**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

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**FORM 10-Q/A**

**(Amendment No. 2)**

 

**ý****   Quarterly Report Under Section 13 or 15(d)of the Securities Exchange Act of 1934**

 

**for****the quarterly period ended June 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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**Commission File Number 0-7282**

 

**COMPUTER HORIZONS CORP.**

(Exact name of registrant as specified in its charter)

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

 

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

 

**Not Applicable**

(Former name, former address and former fiscal year, if

changedsince last report)

 

Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding twelve months (or for such shorterperiod that the registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90 days.

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

 

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

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

 

As of August 3,2004 the issuer had 30,757,323 shares of common stock outstanding.

 

 

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Explanatory Note

 

The purpose of this Amendment No. 2 onForm 10-Q/A to the Quarterly Report on Form 10-Q of Computer HorizonsCorp. the (“Company”) for the three months ended June 30, 2004 as filed withthe Securities and Exchange Commission is to reflect the restatement of theCompany’s consolidated financial statements.

 

Subsequent to the issuance of its financial statementsfor the year ended December 31, 2003, and in connection with an internalreview of accounting processes and procedures conducted in the third quarter of2004, the Company discovered an 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 accruedpayroll on the balance sheet.

 

The aggregate amount forall periods affected was an understatement of consultant costs totaling$5,555,000, with an after-tax impact of $3,462,000 or $(0.12) per share.  The pre-tax, after tax and EPS effect of thisnon-cash charge for each period affected are shown below (dollarsinthousands, except per share data):

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

 

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

 

2

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

 

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

 

In addition, in thesecond quarter of 2003, the Company made a balance sheet correction resultingin an increase in shareholders’ equity and a decrease in accrued payroll of$41,000. In 2004, the Company made balance sheet corrections resulting in anincrease in accounts receivable and shareholder’s equity (specificallyaccumulated comprehensive income/loss) of approximately $65,000 and $42,000 inthe quarters ending March 31, 2004 and June 30, 2004 respectively.

 

As a result of theCompany’s investigation into the causes of this accounting error, severalremediating actions have been or are in the process of being implemented toprevent future reoccurrence and are included in Part 1 - Item 4. Control and Procedures on this Amendment No. 2 ofForm 10-Q/A.

 

The effects of thisrestatement on the consolidated balance sheet of the Company as ofJune 30, 2004, and on the consolidated statements of operations andcondensed consolidated statements of cash flows for the three months and sixmonths ended June 30, 2004, are presented in Item 1 (RestatedFinancial Statements) and Item 2 (Restated Management’s Discussion andAnalysis of Financial Condition and Results of Operations) of Part I ofthis Amendment No. 2. Certain internal accounting control issuesidentified by management and related to the restatement are disclosed inItem 4 of Part I of this Amendment No. 2. The Company’s ChiefExecutive Officer and Chief Financial Officer have also reissued theircertifications required by Sections 302 and 906 of the Sarbanes-Oxley Act.

 

TheCompany’s restatement of its financial statements for the year endedDecember 31, 2003, is reflected in Amendment No. 2 onForm 10-K/A, filed concurrently herewith, which amends its previouslyfiled Form 10-KA for the year ended December 31, 2003. The Company isalso concurrently filing amendments on Forms 10-Q/A to its previouslyfiled Forms 10-Q for each of the periods ended June 30, 2003,September 30, 2003, and March 31, 2004 to reflect the restatement of itsfinancial statements for those periods.

 

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

 

Exceptas required to reflect the effects of the restatement, no attempt has been madein this Amendment No. 2 to modify or update other disclosures presented inthe original report on Form 10-Q/A for the period ended June 30,2004. This Form 10-Q/A does not reflect events occurring after the filingof the original Form 10-Q or modify or update those disclosures affectedby subsequent events.

 

3

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**COMPUTER HORIZONS CORP. AND SUBSIDIARIES**

 

Index

 
| Part I   Restated  Financial Information |   |
|---------------------------------------------------------|--------|
|                                                    |   |   |   |
| Item 1                                                  |   | Consolidated Balance Sheets  June 30, 2004 (unaudited) and December 31, 2003 | 5 |
|                                                    |   |   |   |
|                                                    |   | Consolidated  Statements of Operations Three and Six Months Ended June 30, 2004 and  June 30, 2003 (unaudited) | 6 |
|                                                    |   |   |   |
|                                                    |   | Consolidated  Statements of Cash Flows Six Months Ended June 30, 2004 and  June 30, 2003 (unaudited) | 7 |
|                                                    |   |   |   |
|                                                    |   | Notes to Consolidated  Financial Statements |   |
|                                                    |   |   |   |
| Item  2                                                 |   | Restated  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 29 |
|                                                    |   |   |   |
| Item 4                                                  |   | Controls and  Procedures | 41 |
|                                                    |   |   |   |
| Part II   Other  Information             |   |
|                                                    |   |   |   |
| Item 4                                                  |   | Submission  of Matters to a Vote of Security Holders | 44 |
|                                                    |   |   |   |
| Item 6                                                  |   | Exhibits and  Reports on Form 8-K | 45 |
|                                                    |   |   |   |
|                                                    |   | Signatures | 46 |

 

4

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PART I. Financial Information

 

Item1.

 

COMPUTER HORIZONSCORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollarsin thousands)

 
| ** **                                                                                                                                        | ** ** | **June 30,  2004**   | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                        | ** ** | **(As restated  note 2)** | ** ** | **(As restated  note 2)**   | ** ** |
| ** **                                                                                                                                        | ** ** | **(unaudited)**           | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                                            |       |                      |       |                        |       |
| CURRENT ASSETS:                                                                                                                                   |       |                      |       |                        |       |
| Cash and cash equivalents                                                                                                                         |       | $                         | 36,700     |                        | $          | 52,610 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $5,871 and $5,432 at June 30, 2004 and  December 31, 2003, respectively |       | 54,499                    |       | 48,295                      |       |
| Deferred income taxes                                                                                                                             |       | 4,141                     |       | 4,514                       |       |
| Other                                                                                                                                             |       | 4,187                     |       | 4,759                       |       |
| TOTAL CURRENT ASSETS                                                                                                                              |       | 99,527                    |       | 110,178                     |       |
|                                                                                                                                              |       |                      |       |                        |       |
| PROPERTY AND EQUIPMENT                                                                                                                            |       | 42,149                    |       | 42,252                      |       |
| Less accumulated depreciation                                                                                                                     |       | (34,447                   | )          | (32,929                     | )          |
|                                                                                                                                              |       | 7,702                     |       | 9,323                       |       |
|                                                                                                                                              |       |                      |       |                        |       |
| OTHER ASSETS - NET:                                                                                                                               |       |                      |       |                        |       |
| Goodwill                                                                                                                                          |       | 45,461                    |       | 34,218                      |       |
| Intangibles                                                                                                                                       |       | 4,220                     |       | 2,408                       |       |
| Deferred income taxes                                                                                                                             |       | 14,639                    |       | 14,813                      |       |
| Other                                                                                                                                             |       | 9,768                     |       | 9,386                       |       |
| TOTAL OTHER ASSETS                                                                                                                                |       | 74,088                    |       | 60,825                      |       |
|                                                                                                                                              |       |                      |       |                        |       |
| TOTAL ASSETS                                                                                                                                      |       | $                         | 181,317    |                        | $          | 180,326 |   |
|                                                                                                                                              |       |                      |       |                        |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                         |       |                      |       |                        |       |
| CURRENT LIABILITIES:                                                                                                                              |       |                      |       |                        |       |
| Accounts payable                                                                                                                                  |       | $                         | 10,024     |                        | $          | 8,287 |   |
| Accrued payroll, payroll taxes and benefits                                                                                                       |       | 9,393                     |       | 7,791                       |       |
| Income taxes payable                                                                                                                              |       | 346                       |       | 1,243                       |       |
| Tax benefit reserve                                                                                                                               |       | —                    |       | 19,600                      |       |
| Restructuring reserve                                                                                                                             |       | 1,675                     |       | 2,620                       |       |
| Other accrued expenses                                                                                                                            |       | 4,642                     |       | 5,813                       |       |
| TOTAL CURRENT LIABILITIES                                                                                                                         |       | 26,080                    |       | 45,354                      |       |
|                                                                                                                                              |       |                      |       |                        |       |
| OTHER LIABILITIES                                                                                                                                 |       | 5,147                     |       | 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 June 30, 2004 and December 31,  2003 respectively   |       | 3,315                     |       | 3,315                       |       |
| Additional paid-in capital                                                                                                                        |       | 152,703                   |       | 133,046                     |       |
| Accumulated comprehensive loss                                                                                                                    |       | (3,104                    | )          | (2,789                      | )          |
| Retained earnings                                                                                                                                 |       | 10,658                    |       | 11,100                      |       |
|                                                                                                                                              |       | 163,572                   |       | 144,672                     |       |
| Less shares held in treasury, at cost;  2,322,767 shares and 2,537,692 shares at June 30, 2004 and  December 31, 2003, respectively     |       | (13,482                   | )          | (14,335                     | )          |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                   |       | 150,090                   |       | 130,337                     |       |
|                                                                                                                                              |       |                      |       |                        |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                   |       | $                         | 181,317    |                        | $          | 180,326 |   |
|                                                                                                                                                   |            |                           |            |                             |            |  |  |  |  |

