  sale of assets                                                                        |       | 563                  |       | — |   |
| Purchases of  furniture and equipment                                                                |       | (1,523               | )          | (844 | ) |
| Acquisitions,  net of cash acquired                                                                  |       | —               |       | (14,704 | ) |
| **NET  CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES**                                             |       | (3,386               | )          | (15,548 | ) |
|                                                                                                 |       |                 |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                            |       |                 |       |   |   |
| Stock options  exercised                                                                             |       | 175                  |       | 376 |   |
| Stock issued on  employee stock purchase plan                                                        |       | 357                  |       | 280 |   |
| **NET  CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES**                                             |       | 532                  |       | 656 |   |
|                                                                                                 |       |                 |       |   |   |
| Foreign currency  gains/(losses)                                                                     |       | (419                 | )          | (364 | ) |
| **NET  INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS**                                            |       | 2,205                |       | (15,910 | ) |
|                                                                                                 |       |                 |       |   |   |
| **CASH  AND CASH EQUIVALENTS AT BEGINNING OF YEAR**                                                  |       | 33,649               |       | 52,610 |   |
|                                                                                                 |       |                 |       |   |   |
| **CASH  AND CASH EQUIVALENTS AT END OF PERIOD**                                                      |       | $                    | 35,854     |   | $ | 36,700 |   |

 

Non CashActivities:

 

During the first quarterof 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

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**COMPUTERHORIZONS CORP.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

For the PeriodsJune 30, 2005 and June 30, 2004

(unaudited)

 

**1.****                                      Basisof Presentation**

 

The consolidated balance sheet as of June 30, 2005, theconsolidated statements of operations for the three and six months endedJune 30, 2005 and June 30, 2004, respectively, and the statement ofcash flows for the six months ended June 30, 2005 and 2004 have beenprepared by the Company without audit.  In the opinion of management, alladjustments (which include normal recurring adjustments) necessary to presentfairly the financial position, results of operations and cash flows atJune 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 June 30, 2005 and 2004 are notnecessarily indicative of the operating results for the respective full years.

 

**2.****                                      RecentAccounting Pronouncements**

 

In March 2004, the Financial Accounting Standards Board (FASB)Emerging Issues Task Force (EITF) released Issue No. 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments (EITF03-1).  EITF 03-1 provides guidance fordetermining whether impairment for certain debt and equity investments isother-than-temporary and the measurement of an impaired loss. The recognitionand measurement requirements of EITF 03-1 were initially effective forreporting periods beginning after June 15, 2004. In September 2004,the FASB Staff issued FASB Staff Position (FSP) EITF 03-1-1 that delayed theeffective date for certain measurement and recognition guidance contained inEITF 03-1. The FSP requires that entities continue to apply previously existing“other-than-temporary” guidance until a final consensus is reached. Managementdoes not anticipate that issuance of a final consensus will materially impactthe Company’s financial 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 (SAB) 107, “Share-Based Payment”, in April 2005, which providesthe views of the SEC staff regarding certain aspects of the application of FAS123R.  SAB 107 assists issuers in theirinitial implementation of FAS 123R and indicates that the staff’s understandingthat, particularly in the period of initial implementation, issuers mayreasonably arrive at different estimates and option valuations in applying FAS123R.  We expect the adoption of this statement will have a materialeffect on the Company’s financial statements, but we cannot reasonably estimatethe impact of the adoption because certain assumptions used in the calculationof the value of share-based payments may change in 2005.

 

In December 2004 the FASB issued Statement 153, Exchanges ofNonmonetary Assets- an amendment of APB Opinion No. 29.  The guidance in Opinion 29, *Accounting for Nonmonetary Transactions* is based on theunderlying principle that the measurement of exchanges of nonmonetary assetsshould be based on the fair value of the assets exchanged.  However, Opinion 29 included certainexceptions to that principle, including a requirement that exchanges of similarproductive assets should be recorded at the carrying amount of the assetrelinquished.  Statement 153 eliminatesthat exception and replaces it with a general exception for exchanges ofnonmonetary assets that lack commercial substance.  Only nonmonetary exchanges in which an entity’sfuture cash flows are expected to significantly change as a result of theexchange will be considered to have commercial substance.  Statement 153 must be applied to nonmonetaryasset exchanges occurring in fiscal periods beginning after June 15,2005.  The Company does not anticipatethat the adoption of this statement will have a material impact on the Company’sfinancial statements.

 

In May 2005 the FASBissued Statement 154, *Accounting Changes andError Corrections*, which changes the accounting and reportingrequirements for the change in an accounting principle.  Opinion 20, *AccountingChanges*, which is superseded by Statement 154, required that mostvoluntary changes in accounting principle be recognized by including thecumulative effect of changing to the new accounting principle as a component ofnet income in the period of the change. Statement 154 instead requires retrospective application to priorperiods’ financial statements of changes in an accounting principle, unless itis impracticable to do so.  Statement 154differentiates between *retrospectiveapplication* and *restatement.*  *Retrospective application*isdefined as the application of a different accounting principle to prioraccounting 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 theperiod-specific effects of an accounting change on one or more individual priorperiods presented, but the cumulative effect to all prior periods can bedetermined, the new accounting principle should be applied to assets andliabilities balances as of the beginning of the earliest period for whichretrospective application is practicable. In addition, a corresponding adjustment should be made to the openingbalance of retained earnings (or other appropriate components of equity or netassets in the statement of financial position) for that period rather thanbeing reported in an income statement. If it is impracticable to determine the cumulative effect of applying achange in accounting principle to any prior period, the new accountingprinciple should be applied as if it were adopted prospectively from theearliest date practicable.  Statement 154also requires retrospective application to changes required by a new accountingpronouncement in the unusual instance that the pronouncement does not includespecific transition provisions.  If apronouncement includes specific transition provisions, those provisions shouldbe followed.  Statement 154 limits theretrospective application of a change in accounting principle to the directeffects of the change.  Indirect effectsof a change in accounting principle, such as a change in nondiscretionaryprofit-sharing payments resulting from an accounting change, should berecognized in the period of the change. The Statement also requires that a change in depreciation, amortization,or depletion method for long-lived, nonfinancial assets be accounted for as achange in accounting estimate effected by a change in accountingprinciple.  The guidance contained inOpinion 20 for reporting the corrections of errors in previously issuedfinancial statements, and changes in accounting estimates is carried forward toStatement 154 without change. Additionally, the Statement carries forward the guidance in Opinion 20requiring justification of a change in accounting principle on the basis ofpreferability.  Statement 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005.  TheCompany has not completed the impact of this pronouncement on its financialstatements.

 

 

 

**3.****                                      Accountingfor Stock-Based Compensation**

 

In December 2002, the FASB approved the issuance of Statement ofFinancial Accounting Standard No. 148, “Accounting for Stock-BasedCompensation – Translation and Disclosure” (FAS 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:

 

6

----

 
| ** **                                | ** **                                                                                                                                     | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------------------|------------|----------------------|------------|
| **(in thousands, except per share data)** | ** **                                                                                                                                     | **June 30,   2005**    | ** ** | **June 30,   2004**  | ** ** | **June 30,   2005** | ** ** | **June 30,   2004** | ** ** |
|                                      |                                                                                                                                           |                   |       |                 |       |   |   |   |   |
| Net  income/(loss)                        | As reported                                                                                                                                    |                   | $          | 44                   |       | $ | 125 |   | $ | 374 |   | $ | (442 | ) |
|                                      | Deduct : Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |                   | (197       | )                    | (555       | ) | (529 | ) | (1,257 | ) |
|                                      |                                                                                                                                           |                   |       |                 |       |   |   |   |   |   |
|                                      | Pro forma                                                                                                                                      |                   | $          | (153                 | )          | $ | (430 | ) | $ | (155 | ) | $ | (1,699 | ) |
|                                      |                                                                                                                                           |                   |       |                 |       |   |   |   |   |   |
| Earnings per  share                       |                                                                                                                                           |                   |       |                 |       |   |   |   |   |   |
| Basic                                     | As reported                                                                                                                                    |                   | $          | 0.00                 |       | $ | 0.00 |   | $ | 0.01 |   | $ | (0.01 | ) |
|                                      | Pro forma                                                                                                                                      |                   | (0.00      | )                    | (0.01      | ) | (0.00 | ) | (0.06 | ) |
|                                      |                                                                                                                                           |                   |       |                 |       |   |   |   |   |   |
| Diluted                                   | As reported                                                                                                                                    |                   | $          | 0.00                 |       | $ | 0.00 |   | $ | 0.01 |   | $ | (0.01 | ) |
|                                      | Pro forma                                                                                                                                      |                   | (0.00      | )                    | (0.01      | ) | (0.00 | ) | (0.06 | ) |

 

**4.****                                      RestrictedCash**

 

Included in cash and cash equivalents at June 30, 2005 andDecember 31, 2004 is restricted cash of nil and $191,000,respectively.  Restricted cash represents funds received by Chimes andheld in client-specific bank accounts, to be used to make payments to vendorsof the applicable client.  Cash and cashequivalents at June 30, 2005 and December 31, 2004 also includes approximately$9.0 million and $2.1 million, respectively, of cash to be disbursed to Chimesvendors in accordance with the client payment terms.

