**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

| **ý** | **Quarterly Report Under Section 13 or  15(d)  of the Securities Exchange Act of 1934**                                                                                                                                  | ** ** |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|       |                                                                                                                                                                                                                          |       |
|       | **for the  quarterly period ended September 30, 2004**                                                                                                                                                                   |       |
|       |                                                                                                                                                                                                                          |       |
|       | **or**                                                                                                                                                                                                                        |       |
|       |                                                                                                                                                                                                                          |       |
| **o**      | **Transition Report pursuant to  Section 13 or 15(d)  of the Securities Exchange Act of 1934**                                                                                                                           | ** ** |
|       |                                                                                                                                                                                                                          |       |
|       | **for the  transition period from                 to                 ** |       |

 

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**CommissionFile Number 0-7282**

 

**COMPUTER HORIZONS CORP.**

(Exact name of registrant asspecified in its charter)

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

 

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

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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

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

 

Asof November 9, 2004 the issuer had 30,923,320 shares of common stock outstanding.

 

 

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**COMPUTERHORIZONS CORP. AND SUBSIDIARIES**

 

Index

 
| Part I  | Financial Information                                                                                                               |   |
|---------|-------------------------------------------------------------------------------------------------------------------------------------|--------|
|    |                                                                                                                                |   |
| Item 1  | Consolidated Balance  Sheets September 30, 2004 (unaudited) and December 31, 2003                                         | 3      |
|    |                                                                                                                                |   |
|    | Consolidated  Statements of Operations Three and Nine Months Ended September 30, 2004  and September 30, 2003 (unaudited) | 4      |
|    |                                                                                                                                |   |
|    | Consolidated  Statements of Cash Flows Nine Months Ended September 30, 2004 and  September 30, 2003 (unaudited)           | 5      |
|    |                                                                                                                                |   |
|    | Notes to  Consolidated Financial Statements                                                                                         | 6      |
|    |                                                                                                                                |   |
| Item  2 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                         | 24     |
|    |                                                                                                                                |   |
| Item 4  | Controls and  Procedures                                                                                                            | 34     |
|    |                                                                                                                                |   |
| Part II | Other Information                                                                                                                   |   |
|    |                                                                                                                                |   |
| Item 6  | Exhibits and  Reports on Form 8-K                                                                                                   | 35     |
|    |                                                                                                                                |   |
|    | Signatures                                                                                                                          | 36     |

2

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Part IFinancial Information

Item 1

 

COMPUTERHORIZONS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCESHEETS

(dollarsin thousands)

 
| ** **                                                                                                                                             | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                             | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                                                 |       |                         |       |                        |       |
| CURRENT ASSETS:                                                                                                                                        |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                              |       | $                            | 34,243     |                        | $          | 52,610 |   |
| Accounts receivable, net  of allowance for doubtful accounts of $6,260 and $5,432 at September 30,  2004 and December 31, 2003, respectively |       | 55,083                       |       | 48,295                      |       |
| Deferred income taxes                                                                                                                                  |       | 3,423                        |       | 4,514                       |       |
| Refundable income taxes                                                                                                                                |       | 3,534                        |       | —                      |       |
| Other                                                                                                                                                  |       | 4,260                        |       | 4,759                       |       |
| TOTAL CURRENT ASSETS                                                                                                                                   |       | 100,543                      |       | 110,178                     |       |
|                                                                                                                                                   |       |                         |       |                        |       |
| PROPERTY AND EQUIPMENT                                                                                                                                 |       | 42,695                       |       | 42,252                      |       |
| Less accumulated  depreciation                                                                                                                         |       | (35,602                      | )          | (32,929                     | )          |
|                                                                                                                                                   |       | 7,093                        |       | 9,323                       |       |
|                                                                                                                                                   |       |                         |       |                        |       |
| OTHER ASSETS - NET:                                                                                                                                    |       |                         |       |                        |       |
| Goodwill                                                                                                                                               |       | 45,466                       |       | 34,218                      |       |
| Intangibles                                                                                                                                            |       | 3,737                        |       | 2,408                       |       |
| Deferred income taxes                                                                                                                                  |       | 15,756                       |       | 14,813                      |       |
| Other                                                                                                                                                  |       | 8,674                        |       | 9,386                       |       |
| TOTAL OTHER ASSETS                                                                                                                                     |       | 73,633                       |       | 60,825                      |       |
|                                                                                                                                                   |       |                         |       |                        |       |
| TOTAL ASSETS                                                                                                                                           |       | $                            | 181,269    |                        | $          | 180,326 |   |
|                                                                                                                                                   |       |                         |       |                        |       |
| LIABILITIES AND SHAREHOLDERS’  EQUITY                                                                                                             |       |                         |       |                        |       |
| CURRENT LIABILITIES:                                                                                                                                   |       |                         |       |                        |       |
| Accounts payable                                                                                                                                       |       | $                            | 8,856      |                        | $          | 8,287 |   |
| Accrued payroll, payroll  taxes and benefits                                                                                                           |       | 9,535                        |       | 7,791                       |       |
| Income taxes payable                                                                                                                                   |       | 3,397                        |       | 1,243                       |       |
| Tax benefit reserve                                                                                                                                    |       | —                       |       | 19,600                      |       |
| Restructuring reserve                                                                                                                                  |       | 1,139                        |       | 2,620                       |       |
| Other accrued expenses                                                                                                                                 |       | 3,890                        |       | 5,813                       |       |
| TOTAL CURRENT LIABILITIES                                                                                                                              |       | 26,817                       |       | 45,354                      |       |
|                                                                                                                                                   |       |                         |       |                        |       |
| OTHER LIABILITIES                                                                                                                                      |       | 5,474                        |       | 4,635                       |       |
|                                                                                                                                                   |       |                         |       |                        |       |
| SHAREHOLDERS’ EQUITY:                                                                                                                             |       |                         |       |                        |       |
| Preferred stock, $.10 par;  authorized and unissued 200,000 shares, including 50,000 Series A                                                          |       |                         |       |                        |       |
| Common stock, $.10 par,  authorized 100,000,000 shares; issued 33,153,107 shares at September 30,  2004 and December 31, 2003 respectively   |       | 3,315                        |       | 3,315                       |       |
| Additional paid-in capital                                                                                                                             |       | 151,495                      |       | 133,046                     |       |
| Accumulated comprehensive  loss                                                                                                                        |       | (2,809                       | )          | (2,789                      | )          |
| Retained earnings                                                                                                                                      |       | 10,198                       |       | 11,100                      |       |
|                                                                                                                                                   |       | 162,199                      |       | 144,672                     |       |
| Less shares held in  treasury, at cost; 2,166,584 shares and 2,537,692 shares at September 30,  2004 and December 31, 2003, respectively     |       | (13,221                      | )          | (14,335                     | )          |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                        |       | 148,978                      |       | 130,337                     |       |
|                                                                                                                                                   |       |                         |       |                        |       |
| TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                       |       | $                            | 181,269    |                        | $          | 180,326 |   |

 

3

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COMPUTERHORIZONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(Unaudited)

(dollarsin thousands, except per share data)

 
| ** ** | ** ** | **THREE MONTHS ENDED**      | ** ** | **NINE MONTHS ENDED**       | ** ** |
|------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** ** | ** ** | **September 30, 2004** | ** ** | **September 30, 2003** | ** ** | **September 30, 2004** | ** ** | **September 30, 2003** | ** ** |
| ** ** | ** ** | ** **                  | ** ** | **%****of  revenue**        | ** ** | ** ** | ** ** | **%****of  revenue** | ** ** | ** ** | ** ** | **%****of  revenue** | ** ** | ** ** | ** ** | **%****of  revenue** | ** ** |
|            |            |                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| REVENUES:                                          |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
|----------------------------------------------------|--------|------------|--------|--------|--------|------------|--------|--------|--------|---------|------------|--------|--------|---------|--------|------------|--------|
| IT Services                                        |   | $          | 33,791 |   | 48.7   | %          | $      | 32,235 |   | 50.0    | %          | $      | 95,668 |    | 49.1   | %          | $      | 103.738 |   | 56.5 | % |
| Solutions Group                                    |   | 29,604     |   | 42.7   | %      | 27,016     |   | 41.9   | %      | 81,941  |       | 42.0   | %      | 65,308  |   | 35.6       | %      |
| Chimes                                             |   | 6,002      |   | 8.6    | %      | 5,208      |   | 8.1    | %      | 17,284  |       | 8.9    | %      | 14,499  |   | 7.9        | %      |
|                                               |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
|                                               |   | 69,397     |   | 100.0  | %      | 64,459     |   | 100.0  | %      | 194,893 |       | 100.0  | %      | 183,545 |   | 100.0      | %      |
|                                               |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| COSTS AND EXPENSES:                                |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| Direct costs                                       |   | 47,880     |   | 69.0   | %      | 45,069     |   | 69.9   | %      | 133,192 |       | 68.3   | %      | 131,336 |   | 71.6       | %      |
| Selling, general and administrative                |   | 21,851     |   | 31.5   | %      | 20,883     |   | 32.4   | %      | 62,993  |       | 32.3   | %      | 60,525  |   | 33.0       | %      |
| Amortization of intangibles                        |   | 484        |   | 0.7    | %      | 526        |   | 0.8    | %      | 1,212   |       | 0.6    | %      | 526     |   | 0.3        | %      |
| Restructuring charges                              |   | —     |   | 0.0    | %      | 787        |   | 1.2    | %      | —  |       | 0.0    | %      | 2,985   |   | 1.6        | %      |
| Special charges (credits)                          |   | —     |   | 0.0    | %      | 800        |   | 1.2    | %      | (939    | )          | -0.5   | %      | 8,778   |   | 4.8        | %      |
|                                               |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
|                                               |   | 70,215     |   | 101.2  | %      | 68,065     |   | 105.6  | %      | 196,458 |       | 100.8  | %      | 204,150 |   | 111.2      | %      |
|                                               |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| INCOME/(LOSS) FROM OPERATIONS                      |   | (818       | )      | -1.2   | %      | (3,606     | )      | -5.6   | %      | (1,565  | )          | -0.8   | %      | (20,605 | )      | -11.2      | %      |
|                                               |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| OTHER INCOME / (EXPENSE):                          |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| Gain/(loss) on sale of assets                      |   | —     |   | 0.0    | %      | —     |   | 0.0    | %      | —  |       | 0.0    | %      | (273    | )      | -0.1       | %      |
| Interest income                                    |   | 93         |   | 0.1    | %      | 96         |   | 0.1    | %      | 233     |       | 0.1    | %      | 372     |   | 0.2        | %      |
|                                               |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| Interest expense                                   |   | —     |   | 0.0    | %      | (18        | )      | 0.0    | %      | (28     | )          | 0.0    | %      | (36     | )      | 0.0        | %      |
|                                               |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
|                                               |   | 93         |   | 0.1    | %      | 78         |   | 0.1    | %      | 205     |       | 0.1    | %      | 63      |   | 0.0        | %      |
|                                               |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| INCOME/(LOSS) BEFORE INCOME TAXES                  |   | (725       | )      | -1.1   | %      | (3,528     | )      | -5.5   | %      | (1,360  | )          | -0.7   | %      | (20,542 | )      | -11.2      | %      |
|                                               |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| INCOME TAXES / (BENEFIT):                          |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| Current                                            |   | 76         |   | 0.1    | %      | 298        |   | 0.5    | %      | 387     |       | 0.2    | %      | 298     |   | 0.2        | %      |
| Deferred                                           |   | (399       | )      | -0.6   | %      | (962       | )      | -1.5   | %      | (867    | )          | -0.4   | %      | (5,883  | )      | -3.2       | %      |
|                                               |   | (323       | )      | -0.5   | %      | (664       | )      | -1.0   | %      | (480    | )          | -0.2   | %      | (5,585  | )      | -3.0       | %      |
|                                               |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| INCOME / (LOSS) BEFORE MINORITY INTEREST           |   | (402       | )      | -0.6   | %      | (2,864     | )      | -4.4   | %      | (880    | )          | -0.5   | %      | (14,957 | )      | -8.1       | %      |
|                                               |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| Minority Interest                                  |   | (58        | )      | -0.1   | %      | 21         |   | 0.0    | %      | (22     | )          | 0.0    | %      | (16     | )      | 0.0        | %      |
|                                               |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| NET INCOME / (LOSS)                                |   | $          | (460   | )      | -0.7   | %          | $      | (2,843 | )      | -4.4    | %          | $      | (902   | )       | -0.5   | %          | $      | (14,973 | ) | -8.2 | % |
|                                               |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| EARNINGS / (LOSS) PER SHARE (BASIC & DILUTED): |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
|                                               |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| Net Loss Basic & Diluted                       |   | $          | (0.01  | )      |   |       | $      | (0.09  | )      |    |       | $      | (0.03  | )       |   |       | $      | (0.49 | ) |   |   |
|                                               |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| WEIGHTED AVERAGE NUMBER OF                         |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| SHARES OUTSTANDING:                                |   |       |   |   |   |       |   |   |   |    |       |   |   |    |   |       |   |
| Basic & Diluted                                |   | 30,931,000 |   |   |   | 30,548,000 |   |   |   |    | 30,806,000 |   |   |    |   | 30,403,000 |   |   |   |