 

5

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COMPUTER HORIZONSCORP. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Unaudited)

(dollarsin thousands, except per share data)

 
| ** **                                          | ** ** | **THREE  MONTHS ENDED**                       | ** ** | **SIX  MONTHS ENDED**                         | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                          | ** ** | **June 30,  2004  (As restated note 2)** | ** ** | **June 30,  2003  (As restated note 2)** | ** ** | **June 30,  2004  (As restated note 2)** | ** ** | **June 30,  2003  (As restated note 2)** | ** ** |
| ** **                                          | ** ** | ** **                                    | ** ** | **% of  revenue**                             | ** ** | ** ** | ** ** | **% of  revenue** | ** ** | ** ** | ** ** | **% of  revenue** | ** ** | ** ** | ** ** | **% of  revenue** | ** ** |
| REVENUES:                                           |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| IT Services                                         |       | $                                             | 32,073     |                                          | 48.8       | % | $ | 35,320 |   | 60.0 | % | $ | 61,877 |   | 49.3 | % | $ | 71,503 |   | 60.0 | % |
| Solutions Group                                     |       | 27,788                                        |       | 42.2                                          | %          | 18,691 |   | 31.8 | % | 52,337 |   | 41.7 | % | 38,292 |   | 32.2 | % |
| Chimes                                              |       | 5,929                                         |       | 9.0                                           | %          | 4,822 |   | 8.2 | % | 11,282 |   | 9.0 | % | 9,291 |   | 7.8 | % |
|                                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                |       | 65,790                                        |       | 100.0                                         | %          | 58,833 |   | 100.0 | % | 125,496 |   | 100.0 | % | 119,086 |   | 100.0 | % |
|                                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| COSTS AND  EXPENSES:                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Direct costs                                        |       | 44,507                                        |       | 67.7                                          | %          | 43,494 |   | 73.9 | % | 85,312 |   | 68.0 | % | 86,267 |   | 72.4 | % |
| Selling, general  and administrative                |       | 21,554                                        |       | 32.8                                          | %          | 20,716 |   | 35.2 | % | 41,142 |   | 32.8 | % | 39,642 |   | 33.3 | % |
| Amortization of  intangibles                        |       | 520                                           |       | 0.8                                           | %          | — |   | 0.0 | % | 728 |   | 0.6 | % | — |   | 0.0 | % |
| Restructuring  charges                              |       | —                                        |       | 0.0                                           | %          | 1,949 |   | 3.3 | % | — |   | 0.0 | % | 2,198 |   | 1.8 | % |
| Special charges  (credits)                          |       | (939                                          | )          | -1.4                                          | %          | 7,978 |   | 13.6 | % | (939 | ) | -0.7 | % | 7,978 |   | 6.7 | % |
|                                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                |       | 65,642                                        |       | 99.8                                          | %          | 74,137 |   | 126.0 | % | 126,243 |   | 100.6 | % | 136,085 |   | 114.3 | % |
|                                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INCOME/(LOSS)  FROM OPERATIONS                      |       | 148                                           |       | .2                                            | %          | (15,304 | ) | -26.0 | % | (747 | ) | -0.6 | % | (16,099 | ) | -14.3 | % |
|                                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| OTHER INCOME / (EXPENSE):                           |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gain/(loss) on  sale of assets                      |       | —                                        |       | 0.0                                           | %          | — |   | 0.0 | % | — |   | 0.0 | % | (273 | ) | -0.2 | % |
| Interest income                                     |       | 47                                            |       | 0.1                                           | %          | 102 |   | 0.2 | % | 140 |   | 0.1 | % | 276 |   | 0.2 | % |
| Interest expense                                    |       | (18                                           | )          | 0.0                                           | %          | (12 | ) | 0.0 | % | (28 | ) | 0.0 | % | (18 | ) | 0.0 | % |
|                                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                |       | 29                                            |       | 0.0                                           | %          | 90 |   | 0.2 | % | 112 |   | 0.1 | % | (15 | ) | 0.0 | % |
|                                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INCOME/(LOSS)  BEFORE INCOME TAXES                  |       | 177                                           |       | 0.3                                           | %          | (15,214 | ) | -25.9 | % | (635 | ) | -0.5 | % | (17.014 | ) | -14.3 | % |
|                                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INCOME TAXES /  (BENEFIT):                          |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current                                             |       | 186                                           |       | 0.3                                           | %          | — |   | 0.0 | % | 311 |   | 0.3 | % | — |   | 0.0 | % |
| Deferred                                            |       | (89                                           | )          | -0.1                                          | %          | (4,381 | ) | -7.4 | % | (468 | ) | -0.4 | % | (4,921 | ) | -4.1 | % |
|                                                |       | 97                                            |       | 0.1                                           | %          | (4,381 | ) | -7.4 | % | (157 | ) | -0.1 | % | (4,921 | ) | -4.1 | % |
|                                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INCOME / (LOSS)  BEFORE MINORITY INTEREST           |       | 80                                            |       | 0.1                                           | %          | (10,833 | ) | -18.4 | % | (478 | ) | -0.4 | % | (12,093 | ) | -10.2 | % |
| Minority Interest                                   |       | 45                                            |       | 0.0                                           | %          | (18 | ) | 0.0 | % | 36 |   | 0.0 | % | (37 | ) | 0.0 | % |
|                                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NET INCOME /  (LOSS)                                |       | $                                             | 125        |                                          | 0.2        | % | $ | (10,851 | ) | -18.4 | % | $ | (442 | ) | -0.4 | % | $ | (12,130 | ) | -10.2 | % |
|                                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| EARNINGS / (LOSS)  PER SHARE (BASIC & DILUTED): |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
|   Basic                                   |       | $                                             | 0.00       |                                          |       |   | $ | (0.36 | ) |   |   | $ | (0.01 | ) |   |   | $ | (0.40 | ) |   |   |
|                                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
|   Diluted                                 |       | $                                             | 0.00       |                                          |       |   | $ | (0.36 | ) |   |   | $ | (0.01 | ) |   |   | $ | (0.40 | ) |   |   |
|                                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING:     |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                               |       | 30,810,000                                    |       |                                          |       | 30,292,000 |   |   |   | 30,743,000 |   |   |   | 30,331,000 |   |   |   |
|                                                |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted                                             |       | 31,215,000                                    |       |                                          |       | 30,292,000 |   |   |   | 30,743,000 |   |   |   | 30,331,000 |   |   |   |

 

6

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COMPUTER HORIZONSCORP. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