 

**5.****                                      EarningsPer Share**

 

Basic Earnings Per Share (“EPS”) is based on the weighted averagenumber of common shares outstanding without consideration of common stockequivalents.  Diluted earnings per share is based on the weighted averagenumber of common and common equivalent shares outstanding, except the six-monthperiod ended June 30, 2004, where the effect would have beenantidilutive.  The calculation takes into account the shares that may beissued upon exercise of stock options, reduced by the shares that may berepurchased with the funds received from the exercise, based on the averageprice during the year.

 

In accordance with Statement of Financial Accounting Standard No. 128, “Earningsper Share” (SFAS 128), the table below presents both basic and diluted earningsper share:

 
| ** **                                                                                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                          | ** ** | **June 30,  2005**     | ** ** | **June 30,  2004**   | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
|                                                                                                                |       |                   |       |                 |       |   |   |   |   |
| Numerator:                                                                                                          |       |                   |       |                 |       |   |   |   |   |
| Net  income/(loss) - in thousands                                                                                   |       | $                      | 44         |                 | $          | 125 |   | $ | 374 |   | $ | (442 | ) |
| Denominator:                                                                                                        |       |                   |       |                 |       |   |   |   |   |
| Denominator for basic  earnings per share - weighted average shares outstanding                                     |       | 31,272,000             |       | 30,810,000           |       | 31,232,000 |   | 30,743,000 |   |
| Effect of stock  options                                                                                            |       | 179,000                |       | 405,000              |       | 256,000 |   | — |   |
| Diluted  earnings/(loss) per share:                                                                                 |       |                   |       |                 |       |   |   |   |   |
| Denominator for diluted  earnings per share - adjusted weighted average shares outstanding and assumed  conversions |       | 31,451,000             |       | 31,215,000           |       | 31,488,000 |   | 30,743,000 |   |
| Basic  earnings/(loss) per share                                                                                    |       | $                      | 0.00       |                 | $          | 0.00 |   | $ | 0.01 |   | $ | (0.01 | ) |
| Diluted  earnings/(loss) per share                                                                                  |       | $                      | 0.00       |                 | $          | 0.00 |   | $ | 0.01 |   | $ | (0.01 | ) |

 

7

----

 

The computation of diluted earnings per share excludes options withexercise prices greater than the average market price.  As of June 30, 2005there were 2,410,409 and 2,247,909 excluded options, respectively, for thesecond quarter and the first six months ended June 30, 2005, with exerciseprices between $3.21 and $16.375 and $3.65 and $16.375 respectively, per share.

 

There were 1,021,084 and 268,472 excluded options, respectively, forthe second quarter and first six months ended June 30, 2004, with exerciseprices between $3.89 and $26.63 and $4.40 and $26.63 respectively, per share.

 

**6.****                                      SegmentInformation**

 

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 has reclassified the prioryear amounts in order to provide a basis for comparison, conforming to our newlines of business.  Income/(loss) before income taxes/ (benefit) consists ofincome/(loss) before income taxes, excluding interest income, interest expense,special charges/(credits), minority interest, and amortization ofintangibles.  These exclusions total expense of $29,000 and income of $448,000for the quarter ended June 30, 2005 and 2004, respectively, and income of$471,000 and $323,000 for the six months of June 30, 2005 and 2004,respectively (see reconciliation of segment income/(loss) before incometaxes/(benefit) to consolidated income/(loss) before incometaxes/(benefit)).  Corporate services, consisting of general andadministrative services, are provided to the segments from a centralizedlocation.  Such costs are allocated to the applicable segments receiving corporateservices based on revenue.

 
| ** **                                               | ** ** | **THREE MONTHS ENDED** | ** ** | **SIX MONTHS ENDED** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| **(dollars in thousands)**                               | ** ** | **June 30,  2005**     | ** ** | **June 30,  2004**   | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
| Revenues :                                               |       |                   |       |                 |       |   |   |   |   |
| Commercial                                               |       | $                      | 50,650     |                 | $          | 46,006 |   | $ | 99,321 |   | $ | 90,789 |   |
| Federal                                                  |       | 11,404                 |       | 13,855               |       | 22,943 |   | 23,425 |   |
| Chimes                                                   |       | 7,012                  |       | 5,929                |       | 13,375 |   | 11,282 |   |
| Total revenues                                           |       | $                      | 69,066     |                 | $          | 65,790 |   | $ | 135,639 |   | $ | 125,496 |   |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| Gross Profit :                                           |       |                   |       |                 |       |   |   |   |   |
| Commercial                                               |       | $                      | 9,208      |                 | $          | 9,353 |   | $ | 18,726 |   | $ | 19,043 |   |
| Federal                                                  |       | 5,279                  |       | 6,368                |       | 10,694 |   | 10,518 |   |
| Chimes                                                   |       | 6,816                  |       | 5,562                |       | 12,868 |   | 10,623 |   |
| Total Gross  Profit                                      |       | $                      | 21,303     |                 | $          | 21,283 |   | $ | 42,288 |   | $ | 40,184 |   |
| %                                                        |       | 30.8                   | %          | 32.3                 | %          | 31.2 | % | 32.0 | % |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| Operating Income  :                                      |       |                   |       |                 |       |   |   |   |   |
| Commercial                                               |       | $                      | 2,306      |                 | $          | 2,222 |   | $ | 4,912 |   | $ | 5,332 |   |
| Federal                                                  |       | 1,133                  |       | 2,272                |       | 2,456 |   | 3,240 |   |
| Chimes                                                   |       | 1,607                  |       | 728                  |       | 2,796 |   | 822 |   |
| Total Operating  Income                                  |       | $                      | 5,046      |                 | $          | 5,222 |   | $ | 10,164 |   | $ | 9,394 |   |
| %                                                        |       | 7.3                    | %          | 7.9                  | %          | 7.5 | % | 7.5 | % |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| Corporate  Allocation :                                  |       |                   |       |                 |       |   |   |   |   |
| Commercial                                               |       | $                      | 3,930      |                 | $          | 4,310 |   | $ | 8,003 |   | $ | 8,270 |   |
| Federal                                                  |       | 409                    |       | 578                  |       | 852 |   | 967 |   |
| Chimes                                                   |       | 612                    |       | 605                  |       | 1,206 |   | 1,115 |   |
| Total Corporate  Allocation                              |       | $                      | 4,951      |                 | $          | 5,493 |   | $ | 10,061 |   | $ | 10,352 |   |
| %                                                        |       | 7.2                    | %          | 8.3                  | %          | 7.4 | % | 8.2 | % |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| Total Income /  (Loss) before Income Taxes / (benefit) : |       |                   |       |                 |       |   |   |   |   |
| Commercial                                               |       | $                      | (1,624     | )                    | $          | (2,088 | ) | $ | (3,091 | ) | $ | (2,938 | ) |
| Federal                                                  |       | 724                    |       | 1,694                |       | 1,604 |   | 2,273 |   |
| Chimes                                                   |       | 995                    |       | 123                  |       | 1,590 |   | (293 | ) |
| Total Income /  (Loss) before Income Taxes / (Benefit)   |       | $                      | 95         |                 | $          | (271 | ) | $ | 103 |   | $ | (958 | ) |
| %                                                        |       | 0.1                    | %          | -0.4                 | %          | 0.1 | % | -0.8 | % |