 

4

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COMPUTERHORIZONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASHFLOWS

(Unaudited)

(dollarsin thousands)

 
| ** **                                                                                          | ** ** | **Nine months Ended**        | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                          | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES                                                               |       |                         |       |   |   |
| Net loss                                                                                            |       | $                            | (902       | ) | $ | (14,973 | ) |
| Adjustments to reconcile  net income/(loss) to net cash provided by/(used in) operating activities: |       |                         |       |   |   |
| Deferred taxes                                                                                      |       | (867                         | )          | (5,883 | ) |
| Depreciation                                                                                        |       | 3,709                        |       | 3,836 |   |
| Provision for bad debts                                                                             |       | 982                          |       | 4,252 |   |
| Amortization of  intangibles                                                                        |       | 1,212                        |       | 526 |   |
|                                                                                                |       |                         |       |   |   |
| Loss on sale of assets                                                                              |       | —                       |       | 273 |   |
| Change in assets and  liabilities, net of acquisitions:                                             |       |                         |       |   |   |
| Accounts receivable                                                                                 |       | (4,470                       | )          | 10,816 |   |
| Other current assets                                                                                |       | 517                          |       | 1,741 |   |
| Other assets                                                                                        |       | (499                         | )          | (2,544 | ) |
| Refundable income taxes                                                                             |       | (3,534                       | )          | 19,051 |   |
| Accrued payroll, payroll  taxes and benefits                                                        |       | 997                          |       | 1,714 |   |
| Accounts payable                                                                                    |       | 169                          |       | (1,477 | ) |
| Income taxes payable                                                                                |       | 2,154                        |       | 934 |   |
| Other accrued expenses                                                                              |       | (3,817                       | )          | (1,389 | ) |
| Other liabilities                                                                                   |       | 1,092                        |       | (347 | ) |
|                                                                                                |       |                         |       |   |   |
| NET CASH PROVIDED BY/(USED  IN) OPERATING ACTIVITIES                                                |       | (3,257                       | )          | 16,530 |   |
|                                                                                                |       |                         |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES                                                               |       |                         |       |   |   |
| Purchases of furniture and  equipment                                                               |       | (1,352                       | )          | (1,683 | ) |
| Acquisitions, net of cash  acquired                                                                 |       | (14,710                      | )          | (22,141 | ) |
| Proceeds received from the  sale of assets                                                          |       | —                       |       | 149 |   |
| Additions to intangibles                                                                            |       | —                       |       | (566 | ) |
|                                                                                                |       |                         |       |   |   |
| Additions to goodwill                                                                               |       | —                       |       | (427 | ) |
| NET CASH (USED IN)  INVESTING ACTIVITIES                                                            |       | (16,062                      | )          | (24,668 | ) |
|                                                                                                |       |                         |       |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES                                                               |       |                         |       |   |   |
| Payment of notes payable                                                                            |       | —                       |       | (2,636 | ) |
| Stock options exercised                                                                             |       | 619                          |       | 939 |   |
| Purchase of treasury  shares                                                                        |       | —                       |       | (1,230 | ) |
| Stock issued on employee  stock purchase plan                                                       |       | 301                          |       | 291 |   |
| NET CASH PROVIDED BY /  (USED IN) FINANCING ACTIVITIES                                              |       | 920                          |       | (2,636 | ) |
|                                                                                                |       |                         |       |   |   |
| Foreign currency  gains/(losses)                                                                    |       | 32                           |       | 1,753 |   |
|                                                                                                |       |                         |       |   |   |
| NET INCREASE/(DECREASE) IN  CASH AND CASH EQUIVALENTS                                               |       | (18,367                      | )          | (9,021 | ) |
|                                                                                                |       |                         |       |   |   |
| CASH AND CASH EQUIVALENTS  AT BEGINNING OF YEAR                                                     |       | 52,610                       |       | 59,769 |   |
|                                                                                                |       |                         |       |   |   |
| CASH AND CASH EQUIVALENTS AT  END OF PERIOD                                                         |       | $                            | 34,243     |   | $ | 50,748 |   |
|                                                                                                |       |                         |       |   |   |
| Supplemental Disclosures  of Cash Flow Information:                                                 |       |                         |       |   |   |
| Details of acquisition:                                                                             |       |                         |       |   |   |
| Assets acquired (including  cash of $1,168)                                                         |       | $                            | 4,613      |   |   |   |
| Liabilities assumed                                                                                 |       | (2,523                       | )          |   |   |
| Goodwill                                                                                            |       | 11,248                       |       |   |   |
| Intangibles                                                                                         |       | 2,540                        |       |   |   |
| Cash paid                                                                                           |       | 15,878                       |       |   |   |
| Less: cash received in  acquisition                                                                 |       | 1,168                        |       |   |   |
| Net cash paid                                                                                       |       | $                            | 14,710     |   |   |   |

 

Non-CashActivities:

 

Duringthe first quarter of 2004, the Company recorded a reduction in tax benefitreserves and an increase in additional paid-in capital of $19.9 million. Duringthe third quarter of 2004, the Company recorded a reduction in other assets anda reduction in additional paid-in capital of $1.2 million.

 

5

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**COMPUTER HORIZONSCORP.**

 

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

For the Periods September 30,2004 and September 30, 2003

(unaudited)

 

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

 

Theconsolidated balance sheet as of September 30, 2004, the consolidatedstatements of operations for the three and nine months ended September 30,2004 and September 30, 2003, respectively, and the statement of cash flowsfor the nine months ended September 30, 2004 and 2003 have been preparedby the Company without audit.  In the opinion of management, alladjustments (which include normal recurring adjustments) necessary to presentfairly the financial position, results of operations and cash flows at September 30,2004 (and for all periods presented) have been made.

 

Certaininformation and note disclosures, normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America, which are not required for interim purpose, have beencondensed or omitted.  It is suggested that these consolidated financialstatements be read in conjunction with the financial statements and notesthereto included in the Annual Report on Form 10-K for the year ended December 31,2003 filed by the Company.  The results of operations for the periods endedSeptember 30, 2004 and 2003 are not necessarily indicative of theoperating results for the respective full years.

 

 

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

 

InJanuary 2003, the FASB issued Financial Interpretation No. 46, “Consolidationof Variable Interest Entities” (“FIN 46”), which addresses consolidation bybusiness enterprises of variable interest entities (VIEs).  The accountingprovisions and disclosure requirements of FIN 46 are effective immediately forVIEs created after January 31, 2003, and are effective for the Company’sfiscal period ending March 31, 2004, for VIEs created prior to February 1,2003.  In December 2003, the FASB published a revision to FIN 46 (“FIN46R”) to clarify some of the provisions of the interpretation and to defer theeffective date of implementation for certain entities.  Under the guidanceof FIN 46R, public companies that have interests in VIE’s that are commonlyreferred to as special purpose entities are required to apply the provisions ofFIN 46R for periods ending after December 15, 2003.  A public companythat does not have any interests in special purpose entities but does have avariable interest in a VIE created before February 1, 2003, must apply theprovisions of FIN 46R by the end of the first interim or annual reportingperiod ending after March 14, 2004.  During the quarter ended March 31,2004, the Company adopted the provisions of FIN 46R. Adoption of FIN 46R didnot have a material effect on the Company’s financial statements.

 

InMarch 2004, the EITF reached a concensus on Issue No. 03-1 “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments,”EITF No. 03-1 provided guidance for evaluation whether an investment isother-than-temporarily impaired and was effective for other-than-temporaryimpairment evaluations made in reporting periods beginning after June 15, 2004.The effect of the adoption of this statement was immaterial to the Company.