(dollarsin thousands)

 
| ** **                                                                                          | ** ** | **Six Months Ended**                           | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **June 30,  2004  (As restated  note 2)** | ** ** | **June 30,  2003  (As restated  note 2)** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                                |       |                                           |       |   |   |
| Net loss                                                                                            |       | $                                              | (442       | ) | $ | (12,130 | ) |
| Adjustments to reconcile net income/(loss)  to net cash provided by/(used in) operating activities: |       |                                           |       |   |   |
| Deferred taxes                                                                                      |       | (468                                           | )          | (4,921 | ) |
| Depreciation                                                                                        |       | 2,591                                          |       | 2,575 |   |
| Provision for bad debts                                                                             |       | 745                                            |       | 3,863 |   |
| Loss/(Gain) on sale of assets                                                                       |       | —                                         |       | 273 |   |
| Amortization of intangibles                                                                         |       | 728                                            |       | — |   |
| Change in assets and liabilities, net of  acquisitions:                                             |       |                                           |       |   |   |
| Accounts receivable                                                                                 |       | (3,649                                         | )          | 4,677 |   |
| Other current assets                                                                                |       | 590                                            |       | 1,631 |   |
| Other assets                                                                                        |       | (382                                           | )          | (3,130 | ) |
| Refundable income taxes                                                                             |       | —                                         |       | 19,051 |   |
|                                                                                                |       |                                           |       |   |   |
| Accrued payroll, payroll taxes and benefits                                                         |       | 854                                            |       | 2,161 |   |
| Accounts payable                                                                                    |       | 1,337                                          |       | (3,108 | ) |
| Income taxes payable                                                                                |       | (897                                           | )          | 706 |   |
| Other accrued expenses                                                                              |       | (2,427                                         | )          | (241 | ) |
| Other liabilities                                                                                   |       | 766                                            |       | (250 | ) |
|                                                                                                |       |                                           |       |   |   |
| NET CASH PROVIDED BY/(USED IN) OPERATING  ACTIVITIES                                                |       | (654                                           | )          | 11,157 |   |
|                                                                                                |       |                                           |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                                |       |                                           |       |   |   |
| Purchases of furniture and equipment                                                                |       | (844                                           | )          | (979 | ) |
| Acquisitions, net of cash acquired                                                                  |       | (14,704                                        | )          | — |   |
| Proceeds received from the sale of assets                                                           |       | —                                         |       | 149 |   |
| Acquisition of assets                                                                               |       | —                                         |       | (387 | ) |
| NET CASH (USED IN) INVESTING ACTIVITIES                                                             |       | (15,548                                        | )          | (1,217 | ) |
|                                                                                                |       |                                           |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                                |       |                                           |       |   |   |
| Stock options exercised                                                                             |       | 376                                            |       | 847 |   |
| Purchase of treasury shares                                                                         |       | —                                         |       | (1,230 | ) |
| Stock issued on employee stock purchase  plan                                                       |       | 280                                            |       | 193 |   |
| NET CASH PROVIDED BY / (USED IN) FINANCING  ACTIVITIES                                              |       | 656                                            |       | (190 | ) |
|                                                                                                |       |                                           |       |   |   |
| Foreign currency gains/(losses)                                                                     |       | (364                                           | )          | 1,538 |   |
|                                                                                                |       |                                           |       |   |   |
| NET INCREASE/(DECREASE) IN CASH AND CASH  EQUIVALENTS                                               |       | (15,910                                        | )          | 11,288 |   |
|                                                                                                |       |                                           |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  YEAR                                                     |       | 52,610                                         |       | 59,769 |   |
|                                                                                                |       |                                           |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                          |       | $                                              | 36,700     |   | $ | 71,057 |   |
|                                                                                                |       |                                           |       |   |   |
| Supplemental Disclosures of Cash Flow  Information:                                                 |       |                                           |       |   |   |
| Details of acquistion:                                                                              |       |                                           |       |   |   |
| Assets acquired (including cash of $1,168)                                                          |       | $                                              | 4,613      |   |   |   |
| Liabilities assumed                                                                                 |       | (2,523                                         | )          |   |   |
| Goodwill                                                                                            |       | 11,242                                         |       |   |   |
| Intangibles                                                                                         |       | 2,540                                          |       |   |   |
| Cash paid                                                                                           |       | 15,872                                         |       |   |   |
| Less:  cash received in acquisition                                                            |       | 1,168                                          |       |   |   |
| Net cash paid                                                                                       |       | $                                              | 14,704     |   |   |   |
|                                                                                                     |            |                                                |            |  |  |  |  |  |  |  |

 

Non Cash Activities:

 

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

 

7

----

 

**COMPUTER HORIZONS CORP.**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

(unaudited)

 

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

 

The consolidatedbalance sheet as of June 30, 2004, the consolidated statements ofoperations for the three and six months ended June 30, 2004 andJune 30, 2003, respectively, and the statement of cash flows for the sixmonths ended June 30, 2004 and 2003 have been prepared by the Companywithout audit.  In the opinion of management, all adjustments (whichinclude normal recurring adjustments) necessary to present fairly the financialposition, results of operations and cash flows at June 30, 2004 (and forall periods presented) have been made.

 

Certain information andnote disclosures, normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America, which are not required for interim purpose, have been condensed oromitted.  It is suggested that these consolidated financial statements beread in conjunction with the financial statements and notes thereto included inthe Annual Report on Form 10-K for the year ended December 31, 2003 filedby the Company.  The results of operations for the periods endedJune 30, 2004 and 2003 are not necessarily indicative of the operatingresults for the respective full years.

 

2.               **Restatement of Financial Statements**

 

Subsequent to the issuance of its financial statementsfor the year ended December 31, 2003, and in connection with an internalreview of accounting processes and procedures conducted in the third quarter of2004, the company discovered an 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 accruedpayroll on the balance sheet.

 

As part ofmanagement’s investigation of this accounting error, an extensive review ofintercompany transactions was completed. As a result, other adjustments, not affecting operating results, wererecorded.  These adjustments to thebalance sheet corrected an overstatement of accrued expenses and anunderstatement of shareholders’ equity (specifically the overstatement of accumulatedcomprehensive loss).  In addition, in thesecond quarter of 2003, the Company made a balance sheet correction resultingin an increase in shareholders’ equity and a decrease in accrued payroll of$41,000. In 2004, the Company made a balance sheet correction resulting in anincrease in accounts receivable and shareholder’s equity (specificallyaccumulated comprehensive income/loss) of approximately $65,000 and $42,000 inthe quarters ending March 31, 2004 and June 30, 2004 respectively.

 

The following schedulereconciles net loss for the three and six months ended June 30, 2004 asoriginally reported, to the corresponding amounts on a restated basis after giveneffect to the adjustment described above.

 
| **(In thousands, except  per share data)**      | ** ** | **Three Months  Ended June 30, 2004** | ** ** | **Six Months  Ended June 30, 2004** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
|                                            |       | **(unaudited)**                       |       | **(unaudited)**                     |       |
|                                            |       | ** **                            |       | ** **                          |       |
| Net Income/ (loss) as originally reported       |       | 817                                   |       | 813                                 |       |
|                                            |       |                                  |       |                                |       |
| Direct costs adjustment (pretax)                |       | (1,295                                | )          | (2,159                              | )          |
|                                            |       |                                  |       |                                |       |
| Income tax benefit                              |       | 602                                   |       | 904                                 |       |
| Net loss as restated                            |       | 125                                   |       | (442                                | )          |
|                                            |       |                                  |       |                                |       |
| Income (loss) per share as originally  reported |       | 0.03                                  |       | 0.03                                |       |
| Effect of Direct Costs adjustment               |       | (0.03                                 | )          | (0.04                               | )          |
| Loss per share as restated                      |       | —                                |       | (0.01                               | )          |

 

The previouslyreported results of operations for the three and six months ended June 30, 2004and June 30, 2003 as reported on Form 10Q with the Securities and ExchangeCommission, have been amended to reflect the above adjustments.  The results of such adjustments, as comparedwith the Company’s previously reported results for the three and six-monthperiods ended June 30, 2004, and June 30, 2003 are set forth below.