 

8

----

 

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

 
| ** **                                                   | ** ** | **THREE MONTHS ENDED** | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| **(dollars in thousands)**                                   | ** ** | **June 30,  2005**     | ** ** | **June 30,  2004**   | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| Total segment  income/(loss) before income taxes/(benefit) : |       | $                      | 95         |                 | $          | (271 | ) | $ | 103 |   | $ | (958 | ) |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| Adjustments :                                                |       |                   |       |                 |       |   |   |   |   |
| Special  (charges) / credits                                 |       | 115                    |       | 939                  |       | 790 |   | 939 |   |
| Amortization of  intangibles                                 |       | (264                   | )          | (520                 | )          | (614 | ) | (728 | ) |
| Net interest  income                                         |       | 120                    |       | 29                   |       | 295 |   | 112 |   |
| Total  adjustments                                           |       | (29                    | )          | 448                  |       | 471 |   | 323 |   |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| Consolidated  income/(loss) before income taxes/(benefit)    |       | $                      | 66         |                 | $          | 177 |   | $ | 574 |   | $ | (635 | ) |

 

**7.****                                      RestructuringCharges**

 

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 based on current market conditions.

 
| ** **                 | ** ** | **Remaining at**      | ** ** | ** ** | ** ** | **Currency**      | ** ** | **Remaining at**  | ** ** |
|----------------------------|------------|-----------------------|------------|------------|------------|-------------------|------------|-------------------|------------|
| **(dollars in thousands)** | ** ** | **December 31, 2004** | ** ** | **Paid**   | ** ** | **Translation *** | ** ** | **June 30, 2005** | ** ** |
|                       |       |                  |       |       |       |              |       |              |       |
| Severance :                |       |                  |       |       |       |              |       |              |       |
| Canada                     |       | $                     | 535        |       | $          | (346              | )          | $                 | (9         | ) | $ | 180 |   |
| United States              |       | 1,902                 |       | (1,750     | )          | —            |       | $                 | 152        |   |
| Total Severance            |       | $                     | 2,437      |       | $          | (2,096            | )          | $                 | (9         | ) | $ | 332 |   |
|                       |       |                  |       |       |       |              |       |              |       |
| Lease  Obligations :       |       |                  |       |       |       |              |       |              |       |
| United States              |       | $                     | 110        |       | $          | (54               | )          | $                 | —     |   | $ | 56 |   |
|                       |       |                  |       |       |       |              |       |              |       |
| Total                      |       | $                     | 2,547      |       | $          | (2,150            | )          | $                 | (9         | ) | $ | 388 |   |

 

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.

 
| ** **                 | ** ** | **Remaining at**      | ** ** | ** ** | ** ** | **Currency**      | ** ** | **Remaining at**  | ** ** |
|----------------------------|------------|-----------------------|------------|------------|------------|-------------------|------------|-------------------|------------|
| **(dollars in thousands)** | ** ** | **December 31, 2004** | ** ** | **Paid**   | ** ** | **Translation *** | ** ** | **June 30, 2005** | ** ** |
|                       |       |                  |       |       |       |              |       |              |       |
| Severance :                |       |                  |       |       |       |              |       |              |       |
| United Kingdom             |       | $                     | 50         |       | $          | 0                 |       | $                 | (3         | ) | $ | 47 |   |
| Total Severance            |       | $                     | 50         |       | $          | 0                 |       | $                 | (3         | ) | $ | 47 |   |
|                       |       |                  |       |       |       |              |       |              |       |
| Lease  Obligations :       |       |                  |       |       |       |              |       |              |       |
| United Kingdom             |       | $                     | 123        |       | $          | (13               | )          | $                 | (7         | ) | 103 |   |
| Canada                     |       | 319                   |       | (73        | )          | (12               | )          | 234               |       |
| Total Lease  Obligations   |       | $                     | 442        |       | $          | (86               | )          | $                 | (19        | ) | $ | 337 |   |
|                       |       |                  |       |       |       |              |       |              |       |
| General Office  Closure :  |       |                  |       |       |       |              |       |              |       |
| United Kingdom             |       | $                     | 45         |       | $          | (12               | )          | $                 | (2         | ) | $ | 31 |   |
|                       |       |                  |       |       |       |              |       |              |       |
| Total                      |       | $                     | 537        |       | $          | (98               | )          | $                 | (24        | ) | $ | 415 |   |

 

----

* Recordedbalances change due to fluctuations in exchange rates

 

9

----

 

During 2002, the Company recorded restructuring charges approximating$2.8 million, primarily pertaining to office closings.   In the second quarter of 2005, the Companyrecorded an additional charge pertaining to sublease income which did notmaterialize as estimated in the initial 2002 restructuring charge.  Amounts remaining from this restructuring,and previous restructurings, pertain to future lease obligation costs.

 
| ** **                 | ** ** | **Remaining at**      | ** ** | ** **   | ** ** | ** ** | ** ** | ** **   | ** ** | **Remaining at**  | ** ** |
|----------------------------|------------|-----------------------|------------|--------------|------------|------------|------------|--------------|------------|-------------------|------------|
| **(dollars in thousands)** | ** ** | **December 31, 2004** | ** ** | **Recorded** | ** ** | **Paid**   | ** ** | **Adjusted** | ** ** | **June 30, 2005** | ** ** |
|                       |       |                  |       |         |       |       |       |         |       |              |       |
| Lease  Obligations :       |       |                  |       |         |       |       |       |         |       |              |       |
| United States              |       | $                     | 267        |         | $          | 142        |       | $            | (375       | )                 | $          | — |   | $ | 34 |   |
|                            |            |                       |            |              |            |            |            |              |            |                   |            |  |  |  |  |  |

 

**8.****                                      Shareholders’Equity**

 
| ** **                                        | ** ** | **Six Months Ended**       | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **June 30, 2005**          | ** ** |
| ** **                                        | ** ** | **Amount**                 | ** ** | **Shares** | ** ** |
| ** **                                        | ** ** | **(dollars in thousands)** | ** ** | ** ** | ** ** |
|                                              |       |                       |       |   |   |
| Balance at  beginning of period                   |       | $                          | 125,781    |   | 31,093,794 |   |
| Net income                                        |       | 374                        |       |   |   |
| Proceeds upon  exercise of stock options and ESPP |       | 532                        |       | 178,004 |   |
| Other  comprehensive loss                         |       | (564                       | )          |   |   |
|                                              |       | $                          | 126,122    |   | 31,271,798 |   |

 

**9.****                                      ComprehensiveIncome/(Loss)**

 

Statement of Financial Accounting Standards No. 130, “ReportingComprehensive Income” (SFAS 130), requires that items defined as othercomprehensive income/ (loss), such as foreign currency translation adjustmentsand unrealized gains and losses, be separately classified in the financial statementsand that the accumulated balance of other comprehensive income/ (loss) bereported separately from retained earnings and additional paid-in capital inthe equity section of the balance sheet. The components of comprehensiveloss for the three and six months ended June 30, 2005 and June 30,2004 are as follows:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|
| **(dollars  in thousands)**                 | ** ** | **June 30,   2005**    | ** ** | **June 30, 2004** | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
| Comprehensive  income/(loss) :              |       |                   |       |                   |       |   |   |   |   |
|                                        |       |                   |       |                   |       |   |   |   |   |
| Net  income/(loss)                          |       | $                      | 44         |                   | $          | 125 |   | $ | 374 |   | $ | (442 | ) |
| Other  comprehensive income/(loss) -        |       |                   |       |                   |       |   |   |   |   |
| Foreign currency  adjustment                |       | (187                   | )          | (213                   | )          | (419 | ) | (365 | ) |
| Unrealized  gain/(loss) on SERP investments |       | 25                     |       | (24                    | )          | (145 | ) | 50 |   |
| Comprehensive  income/(loss)                |       | $                      | (118       | )                      | $          | (112 | ) | $ | (190 | ) | $ | (757 | ) |

 

The accumulated balances related to each component of othercomprehensive income/(loss) for the six months ended June 30, 2005 and June 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) |       | (419                               | )          | (145                                        | )          | (564                                       | )          |
| Balance at June  30, 2005                |       | $                                  | (1,355     | )                                           | $          | (1,409                                     | )          | $ | (2,764 | ) |
|                                     |       |                               |       |                                        |       |                                       |       |
| Balance at  December 31, 2003            |       | $                                  | (1,200     | )                                           | $          | (1,589                                     | )          | $ | (2,789 | ) |
| Accumulated  comprehensive income/(loss) |       | (365                               | )          | 50                                          |       | (315                                       | )          |
| Balance at June  30, 2004                |       | $                                  | (1,565     | )                                           | $          | (1,539                                     | )          | $ | (3,104 | ) |

 

10

----

 

**10.****                               Purchaseof 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 repurchase sharesof its common stock during the six months ended June 30, 2005 and June 30,2004, respectively.  As of June 30,2005, the remaining authorization for repurchase is approximately 93,000shares.