 

6

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**3.****             ****Accounting forStock Based Compensation**

 

TheCompany applies Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” as modified by FIN 44, “Accounting for CertainTransactions Involving Stock Compensation,” in accounting for stock-basedemployee compensation, whereby no compensation cost had been recognized for theplans.  The exercise price per share on all options granted may not beless than the fair value at the date of the option grant.  The Companyexpects to continue following the guidance under APB 25 for stock basedcompensation to employees.  Had compensation cost for the plans beendetermined based on the fair value of the options at the grant dates and beenconsistent with the method of SFAS No. 123, the Company’s net income / (loss)and income / (loss) per share would have been decreased to the pro formaamounts indicated below:

 

 
| ** **                   | ** **                                                                                                                                    | ** ** | **Three Months Ended**       | ** ** | **Nine months Ended**        | ** ** |
|------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **(in 000’s)**          | ** **                                                                                                                                    | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** |
| Net income / (loss)          | As reported                                                                                                                                   |       | $                            | (460       | )                            | $          | (2,843 | ) | $ | (902 | ) | $ | (14,973 | ) |
|                         | Deduct: Total stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects |       | (199                         | )          | (438                         | )          | (1,456 | ) | (1,746 | ) |
|                         |                                                                                                                                          |       |                         |       |                         |       |   |   |   |   |
|                         | Pro forma                                                                                                                                     |       | $                            | (659       | )                            | $          | (3,281 | ) | $ | (2,358 | ) | $ | (16,719 | ) |
| Earnings / (loss) per  share |                                                                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Basic                        | As reported                                                                                                                                   |       | $                            | (0.01      | )                            | $          | (0.09 | ) | $ | (0.03 | ) | $ | (0.49 | ) |
|                         |                                                                                                                                          |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
|                         | Pro forma                                                                                                                                     |       | $                            | (0.02      | )                            | $          | (0.11 | ) | $ | (0.08 | ) |   | (0.55 | ) |
|                         |                                                                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Diluted                      | As reported                                                                                                                                   |       | $                            | (0.01      | )                            | $          | (0.09 | ) | $ | (0.03 | ) | $ | (0.49 | ) |
|                         |                                                                                                                                          |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
|                         | Pro forma                                                                                                                                     |       | $                            | (0.02      | )                            |       | (0.11 | ) | $ | (0.08 | ) |   | (0.55 | ) |

 

7

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**4.****             ****RestrictedCash**

 

Includedin cash and cash equivalents at September 30, 2004 and December 31,2003 is restricted cash of approximately $487,000 and $2.2 million,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.

 

**5.****             ****Earnings PerShare**

 

Thecomputation of diluted earnings per share excludes options with exercise pricesgreater than the average market price.  As of September 30, 2004there were 268,472 excluded options, with exercise prices between $4.40 and$26.63 at September 30, 2004.

 

Therewere 275,138 and 285,263 excluded options, respectively for the third quarterand first nine months ended September 30, 2003, outstanding at September 30,2003 with exercise prices between $4.40 and $26.63 and $4.00 and $26.63respectively, per share.

 

8

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**6.****             ****SegmentInformation**

 

TheCompany has identified three business segments: IT Services, the SolutionsGroup and Chimes, Inc.  The IT Services division provides highly skilledsoftware professionals to augment the internal information management staffs ofmajor corporations.  IT Services is primarily staff augmentation. The Solutions division provides enterprise application services, e-businesssolutions, customized Web development and Web enablement of strategicapplications, Customer Relationship Management (CRM), network services,strategic outsourcing and managed resourcing to major corporations, along withfederal, state and local governments.  Chimes, Inc., a wholly-ownedsubsidiary of CHC, provides workforce procurement and management services toGlobal 2000 companies, which, according to Forbes magazine, represents thebiggest and most important companies, as measured by sales, profits, assets andmarket value.  Income/(loss) before income taxes/(benefits) consists ofincome/(loss) before income taxes, excluding interest income, interest expense,gain/(loss) on the sale of assets, restructuring charges, amortization ofintangibles, special charges (credits) and the write-off of a terminatedproject.  These exclusions total expense of $0.4 million and $2.0 millionfor the third quarter of 2004 and 2003, respectively and expense of $0.1million and $15.3 million for the first nine months of September 30, 2004and 2003, respectively (see reconciliation of segments income/(loss) beforeincome taxes/ (benefit) to consolidated income/(loss) before incometaxes/(benefit)).  Corporate services, consisting of general andadministrative services are provided to the segments from a centralized location. Such costs are allocated to the applicable segments receiving Corporateservices based on revenue.

 

9

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**(In thousands)**

 
| ** **                                               | ** ** | **THREE MONTHS ENDED**       | ** ** | **NINE MONTHS ENDED**        | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** |
| **Revenues:**                                            |       | ** **                   | ** ** |                         |       | ** ** | ** ** |   |   |
| **IT Services**                                          |       | **$**                        | **33,791** | ** **                   | $          | 32,235 |   | **$** | **95,668** | ** ** | $ | 103,738 |   |
| **Solutions Group**                                      |       | **29,604**                   | ** ** | 27,016                       |       | **81,941** | ** ** | 65,308 |   |
| **Chimes**                                               |       | **6,002**                    | ** ** | 5,208                        |       | **17,284** | ** ** | 14,499 |   |
| **Total Revenues**                                       |       | **69,397**                   | ** ** | 64,459                       |       | **194,893** | ** ** | 183,545 |   |
| ** **                                               |       | ** **                   | ** ** |                         |       | ** ** | ** ** |   |   |
| **Gross Profit:**                                        |       | ** **                   | ** ** |                         |       | ** ** | ** ** |   |   |
| **IT Services**                                          |       | **5,722**                    | ** ** | 6,514                        |       | **18,304** | ** ** | 20,763 |   |
| **Solutions Group**                                      |       | **10,140**                   | ** ** | 7,993                        |       | **27,120** | ** ** | 18,009 |   |
| **Chimes**                                               |       | **5,655**                    | ** ** | 4,882                        |       | **16,277** | ** ** | 13,436 |   |
| **Total Gross Profit**                                   |       | **21,517**                   | ** ** | 19,389                       |       | **61,701** | ** ** | 52,208 |   |
| **%**                                                    |       | **31.0**                     | **%**      | 30.1                         | %          | **31.7** | **%** | 28.4 | % |
| ** **                                               |       | ** **                   | ** ** |                         |       | ** ** | ** ** |   |   |
| **Operating Income:**                                    |       | ** **                   | ** ** |                         |       | ** ** | ** ** |   |   |
| **IT Services**                                          |       | **701**                      | ** ** | 1,975                        |       | **4,704** | ** ** | 6,150 |   |
| **Solutions Group**                                      |       | **2,936**                    | ** ** | 2,143                        |       | **7,504** | ** ** | 6,525 |   |
| **Chimes**                                               |       | **395**                      | ** ** | (113                         | )          | **1,217** | ** ** | (2,377 | ) |
| **Total Operating Income/ (Loss):**                      |       | **4,032**                    | ** ** | 4,005                        |       | **13,425** | ** ** | 10,298 |   |
| **%**                                                    |       | **5.8**                      | **%**      | 6.2                          | %          | **6.9** | **%** | 5.6 | % |
| ** **                                               |       | ** **                   | ** ** |                         |       | ** ** | ** ** |   |   |
| **Corporate Allocation:**                                |       | ** **                   | ** ** |                         |       | ** ** | ** ** |   |   |
| **IT Services**                                          |       | **2,629**                    | ** ** | 3,213                        |       | **8,908** | ** ** | 9,249 |   |
| **Solutions Group**                                      |       | **1,271**                    | ** ** | 1,767                        |       | **4,197** | ** ** | 4,999 |   |
| **Chimes**                                               |       | **467**                      | ** ** | 519                          |       | **1,613** | ** ** | 1,303 |   |
| **Total Corporate Allocation**                           |       | **4,367**                    | ** ** | 5,499                        |       | **14,718** | ** ** | 15,551 |   |
| **%**                                                    |       | **6.3**                      | **%**      | 8.5                          | %          | **7.6** | **%** | 8.5 | % |
| ** **                                               |       | ** **                   | ** ** |                         |       | ** ** | ** ** |   |   |
| **Total Income/ (loss) before  Income Taxes (benefit):** |       | ** **                   | ** ** |                         |       | ** ** | ** ** |   |   |
| **IT Services**                                          |       | **(1,928**                   | **)**      | (1,238                       | )          | **(4,204** | **)** | (3,099 | ) |
| **Solutions Group**                                      |       | **1,665**                    | ** ** | 376                          |       | **3,307** | ** ** | 1,526 |   |
| **Chimes**                                               |       | **(72**                      | **)**      | (632                         | )          | **(396** | **)** | (3,680 | ) |
| **Total Income/ (loss) before  Income Taxes (benefit)**  |       | **$**                        | **(335**   | **)**                        | $          | (1,494 | ) | **$** | **(1,293** | **)** | $ | (5,253 | ) |
| ** **                                               |       | ** **                   | ** ** |                         |       | ** ** | ** ** |   |   |
| **%**                                                    |       | **(0.5**                     | **)%**     | (2.3                         | )%         | **(0.7** | **)%** | (2.9 | )% |

 

10

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

 
| ** **                                                  | ** ** | **Three Months Ended**       | ** ** | **Nine Months Ended**        | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **(000’s)**                                            | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** |
| Total Segments  Income/(Loss) before Income Taxes/(Benefit) |       | $                            | (335       | )                            | $          | (1,494 | ) | $ | (1,293 | ) | $ | (5,253 | ) |
| Adjustments:                                                |       |                         |       |                         |       |   |   |   |   |
| Interest Income, net                                        |       | 93                           |       | 78                           |       | 205 |   | 336 |   |
| Loss on sale of assets                                      |       | —                       |       | —                       |       | — |   | (273 | ) |
| Restructuring charges                                       |       | —                       |       | (787                         | )          | — |   | (2,985 | ) |
| Special (charges)/credits                                   |       | —                       |       | (800                         | )          | 939 |   | (8,778 | ) |
| Write-off of terminated  project                            |       | —                       |       | —                       |       | — |   | (3,064 | ) |
| Amortization of  Intangibles                                |       | (484                         | )          | (526                         | )          | (1,212 | ) | (526 | ) |
| Total Adjustments:                                          |       | $                            | (391       | )                            | $          | (2,035 | ) | $ | (68 | ) | $ | (15,290 | ) |
| Consolidated Income/(Loss)  Before Income Taxes             |       | $                            | (726       | )                            | $          | (3,529 | ) | $ | (1,360 | ) | $ | (20,543 | ) |

 

**7.****             ****RestructuringCharges**

 

Duringthe fourth quarter of 2003, the Company recorded a restructuring charge ofapproximately $329,000 relating to the closing of one office in the U.S. andthe related severance.  The Company decided to continue business in thisarea through virtual offices and therefore recorded the charge after thebuilding was closed.  The lease obligation of $90,000 was calculated basedon current rent commitments less a calculated sublease amount based on currentmarket conditions.