 
| **(In  thousands, except  per share data)**     | ** ** | **Three Months  Ended  June 30, 2004****(unaudited)** | ** ** | **Three  Months Ended  June 30, 2004****(unaudited)** | ** ** | **Six  Months Ended  June 30, 2004****(unaudited)** | ** ** | **Six  Months Ended  June 30, 2004****(unaudited)** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                      | ** ** | **As  Originally Reported**                           | ** ** | **As  Restated**                                      | ** ** | **As  Originally Reported**                         | ** ** | **As  Restated**                                    | ** ** |
|                                            |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Revenue                                         |       | 65,790                                                |       | 65,790                                                |       | 125,496                                             |       | 125,496                                             |       |
|                                            |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Cost and expenses                               |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Direct costs                                    |       | 43,213                                                |       | 44,507                                                |       | 83,153                                              |       | 85,312                                              |       |
| Selling, general  and administrative            |       | 21,554                                                |       | 21,554                                                |       | 41,142                                              |       | 41,142                                              |       |
| Amortization of  intangibles                    |       | 520                                                   |       | 520                                                   |       | 728                                                 |       | 728                                                 |       |
| Restructuring  charge                           |       | —                                                |       | —                                                |       | —                                              |       | —                                              |       |
| Special charges  (credits)                      |       | (939                                                  | )          | (939                                                  | )          | (939                                                | )          | (939                                                | )          |
|                                            |       | 64,348                                                |       | 65,642                                                |       | 124,084                                             |       | 126,243                                             |       |
|                                            |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Loss from  Operations                           |       | 1,442                                                 |       | 148                                                   |       | 1,412                                               |       | (747                                                | )          |
|                                            |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Other income/expenses                           |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Loss on sale of  assets                         |       | —                                                |       | —                                                |       | —                                              |       | —                                              |       |
| Interest income                                 |       | 47                                                    |       | 47                                                    |       | 140                                                 |       | 140                                                 |       |
| Interest expense                                |       | (18                                                   | )          | (18                                                   | )          | (28                                                 | )          | (28                                                 | )          |
|                                            |       | 29                                                    |       | 29                                                    |       | 112                                                 |       | 112                                                 |       |
|                                            |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Loss before  income taxes and minority interest |       | 1,471                                                 |       | 177                                                   |       | 1,524                                               |       | (635                                                | )          |
|                                            |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Income tax /  (benefit) (Notes 1 and 18):       |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Current                                         |       | 287                                                   |       | 186                                                   |       | 311                                                 |       | 311                                                 |       |
| Deferred                                        |       | 412                                                   |       | (89                                                   | )          | 436                                                 |       | (468                                                | )          |
| Income tax  benefit                             |       | 699                                                   |       | 97                                                    |       | 747                                                 |       | (157                                                | )          |
|                                            |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Net loss before  minority interest              |       | 772                                                   |       | 80                                                    |       | 777                                                 |       | (478                                                | )          |
| Minority Interest                               |       | 45                                                    |       | 45                                                    |       | 36                                                  |       | 36                                                  |       |
| Net loss                                        |       | 817                                                   |       | 125                                                   |       | 813                                                 |       | (442                                                | )          |
|                                            |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Earnings / (Loss)  per Share:                   |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Basic                                           |       | 0.03                                                  |       | 0.00                                                  |       | 0.03                                                |       | (0.01                                               | )          |
| Diluted                                         |       | 0.03                                                  |       | 0.00                                                  |       | 0.03                                                |       | (0.01                                               | )          |
|                                            |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Weighted average number  of shares outstanding: |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Basic                                           |       | 30,810,000                                            |       | 30,810,000                                            |       | 30,743,000                                          |       | 30,331,000                                          |       |
| Diluted                                         |       | 31,215,000                                            |       | 30,292,000                                            |       | 30,743,000                                          |       | 30,331,000                                          |       |

 

8

----

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

 

The following tablesets forth the effects of the restatement adjustments discussed above on theconsolidated balance sheets at June 30, 2004.

 

9

----

 

COMPUTER HORIZONS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 
| ** **                                                                                                                                        | ** ** | **June 30,  2004  As Originaly Reported** | ** ** | **June 30,  2004  As Restated** | ** ** | **December 31,  2003  As Originaly Reported** | ** ** | **December 31,  2003  As Restated** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                        | ** ** | **(unaudited)**                                |       | **(unaudited)**                      |       |                                               |       |                                     |       |
| ASSETS                                                                                                                                            |       |                                           |       |                                 |       |                                               |       |                                     |       |
| CURRENT ASSETS:                                                                                                                                   |       |                                           |       |                                 |       |                                               |       |                                     |       |
| Cash and cash  equivalents                                                                                                                        |       | $                                              | 36,700     |                                 | $          | 36,700                                             |       | $                                        | 52,610     |   | $ | 52,610 |   |
|                                                                                                                                              |       |                                           |       |                                 |       |                                               |       |                                     |       |
| Accounts receivable,  net of allowance for doubtful accounts of $5,871 and $5,432 at June 30,  2004 and December 31, 2003, respectively |       | 54,392                                         |       | 54,499                               |       | 48,295                                             |       | 48,295                                   |       |
| Deferred income  taxes                                                                                                                            |       | 4,141                                          |       | 4,141                                |       | 4,514                                              |       | 4,514                                    |       |
| Other                                                                                                                                             |       | 4,187                                          |       | 4,187                                |       | 4,759                                              |       | 4,759                                    |       |
| TOTAL CURRENT  ASSETS                                                                                                                             |       | 99,420                                         |       | 99,527                               |       | 110,178                                            |       | 110,178                                  |       |
|                                                                                                                                              |       |                                           |       |                                 |       |                                               |       |                                     |       |
| PROPERTY AND  EQUIPMENT                                                                                                                           |       | 42,149                                         |       | 42,149                               |       | 42,252                                             |       | 42,252                                   |       |
| Less accumulated  depreciation                                                                                                                    |       | (34,447                                        | )          | (34,447                              | )          | (32,929                                            | )          | (32,929                                  | )          |
|                                                                                                                                              |       | 7,702                                          |       | 7,702                                |       | 9,323                                              |       | 9,323                                    |       |
|                                                                                                                                              |       |                                           |       |                                 |       |                                               |       |                                     |       |
| OTHER ASSETS -  NET:                                                                                                                              |       |                                           |       |                                 |       |                                               |       |                                     |       |
| Goodwill                                                                                                                                          |       | 45,461                                         |       | 45,461                               |       | 34,218                                             |       | 34,218                                   |       |
| Intangibles                                                                                                                                       |       | 4,220                                          |       | 4,220                                |       | 2,408                                              |       | 2,408                                    |       |
| Deferred income  taxes                                                                                                                            |       | 12,546                                         |       | 14,639                               |       | 13,624                                             |       | 14,813                                   |       |
| Other                                                                                                                                             |       | 9,768                                          |       | 9,768                                |       | 9,386                                              |       | 9,386                                    |       |
| TOTAL OTHER  ASSETS                                                                                                                               |       | 71,995                                         |       | 74,088                               |       | 59,636                                             |       | 60,825                                   |       |
|                                                                                                                                              |       |                                           |       |                                 |       |                                               |       |                                     |       |
| TOTAL ASSETS                                                                                                                                      |       | $                                              | 179,117    |                                 | $          | 181,317                                            |       | $                                        | 179,137    |   | $ | 180,326 |   |
|                                                                                                                                              |       |                                           |       |                                 |       |                                               |       |                                     |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                        |       |                                           |       |                                 |       |                                               |       |                                     |       |
| CURRENT  LIABILITIES:                                                                                                                             |       |                                           |       |                                 |       |                                               |       |                                     |       |
| Accounts payable                                                                                                                                  |       | $                                              | 10,024     |                                 | $          | 10,024                                             |       | $                                        | 8,287      |   | $ | 8,287 |   |
| Accrued payroll,  payroll taxes and benefits                                                                                                      |       | 3,878                                          |       | 9,393                                |       | 4,436                                              |       | 7,791                                    |       |
| Income taxes  payable                                                                                                                             |       | 346                                            |       | 346                                  |       | 1,243                                              |       | 2,620                                    |       |
| Tax benefit  reserve                                                                                                                              |       | —                                         |       | —                               |       | 19,600                                             |       | 1,243                                    |       |
| Restructuring  reserve                                                                                                                            |       | 1,675                                          |       | 1,675                                |       | 2,620                                              |       | 19,600                                   |       |
| Other accrued expenses                                                                                                                            |       | 6,853                                          |       | 4,642                                |       | 7,572                                              |       | 5,813                                    |       |
| TOTAL CURRENT  LIABILITIES                                                                                                                        |       | 22,776                                         |       | 26,080                               |       | 43,758                                             |       | 45,354                                   |       |
|                                                                                                                                              |       |                                           |       |                                 |       |                                               |       |                                     |       |
| OTHER LIABILITIES                                                                                                                                 |       | 5,147                                          |       | 5,147                                |       | 4,635                                              |       | 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  June 30, 2004 and December 31, 2003 respectively   |       | 3,315                                          |       | 3,315                                |       | 3,315                                              |       | 3,315                                    |       |
|                                                                                                                                              |       |                                           |       |                                 |       |                                               |       |                                     |       |
| Additional  paid-in capital                                                                                                                       |       | 152,703                                        |       | 152,703                              |       | 133,046                                            |       | 133,046                                  |       |
|                                                                                                                                              |       |                                           |       |                                 |       |                                               |       |                                     |       |
| Accumulated  comprehensive loss                                                                                                                   |       | (5,462                                         | )          | (3,104                               | )          | (4,589                                             | )          | (2,789                                   | )          |
| Retained earnings                                                                                                                                 |       | 14,120                                         |       | 10,658                               |       | 13,307                                             |       | 11,100                                   |       |
|                                                                                                                                              |       | 164,676                                        |       | 163,572                              |       | 145,079                                            |       | 144,672                                  |       |
| Less shares held  in treasury, at cost; 2,322,767 shares and 2,537,692 shares at June 30,  2004 and December 31, 2003, respectively     |       | (13,482                                        | )          | (13,482                              | )          | (14,335                                            | )          | (14,335                                  | )          |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                                                                  |       | 151,194                                        |       | 150,090                              |       | 130,744                                            |       | 130,337                                  |       |
|                                                                                                                                              |       |                                           |       |                                 |       |                                               |       |                                     |       |
| TOTAL LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                                                  |       | $                                              | 179,117    |                                 | $          | 181,317                                            |       | $                                        | 179,137    |   | $ | 180,326 |   |