 

**11.****                               Asset-BasedLending 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 June 30,2005, the Company had no outstanding loan balance against the facility. Based on the Company’s eligible client receivables and cash balances, $16.9million was available for borrowing as of June 30, 2005.  The fee forthe unused portion of the line of credit is 0.375% per annum charged to theCompany monthly.  This charge was approximately $64,000 and $52,000 forthe six month periods ended June 30, 2005 and 2004, respectively. This line of credit includes covenants relating to the maintenance of cashbalances and providing for limitations on incurring obligations and spendinglimits on capital expenditures.  The Company did not satisfy this covenantfor the quarter ended March 31, 2004.  A waiver was received from thelending institution for the quarter ended March 31, 2004 along with anamendment to the loan agreement lowering the three-month average minimumcollections covenant to $10 million.  At June 30, 2005, the Company is incompliance with the covenant.  The facility was scheduled to expire inJuly 2005. However, on July 1, 2005, the Company signed a one-yearextension of the facility, which will remain in effect until July 2006.

 

**12.****                               IncomeTaxes**

 

*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 accepted them without change. Accordingly, the tax benefit was recorded as a decrease in tax benefit reservesof $19.6 million, a decrease in other tax reserves of $0.3 million, and anincrease in additional paid-in capital of $19.9 million. There was no charge orcredit to income.  The Company did not record deferred tax assets for thetax benefits being carried forward due to remaining uncertainties.  It isanticipated that a deferred tax asset, net of an appropriate valuation allowance,will be recorded when it is probable that the tax benefit will berealized.  The tax benefit will be reflected as an increase in additionalpaid-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.  TheCompany 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.

 

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The Company believes that it is more likely than not that the netremaining deferred tax assets of $19.5 million at June 30, 2005 will berealized, principally based upon forecasted taxable income.  Although theCompany has experienced operating losses in past years, the Company experiencedimproved operational performance in the first six months of 2005 resulting fromthe Company’s realignment initiatives completed in the fourth quarter of 2004,and continued improvement in the operating results of its Chimessubsidiary.  This operating improvement is expected to continue in2005.  The minimum average annual taxable income required to realize thedeferred tax assets over the 20-year net operating loss carryforward period isapproximately $2.8 million.

 

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

 

**13.****                               RescissionOffer**

 

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

 

As a result, the Company 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.****                               SpecialItems**

 

Income from operations for the second quarter and six months of 2005includes the following special charges/(credits), which have been combined on aseparate line for presentation purposes.

 
| ** **               | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------|------------|------------------------|------------|----------------------|------------|
| ** **               | ** ** | **June 30,   2005**    | ** ** | **June 30,   2004**  | ** ** | **June 30,   2005** | ** ** | **June 30,   2004** | ** ** |
|                     |       |                   |       |                 |       |   |   |   |   |
| Bad debt  recovery       |       | $                      | —     |                 | $          | — |   | $ | (675 | ) | $ | — |   |
| Restructuring  charges   |       | 142                    |       | —               |       | 142 |   | — |   |
| Gain on sale of  assets  |       | (327                   | )          | —               |       | (327 | ) | — |   |
| Merger related  expenses |       | 70                     |       | —               |       | 70 |   | — |   |
| Insurance refund         |       | —                 |       | (939                 | )          | — |   | (939 | ) |
|                     |       | $                      | (115       | )                    | $          | (939 | ) | $ | (790 | ) | $ | (939 | ) |

 

**15.****                               LegalMatters**

 

In July 2005, the Company received notification that a former financialadvisor to the Company has asserted a claim for at least $1.75 million inamounts allegedly owed to it in connection with the proposed merger withAnalysts International Corporation.  Theformer advisor claims that, pursuant to the terms of its engagement arrangementwith the Company which is expired, it had the right to act as exclusivefinancial advisor to the Company with respect to certain transactions involvingthe Company such as the proposed merger, notwithstanding the expiration of itsengagement.  The Company believes it hasmeritorious defenses and potential counterclaims pertaining to thismatter.  The Company is involved in othervarious and routine litigation matters, which arise through the normal courseof business.  Management believes that the resolution of these matterswill not have a material adverse effect on the Company’s financial position orresults of operations.

 

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**16. ****                            ProposedMerger and Deferred Merger Costs**

 

On April 12, 2005, the Company, JV Merger Corp., a Minnesotacorporation and a wholly-owned subsidiary of the Company (the “Sub”), and AnalystsInternational Corporation, a Minnesota corporation (“Analysts”), entered intoan Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which,subject to satisfaction or waiver of applicable conditions, Sub will be mergedwith and into Analysts (the “Merger”) and each issued and outstanding share ofcommon stock, par value $.10 per share, of Analysts (other than shares held ofrecord by the Company, Sub, Analysts and any of their subsidiaries) shall beconverted into the right to receive 1.15 fully paid and non-assessable sharesof the Company’s common stock, par value $.10 per share (the “MergerConsideration”).  In addition, upon completion of the Merger, the Companywill assume all options then outstanding under Analysts’ existing equityincentive plans, each of which will be exercisable for a number of shares ofCompany common stock (and at an exercise price) adjusted to reflect the MergerConsideration.  Upon completion of the merger, based upon the number ofshares outstanding on the record date and after giving effect to restrictedshares of Analysts common stock, Analysts shareholders will own approximately48% of the outstanding shares of the combined company.  Completion of the Merger is subject toseveral conditions, including approval by the shareholders of each company,effectiveness of a Form S-4 registration statement filed with theSecurities and Exchange Commission, and other customary closingconditions.  The transaction is intended to qualify as a tax-free reorganizationunder Section 368(a) of the Internal Revenue Code of 1986, asamended.  Additionally, the Merger Agreement may be terminated by theCompany or Analysts upon the occurrence or failure to occur of certain events,including a failure of the Merger to be consummated by November 30, 2005.

 

The Merger Agreement provides that the board of directors of theCompany following the Merger will consist of ten directors, including five ofwhom who shall be selected from the current Company board and five of whom who shallbe selected from the current Analysts board.

 

During the six months ended June 30, 2005, the Company has recordeddeferred merger costs of approximately $2.4 million primarily for legal andfinancial advisory services.  Such costswill be capitalized as part of the purchase price if the merger is consummated,or expensed if consummation does not occur.

 

On July 22, 2005, a groupcomprised of Crescendo Partners II, L.P., Series R, Crescendo Investments II,LLC, Eric Rosenfeld, F. Annette Scott Florida Trust, Richard L. Scott FloridaTrust, Scott Family Florida Partnership Trust, Richard L. Scott , Stephen T.Braun and The Computer Horizons Full Value Committee (collectively, the “CrescendoGroup”), filed a Statement on Schedule 13D (the “Schedule 13D”) with theSecurities and Exchange Commission (the “SEC”) disclosing their opposition tothe merger and their intention to solicit the Company’s shareholders to voteagainst the Company’s proposals in furtherance of the proposed merger.  The Schedule 13D further discloses theCrescendo Group’s intention to call a special meeting of the Company’sshareholders in order to remove up to all of the Company’s existing directorsand to replace them with the Crescendo Group’s own slate of director nominees.  In furtherance of its stated intentions, alsoon July 22, 2005, the Crescendo Group filed a preliminary proxy statement withthe SEC opposing the merger and soliciting votes of the Company’s shareholdersin opposition to the proposals intended to consummate the merger, inparticular, the proposal to approve the issuance of shares of the Company’scommon stock in connection with the merger. Also on July 22, 2005, the Crescendo Group filed solicitation materialwith the SEC containing the text of a press release issued on that date inwhich it identified itself and announced its position regarding the merger andits intentions to solicit opposition to the merger.  At the time of the filing of this QuarterlyReport on Form 10-Q, the Crescendo Group’s preliminary proxy statement had notbecome definitive.