 

| ** **         | ** ** | **Remaining at  December 31,  2003** | ** ** | **Paid** | ** ** | **Remaining at  September 30,  2004** | ** ** |
|--------------------|------------|-------------------------------------------|------------|----------|------------|--------------------------------------------|------------|
| Lease Obligations: |       |                                      |       |     |       |                                       |       |
| United States      |       | $                                         | 90         |     | $          | (90                                        | )          | $ | — |   |
|                    |            |                                           |            |          |            |                                            |            |  |  |  |

 

11

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Duringthe third quarter of 2003, the Company recorded a restructuring charge ofapproximately $787,000 relating to the closing of Chimes (UK) Ltd. andseverance charges related to U.S. operations.  The Company decided tocontinue business in this geographic area through a third party and thereforerecorded the charge after the building was closed.  The provision includesan accrual relating to the future costs associated with continuing rent on thisproperty in the United Kingdom.  The closing of this office resulted in aseverance charge of $305,000.

 

| ** **             | ** ** | **Remaining at  December 31,  2003** | ** ** | **Paid** | ** ** | **Exchange  Rate  Fluctuation** | ** ** | **Remaining at  September 30,  2004** | ** ** |
|------------------------|------------|-------------------------------------------|------------|----------|------------|---------------------------------|------------|--------------------------------------------|------------|
|                   |       |                                      |       |     |       |                            |       |                                       |       |
| Severance              |       | $                                         | 47         |     | $          | —                          |       | $                                          | 1          |   | $ | 48 |   |
|                   |       |                                      |       |     |       |                            |       |                                       |       |
| Lease Obligations      |       | $                                         | 150        |     | $          | (26                             | )          | $                                          | 1          |   | $ | 125 |   |
|                   |       |                                      |       |     |       |                            |       |                                       |       |
| General Office Closure |       | $                                         | 49         |     | $          | (7                              | )          | $                                          | 1          |   | $ | 43 |   |
|                   |       |                                      |       |     |       |                            |       |                                       |       |
| Total                  |       | $                                         | 246        |     | $          | (33                             | )          | $                                          | 3          |   | $ | 216 |   |

 

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

 

| ** **         | ** ** | **Remaining at  December 31,  2003** | ** ** | **Paid** | ** ** | **Exchange  Rate  Fluctuation** | ** ** | **Remaining at  September 30,  2004** | ** ** |
|--------------------|------------|-------------------------------------------|------------|----------|------------|---------------------------------|------------|--------------------------------------------|------------|
| Lease Obligations: |       |                                      |       |     |       |                            |       |                                       |       |
| Canada             |       | $                                         | 739        |     | $          | (351                            | )          | $                                          | (8         | ) | $ | 380 |   |
|                    |            |                                           |            |          |            |                                 |            |                                            |            |  |  |  |  |

 

12

----

 

Duringthe fourth quarter of 2002, the Company recorded a restructuring charge of $2.8million pertaining to 2002 office closings.  During the second quarter of2003, half of the rent for one office closing was reversed after the rent wasnegotiated at a lower rate for half the building.  During the fourthquarter of 2003, the Company made an additional adjustment to the reserve forfour of the properties due to sublease.

 
| ** **         | ** ** | **Remaining at  December 31,  2003** | ** ** | **Paid** | ** ** | **Remaining at  September 30,  2004** | ** ** |
|--------------------|------------|-------------------------------------------|------------|----------|------------|--------------------------------------------|------------|
| Lease Obligations: |       |                                      |       |     |       |                                       |       |
| United States      |       | $                                         | 1,159      |     | $          | (788                                       | )          | $ | 371 |   |
|                    |            |                                           |            |          |            |                                            |            |  |  |  |

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

 

Atthe end of 2003, the Company had $78,000 of five lease obligations remainingfrom the restructure expense recorded in 2001.  As of September 30,2004 there are no remaining lease obligations.

 
| ** **         | ** ** | **Remaining at  Dec. 31,  2003** | ** ** | **Paid** | ** ** | **Remaining at  September 30,  2004** | ** ** |
|--------------------|------------|----------------------------------|------------|----------|------------|--------------------------------------------|------------|
|               |       |                             |       |     |       |                                       |       |
| Lease Obligations: |       |                             |       |     |       |                                       |       |
| United States      |       | $                                | 78         |     | $          | (78                                        | )          | $ | 0 |   |
|                    |            |                                  |            |          |            |                                            |            |  |  |  |

 

13

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

 

Atthe end of 2003, the Company had $308,000 of one lease obligation remaining onthe restructure expense recorded in 2000, with the lease terminating in2005.  The balance remaining at September 30, 2004 was $172,000.

 
| ** **         | ** ** | **Remaining at  Dec. 31,  2003** | ** ** | **Paid** | ** ** | **Remaining at  September 30,  2004** | ** ** |
|--------------------|------------|----------------------------------|------------|----------|------------|--------------------------------------------|------------|
| Lease Obligations: |       |                             |       |     |       |                                       |       |
| United States      |       | $                                | 308        |     | $          | (136                                       | )          | $ | 172 |   |
|                    |            |                                  |            |          |            |                                            |            |  |  |  |

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

 

14

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**8.****             ****ComprehensiveIncome/(Loss)**

 

Statementof Financial Accounting Standards No. 130, Reporting Comprehensive Income (“SFASNo.130”), requires that items defined as other comprehensive income/ (loss),such as foreign currency translation adjustments and unrealized gains andlosses, be separately classified in the financial statements and that the accumulatedbalance of other comprehensive income/ (loss) be reported separately fromretained earnings and additional paid-in capital in the equity section ofthe balance sheet. The components of comprehensive loss for the three and ninemonths ended September 30, 2004 and September 30, 2003 are asfollows:

 
| ** **                                                             | ** ** | **Three Months Ended**       | ** ** | **Nine months Ended**        | ** ** |
|------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                             | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** |
|                                                                   |       |                         |       |                         |       |   |   |   |   |
| Comprehensive  Income/(Loss):                                          |       |                         |       |                         |       |   |   |   |   |
|                                                                   |       |                         |       |                         |       |   |   |   |   |
| Net Income/(Loss)                                                      |       | $                            | (460       | )                            | $          | (2,843 | ) | $ | (902 | ) | $ | (14,973 | ) |
| Other comprehensive  income/ (loss) – foreign currency adjustment |       | 397                          |       | 214                          |       | 32 |   | 1,753 |   |
| Unrealized gain /(loss) on  SERP investments                           |       | (102                         | )          | (112                         | )          | (52 | ) | 621 |   |
| Comprehensive  Income/(Loss)                                           |       | $                            | (165       | )                            | $          | (2,741 | ) | $ | (922 | ) | $ | (12,599 | ) |

 

**9.****             ****Acquisitions**

 

OnApril 1, 2004 the Company’s subsidiary RGII Technologies, Inc. acquiredall of the common stock of privately held Automated Information Management,Inc. (“AIM”). The cash transaction is valued at approximately $13.8 millionplus an adjustment to purchase price for excess working capital ofapproximately $2.0 million.

 

TheCompany purchased AIM to further its commitment to driving the growth potentialthat exists in the Federal government market and to expand RGII’s footprint,providing an entrance into certain government agencies, as well as strongrelationships with large, prime contractors.

 

15

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TheCompany completed a preliminary allocation of the purchase price to assets andliabilities acquired, utilizing outside valuation consultants to assist in theprocess.  The allocation of the purchase price to assets acquired andliabilities assumed (which is subject to adjustment) was as follows (in thousands):

 
| ** **               | ** ** | **Allocation of  Purchase Price** | ** ** |
|--------------------------|------------|-----------------------------------|------------|
|                     |       |                              |       |
| Cash                     |       | $                                 | 1,168      |   |
|                     |       |                              |       |
| Accounts Receivable      |       | 3,300                             |       |
|                     |       |                              |       |
| Other Current Assets     |       | 18                                |       |
|                     |       |                              |       |
| Goodwill                 |       | 11,248                            |       |
|                     |       |                              |       |
| Intangibles              |       | 2,540                             |       |
|                     |       |                              |       |
| Property and Equipment   |       | 127                               |       |
|                     |       |                              |       |
| Total Assets             |       | 18,401                            |       |
|                     |       |                              |       |
| Accounts Payable         |       | 400                               |       |
|                     |       |                              |       |
| Accrued Payroll          |       | 747                               |       |
|                     |       |                              |       |
| Other Accrued Expenses   |       | 361                               |       |
|                     |       |                              |       |
| Deferred Tax Liabilities |       | 1,015                             |       |
|                     |       |                              |       |
| Total Liabilities        |       | 2,523                             |       |
|                     |       |                              |       |
| Net Assets               |       | $                                 | 15,878     |   |

 

Purchasedintangibles totaling $2.5 million included unfunded backlog, funded backlog andnon-compete agreements; approximately $11.2 million was recorded as goodwill.

 

Theacquisition was structured as a purchase of common stock; and accordingly,goodwill will not be subject to amortization for tax purposes.

 

16

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ProForma Results

 

EffectiveApril 1, 2004 the results of AIM’s operations have been included in theconsolidated financial statements of the Company.  The following unauditedpro forma financial information presents the combined results of operations ofthe Company and AIM as if the acquisition had occurred as of the beginning ofthe periods presented.  The revenues and results of operations included inthe following pro forma unaudited consolidated condensed statement ofoperations is not considered necessarily indicative of the results ofoperations for the periods specified had the transaction actually beencompleted at the beginning of the period.

 
| ** **                                         | ** ** | **Actual**                                       | ** ** | **Pro Forma**                                    | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                         | ** ** | **Three Months  Ended  September 30  2004** | ** ** | **Three Months  Ended  September 30  2003** | ** ** | **Nine months  Ended  September 30  2004** | ** ** | **Nine months  Ended  September 30  2003** | ** ** |
| Revenues:                                          |       |                                             |       |                                             |       |   |   |   |   |
| IT Services                                        |       | $                                                | 33,791     |                                             | $          | 32,235 |   | $ | 95,668 |   | $ | 103,738 |   |
| Solutions Group                                    |       | 29,604                                           |       | 31,687                                           |       | 86,379 |   | 78,705 |   |
| Chimes                                             |       | 6,002                                            |       | 5,208                                            |       | 17,284 |   | 14,499 |   |
| Total                                              |       | 69,397                                           |       | 69,130                                           |       | 199,331 |   | 196,942 |   |
| Income/(loss) before  minority interest            |       | (402                                             | )          | (2,649                                           | )          | (966 | ) | (14,622 | ) |
| Minority interest                                  |       | (58                                              | )          | 21                                               |       | (22 | ) | (16 | ) |
| Net Income/(Loss)                                  |       | $                                                | (460       | )                                                | $          | (2,628 | ) | $ | (988 | ) | $ | (14,638 | ) |
| Net Income/(loss) per  share (basic & diluted) |       | $                                                | (0.01      | )                                                | $          | (0.09 | ) | $ | (0.03 | ) | $ | (0.48 | ) |
| Weighted average number of  shares outstanding     |       |                                             |       |                                             |       |   |   |   |   |
| Basic & Diluted                                |       | 30,931,000                                       |       | 30,548,000                                       |       | 30,806,000 |   | 30,403,000 |   |

 

Theunaudited pro forma financial information above reflects the followingadjustments to the historical consolidated financial statements for the threemonths ended September 30, 2003: $313,000 amortization expense onpurchased intangible assets, $43,500 reduction of interest income for cashconsideration paid and $50,000 adjustment to record income taxes for AIM as ifit was a C-Corporation and to record income tax effect of pro formaadjustments.