 

**3.****             ****Recent Accounting Pronouncements**

 

In January 2003,the FASB issued Financial Interpretation No. 46, “Consolidation of VariableInterest Entities” (“FIN 46”), which addresses consolidation by businessenterprises 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 toFebruary 1, 2003.  In December 2003, the FASB published arevision to FIN 46 (“FIN 46R”) to clarify some of the provisions of theinterpretation and to defer the effective date of implementation for certainentities.  Under the guidance of FIN 46R, public companies that haveinterests in VIE’s that are commonly referred to as special purpose entitiesare required to apply the provisions of FIN 46R for periods ending afterDecember 15, 2003.  A public company that does not have any interestsin special purpose entities but does have a variable interest in a VIE createdbefore February 1, 2003, must apply the provisions of FIN 46R by the endof the first interim or annual reporting period ending after March 14,2004.  During the quarter ended March 31, 2004, the Company adoptedthe provisions of FIN 46R. Adoption of FIN 46R did not have a material effecton the Company’s financial statements.

 

10

----

 

**4.****             ****Accounting for Stock Based Compensation**

 

The Company appliesAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” as modified by FIN 44, “Accounting for Certain TransactionsInvolving Stock Compensation,” in accounting for stock-based employeecompensation, 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**                         | ** ** | **Six Months Ended**                           | ** ** |
|-----------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------|------------|------------------------------------------------|------------|
| **(in 000’s)**         | ** **                                                                                                                                          | **June 30,  2004  (As restated  note 2)** | ** ** | **June 30,  2003  (As restated  note 2)** | ** ** | **June 30,  2004  (As restated  note 2)** | ** ** | **June 30,  2003  (As restated  note 2)** | ** ** |
| Net income / (loss)         | As reported                                                                                                                                         |                                           | $          | 125                                            |       | $ | (10,851 | ) | $ | (442 | ) | $ | (12,130 | ) |
|                        | Deduct:  Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |                                           | (555       | )                                              | (403       | ) | (1,257 | ) | (1,387 | ) |
|                        |                                                                                                                                                |                                           |       |                                           |       |   |   |   |   |   |
|                        | Pro forma                                                                                                                                           |                                           | $          | (430                                           | )          | $ | (11,254 | ) | $ | (1,699 | ) | $ | (13,517 | ) |
| Earnings / (loss) per share |                                                                                                                                                |                                           |       |                                           |       |   |   |   |   |   |
| Basic                       | As reported                                                                                                                                         |                                           | $          | 0.00                                           |       | $ | (0.36 | ) | $ | (0.01 | ) | $ | (0.40 | ) |
|                        | Pro forma                                                                                                                                           |                                           | (0.01      | )                                              | (0.37      | ) | (0.06 | ) | (0.45 | ) |
|                        |                                                                                                                                                |                                           |       |                                           |       |   |   |   |   |   |
| Diluted                     | As reported                                                                                                                                         |                                           | $          | 0.00                                           |       | $ | (0.36 | ) | $ | (0.01 | ) | $ | (0.40 | ) |
|                        | Pro forma                                                                                                                                           |                                           | (0.01      | )                                              | (0.37      | ) | (0.06 | ) | (0.45 | ) |

 

11

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**5.****             ****Restricted Cash**

 

Included in cash andcash equivalents at June 30, 2004 and December 31, 2003 is restrictedcash of approximately $ 315,000 and $2.2 million, respectively. Restricted cash represents funds received by Chimes and held in client-specificbank accounts, to be used to make payments to vendors of the applicable client.

 

**6.****             ****Earnings Per Share**

 

Basic Earnings Per Share (“EPS”) is based on the weighted average number ofcommon shares outstanding without consideration of common stockequivalents.  Diluted earnings per share is based on the weighted averagenumber of common and common equivalent shares outstanding, except thethree-month period ended June 30, 2003 and the six-month period endedJune 30, 2003, where the effect would have been antidilutive.  Thecalculation takes into account the shares that may be issued upon exercise ofstock options, reduced by the shares that may be repurchased with the fundsreceived from the exercise, based on the average price during the year.

 

In accordance withSFAS No. 128, the table below presents both basic and diluted earnings pershare:

 
| ** **                                                                                                              | ** ** | **Three Months Ended**                         | ** ** | **Six Months Ended**                           | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **June 30,  2004  (As restated  note 2)** | ** ** | **June 30,  2003  (As restated  note 2)** | ** ** | **June 30,  2004  (As restated  note 2)** | ** ** | **June 30,  2003  (As restated  note 2)** | ** ** |
| Numerator:                                                                                                              |       |                                           |       |                                           |       |   |   |   |   |
| Net Income/(Loss) –in thousands                                                                                    |       | $                                              | 125        |                                           | $          | (10,851 | ) | $ | (442 | ) | $ | (12,130 | ) |
| Denominator:                                                                                                            |       |                                           |       |                                           |       |   |   |   |   |
| Denominator for basic earnings per share —  weighted average shares outstanding                                    |       | 30,810,000                                     |       | 30,292,000                                     |       | 30,743,000 |   | 30,331,000 |   |
| Effect of stock options                                                                                                 |       | 405,000                                        |       | —                                         |       | — |   | — |   |
| Diluted earnings/(loss) per share:                                                                                      |       |                                           |       |                                           |       |   |   |   |   |
| Denominator for diluted earnings per share  — adjusted weighted average shares outstanding and assumed conversions |       | 31,215,000                                     |       | 30,292,000                                     |       | 30,743,000 |   | 30,331,000 |   |
| Basic earnings/(loss) per share                                                                                         |       | $                                              | 0.00       |                                           | $          | (0.36 | ) | $ | (0.01 | ) | $ | (0.40 | ) |
| Diluted earnings/(loss) per share                                                                                       |       | $                                              | 0.00       |                                           | $          | (0.36 | ) | $ | (0.01 | ) | $ | (0.40 | ) |
|                                                                                                                         |            |                                                |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |

 

The computation ofdiluted earnings per share excludes options with exercise prices greater thanthe average market price.  As of June 30, 2004 there were 1,021,084 and268,472 excluded options, respectively, for the second quarter and the firstsix months ended June 30, 2004, with exercise prices between $3.89 and $26.63and $4.40 and $26.63 respectively, per share.

 

There were 257,739 and264,913 excluded options, respectively for the second quarter and first sixmonths ended June 30, 2003, outstanding at June 30, 2003 with exercise pricesbetween $4.40 and $26.63 and $4.00 and $26.63 respectively, per share.