 

On July 27, 2005, theCompany received from counsel to the Crescendo Group a request that a specialmeeting of the shareholders of the Company be called for the followingpurposes: (i) to remove all of the existing directors serving on the Company’sboard of directors without cause, (ii) to fix the number of members comprisingthe board at five, and (iii) to elect five director nominees to be selected bythe Crescendo Group. This request was for a second special meeting in additionto the special meeting contemplated by the Company in connection with theapproval of proposals relating to the proposed merger. After advising theCrescendo Group’s counsel that the request was improper under the Company’sby-laws, the Company received a second request on August 2, 2005, which requestwas proper.

 

The Company’sregistration statement containing its joint proxy statement/prospectus was declaredeffective by the SEC on August 4, 2005 and the joint proxy statement has beenmailed out to the Company’s shareholders.

 

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**Item2**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

For the Periods EndedJune 30, 2005 and June 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 Companies 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 is 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 June 30, 2005 of $69.1million, a five percent increase from the comparable period in 2004.  Forthe six months ended June 30, 2005, revenues totaled $135.6 million,compared to $125.5 million in the comparable period of 2004.  Net incomefor the second quarter of 2005 totaled $44,000, or breakeven per share,compared with a net income of $125,000, or breakeven per share, in thecomparable period of 2004.  Net income for the six months endedJune 30, 2005 totaled $374,000, or $0.01 per share, compared with a netloss of $(442,000), or $(0.01) per share, in the comparable six month period of2004.  Net income for the six months ended June 30, 2005 includes specialcredits of $1,002,000 relating to a bad debt recovery and a gain on sale ofassets, which are partially offset by merger-related and restructuring expensestotaling $212,000, and a $614,000 charge pertaining to the amortization ofintangibles.  The net loss for the first six months of 2004 includes aone-time credit of $939,000 relating to an insurance refund, and a $728,000charge pertaining to the amortization of intangibles.

 

Management continues to focus on maintaining a strong balance sheet,with approximately $35.9 million in cash and cash equivalents at June 30,2005, along with $66.8 million in working capital and no debt outstanding.

 

On April 1, 2004, the Company’s subsidiary RGII acquired AutomatedInformation Management, Inc. (AIM), a Federal government IT services company,for approximately $15.8 million in cash.  The acquisition of AIM isdirectly 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**

 

On April 12, 2005, the Company, JV Merger Corp., a Minnesotacorporation and a wholly-owned subsidiary of the Company (the “Sub”), andAnalysts International Corporation, a Minnesota corporation (“Analysts”),entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuantto which, subject to satisfaction or waiver of applicable conditions, Sub willbe merged with and into Analysts (the “Merger”) and each issued and outstandingshare of common stock, par value $.10 per share, of Analysts (other than sharesheld of record by the Company, Sub, Analysts and any of their subsidiaries)shall be converted into the right to receive 1.15 fully paid and nonassessableshares of the Company’s common stock, par value $.10 per share (the “MergerConsideration”).  In addition, upon completion of the Merger, the Companywill assume all options then outstanding under Analysts’ existing equityincentive plans, each of which will be exercisable for a number of shares ofCompany common stock (and at an exercise price) adjusted to reflect the MergerConsideration. Upon completion of the merger, based upon the number ofshares outstanding on the record date and after giving effect to restricted sharesof Analysts common stock, Analysts shareholders will own approximately 48% ofthe outstanding shares of the combined company.  Completion of the Merger is subject to severalconditions, including approval by the shareholders of each company,effectiveness of a Form S-4 registration statement filed with theSecurities and Exchange Commission, and other customary closingconditions.  The transaction is intended to qualify as a tax-freereorganization under Section 368(a) of the Internal Revenue Code of1986, as amended.  Additionally, the Merger Agreement may be terminated bythe Company or Analysts upon the occurrence or failure to occur of certainevents, including a failure of the Merger to be consummated byNovember 30, 2005.

 

The Merger Agreement provides that the board of directors of theCompany following the Merger will consist of ten directors, including five ofwhom who shall be selected from the current Company board and five of whom who shallbe selected from the current Analysts board.

 

On July 22, 2005, a groupcomprised of Crescendo Partners II, L.P., Series R, Crescendo Investments II,LLC, Eric Rosenfeld, F. Annette Scott Florida Trust, Richard L. Scott FloridaTrust, Scott Family Florida Partnership Trust, Richard L. Scott , Stephen T.Braun and The Computer Horizons Full Value Committee (collectively, the “CrescendoGroup”), filed a Statement on Schedule 13D (the “Schedule 13D”) with theSecurities and Exchange Commission (the “SEC”) disclosing their opposition tothe merger and their intention to solicit the Company’s shareholders to voteagainst the Company’s proposals in furtherance of the proposed merger.  The Schedule 13D further discloses theCrescendo Group’s intention to call a special meeting of the Company’sshareholders in order to remove up to all of the Company’s existing directorsand to replace them with the Crescendo Group’s own slate of director nominees.  In furtherance of its stated intentions, alsoon July 22, 2005, the Crescendo Group filed a preliminary proxy statement withthe SEC opposing the merger and soliciting votes of the Company’s shareholdersin opposition to the proposals intended to consummate the merger, inparticular, the proposal to approve the issuance of shares of the Company’scommon stock in connection with the merger. Also on July 22, 2005, the Crescendo Group filed solicitation materialwith the SEC containing the text of a press release issued on that date inwhich it identified itself and announced its position regarding the merger andits intentions to solicit opposition to the merger.  At the time of the filing of this QuarterlyReport on Form 10-Q, the Crescendo Group’s preliminary proxy statement had notbecome definitive.

 

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On July 27, 2005, theCompany received from counsel to the Crescendo Group a request that a specialmeeting of the shareholders of the Company be called for the followingpurposes: (i) to remove all of the existing directors serving on the Company’sboard of directors without cause, (ii) to fix the number of members comprisingthe board at five, and (iii) to elect five director nominees to be selected bythe Crescendo Group. This request was for a second special meeting in additionto the special meeting contemplated by the Company in connection with theapproval of proposals relating to the proposed merger. After advising theCrescendo Group’s counsel that the request was improper under the Company’sby-laws, the Company received a second request on August 2, 2005, which requestwas proper.

 

The Company’sregistration statement containing its joint proxy statement/prospectus was declaredeffective by the SEC on August 4, 2005 and the joint proxy statement has beenmailed out to the Company’s shareholders.

 

**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 bywords such as “believe,” “expect,” “anticipate,” “plan,” “potential,” “continue”or similar expressions.  Forward-looking statements also include theassumptions underlying or relating to any of the foregoing statements. Such forward-looking statements are based upon current expectations and beliefsand are subject to a number of factors and uncertainties that could causeactual results to differ materially from those described in the forward-lookingstatements.  The forward-looking statements contained in this Report mayinclude statements about future financial and operating results and about theproposed merger of Computer Horizons and Analysts International.  These statements are not guarantees of futureperformance, involve certain risks, uncertainties and assumptions that aredifficult to predict, and are based upon assumptions as to future events thatmay not prove accurate.  Therefore, actual outcomes and results may differmaterially from what is expressed herein.  For example, if either of thecompanies does not receive required shareholder approval or fails to satisfyother conditions to closing, the transaction will not be consummated.  Inany forward-looking statement in which Computer Horizons or AnalystsInternational expresses an expectation or belief as to future results, suchexpectation or belief is expressed in good faith and believed to have areasonable basis, but there can be no assurance that the statement orexpectation or belief will result or be achieved or accomplished.  Thefollowing factors, among others, could cause actual results to differmaterially from those described in the forward-looking statements: (i) therisk that the Computer Horizons’ and Analysts’ businesses will not beintegrated successfully to yield the anticipated cost savings and financialresults; (ii)  costs related to the proposed merger may be higher due todelays in obtaining regulatory approval; (iii) failure of the ComputerHorizons and Analysts shareholders to approve the proposed merger; and (iv) othereconomic, business, competitive and/or regulatory factors affecting ComputerHorizons’ and Analysts’  businesses generally, including those set forthin Computer Horizons’ and Analysts’ filings with the SEC, including in theirrespective Annual Reports on Form 10-K for the most recent fiscal years,especially in the Management’s Discussion and Analysis section, the most recentQuarterly Reports on Form 10-Q and the Current Reports onForm 8-K.  All forward-looking statements included in this Report arebased on information available to Computer Horizons and Analysts on the datehereof.  Computer Horizons and Analysts undertake no obligation (andexpressly disclaim any such obligation) to update forward-looking statementsmade in this Report to reflect events or circumstances after the date of thisReport or to update reasons why actual results would differ from thoseanticipated in such forward-looking statements.