 

Theunaudited pro forma financial information above reflects the following adjustmentsto the historical consolidated financial statements for the nine months ended September 30,2004: $313,000 amortization expense on purchased intangible assets, eliminationof Acquisition related bonuses of $2.3 million, $43,500 reduction of interest incomefor cash consideration paid and $40,000

 

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adjustmentto record income tax benefit for AIM as if it was a C-Corporation and to recordincome tax effect of pro forma adjustments.

 

Theunaudited pro forma financial information above reflects the followingadjustments to the consolidated financial statements for the nine months ended September 30,2003: $940,000 amortization expense on purchased intangible assets, $131,000reduction of interest income for cash consideration paid and $124,000adjustment to record income taxes for AIM as if it was a C-Corporation and torecord income tax effect of pro forma adjustments.

 

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

 

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On July 8, 2003, theCompany acquired all of the stock of privately-held RGII Technologies, Inc. (“RGII”). The Company purchased RGII because acquiring a platform company in the Federalgovernment IT Services marketplace has been a long-term priority for theCompany.  The purchase price of approximately $22.1 million included anup-front cash payment, acquisition expenses, working capital adjustment and thepayoff of a note payable of $1.5 million.  In addition, the seller may beentitled to contingent payments based on RGII’s performance againstprofitability objectives over the next three years.  The contingentpayments are evidenced by a contingent note with a face value of $10 millionthat is payable over three years, only if performance objectives are met. These financial performance objectives are based on earnings before interestand taxes (“EBIT”) targets totaling $19.8 million over a three yearperiod.  There are no minimum or maximum payment obligations under theterms of the contingent note. The contingent payment will be reduced on adollar-for-dollar basis for financial performance below EBIT targets, andincreased by 29 cents ($0.29) for each dollar exceeding EBIT targets.  TheCompany made a payment of $631,000 during the first quarter of 2004.  TheCompany also entered into employment agreements with the former shareholder andemployees of RGII and has agreed to issue an aggregate of 600,000 options topurchase shares of Computer Horizons stock over a three year period.

 

The Company completed theallocation of the purchase price to assets and liabilities acquired utilizingoutside valuation consultants to assist in this process.

 

As a result of the integrationof AIM into RGII, the Company and the seller of RGII have agreed that theoperating results of AIM shall remain separate from and not be included in the RGIIEBIT targets related to contingent payments. RGII, however, shall be permitted an intercompany charge to AIM for AIM’sshare of the combined operating overhead expenses. In addition, the seller ofRGII will be eligible to receive a five percent bonus based on the operatingincome of AIM.

 

On January 31, 2003, theCompany acquired the IT Solutions operations of Global Business TechnologySolutions (GBTS), from Alea (Bermuda) Limited, a member of the Alea Group ofcompanies and Westfield Services, Inc., a subsidiary of Westfield FinancialCorporation for $400,000.  The outsourcing facility and its ITprofessionals are located in Chennai (Madras), India.  This transactionwas accounted for as a purchase and the entire purchase price was allocated togoodwill.

 

**10.****      ****Goodwill**

 

The changes in the carryingamount of goodwill for the nine months ended September 30, 2004, are asfollows:

 
| **Reporting Units**              | ** ** | **Solutions** | ** ** | **IT Services** | ** ** | **Education** | ** ** | **Chimes** | ** ** | **Consolidated** | ** ** |
|----------------------------------|------------|---------------|------------|-----------------|------------|---------------|------------|------------|------------|------------------|------------|
|                             |       |          |       |            |       |          |       |       |       |             |       |
| Balance as of December 31, 2003  |       | $             | 34,218     |            | $          | —        |       | $          | —     |             | $          | — |   | $ | 34,218 |   |
| Additions to Goodwill*           |       | 11,248        |       | —          |       | —        |       | —     |       | 11,248           |       |
| Balance as of September 30, 2004 |       | $             | 45,466     |            | $          | —        |       | $          | —     |             | $          | — |   | $ | 45,466 |   |

 

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* reflects goodwill resultingfrom AIM acquisition.  See Note 9.

 

The reporting units are equalto, or one level below, reportable segments.  The Company engaged outsidevaluation consultants to assist with the completion of a preliminary allocationof the purchase price to assets and liabilities acquired.

 

**11.****      ****Sale ofSubsidiaries**

 

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

 

**12.****      ****Purchase ofTreasury Stock**

 

In April of 2001, theBoard of Directors approved the repurchase in the open market of up to 10% ofits common shares outstanding, or approximately 3.2 million shares.  As ofSeptember 30, 2004 the remaining authorization for repurchase isapproximately 93,000 shares.

 

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**13.****      ****Asset-BasedLending Facility**

 

The Company has a $40 millionline of credit facility with availability based primarily on eligible customerreceivables.  The interest rate is LIBOR plus 2.75% based on unpaidprincipal.  The borrowing base less outstanding loans must equal or exceed$5.0 million.  As of September 30, 2004, the Company had nooutstanding loan balance against the facility.  Based on the Company’seligible customer receivables and cash balances, $19.5 million was availablefor borrowing as of September 30, 2004.  The fee for the unusedportion of the line of credit is 0.375% per annum charged to the Companymonthly.  This charge was approximately $77,500 and $84,000 for the ninemonth periods ended September 30, 2004 and 2003, respectively.  Thisline of credit includes covenants relating to the maintenance of cash balancesand providing for limitations on incurring obligations and spending limits oncapital expenditures.  The Company did not satisfy this covenant for thequarter ended March 31, 2004.  A waiver was received from the lendinginstitution for the quarter ended March 31, 2004 along with an amendment to theloan agreement lowering the three-month average minimum collections covenant to$10 million.  At September 30, 2004, the Company is in compliance with thecovenant.  The facility was scheduled to expire in July 2004;however, on July 14, 2004, the Company signed a one-year extension of thefacility, which will remain in effect until July 2005.

 

**14.****      ****Tax BenefitReserve**

 

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

 

During 1998, the Companycompleted a business combination, which for financial statement purposes, wasaccounted for as a pooling-of-interests.  For income tax purposes, thetransaction was treated as a taxable purchase that gave rise to future taxdeductions.  Upon the sale of the acquired business in 2001, thesedeductions were recognized for tax purposes.  The tax benefit of $19.6million relating to the part of these deductions that was carried back to prioryears was included in refundable income taxes in 2002.  Since the taxstructure of the transaction was subject to review by the tax authorities, theCompany recorded a reserve for the tax benefits resulting from the carrybackand did not record deferred tax assets for the tax benefits being carriedforward. The Company intended that upon conclusion of review of the relevanttax returns by the authorities, it would record a deferred tax asset for thepart of the tax benefits being carried forward and a tax benefit for theportion that was carried back, net of an appropriate valuation allowance. Thetax benefit would be reflected as an increase in additional paid-incapital.  Any adjustments to the valuation allowance would be charged orcredited to income.

 

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In December 2003, theInternal Revenue Service examined the Company’s federal income tax returns forthe years ended December 31, 2001 and 2000, along with its federal refundclaims for the calendar years 1996 through 1999.  The additional refundamount received in January 2003 was shown as a liability until the auditwas completed.  During the first quarter of 2004, the Internal RevenueService and the Joint Committee on Taxation completed their examination of theCompany’s federal income tax returns and federal refund claims, and acceptedthem without change.  Accordingly, the tax benefit was recorded as adecrease in tax benefit reserves of $19.6 million, a decrease in other taxreserves of $0.3 million, and an increase in additional paid-in capital of$19.9 million. There was no charge or credit to income.

 

**15.****      ****RescissionOffer**

 

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

 

As a result, the Company made arescission offer, effective July 27, 2004, to all those persons whopurchased shares of common stock pursuant to the Employee Stock Purchase Planduring the affected periods.  The rescission offer was made pursuant to aregistration statement filed under the Securities Act and pursuant toapplicable state securities laws.  In this rescission offer, the Companyis offering to repurchase the shares, subject to our rescission offer, for theprice paid per share plus interest from the date of purchase until therescission offer expires, at the current statutory rate per year mandated bythe state in which the shares were purchased.  The rescission offer expiredon August 27, 2004, with no individuals accepting the rescission offer.

 

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**16.****      ****Special Items**

 

Income from operations for thesecond quarter of 2004 includes a one-time credit of $939,000, primarilyrelating to an insurance refund.  During the second quarter of 2003, theCompany incurred special charges of $8.0 million consisting of $3.7 million forthe separation package of the former CEO and $4.3 million pertaining toexpenses related to the unilateral acquisition proposal and activities ofAquent.  The separation package of the former CEO included a $3.5 millionseverance payment and $200,000 in continued medical coverage.  The $4.3million expense related to the unilateral acquisition proposal and activitiesof Aquent LLC was primarily attributable to approximately $2.3 million of legalfees, $1.0 million in financial advisor fees and $1.0 million of proxysolicitations and other fees.  As management considers these special itemsto be infrequent and material in nature, the Company has reported thecharges/credits on a separate line for full disclosure purposes; however, theamounts are reported within operating income.

 

The Company also incurred arestructuring expense of $1.9 million during the second quarter of 2003relating primarily to the closing of facilities in Canada.  In addition,the Company voluntarily terminated a sub-contract with ATEB, a privately heldcompany, for financial reasons and recorded a write-off of approximately $3.1million (reported in second quarter of 2003 in SG&A expense) due to theuncertainty of the realization of the receivable.  ATEB was the primarycontractor to develop a new pharmacy system for Royal Ahold.  The Companyis continuing recovery efforts of this receivable.