 

12

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**7.****             ****Segment Information**

 

The Company hasidentified three business segments: IT Services, the Solutions Group andChimes, Inc.  The IT Services division provides highly skilled softwareprofessionals to augment the internal information management staffs of majorcorporations.  IT Services is primarily staff augmentation.  TheSolutions 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 the biggest and most important companies, as measured bysales, profits, assets and market value.  Income/(loss) before incometaxes/(benefits) consists of income/(loss) before income taxes, excludinginterest income, interest expense, gain/(loss) on the sale of assets,restructuring charges, amortization of intangibles, special charges (credits)and the write-off of a terminated project.  These exclusions total incomeof $0.4 million and expense of $ 12.9 million for the second quarter of 2004and 2003 **,******respectively and income of $0.3 millionand expense of $13.3 million for the first six months of June 30, 2004 and2003, respectively (see reconciliation of segments income/(loss) before incometaxes/ (benefit) to consolidated income/(loss) before incometaxes/(benefit)).  Corporate services, consisting of general andadministrative services are provided to the segments from a centralizedlocation.  Such costs are allocated to the applicable segments receiving Corporate services based on revenue.

 

13

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**(In thousands)**

 
| ** **                                               | ** ** | **THREE MONTHS ENDED**                         | ** ** | **SIX MONTHS ENDED**                           |       |
|----------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                               | ** ** | **June 30,  2004  (As restated  note 2)** | ** ** | **June 30,  2003  (As restated  note 2)** | ** ** | **June 30,  2004  (As restated  note 2)** | ** ** | **June 30,  2003  (As restated  note 2)** | ** ** |
| **Revenues:**                                            |       |                                           |       |                                           |       |   |   |   |   |
| **IT Services**                                          | ** ** | **$**                                          | **32,073** | ** **                                     | $          | 35,320 |   | **$** | **61,877** | ** ** | $ | 71,503 |   |
| **Solutions Group**                                      | ** ** | **27,788**                                     | ** ** | 18,691                                         |       | **52,337** | ** ** | 38,292 |   |
| **Chimes**                                               | ** ** | **5,929**                                      | ** ** | 4,822                                          |       | **11,282** | ** ** | 9,291 |   |
| **Total Revenues**                                       | ** ** | **65,790**                                     | ** ** | 58,833                                         |       | **125,496** | ** ** | 119,086 |   |
|                                                     |       |                                           | ** ** |                                           |       |   | ** ** |   |   |
| **Gross Profit:**                                        |       |                                           | ** ** |                                           |       |   | ** ** |   |   |
| **IT Services**                                          | ** ** | **6,525**                                      | ** ** | 7,079                                          |       | **12,582** | ** ** | 14,249 |   |
| **Solutions Group**                                      | ** ** | **9,196**                                      | ** ** | 3,810                                          |       | **16,980** | ** ** | 10,016 |   |
| **Chimes**                                               | ** ** | **5,561**                                      | ** ** | 4,450                                          |       | **10,622** | ** ** | 8,554 |   |
| **Total Gross Profit**                                   | ** ** | **21,282**                                     | ** ** | 15,339                                         |       | **40,184** | ** ** | 32,819 |   |
| **%**                                                    | ** ** | **32.3**                                       | **%**      | 26.1                                           | %          | **32.0** | **%** | 27.6 | % |
|                                                     |       |                                           | ** ** |                                           |       |   | ** ** |   |   |
| **Operating Income:**                                    |       |                                           | ** ** |                                           |       |   | ** ** |   |   |
| **IT Services**                                          | ** ** | **1,963**                                      | ** ** | 2,289                                          |       | **4,004** | ** ** | 4,175 |   |
| **Solutions Group**                                      | ** ** | **2,531**                                      | ** ** | 1,027                                          |       | **4,568** | ** ** | 4,382 |   |
| **Chimes**                                               | ** ** | **728**                                        | ** ** | (697                                           | )          | **822** | ** ** | (2,264 | ) |
| **Total Operating Income/ (Loss):**                      | ** ** | **5,222**                                      | ** ** | 2,619                                          |       | **9,394** | ** ** | 6,293 |   |
| **%**                                                    | ** ** | **7.9**                                        | **%**      | 4.5                                            | %          | **7.5** | **%** | 5.3 | % |
|                                                     |       |                                           | ** ** |                                           |       |   | ** ** |   |   |
| **Corporate Allocation:**                                |       |                                           | ** ** |                                           |       |   | ** ** |   |   |
| **IT Services**                                          | ** ** | **3,392**                                      | ** ** | 2,961                                          |       | **6,280** | ** ** | 6,036 |   |
| **Solutions Group**                                      | ** ** | **1,475**                                      | ** ** | 1,567                                          |       | **2,926** | ** ** | 3,233 |   |
| **Chimes**                                               | ** ** | **626**                                        | ** ** | 404                                            |       | **1,145** | ** ** | 783 |   |
| **Total Corporate Allocation**                           | ** ** | **5,493**                                      | ** ** | 4,932                                          |       | **10,351** | ** ** | 10,052 |   |
| **%**                                                    | ** ** | **8.3**                                        | **%**      | 8.4                                            | %          | **8.2** | **%** | 8.4 | % |
|                                                     |       |                                           | ** ** |                                           |       |   | ** ** |   |   |
| **Total Income/ (loss) before Income Taxes  (benefit):** |       |                                           | ** ** |                                           |       |   | ** ** |   |   |
| **IT Services**                                          | ** ** | **(1,429**                                     | **)**      | (672                                           | )          | **(2,276** | **)** | (1,861 | ) |
| **Solutions Group**                                      | ** ** | **1,056**                                      | ** ** | (540                                           | )          | **1,642** | ** ** | 1,150 |   |
| **Chimes**                                               | ** ** | **102**                                        | ** ** | (1,101                                         | )          | **(323** | **)** | (3,048 | ) |
| **Total Income/ (loss) before Income Taxes  (benefit)**  | ** ** | **$**                                          | **(271**   | **)**                                          | $          | (2,313 | ) | **$** | **(957** | **)** | $ | (3,759 | ) |
| **%**                                                    | ** ** | **(0.4**                                       | **)%**     | (3.9                                           | )%         | **(0.8** | **)%** | (3.2 | )% |
|                                                          |            |                                                |            |                                                |            |  |  |  |  |  |  |  |  |  |

 

14

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

 
| ** **                                                  | ** ** | **Three Months Ended**                         | ** ** | **Six Months Ended**                               | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------|------------|
| **(000’s)**                                            | ** ** | **June 30,  2004  (As restated  note 2)** | ** ** | **June 30,  2003**

**(As restated  note 2)** | ** ** | **June 30,  2004  (As restated  note 2)** | ** ** | **June 30,  2003  (As restated  note 2)** | ** ** |
| Total Segments Income/(Loss) before Income  Taxes/(Benefit) |       | $                                              | (271       | )                                                  | $          | (2,313 | ) | $ | (957 | ) | $ | (3,759 | ) |
| Adjustments:                                                |       |                                           |       |                                               |       |   |   |   |   |
| Interest Income, net                                        |       | 29                                             |       | 90                                                 |       | 112 |   | 258 |   |
| Loss on sale of assets                                      |       | —                                         |       | —                                             |       | — |   | (273 | ) |
| Restructuring charges                                       |       | —                                         |       | (1,949                                             | )          | — |   | (2,198 | ) |
| Special (charges)/credits                                   |       | 939                                            |       | (7,978                                             | )          | 939 |   | (7,978 | ) |
| Write-off of terminated project                             |       | —                                         |       | (3,064                                             | )          | — |   | (3,064 | ) |
| Amortization of Intangibles                                 |       | (520                                           | )          | —                                             |       | (728 | ) | — |   |
| Total Adjustments:                                          |       | $                                              | 448        |                                               | $          | (12,901 | ) | $ | 323 |   | $ | (13,255 | ) |
| Consolidated Income/(Loss) Before Income  Taxes             |       | $                                              | 177        |                                               | $          | (15,214 | ) | $ | (634 | ) | $ | (17,014 | ) |
|                                                             |            |                                                |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |

 

**8.****             ****Restructuring Charges**

 

During the fourthquarter of 2003, the Company recorded a restructuring charge of approximately$329,000 relating to the closing of one office in the U.S. and the relatedseverance.  The Company decided to continue business in this area throughvirtual offices and therefore recorded the charge after the building wasclosed.  The lease obligation of $90,000 was calculated based on currentrent commitments less a calculated sublease amount based on current marketconditions.