 

**Additional Information and Where toFind It**

 

Computer Horizons Corp. has filed with the Securities and ExchangeCommission a registration statement on Form S-4 and Computer HorizonsCorp. and Analysts International Corporation have filed with the Commission arelated joint proxy statement/prospectus in connection with the mergertransaction involving Computer Horizons and Analysts International. **INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THEREGISTRATION STATEMENT AND RELATED JOINT PROXY STATEMENT/ PROSPECTUS REGARDINGTHE PROPOSED MERGER BECAUSE IT CONTAINS IMPORTANT INFORMATION ABOUT THE MERGERTRANSACTION.**  Investors and security holders may obtain afree copy of the joint proxy statement/prospectus and other documents filed byComputer Horizons Corp. and Analysts International Corporation with theSecurities and Exchange Commission at the Securities and Exchange Commission’sweb site at http://www.sec.gov.  Free copies of the joint proxystatement/prospectus and other documents may also be obtained for free fromComputer Horizons Corp.’s and Analysts International Corporation’s respectiveinvestor relations at dreingold@computerhorizons.com and Analysts InternationalCorporation investor relations at pquist@analysts.com.

 

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Computer Horizons Corp. and Analysts International Corporation andtheir respective directors, officers and other employees and proxy solicitorsmay be deemed to be participants in the solicitation of proxies from theshareholders of Computer Horizons and Analysts International with respect tothe transactions contemplated by the merger agreement.  Informationregarding Computer Horizons’ officers and directors is included in ComputerHorizons’ Proxy Statement for its 2005 Annual Meeting of Shareholders filedwith the Securities and Exchange Commission on April 12, 2005. Information regarding Analysts International’s officers and directors isincluded in Analysts International’s Proxy Statement for its 2005 AnnualMeeting of Shareholders filed with the Securities and Exchange Commission onApril 22, 2005.  These documents are or will be available free ofcharge at the Securities and Exchange Commission’s web site athttp://www.sec.gov and from Computer Horizons Corp.’s investor relations atdreingold@computerhorizons.com and Analysts International Corporation investorrelations at pquist@analysts.com.

 

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

 

**Revenue Generating Activities**

 

The majority of the Company’s revenues are derived from professionalservices rendered in the information technology sector.  Effective January 1, 2005, the Companyrealigned its business operations into three segments : Commercial, Federal Governmentand 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 endedJune 30, 2005, this segment represented approximately 73% of total revenues,including $36.5 million of staff augmentation revenue and $14.2 million ofcommercial solutions revenue.  For the six months ended June 30, 2005,this segment represented approximately 73% of total revenues, including $72.0million of staff augmentation revenue and $27.4 million of commercial solutionsrevenue.

 

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 technicaldetails of the work to be done.  The SOW, although falling under thecorresponding master agreement, is a stand-alone binding contractual document,typically outlining the project objectives, describing the personnel who willwork on the project, describing phases of the project, the timeframes for workperformance, and the rate of compensation, on a time and materials basis. In the event that the parameters of the project expand or otherwise change, aProject Change Request is implemented to memorialize whatever change hasoccurred to the deliverables, personnel and/or time/materials.  The masteragreements, in conjunction with the SOWs, are written to define, with as muchdetail as possible, the client relationship and all aspects of the work to beperformed for the client.  With regard to revenues expected in futureperiods, each SOW has a defined term or sets forth the anticipated length of aproject.  Where a client engagement is on-going, like certain “Help Desk”type services, the master agreements would still have a term length, but wouldrecite that the agreement was renewable.  Generally, commercial solutionsengagements are for a year or less.  Staff augmentation engagements canand do last for more than a year, with variations in the number of consultantsbeing provided at any given time.  Staffing engagements are generallycancelable by clients 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 six months ended June 30, 2005,the Federal Government segment accounted for approximately 17% of consolidatedrevenues.

 

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 six months ended June 30, 2005,Chimes accounted for approximately 10% of total revenues.

 

**Critical Accounting Policies**

 

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

 

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Revenue Recognition

 

Approximately 95% of consolidated revenue in the quarter ended June 30,2005 and June 30, 2004 was derived from time-and-material 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 thebilling.  At the end of each reporting period an assessment of revenuerecognized on the percentage of completion and milestones achieved criteria ismade.  If it becomes apparent that estimated cost will be exceeded orrequired milestones or deliverables will not have been obtained, an adjustmentto revenue and/or costs will be made.  The cumulative effect of revisionsin estimated revenues and costs are recognized in the period in which the factsthat 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 goodwill of $27.6 million, as ofDecember 31, 2004, is associated with the Company’s Federal Governmentpractice.  As of December 31, 2004, the indicated fair value of the FederalGovernment reporting unit exceeded the carrying value.  As a result, theCompany concluded that the goodwill of approximately $27.6 million is notimpaired.

 

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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.

 

**RESULTS OF OPERATIONS**

 

*Revenues* .  Consolidatedrevenues increased to $69.1 million in the second quarter of 2005 from $65.8million in the second quarter of 2004, an increase of $3.3 million or 5%. Revenues increased to $135.6 million in the first six months of 2005 from $125.5million in the first six months of 2004, an increase of $10 million or 8%.

 

Commercial Group revenues increased to $50.7 million in the secondquarter of 2005 from $46.0 million in the second quarter of 2004, an increaseof $4.6 million or 10%.  Commercial Grouprevenues, for the first six months of 2005, increased to $99.3 million from$90.8 million in the first six months of 2004, an increase of $8.2 million or9.4%.  The year-over-year increase in theCommercial Group revenues for the second quarter of 2005 is primarilyattributable to an increase in average consultant headcount of approximately5%, along with improved utilization in comparison to the second quarter of2004.

 

Federal Government Group revenues (comprised of RGII and AIM) decreasedto $11.4 million in the second quarter of 2005 from $13.9 million in the secondquarter of 2004, a net decrease of approximately $2.5 million or 18%.  FederalGovernment Group revenues, for the first six months of 2005, decreased to $22.9million from $23.4 million in the first six months of 2004, a decrease of$482,000 or 2.1%.  The year-over-yeardecrease is attributable to the transition of restricted contracts, customer/agencybudget cuts and delays in funding.

 

Chimes revenues increased to $7.0 million in the second quarter of 2005from $5.9 million in the second quarter of 2004, an increase of $1.1 million,or 18%.  Chimes revenues, for the first six months of 2005, increased to$13.4 million from $11.3 million in the first six months of 2004, an increaseof $2.1 million or 18.6%. This increase in Chimes revenue for the first half of2005 is due to an increase of approximately $0.7 million in revenue from newcustomers and $1.4 million from existing customers in this segment.

 

*Direct Costs and Gross Margins*..  Direct costs were $47.8 million and $93.4 million in the second quarterand first half of 2005, respectively, and $44.5 million and $85.3 million inthe second quarter and first half of 2004, respectively.  Gross margin,revenues less direct costs, decreased to 30.8% in the second quarter of 2005from 32.3% in the same period of 2004.  Gross margin decreased to 31.2% inthe first six months of 2005 from 32.0% in the same period of 2004. In theCompany’s Commercial Group, gross profit totaled $18.7 million, or 18.9% forthe six months ending June 30, 2005 compared to $19.0 million, or 21.0% inthe comparable prior year period. This decrease is primarily attributable to grossmargin reductions in the Staff Augmentation business to approximately 17.5% inthe first half of 2005, down from 20.3% in the first half of 2004, which is dueto continued pressure on average bill rates within this business.  The Federal Government Group gross marginsfor the six months ended June 30, 2005 were $10.7 million, or 46.6%,compared to $10.5 million, or 44.9% for the comparable period of 2004. Chimes gross margins totaled $12.9 million, or 96.2% for the six months endedJune 30, 2005, compared to $10.6 million, or 94.2% in 2004, due toimproved leveraging of direct costs.