 

**17.****      ****Aquent/LegalMatters**

 

On April 29, 2003, theCompany filed an action in the United States District Court for the District ofNew Jersey against Aquent LLC, seeking (i) to enjoin Aquent from disseminatingfalse and misleading proxy materials and press releases in support of its twonominees for director positions in connection with the Company’s May 14, 2003Annual Meeting; (ii) to invalidate any proxies secured by Aquent through theuse of unlawful proxy solicitation materials; and (iii) to require Aquent todisseminate corrective disclosure that not only amended the false andmisleading proxy materials but also advised CHC shareholders how Aquent’ssolicitations had violated the securities laws.

 

On May 27, 2003, the Companybrought an action in the Supreme Court of the State of New York, New YorkCounty, seeking an order invalidating votes for directors Karl Meyer and RobertTrevisani cast at the Annual Meeting by stockholders of record who sold theirshares between the record date and the date of the Annual Meeting.

 

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Each of the legal proceedingsdescribed above were settled and dismissed as a result of a settlementagreement between the Company and Aquent LLC entered into on December 12,2003.  As part of the settlement, the Company agreed to modify its September 30,2003 by-law agreement regarding special meeting procedures by, among otherthings, reducing from 75 to 50 the minimum number of days between the time a 10percent or more shareholder requests a special meeting of shareholders and thedate of that meeting.  In addition, Aquent entered into a standstillagreement pursuant to which, for a period of one year, it agreed not to requesta special meeting of Computer Horizons’ shareholders for any purpose, ornominate anyone to serve as a member of CHC’s Board of Directors, or engage inany proxy solicitation of Computer Horizons’ shareholders.

 

The Company is involved invarious 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.

 

**18.  Balance Sheet Reclassification**

 

During the third quarter of2004, the Company recorded a reclassification reducing other assets andadditional paid-in capital by approximately $1.2 million to adjust theelimination of an investment in a subsidiary company.

 

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Forthe Periods Ended September 30, 2004 and September 30, 2003

 

The following detaileddiscussion and analysis of the Company’s financial condition and results ofoperations should be read in conjunction with the December 31, 2003financial statements and related notes included in the Company's Form 10-K andthe financial statements and notes included elsewhere in this Form 10-Q.

 

**Overview**

 

Computer Horizons Corp.,(“CHC” or the “Company”), is a strategic solutions and human capital managementcompany with more than thirty-six years of experience, specifically ininformation technology.  The Company’s clients are primarily Global 2000companies, serviced by over 20 offices in the United States, Canada, and India.

 

The Company had revenuesfor the quarter ending September 30, 2004 of $69.4 million, an eightpercent increase from the comparable period in 2003.  For the nine monthsended September 30, 2004, revenues totaled $194.9 million, compared to$183.5 million in the comparable period of 2003.  The revenue increasesfor the quarter and nine months ended September 30, 2004 were attributableto growth in our Solutions business due to the July 2003 acquisition ofRGII and the April 2004 acquisition, by RGII, of Automated InformationManagement, Inc. (AIM).  Also contributing to the revenue increase wasgrowth achieved by the Company’s Chimes subsidiary.  Revenue growth duringthe first nine months of 2004 was partially offset by revenue declines in ourcommercial (non-federal) Solutions business and declines in our IT Services business(staff augmentation) due to a decrease in demand for temporary technologyworkers and the trend of companies to outsource technology jobs offshore.

 

Net loss for the thirdquarter of 2004 totaled $0.5 million, or $(0.01) per share, compared with a netloss of approximately $2.8 million, or $(0.09) per share, in the comparableperiod of 2003.  Net loss for the nine months ending September 30,2004 totaled $0.9 million, or $(0.03) per share, compared with a net loss of$15.0 million, or $(0.49) per share, in the comparable nine months endingSeptember 30, 2003.  Net loss for the nine months endingSeptember 30, 2004 includes a one-time credit of approximately $0.02 pershare, primarily relating to an insurance refund, and a $(0.03) per sharecharge pertaining to the amortization of intangibles.  The first ninemonths of 2003 net loss includes special charges of $(0.38) per share relatingto severance charges, the write-off of a terminated project, costs associatedwith the unilateral proposal and activities of Aquent, restructuring charges atthe Company’s Canadian facilities and amortization of intangibles.

 

Management continues tofocus on maintaining a strong balance sheet, with approximately $34.2 millionin cash and cash equivalents at September 30, 2004, along with $73.7million in working capital and no debt outstanding.

 

On April 1, 2004,the Company’s subsidiary RGII acquired Automated Information Management, Inc.(AIM), a federal government IT Services company, for approximately $15.8million in cash.  The acquisition of AIM is directly linked to the Company’sstrategy of expanding its presence in the federal government IT market andpursuing bolt-on expansions to its RGII subsidiary.

 

The Company reported netloss of $0.9 million during the nine months of 2004, and, the level of businessactivity in the IT market remains uncertain, primarily in the Company’s ITServices and commercial solutions business.  This uncertaintysignificantly reduced revenues in the Company’s IT Services business in thefirst nine months of 2004, compared to the prior year.  The IT Servicesbusiness accounted for approximately 49% of the Company’s total revenue in thefirst nine months of 2004.  Although IT Services

 

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third quarter revenue increasedsequentially from the second quarter of 2004, the Company cannot predict ifthese increases are sustainable and when the overall level of business activityin the IT market will improve.

 

**FORWARD-LOOKINGSTATEMENTS**

 

Statements included in thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and elsewhere in this document that do not relate to present orhistorical conditions are “forward-looking statements” within the meaning ofthat term in Section 27A of the Securities Act of 1933, as amended, and inSection 21F of the Securities Exchange Act of 1934, as amended. Additional oral or written forward-looking statements may be made by theCompany from time to time, and such statements may be included in documentsthat are filed with the Securities and Exchange Commission (SEC).  Suchforward-looking statements involve risks and uncertainties that could causeresults or outcomes to differ materially from those expressed in suchforward-looking statements.  Forward-looking statements may include,without limitation, statements relating to the Company’s plans, strategies,objectives, expectations and intentions and are intended to be made pursuant tothe safe harbor provisions of the Private Securities Litigation Reform Act of1995.  Words such as “believes,” “forecasts,” “intends,” “possible,” “expects,”“estimates,” “anticipates,” or “plans”, and similar expressions, are intendedto identify forward-looking statements.  Among the important factors onwhich such statements are based are assumptions concerning the anticipatedgrowth of the information technology industry, the continued need of currentand prospective customers for the Company’s services, the availability ofqualified professional staff, and price and wage inflation.

 

## **Revenue Generating Activities**

 

The majority of the Company’srevenues are derived from professional services rendered in the informationtechnology sector.

 

The Company operates itsbusiness in three basic segments: IT Services, the Solutions Group and Chimes,Inc.  The distinctions between the IT Services and Solutions Groupsegments primarily relate to the management and supervision of servicesperformed and related gross margins.  Chimes, Inc., a wholly-ownedsubsidiary of CHC, provides workforce procurement and management services toGlobal 2000 companies.

 

The IT Services businessconsists of providing technology consultants to large organizations on atemporary hire basis. The consultant work is supervised and managed by thecustomer. For the quarter and first nine months ended September 30, 2004,this segment represented approximately 49% of total revenues. The IT Servicesbusiness tends to be a lower risk, lower gross margin business with very competitivepricing.

 

The Solutions Group, tends tobe a higher margin, higher risk business, due to the fact that the Company isresponsible for project deliverables and other conditions contained instatements of work and/or contracts with customers. Virtually all projectsperformed by the Solutions Group are IT related and consist of practices suchas application development, outsourcing arrangements, government services,Health Insurance Portability and Accountability Act, or HIPAA, services,technology training and managed services.  For the quarter and first ninemonths ended September 30, 2004, the Solutions Group (excluding Chimes)accounted for 43% and 42% of consolidated revenues respectively.

 

The Company’s customerrelationships are memorialized in a master agreement, which address the termsand conditions, which define the client engagement.  Depending on theservice to be performed for the client, either a task order (in the case of aStaffing engagement) or a Statement of Work (“SOW”) (in the case of a Solutionsengagement) is generated. The SOW is signed by both the Company and thecustomer.  In general, no Solutions work is done unless there is a SOWbecause the SOW provides the technical details of the work to be done. The SOW, although falling under the corresponding master agreement, is a stand-alone

 

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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 master agreements, inconjunction with the SOW’s, are written to define, with as much detail aspossible, the client relationship and all aspects of the work to be performed forthe client.  With regard to revenues expected in future periods, each SOWhas a defined term or sets forth the anticipated length of a project. Where a client engagement is on going, like certain “Help Desk” type services,the master agreements would still have a term length, but would recite that theagreement was renewable.  Generally, Solutions engagements are for a yearor less.  Staffing engagements can and do last for more than a year, withvariations in the number of consultants being provided at any given time. Staffing engagements are generally cancelable by clients with a two to fourweek notice period.

 

Chimes, Inc. is a human capitalmanagement solution company that, through the use of proprietary software andprocesses, manages the temporary workforce of large organizations. During thequarter and first nine months ended September 30, 2004, Chimes accountedfor approximately 9.0% of total revenues.

 

## **Critical Accounting Policies**

 

The most critical accountingpolicies used in the preparation of the Company’s financial statements arerelated to revenue recognition, the evaluation of the bad debt reserve, thevaluation of goodwill and the valuation of the deferred tax asset.

 

##### **Revenue Recognition**

 

Approximately 95% and 92% ofconsolidated revenue in the quarter and nine months ended September 30,2004 and September 30, 2003, respectively, was derived fromtime-and-material contracts.

 

For the IT Services division,revenues are recognized as services are performed under time-and materialcontracts.  Under a typical time and materials billing arrangement, ourcustomers are billed on a regularly scheduled basis, such as biweekly ormonthly.  At the end of each accounting period, revenue is estimated andaccrued for services performed since the last billing cycle.  Theseunbilled amounts are billed the following month.

 

The Solutions Group recognizesrevenue either on a time and material basis or on a fixed fee basis, however,principally on a time and material basis. For fixed-fee contracts, revenue is recognizedon the basis of the estimated percentage of completion based on costs incurredrelative to total estimated costs.  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 adjustmentwill be made.  The cumulative effect of revisions in estimated revenuesand costs are recognized in the period in which the facts that give rise to theimpact of any revisions become known.

 

Unbilled accounts receivable,in the IT Services and Solutions Group, represent amounts recognized as revenuebased on services performed in advance of customer billings principally on atime-and- material 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.