 
| ** **         | ** ** | **Remaining at  December 31,  2003** | ** ** | **Paid** | ** ** | **Remaining at  June 30,  2004** | ** ** |
|--------------------|------------|-------------------------------------------|------------|----------|------------|---------------------------------------|------------|
| Lease Obligations: |       |                                      |       |     |       |                                  |       |
| United States      |       | $                                         | 90         |     | $          | (36                                   | )          | $ | 54 |   |
|                    |            |                                           |            |          |            |                                       |            |  |  |  |

 

15

----

 

During the thirdquarter of 2003, the Company recorded a restructuring charge of approximately$787,000 relating to the closing of Chimes (UK) Ltd. and severance chargesrelated to U.S. operations.  The Company decided to continue business inthis geographic area through a third party and therefore recorded the chargeafter the building was closed.  The provision includes an accrual relatingto the future costs associated with continuing rent on this property in theUnited Kingdom.  The closing of this office resulted in a severance chargeof $305,000.

 
| ** **             | ** ** | **Remaining at  December 31,  2003** | ** ** | **Paid** | ** ** | **Exchange  Rate  Fluctuation** | ** ** | **Remaining at  June 30,  2004** | ** ** |
|------------------------|------------|-------------------------------------------|------------|----------|------------|---------------------------------|------------|---------------------------------------|------------|
|                   |       |                                      |       |     |       |                            |       |                                  |       |
| Severance              |       | $                                         | 47         |     | $          | —                          |       | $                                     | 1          |   | $ | 48 |   |
|                   |       |                                      |       |     |       |                            |       |                                  |       |
| Lease Obligations      |       | $                                         | 150        |     | $          | (17                             | )          | $                                     | 2          |   | $ | 135 |   |
|                   |       |                                      |       |     |       |                            |       |                                  |       |
| General Office Closure |       | $                                         | 49         |     | $          | (7                              | )          | $                                     | 1          |   | $ | 43 |   |
|                   |       |                                      |       |     |       |                            |       |                                  |       |
| Total                  |       | $                                         | 246        |     | $          | (24                             | )          | $                                     | 4          |   | $ | 226 |   |

 

During the secondquarter of 2003, the Company evaluated the geographic area in Canada anddecided 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 the consolidatingand closing of these facilities in the Canadian subsidiary.  The $1.3million expense for lease obligations was calculated based on current rentcommitments 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  June 30,  2004** | ** ** |
|--------------------|------------|-------------------------------------------|------------|----------|------------|---------------------------------|------------|---------------------------------------|------------|
| Lease Obligations: |       |                                      |       |     |       |                            |       |                                  |       |
| Canada             |       | $                                         | 739        |     | $          | (245                            | )          | $                                     | (25        | ) | $ | 469 |   |
|                    |            |                                           |            |          |            |                                 |            |                                       |            |  |  |  |  |

 

16

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During the fourthquarter of 2002, the Company recorded a restructuring charge of $2.8 millionpertaining to 2002 office closings.  During the second quarter of 2003,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 June 30,  2004** | ** ** |
|--------------------|------------|-------------------------------------------|------------|----------|------------|--------------------------------------|------------|
| Lease Obligations: |       |                                      |       |     |       |                                 |       |
| United States      |       | $                                         | 1,159      |     | $          | (463                                 | )          | $ | 696 |   |
|                    |            |                                           |            |          |            |                                      |            |  |  |  |

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

 

At the end of 2003,the Company had $78,000 of five lease obligations remaining from therestructure expense recorded in 2001.  Of the five lease obligations, tworemain and the balance as of June 30, 2004 was $14,000.

 
| ** **         | ** ** | **Remaining at  Dec. 31,  2003** | ** ** | **Paid**   | ** ** | **Remaining at  June 30,  2004** | ** ** |
|--------------------|------------|----------------------------------|------------|------------|------------|---------------------------------------|------------|
| ** **         | ** ** | ** **                       | ** ** | ** ** | ** ** | ** **                            | ** ** |
| Lease Obligations: |       |                             |       |       |       |                                  |       |
| United States      |       | $                                | 78         |       | $          | (64                                   | )          | $ | 14 |   |
|                    |            |                                  |            |            |            |                                       |            |  |  |  |

 

17

----

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

 

At the end of 2003, the Companyhad $308,000 of one lease obligation remaining on the restructure expense recordedin 2000, with the lease terminating in 2005.  The balance remaining atJune 30, 2004 was $217,000.

 
| ** **         | ** ** | **Remaining  at  Dec. 31,  2003** | ** ** | **Paid** | ** ** | **Remaining  at  June 30,  2004** |   |
|--------------------|------------|-----------------------------------|------------|----------|------------|-----------------------------------|--------|
| Lease Obligations: |       |                              |       |     |       |                              |   |
| United States      |       | $                                 | 308        |     | $          | (91                               | )      | $ | 217 |   |
|                    |            |                                   |            |          |            |                                   |        |  |  |  |

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

 

18

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

 

Statement of FinancialAccounting Standards No. 130, Reporting Comprehensive Income (“SFAS No.130”),requires that items defined as other comprehensive income/ (loss), such asforeign currency translation adjustments and unrealized gains and losses, beseparately 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 sixmonths ended June 30, 2004 and June 30, 2003 are as follows:

 
| ** **                                                             | ** ** | **Three Months Ended**                         | ** ** | **Six Months Ended**                           | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                             | ** ** | **June 30,  2004  (As restated  note 2)** | ** ** | **June 30,  2003  (As restated  note 2)** | ** ** | **June 30,  2004  (As restated  note 2)** | ** ** | **June 30,  2003  (As restated  note 2)** | ** ** |
|                                                                   |       |                                           |       |                                           |       |   |   |   |   |
| Comprehensive Income/(Loss):                                           |       |                                           |       |                                           |       |   |   |   |   |
|                                                                   |       |                                           |       |                                           |       |   |   |   |   |
| Net Income/(Loss)                                                      |       | $                                              | 125        |                                           | $          | (10,851 | ) | $ | (442 | ) | $ | (12,130 | ) |
| Other comprehensive income/ (loss) –  foreign currency adjustment |       | (213                                           | )          | 1,553                                          |       | (365 | ) | 1,539 |   |
| Unrealized gain /(loss) on SERP investments                            |       | (24                                            | )          | 943                                            |       | 50 |   | 733 |   |
|                                                                   |       |                                           |       |                                           |       |   |   |   |   |
| Comprehensive Income/(Loss)                                            |       | $                                              | (112       | )                                              | $          | (8,355 | ) | $ | (757 | ) | $ | (9,859 | ) |

 

**10.****      ****Acquisitions**

 

On April 1, 2004 theCompany’s subsidiary RGII Technologies, Inc. acquired all of the common stockof privately held Automated Information Management, Inc. (“AIM”). The cashtransaction is valued at approximately $13.8 million plus an adjustment topurchase price for excess working capital of approximately $2.0 million.

 

The Company purchased AIM tofurther its commitment to driving the growth potential that exists in theFederal government market and to expand RGII’s footprint, providing an entranceinto certain government agencies, as well as strong relationships with large,prime contractors.

 

19

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The Company completed apreliminary allocation of the purchase price to assets and liabilitiesacquired, 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 (inthousands):

 
| ** **               | ** ** | **Allocation of  Purchase Price** | ** ** |
|--------------------------|------------|-----------------------------------|------------|
|                     |       |                              |       |
| Cash                     |       | $                                 | 1,168      |   |
|                     |       |                              |       |
| Accounts Receivable      |       | 3,300                             |       |
|                     |       |                              |       |
| Other Current Assets     |       | 18                                |       |
|                     |       |                              |       |
| Goodwill                 |       | 11,242                            |       |
|                     |       |                              |       |
| Intangibles              |       | 2,540                             |       |
|                     |       |                              |       |
| Property and Equipment   |       | 127                               |       |
|                     |       |                              |       |
| Total Assets             |       | 18,395                            |       |
|                     |       |                              |       |
| Accounts Payable         |       | 400                               |       |
|                     |       |                              |       |
| Accrued Payroll          |       | 747                               |       |
|                     |       |                              |       |
| Other Accrued Expenses   |       | 361                               |       |
|                     |       |                              |       |
| Deferred Tax Liabilities |       | 1,015                             |       |
|                     |       |                              |       |
| Total Liabilities        |       | 2,523                             |       |
|                     |       |                              |       |
| Net Assets               |       | $                                 | 15,872     |   |

 

Purchased intangibles totaling$2.5 million included unfunded backlog, funded backlog and non-competeagreements; approximately $11.2 million was recorded as goodwill.