 

*Costs and Expenses. *Selling, general and administrative expenses were $21.2 million and $42.2million in the second quarter and first half of 2005, respectively, compared to$21.6 million and $41.1 million in the comparable periods of 2004.  Theincrease for the first half of 2005 from first half of 2004 was primarily dueto the acquisition of AIM in April 2004. As a percentage of revenue, the Company’s SG&A expenses were 30.7%and 31.1% in the second quarter and first half of 2005, respectively; a decreasefrom 32.8% and 32.8% in the comparable periods of 2004.  This decrease is primarily attributable tocost reductions resulting from the fourth quarter 2004 restructuring inconnection with the Company’s business model realignment.

 

*Income / (Loss) from Operations*..  The Company’s loss from operations totaled $54,000 in the secondquarter of 2005, including amortization expense totaling $264,000 and specialcredits of $115,000 (primarily from gain on sale of assets, partially offset byrestructuring charges and merger related expenses).  This compares to incomefrom operations of $148,000 in the second quarter of 2004, which includes amortizationexpense totaling $520,000 and a special credit (insurance refund) of $939,000.  The composition of the operating profit forthe quarter ended June 30, 2005, excluding amortization expense of$264,000 and the special credits of $115,000, included a loss of $1,624,000 inthe Commercial Group, income of $724,000 in the Federal Government Group andincome of $995,000 in Chimes.  For the comparable quarter of 2004, theCommercial Group had a loss of $2,088,000, the Federal Group had an income ofapproximately $1,694,000, and Chimes had an income of $123,000.

 

The Company’s income from operations totaled $279,000 in the first halfof 2005, including amortization expense totaling $614,000 and special creditsof $790,000 (primarily from a bad debt recovery and gain on sale of assets, partiallyoffset by restructuring charges and merger related expenses).  Thiscompares to a loss from operations of $747,000 in the first half of 2004, whichincludes amortization expense totaling $728,000 and a special credit (insurancerefund) of $939,000.  The composition ofthe operating profit for the first half of 2005, excluding amortization expenseof $614,000 and the special credits of $790,000, included a loss of $3,091,000in the Commercial Group, income of $1,604,000 in the Federal Government Groupand income of $1,590,000 in Chimes.  For the comparable six month periodof 2004, the Commercial Group had a loss of $2,938,000, the Federal Group hadan income of approximately $2,273,000, and Chimes had a loss of $293,000.

 

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*Other Income/(Expense)*..  Other income (primarily net interest income) totaled $120,000 in thesecond quarter of 2005, compared to $29,000 in the second quarter of 2004.  Other income for the first half of 2005approximated $295,000, compared to $112,000 for the first half of 2004.

 

*Provision for Income Taxes*..  The effective tax rates for Federal, state and local income taxes weretax expense of 33% for the second quarter of 2005 and 35% for the first sixmonths of 2005, compared with tax expense of 55% for the second quarter of 2004and a tax benefit of 25% for the first six months of 2004 (due to the lossesincurred in this period).

 

*Net Income / (Loss)*..  Net income for the second quarter of 2005 was $44,000, or breakeven perbasic and diluted share, compared to net income of $125,000, or breakeven per basicand diluted share for the second quarter of 2004.   The effect of special credits andamortization expense amounted to $0.01 earnings per share and $(0.01) loss pershare, net of tax, respectively, in the second quarter of 2005.  Thesecond quarter of 2004 net income included special credits and amortizationexpense of $0.02 earnings per share and $(0.01) loss per share, net of tax,respectively.  For the first half of 2005,net income was $374,000 or $0.01 earnings per basic and diluted share, comparedto a net loss of $(442,000), or $(0.01) per share for the first half 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 June 30, 2005, the Company hadapproximately $66.8 million in working capital, of which $35.9 million was cashand cash equivalents.  Cash and cashequivalents at June 30, 2005 and December 31, 2004 includes approximately $9.0million and $2.1 million of cash, respectively, to be disbursed to Chimesvendors in accordance with the client payment terms.  At June 30, 2005, the Company had acurrent ratio position of 3.3 to 1.

 

Net cash provided by operating activities in the first six months of2005 was $5.5 million, primarily attributable to net income, depreciation,amortization and other non-cash expenses, increases in accounts payable(primarily Chimes vendor payments), partially offset by a reduction in accruedexpenses.

 

Total accounts receivable decreased $0.2 million to $51.1 million atJune 30, 2005 from $51.3 million at December 31, 2004.  Accountsreceivable days sales outstanding (“DSO”) were 67 days at June 30, 2005compared to 74 days at June 30, 2004 and 68 days at December 31, 2004.  DSO’sare 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 June 30,2005, there were no significant changes in credit terms, credit policies orcollection efforts.

 

Net cash used in investing activities in the first six months of 2005was $3.4 million, consisting primarily of deferred merger costs of $2.4million, capital expenditures totaling $1.5 million partially offset byproceeds from sale of assets of $0.5 million.

 

Net cash provided by financing activities in the first six months of2005 was $0.5 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 client 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 June 30, 2005,the Company had no outstanding loan balance against the facility.  Basedon the Company’s eligible client receivables and cash balances, $16.9 millionwas available for borrowing as of June 30, 2005.  The fee for the unusedportion of the line of credit is 0.375% per annum charged to the Companymonthly.  This charge was approximately $64,000 and $52,000 for the sixmonths ended June 30, 2005 and 2004, respectively.  This line of creditincludes covenants relating to the maintenance of cash balances and 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.  At June 30, 2005, the Company is in compliancewith the covenant.  The facility was scheduled to expire inJuly 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.  There are no minimum or maximum payment obligationsunder the terms of the contingent note. The contingent payment will be reducedon a dollar for dollar basis for financial performance below EBIT targets andincreased by 29 cents ($0.29) for each dollar exceeding EBIT targets.  InFebruary 2004, a payment was made for the first six-month installment ofapproximately $631,000, pertaining to this contingent note.  InFebruary 2005, a payment of approximately $1.8 million was made representingthe second installment of the contingent note.  Future payments, if theapplicable EBIT targets are met, will be due as follows: 2005 payment of$3.3 million and 2006 payment of $4.3 million.  These payments will bereduced or increased based on actual EBIT performance over the three-yearperiod.

 

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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.

 

If the merger with Analysts International Corporation is consummated,the Company will be obligated to pay change of control payments to terminatedemployees totaling approximately $5.9 million. In addition, approximately $0.7 million will be paid to individuals whohave waived their rights to receive such change of control payments and apayment of $1.2 million may be made to one individual should he choose toterminate his employment.  Also, as aresult of the consummated merger, the Company may be obligated to pay $1.75million to its former financial advisor in connection with an alleged claimrelating to the proposed merger.  Theformer advisor claims that, pursuant to the terms of its engagement arrangementwith the Company which is expired, it had the right to act as exclusivefinancial advisor to CHC with respect to certain transactions involving CHCsuch as the proposed merger, notwithstanding the expiration of its engagement.  The Company believes it has meritoriousdefenses and potential counterclaims pertaining to this matter.