 

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The Company’s Chimes subsidiaryrecognizes revenue on a transaction fee basis.  The Chimes serviceoffering aggregates the suppliers of temporary workers to the customer andrenders one invoice to the customer.  Upon payment from the customer,Chimes deducts a transaction fee and remits the balance of the client paymentto the applicable vendor.  Chimes recognizes only their fee for theservice, not the aggregate billing to the customer.  The gross amount ofthe customer invoicing is not considered revenue or receivable to Chimesbecause there is no earnings process for the gross amount and by contractterms, Chimes is not obligated to pay the vendor until paid by the customer .

 

Evaluation of Bad Debt Reserve

 

The Company determines itsallowance by considering a number of factors, including the length of timetrade accounts receivable are past due, the Company’s previous loss history,the customer’s current ability to pay its obligation to the Company and thecondition of the general economy and the industry as a whole.  The Companywrites off accounts receivable when they become uncollectible, and paymentssubsequently received on such receivables are credited to the allowance fordoubtful accounts.

 

Goodwill

 

For the years endedDecember 31, 2003 and 2002, the Company completed valuations of thecarrying value of the remaining goodwill and it was determined that no impairmenthad occurred at either date.

 

As of December 31, 2003and 2002, the fair value of each of the reporting units was calculated usingthe following approaches (i) market approach and (ii) income approach. Under the market approach, value is estimated by comparing the performancefundamentals relating to similar public companies’ stock prices. Multiples are then developed of the value of the publicly traded stock tovarious measures and are then applied to each reporting unit to estimate thevalue of its equity.  Under the income approach, value was determinedusing the present value of the projected future cash flows to be generated bythe reporting unit.

 

The fair value conclusion ofthe reporting units reflects an appropriately weighted value of the marketmultiple approach and the income approach discussed above.  An assetapproach was not used because the asset approach is most relevant forliquidation approaches, investment company valuations and asset rich companyvaluations (i.e. real estate entities) and was not deemed relevant formanufacturing and service company going-concern valuations.  When eitherthe income approach or the market approach was used, each indicated value ofthe Solutions entity’s equity exceeded the carrying value of the Solutionsentity by at least $12 million and $15 million as of December 31, 2003 and2002, respectively.  Since each of the two approaches yielded values inexcess of carrying value, any weighting of the two approaches or eitherapproach used alone results in the same conclusion, that the goodwill was notimpaired.

 

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Valuation of the Deferred TaxAsset

 

The Company records deferredtax assets for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and theirrespective tax bases, and to operating loss carryforwards.  Deferred taxassets are reduced by a valuation allowance if, based on available evidence, itis more likely than not that some portion or all of the deferred tax assetswill not be realized.  In assessing the realizability of deferred taxassets, management considers the scheduled reversal periods of the deferred taxassets as well as projected future taxable income and tax planning strategies.

 

**RESULTS OFOPERATIONS**

 

*Revenues*.  Revenues increased to$69.4 million in the third quarter of 2004 from $64.5 million in the thirdquarter of 2003, an increase of $4.9 million or 7.7%.  Revenues increasedto $194.9 million in the first nine months of 2004 from $183.5 million in thefirst nine months of 2003, an increase of $11.4 million or 6.2%.

 

Solutions Group revenuesincreased to $29.6 million in the third quarter of 2004 from $27.0 million inthe third quarter of 2003, an increase of $2.6 million or 9.6%. ** **Theincrease in Solutions Group revenues is attributable to the Company’s federalgovernment practice, including the July 2003 acquisition of RGII and theApril 2004 acquisition, by RGII, of AIM, with revenues in the third quarterof 2004 totaling approximately $13.3 million.  This revenue increase forthe quarter was partially offset by several commercial (non-federal) domesticsolutions projects ending and revenue declines attributable to projects withthe City of New York, totaling approximately $1.7 million, in comparison to thethird quarter of 2003.  Solutions Group revenues increased to $81.9million in the first nine months of 2004 from $65.3 million in the first ninemonths of 2003, an increase of $16.6 million or 25.5%**. **The increase in Solutions Group revenues isattributable to the Company’s federal government practice expansion, includingthe acquisition of RGII and AIM, with total first nine month 2004 revenues of$36.7 million, partially offset by revenue declines in commercial domesticsolutions projects and the City of New York, totaling approximately $11.0million, in comparison to the first nine months of 2003.

 

IT Services revenues increasedto $33.8 million in the third quarter of 2004 from $32.2 million in the thirdquarter of 2003, an increase of $1.6 million or 4.8%.  For the thirdquarter of 2004, headcount increased by 8%, in comparison with the thirdquarter of 2003.  IT Services revenues decreased to $95.7 million in thefirst nine months of 2004 from $103.7 million in the first nine months of 2003,a decrease of $8.1 million or 7.8%.  For the first nine months of 2004,average headcount decreased by 6% in comparison to the first nine months of2003, accounting for approximately $6.1 million of the revenue decrease. The balance of the decrease in revenue (approximately $2.0 million) isattributable to a reduction in average bill rates.  The decrease in ITServices revenue during the first nine months of 2004, is the result ofcontinued decreases in the demand for temporary technology workers, the trendof companies to outsource technology jobs offshore and the impact of pricingdecreases by customers.

 

Chimes revenues increased to$6.0 million in the third quarter of 2004 from $5.2 million in the third quarterof 2003, an increase of $0.8 million, or 15.2%.  Chimes revenues, for thefirst nine months of 2004, increased to $17.3 million from $14.5 million in thefirst nine months of 2003, an increase of $2.8 million or 19.2%. This increasein Chimes revenue for the first nine months of 2004 is due to the expansion ofmanaged spend at existing customers (accounting for $2.2 million of the revenueincrease) and the addition of new customers (accounting for $0.6 million of therevenue increase) in this segment.

 

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*Direct Costsand Gross margins*. Direct costs were $47.9 million and $133.2 million in the third quarter andfirst nine months of 2004, respectively, and $45.1 million and $131.3 millionin the third quarter and first nine months of 2003, respectively.  Grossmargin, revenues less direct costs, increased to 31.0% in the third quarter of2004 from 30.1% in the same period of 2003.  Gross margin increased to31.7% in the first nine months of 2004 from 28.4% in the same period of 2003.In the Company’s Solutions Group, gross profit totaled $27.1 million, or 33.1%for the nine months ending September 30, 2004 compared to $18.0 million,or 27.6% in 2003.  This increase isprimarily attributable to the RGII and AIM acquisitions.  IT Servicesgross margins for the nine months ended September 30, 2004 were $18.3million, or 19.1%, compared to $20.8 million, or 20.0% for the comparableperiod of 2003.  This decrease isattributable to a reduction in average bill rates.  Chimes gross margins approximated 94.2% forthe nine months ended September 30, 2004, compared to 92.7% in 2003, dueto improved leveraging of direct costs.

 

The Company’s gross marginimprovement is primarily attributable to the change in the revenue mix amongthe Company’s business segments.  Chimes and the Solutions Group arehigher gross margin businesses than the Company’s IT Services segment. For the first nine months of 2004, Chimes and Solutions Group revenue totaledapproximately 51% of consolidated revenue, compared to approximately 43% ofconsolidated revenue for the comparable period in 2003.

 

*Costs andExpenses. *Selling,general and administrative expenses decreased to $21.9 million and $63.0million in the third quarter and first nine months of 2004, respectively, from$20.9 million and $60.5 million in the comparable periods of 2003. For the ninemonths ending September 30, 2003, SG&A expenses included a write-off of aterminated project with ATEB, for financial reasons, of approximately $3.1million. Excluding this write-off in 2003, as a percentage of revenue, theCompany's SG&A expenses were 31.5% and 32.4% in the third quarter and firstnine months of 2004, respectively; as compared to 32.4% and 31.2% in thecomparable periods of 2003. The increase in the first nine months on 2004SG&A expenses is primarily attributable to the acquisitions of RGII and AIMin July 2003 and April 2004, respectively.

 

*Income /(Loss) from Operations*.  The Company’s loss from operations totaled $0.8million in the third quarter of 2004, including amortization expense totaling$484,000.  This compares to a loss from operations of $3.6 million in thethird quarter of 2003, which includes restructuring charges of $0.8 million,special charges of $0.8 million, pertaining to costs associated with theunilateral proposal and activities of Aquent, and amortization expense totaling$526,000. 

 

The composition of theoperating loss for the quarter ending September 30, 2004, excluding allspecial charges/(credits), interest income/(expense) and amortization expense,of $(335,000) included a loss of $1.9 million in IT Services, income of $1.7million in the Solutions Group and a loss of $0.1 million in Chimes.

 

The Company’s loss fromoperations totaled $1.6 million in the first nine months of 2004, includingamortization expense of $1.2 million and a special credit of $0.9million.  This compares to a loss from operations of $20.6 million in thefirst nine months of 2003, which includes restructuring charges of $3.0 million,special charges of $8.8 million pertaining to costs associated with theunilateral proposal and activities of Aquent, the write-off of a terminatedproject with ATEB, for financial reasons, of approximately $3.1 million, andamortization expense totaling $0.5 million.  The composition of the 2004operating loss of $1.3 million, excluding all special charges/(credits),interest income/(expense) and amortization expense included a loss of $4.2million in IT Services, income of $3.3 million in the Solutions Group and aloss of $0.4 million in Chimes.

 

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*OtherIncome/(Expense)*. Other income was $93,000 in the third quarter of 2004, compared to other incomeof $78,000 in the comparable period of 2003.  Other income was $205,000 in the first ninemonths of 2004, compared to other income of $63,000 in the comparable period of2003, which included a loss on sale of assets of $273,000.

 

*Provision forIncome Taxes*. The effective tax rates for Federal, state and local income taxes were taxbenefits of 45% for the third quarter of 2004 and 35% for the first nine monthsof 2004, compared with 19% for the third quarter of 2003 and 27% for the firstnine months of 2003.

 

*Net Income /(Loss)*. Net loss for the third quarter of 2004 was $0.5 million or $(0.01) per dilutedshare, compared to net loss of $2.8 million, or $(0.09) per diluted share forthe third quarter of 2003.  The effect of amortization expense amounted to$(0.01) per share, net of taxes in the third quarter of 2004.  The effectof special charges, restructuring charges and amortization of intangiblesamounted to $(0.06) per share, net of taxes, in the third quarter of2003.  For the first nine months of 2004, the net loss was $0.9 million,or $(0.03) per diluted share, compared to a net loss of $15.0 million, or$(0.49) per diluted share for the first nine months of 2003.

 

**Liquidity andCapital Resources**

 

Computer Horizons hashistorically financed its operations through cash generated from operations, borrowingsagainst bank lines of credit and the public sale of its common stock. AtSeptember 30, 2004, the Company had approximately $73.7 million in workingcapital, of which $34.2 million was cash and cash equivalents. AtSeptember 30, 2004, the Company had a current ratio position of 3.7 to 1.

 

Net cash used in operatingactivities in the first nine months of 2004 was $3.3 million, primarilyattributable to the net loss, offset by non-cash charges of $5.0 million, anincrease in accounts receivable of $4.5 million, a decrease in other accruedexpenses of $3.8 million, an increase in refundable income taxes of $3.5million and an increase in income taxes payable of $2.2 million.

 

Total accounts receivableincreased $6.8 million to $55.1 million at September 30, 2004 (including$3.3 million of accounts receivable acquired from AIM), from $48.3 million atDecember 31, 2003.  Accounts receivable days sales outstanding (“DSO”)were 71 days at September 30, 2004 compared to 74 days at June 30, 2004,77 days at March 31, 2004 and 70 days at December 31, 2003.  Theincrease in DSO’s from December 31, 2003, is primarily attributable to theseasonal slowdown of payments from clients, which historically occurs in thefirst quarter of each year.  A six-day improvement in DSO’s was noted inthe second and third quarter and DSO’s are expected to decrease for theremainder of 2004.  All client receivable collectibility and billingissues identified by management have been adequately reserved.  For theperiod ending September 30, 2004, there were no significant changes incredit terms, credit policies or collection efforts.

 

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Net cash used in investingactivities in the first nine months of 2004 was $16.1 million, consistingprimarily of capital expenditures totaling $1.3 million and the acquisition ofAIM for cash, totaling approximately $14.7 million, net of cash acquired.

 

Net cash provided by financingactivities in the first nine months of 2004 was $920,000, primarily consistingof shares issued pursuant to the employee stock option plan and employee stockpurchase plan.

 

The Company has a $40 millionline of credit facility with availability based primarily on eligible customerreceivables.  The interest rate is LIBOR plus 2.75% based on unpaidprincipal.  The borrowing base less outstanding loans must equal or exceed$5.0 million.  As of September 30, 2004, the Company had nooutstanding loan balance against the facility.  Based on the Company’seligible customer receivables and cash balances, $19.5 million was availablefor borrowing as of September 30, 2004.  The fee for the unusedportion of the line of credit is 0.375% per annum charged to the Companymonthly.  This charge was approximately $77,500 and $84,000 for the ninemonth periods ended September 30, 2004 and 2003, respectively.  Thisline of credit includes covenants relating to the maintenance of cash balancesand providing for limitations on recurring obligations and spending limits oncapital expenditures.  The Company did not satisfy this covenant for thequarter ended March 31, 2004.  A waiver was received from the lendinginstitution for the quarter ended March 31, 2004 along with an amendment to theloan agreement lowering the three-month average minimum collections covenant to$10 million.  At September 30, 2004, the Company is in compliance with thecovenant.  The facility was scheduled to expire in July 2004;however, on July 14, 2004, the Company signed a one-year extension of thefacility, which will remain in effect until July 2005.

 

During the first quarter of2004, the Company recorded a non-cash reduction in tax benefit reserves and anincrease in additional paid-in capital of $19.9 million.

 

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

 

On April 1, 2004, theCompany’s subsidiary, RGII Technologies Inc., closed on its acquisition ofAutomated Information Management Inc. (AIM), a federal government IT Servicescompany with 2003 revenues of approximately $18.5 million.  The all-cashtransaction totaled approximately $15.8 million, including a working capitaladjustment.  As a result of the integration of AIM into RGII, the Companyand the seller of RGII have agreed that the operating results of AIM shallremain separate from and not be included in the RGII EBIT targets related tocontingent payments. RGII, however shall be permitted an intercompany charge toAIM for AIM’s share of combined operating overhead expenses.  Inaddition, the seller of RGII will be eligible to receive a five percent bonusbased on the operating income of AIM.

 

Over the past several months,the Company has been examining its business and the marketplaces it serves. Asa result and in order to better serve its customers, management will realignthe Company’s business model around its three distinct segments of customers;federal government, commercial and vendor management services.  This newCommercial segment will include all professional services, staffing andsolutions, excluding the federal government vertical.  This will enablethe Company to focus on these segments individually, with a business modelspecific to each market.  The Company expects the realignment to becompleted during the fourth quarter of 2004, and will begin to report by itsthree realigned business segments; Commercial, Federal and Chimes, commencingwith the first quarter of 2005.  Considering the effects of these changes,and the heightened need to reduce costs in the Commercial segment, the Companyanticipates a restructuring charge in the range of $2 to $3 million in thefourth quarter of 2004.  The restructuring plan is targeted to reduceconsolidated operating expenses (direct cost and SG&A) by approximately $4million on an annual basis.

 

The Company believes that itscash and cash equivalents, available borrowings and internally generated fundswill be sufficient to meet its working capital needs through the next year.

 

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**ContractualObligations and Commercial Commitments**

 

The Company does not utilizeoff balance sheet financing other than operating lease arrangements for officepremises and related equipment.  The following table summarizes allcommitments under contractual obligations as of September 30, 2004:

 
| ** **                   | ** ** | **Obligation Due** | ** ** |
|------------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **Total  Amount**  | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **Over 5 Years** | ** ** |
| ** **                   | ** ** | **(in thousands)** | ** ** |
| Operating leases             |       | $                  | 11,023     |   | $ | 4,496 |   | $ | 5,676 |   | $ | 851 |   | $ | — |   |
| RGII Contingent Note         |       | 9,369              |       | 3,300 |   | 6,069 |   |   |   |   |   |
| Deferred Compensation        |       | 2,531              |       |   |   |   |   |   |   | 2,531 |   |
| Supplemental Retirement Plan |       | 12,318             |       |   |   |   |   |   |   | 12,318 |   |
| Other                        |       | 902                |       | 902 |   |   |   |   |   |   |   |
| Total Cash Obligations       |       | $                  | 36,143     |   | $ | 8,698 |   | $ | 11,745 |   | $ | 851 |   | $ | 14,849 |   |

 

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## **Recent Accounting Pronouncements**

 

In January 2003, the FASBissued Financial Interpretation No. 46, “Consolidation of Variable InterestEntities” (“FIN 46”), which addresses consolidation by business enterprises ofvariable interest entities (VIEs).  The accounting provisions anddisclosure requirements of FIN 46 are effective immediately for VIEs createdafter January 31, 2003, and are effective for the Company’s fiscal periodending March 31, 2004, for VIEs created prior to February 1,2003.  In December 2003, the FASB published a revision to FIN 46 (“FIN46R”) to clarify some of the provisions of the interpretation and to defer theeffective date of implementation for certain entities.  Under the guidanceof FIN 46R, public companies that have interests in VIE’s that are commonlyreferred to as special purpose entities are required to apply the provisions ofFIN 46R for periods ending after December 15, 2003.  A public companythat does not have any interests in special purpose entities but does have avariable interest in a VIE created before February 1, 2003, must apply theprovisions of FIN 46R by the end of the first interim or annual reportingperiod ending after March 14, 2004.  Adoption of FIN 46R did not havea material effect on the Company’s financial statements.

 

InMarch 2004, the EITF reached a concensus on Issue No. 03-1 “The meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments,”EITF No. 03-1 provided guidance for evaluation whether an investment isother-than-temporarily impaired and was effective for other-than-temporaryimpairment evaluations made in reporting periods beginning after June 15, 2004.The effect of the adoption of this statement was immaterial to the Company.

 

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Item 4.    Controls and Procedures

 

Disclosure Controls andProcedures

 

The Company’s CEO and CFO haveevaluated the effectiveness of the Company’s disclosure controls and procedures(as such term is defined in Rules 13a-15(e) under the Securities Exchange Actof 1934, as amended) as of the end of the period covered by this report. Based upon such evaluation, and except as described below, the Company’s ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theend of the period, the Company’s disclosure controls and procedures areeffective in recording, processing, summarizing and reporting, on a timelybasis, information required to be disclosed by the Company in the reports thatit files or submits under the Securities Exchange Act of 1934, as amended.

 

Internal Controls overFinancial Reporting

 

There have not been any changes in the Company’sinternal controls over financial reporting (as such term is defined in Rules13a-15(f) under the Securities Exchange Act of 1934, as amended) during thefiscal quarter to which this report relates that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.  However, subsequentto September 30, 2004, the audit committee was advised by management that,based on an internal review of accounting processes and procedures, managementhad discovered an accounting error pertaining to the incorrectadjustment of consulting costs relating to intercompany transactions betweenthe Company and its Canadian subsidiary. This error caused an understatement of consolidated consultant costs(i.e. direct costs) in the Company’s consolidated income statement and an underaccrual of consolidated accrued payroll on the balance sheet. The aggregateamount for all periods affected was an understatement of consultant coststotaling $5,555,000, with an after-tax impact of $3,462,000 or $(0.12) pershare.

 

As part of management’sinvestigation of this accounting error, an extensive review of intercompanytransactions was completed.  As a result,other adjustments, not affecting operating results, were recorded.  These adjustments to the balance sheetcorrected an overstatement of accrued expenses and an understatement ofshareholders’ equity (specifically the overstatement of accumulatedcomprehensive loss).

 

As a result of the discovery ofthis error, on October 26, 2004, management and the Audit Committee wereinformed by the Company’s independent accountants of certain matters involvinginternal controls that the Company’s auditors consider material weaknesses.  The first material weakness principallyfocused on the Company’s quarterly consolidation process, includingintercompany transactions relating to the Company’s Canadian subsidiary, whichwere incorrectly recorded over the five fiscal quarters ending June 30,2004.  This resulted in an understatementof consolidated consultant costs (direct cost) and an under accrual of consolidatedaccrued payroll in each period and for the year ended December 31, 2003.  The second material weakness principally focusedon the fact that certain accounts were not properly reconciled, resulting inadjustments to accounts including accrued expenses and shareholders’ equity(not affecting operating results), to be recorded on the consolidated balancesheet.

 

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

 

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

 

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

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

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

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

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

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

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

 

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

 

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PART II - Other Information

 

Item 6.                                     Exhibits and Reports on Form 8-K

 

a)              Exhibits

 

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

 

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

 

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

 

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

 

b)             *Report on Form 8-K*

 

A report on Form 8-K was filed on July 29, 2004,reporting the issuance of a press release reporting the financial results ofComputer Horizons for its second quarter, 2004.

 

A report on form 8-K was filed on September 10, 2004 whichincluded a copy of a presentation presented at several investor conferences.This information was furnished, not filed, pursuant to Regulation FD.

 

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Signatures

 

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

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

 

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