 

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

 

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 andCommercial Commitments**

 

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

 
| ** **                    | ** ** | **Obligation Due** | ** ** |
|-------------------------------|------------|--------------------|------------|
| **(dollars in thousands)**    | ** ** | **Total Amount**   | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **Over 5 Years** | ** ** |
|                          |       |               |       |   |   |   |   |   |   |   |   |
| Operating Leases              |       | $                  | 8,600      |   | $ | 5,241 |   | $ | 3,359 |   | $ | — |   | $ | — |   |
| RGII Contingent  Notes *      |       | 7,596              |       | 3,300 |   | 4,296 |   | — |   | — |   |
| Deferred  Compensation        |       | 2,617              |       | 4 |   | 14 |   | 437 |   | 2,162 |   |
| Supplemental  Retirement Plan |       | 9,750              |       | — |   | 250 |   | 1,000 |   | 8,500 |   |
| Other                         |       | 784                |       | 784 |   | — |   | — |   | — |   |
| Total Cash  Obligations       |       | $                  | 29,347     |   | $ | 9,329 |   | $ | 7,919 |   | $ | 1,437 |   | $ | 10,662 |   |

 

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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 guidancefor determining whether impairment for certain debt and equity investments isother-than-temporary and the measurement of an impaired loss. The recognitionand measurement requirements of EITF 03-1 were initially effective forreporting periods beginning after June 15, 2004. In September 2004,the FASB Staff issued FASB Staff Position (FSP) EITF 03-1-1 that delayed theeffective date for certain measurement and recognition guidance contained inEITF 03-1. The FSP requires that entities continue to apply previously existing“other-than-temporary” guidance until a final consensus is reached. Managementdoes not anticipate that issuance of a final consensus will materially impactthe Company’s financial 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 (SAB) 107, “Share-Based Payment”, in April 2005, which providesthe views of the SEC staff regarding certain aspects of the application of FAS123R.  SAB 107 assists issuers in theirinitial implementation of FAS 123R and indicates that the staff’s understandingthat, particularly in the period of initial implementation, issuers mayreasonably arrive at different estimates and option valuations in applying FAS123R.  We expect the adoption of this statement will have a materialeffect on the Company’s financial statements, but we cannot reasonably estimatethe impact of the adoption because certain assumptions used in the calculationof the value of share-based payments may change in 2005.

 

In December 2004 the FASB issued Statement 153, Exchanges ofNonmonetary Assets- an amendment of APB Opinion No. 29.  The guidance in Opinion 29, *Accounting for Nonmonetary Transactions* is based on theunderlying principle that the measurement of exchanges of nonmonetary assetsshould be based on the fair value of the assets exchanged.  However, Opinion 29 included certainexceptions to that principle, including a requirement that exchanges of similarproductive assets should be recorded at the carrying amount of the assetrelinquished.  Statement 153 eliminatesthat exception and replaces it with a general exception for exchanges ofnonmonetary assets that lack commercial substance.  Only nonmonetary exchanges in which anentity’s future cash flows are expected to significantly change as a result ofthe exchange will be considered to have commercial substance.  Statement 153 must be applied to nonmonetaryasset exchanges occurring in fiscal periods beginning after June 15, 2005.  The Company does not anticipate that theadoption of this statement will have a material impact on the Company’sfinancial statements

 

In May 2005 the FASB issued Statement 154, *Accounting Changes and Error Corrections*,which changes the accounting and reporting requirements for the change in anaccounting principle.  Opinion 20, *Accounting Changes*, which is superseded byStatement 154, required that most voluntary changes in accounting principle berecognized by including the cumulative effect of changing to the new accountingprinciple as a component of net income in the period of the change.  Statement 154 instead requires retrospectiveapplication to prior periods’ financial statements of changes in an accountingprinciple, unless it is impracticable to do so. Statement 154 differentiates between *retrospectiveapplication* and *restatement.*  *Retrospective application*isdefined as the application of a different accounting principle to prioraccounting 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 anerror.  If it is impracticable todetermine the period-specific effects of an accounting change on one or moreindividual prior periods presented, but the cumulative effect to all priorperiods can be determined, the new accounting principle should be applied toassets and liabilities balances as of the beginning of the earliest period forwhich retrospective application is practicable. In addition, a corresponding adjustment should be made to the openingbalance of retained earnings (or other appropriate components of equity or netassets in the statement of financial position) for that period rather thanbeing reported in an income statement. If it is impracticable to determine the cumulative effect of applying achange in accounting principle to any prior period, the new accountingprinciple should be applied as if it were adopted prospectively from theearliest date practicable.  Statement 154also requires retrospective application to changes required by a new accountingpronouncement in the unusual instance that the pronouncement does not includespecific transition provisions.  If apronouncement includes specific transition provisions, those provisions shouldbe followed.  Statement 154 limits theretrospective application of a change in accounting principle to the directeffects of the change.  Indirect effectsof a change in accounting principle, such as a change in nondiscretionaryprofit-sharing payments resulting from an accounting change, should berecognized in the period of the change. The Statement also requires that a change in depreciation, amortization,or depletion method for long-lived, nonfinancial assets be accounted for as achange in accounting estimate effected by a change in accountingprinciple.  The guidance contained inOpinion 20 for reporting the corrections of errors in previously issuedfinancial statements, and changes in accounting estimates is carried forward toStatement 154 without change. Additionally, the Statement carries forward the guidance in Opinion 20requiring justification of a change in accounting principle on the basis ofpreferability.  Statement 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005. The Company has not completed its assessment of the impact of thispronouncement on its financial statements.

 

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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, asamended) as of the end of the period covered by this report.  Based uponsuch evaluation, the Company’s Chief Executive Officer and Chief FinancialOfficer have concluded that, as of the end of the period, the Company’sdisclosure controls and procedures are effective in recording, processing,summarizing and reporting, on a timely basis, information required to bedisclosed by the Company in the reports that it files or submits under theSecurities Exchange Act of 1934, as amended.

 

Internal Controls over Financial Reporting

 

There have not been any changes in the Company’s internal controls overfinancial reporting (as such term is defined in Rules 13a-15(f) underthe Securities Exchange Act of 1934, as amended) during the period to whichthis report relates that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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PART II - Other Information

 

Item 4. Submission ofMatters to a Vote of Security Holders

 

On May 18, 2005, the Company held its Annual Meeting of Stockholders.

 

(1)  The following directors were elected to serve on the Company’sBoard of Directors:

 
| ** **             | ** ** | **For**    | ** ** | **Against** | ** ** |
|------------------------|------------|------------|------------|-------------|------------|
| William M. Duncan      |       | 24,476,134 |       | 2,644,059   |       |
| Eric P. Edelstein      |       | 24,479,130 |       | 2,641,063   |       |
| William J. Marino      |       | 24,477,091 |       | 2,643,102   |       |
| Earl L. Mason          |       | 24,475,176 |       | 2,645,017   |       |
| L. White Matthews, III |       | 24,476,351 |       | 2,643,842   |       |
| William J. Murphy      |       | 24,475,144 |       | 2,645,049   |       |
| Edward J. Obuchowski   |       | 24,476,683 |       | 2,643,510   |       |

 

(2)  The appointment of Grant Thornton LLP as independent auditorsof the Company for fiscal year 2005 was ratified.

 
| For:     |   | 26,117,253 |   |
|----------|--------|------------|--------|
| Against: |   | 615,994    |   |
| Abstain: |   | 386,946    |   |

 

Item 6.                                     Exhibitsand Reports on Form 8-K

 

a)                                      Exhibits

 

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

 

31.2 – CFO Certification required by Rule 13a-14(a)/15d-14(a) under theSecurities 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.

 

b)                                     *Report on Form 8-K*

 

A report on Form 8-K was filed on April 12, 2005, reporting that Companyhad entered into an employment agreement with John Ferdinandi as Controller.

 

A report on Form 8-K was filed on April 13, 2005, reporting thatCompany had entered into an Agreement and Plan of Merger with AnalystsInternational Corporation (“Analysts”).

 

A report on Form 8-K was filed on April 14, 2005 providing regulationFD disclosure resulting from the Company’s joint conference call held withAnalysts to discuss the Agreement and Plan of Merger.

 

A report on Form 8-K was filed on April 29, 2005, reporting theissuance of a press release regarding the financial results of ComputerHorizons for its first quarter, 2005.

 

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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:  | August 8, 2005 |   | /s/  William J. Murphy          |   |
|   |           |   | William J. Murphy, President and CEO |
|   |           |   | (Principal Executive Officer)        |
|   |           |   |                                 |
|   |           |   |                                 |
| DATE:  | August 8, 2005 |   | /s/ Michael J. Shea                  |   |
|   |           |   | Michael J. Shea,                     |
|   |           |   | Vice President and CFO               |
|   |           |   | (Principal Financial Officer)        |
|   |           |   |                                 |
|   |           |   |                                 |
| DATE:  | August 8, 2005 |   | /s/ John E. Ferdinandi               |   |
|   |           |   | John E. Ferdinandi                   |
|   |           |   | Corporate Controller                 |
|   |           |   | (Principal Accounting Officer)       |
|        |                |        |                                      |        |  |

 

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