 

The acquisition was structuredas a purchase of common stock; and accordingly, goodwill will not be subject toamortization for tax purposes.

 

20

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Pro Forma Results

 

Effective April 1, 2004the results of AIM’s operations have been included in the consolidated financialstatements of the Company.  The following unaudited pro forma financialinformation presents the combined results of operations of the Company and AIMas if the acquisition had occurred as of the beginning of the periodspresented.  The revenues and results of operations included in thefollowing pro forma unaudited consolidated condensed statement of operations isnot considered necessarily indicative of the results of operations for theperiods specified had the transaction actually been completed at the beginningof the period.

  
| ** **                                         | ** ** | **Actual**                                    | ** ** | **Pro Forma**                            | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                         | ** ** | **Three Months  Ended  June 30****2004** | ** ** | **Three Months  Ended  June 30****2003** | ** ** | **Six Months  Ended  June 30****2004** | ** ** | **Six Months  Ended  June 30****2003** |   |
| Revenues:                                          |       |                                          |       |                                     |       |   |   |   |   |
| IT Services                                        |       | $                                             | 32,073     |                                     | $          | 35,320 |   | $ | 61,877 |   | $ | 71,503 |   |
| Solutions Group                                    |       | 27,788                                        |       | 23,158                                   |       | 56,775 |   | 47,018 |   |
| Chimes                                             |       | 5,929                                         |       | 4,822                                    |       | 11,282 |   | 9,291 |   |
| Total                                              |       | 65,790                                        |       | 63,300                                   |       | 129,934 |   | 127,812 |   |
| Income/(loss) before minority interest             |       | 80                                            |       | (10,889                                  | )          | (542 | ) | (11,953 | ) |
| Minority interest                                  |       | 45                                            |       | (18                                      | )          | 36 |   | (37 | ) |
| Net Income/(Loss)                                  |       | $                                             | 125        |                                     | $          | (10,907 | ) | $ | (506 | ) | $ | (11,990 | ) |
| Net Income/(loss) per share (basic &  diluted) |       | $                                             | 0.00       |                                     | $          | (0.36 | ) | $ | (0.02 | ) | $ | (0.40 | ) |
| Weighted average number of shares  outstanding     |       |                                          |       |                                     |       |   |   |   |   |
| Basic                                              |       | 30,810,000                                    |       | 30,292,000                               |       | 30,743,000 |   | 30,331,000 |   |
| Diluted                                            |       | 31,215,000                                    |       | 30,292,000                               |       | 30,743,000 |   | 30,331,000 |   |
|                                                    |            |                                               |            |                                          |            |  |  |  |  |  |  |  |  |  |

 

The unaudited pro formafinancial information above reflects the following adjustments to thehistorical consolidated financial statements for the three months endedJune 30, 2003: $313,000 amortization expense on purchased intangibleassets, $43,500 reduction of interest income for cash consideration paid and$26,000 adjustment to record income taxes for AIM as if it was a C-Corporationand to record income tax effect of pro forma adjustments.

 

The unaudited pro formafinancial information above reflects the following adjustments to thehistorical consolidated financial statements for the six months endedJune 30, 2004: $313,000 amortization expense on purchased intangible assets,elimination of Acquisition related bonuses of $2.3 million, $43,500 reductionof interest income for cash consideration paid and $62,000

 

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adjustment to record income taxbenefit for AIM as if it was a C-Corporation and to record income tax effect ofpro forma adjustments.

 

The unaudited pro formafinancial information above reflects the following adjustments to theconsolidated financial statements for the six months ended June 30, 2003:$625,000 amortization expense on purchased intangible assets, $87,000 reductionof interest income for cash consideration paid and $55,000 adjustment to recordincome taxes for AIM as if it was a C-Corporation and to record income taxeffect of pro forma adjustments.

 

On September 12, 2003, theCompany acquired, from Commerce One, the Xpress solution, a suite of softwareand services designed to rapidly facilitate product data synchronizationbetween trading partners.  The purchase price of the software was $566,000,recorded as intangible assets, and is being amortized 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, and increasedby 29 cents ($0.29) for each dollar exceeding EBIT targets.  The Companymade a payment of $631,000 during the first quarter of 2004.  The Companyalso 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 are assessing the impactof RGII EBIT targets related to contingent payments.  Although notfinalized for the entire earn-out period, the agreement could result inpayments of a maximum of $667,000 for fiscal year 2004, and a maximum of $2.0million (which includes the $667,000) over the three year period.

 

On January 31, 2003, theCompany acquired the IT Solutions operations of Global Business Technology Solutions(GBTS), from Alea (Bermuda) Limited, a member of the Alea Group of companiesand Westfield Services, Inc., a subsidiary of Westfield Financial Corporationfor $400,000.  The outsourcing facility and its IT professionals arelocated in Chennai (Madras), India.  This transaction was accounted for asa purchase and the entire purchase price was allocated to goodwill.

 

**11.****      ****Goodwill**

 

The changes in the carryingamount of goodwill for the six months ended June 30, 2004, are as follows:

 
| **Reporting Units**             | ** ** | **Solutions** | ** ** | **IT Services** | ** ** | **Education** | ** ** | **Chimes** | ** ** | **Consolidated** | ** ** |
|---------------------------------|------------|---------------|------------|-----------------|------------|---------------|------------|------------|------------|------------------|------------|
|                            |       |          |       |            |       |          |       |       |       |             |       |
| Balance as of December 31, 2003 |       | $             | 34,218     |            | $          | —        |       | $          | —     |             | $          | — |   | $ | 34,218 |   |
| Additions to Goodwill*          |       | 11,242        |       | —          |       | —        |       | —     |       | 11,242           |       |
| Balance as of June 30, 2004     |       | $             | 45,460     |            | $          | —        |       | $          | —     |             | $          | — |   | $ | 45,460 |   |
|                                 |            |               |            |                 |            |               |            |            |            |                  |            |  |  |  |  |  |  |  |  |  |

 

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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.

 

**12.****      ****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.

 

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**13.  Purchase of Treasury Stock**

 

In April of 2001, theBoard of Directors approved the repurchase in the open market of up to 10% ofits common shares outstanding, or approximately 3.2 million shares.  As ofJune 30, 2004 the remaining authorization for repurchase is approximately93,000 shares.

 

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**14.****      ****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 June 30, 2004, the Company had no outstandingloan balance against the facility.  Based on the Company’s eligiblecustomer receivables and cash balances, $16.3 million was available forborrowing as of June 30, 2004.  The fee for the unused portion of theline of credit is 0.375% per annum charged to the Company monthly.  Thischarge was approximately $52,000 and $62,000 for the six month periods endedJune 30, 2004 and 2003, respectively.  This line of credit includescovenants relating to the maintenance of cash balances and providing forlimitations on incurring obligations and spending limits on capitalexpenditures.  The Company did not satisfy this covenant for the quarterended March 31, 2004.  A waiver was received from the lendinginstitution for the quarter ended March 31, 2004 along with an amendment to theloan agreement lowering the three-month average minimum collections covenant to$10 million.  At June 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.

 

**15.****      ****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 tax deductions. Upon the sale of the acquired business in 2001, these deductions wererecognized for tax purposes.  The tax benefit of $19.6 million relating tothe part of these deductions that was carried back to prior years was includedin refundable income taxes in 2002.  Since the tax structure of thetransaction was subject to review by the tax authorities, the Company recordeda reserve for the tax benefits resulting from the carryback and did not recorddeferred tax assets for the tax benefits being carried forward. The Companyintended that upon conclusion of review of the relevant tax returns by theauthorities, it would record a deferred tax asset for the part of the taxbenefits being carried forward and a tax benefit for the portion that wascarried back, net of an appropriate valuation allowance. The tax benefit wouldbe reflected as an increase in additional paid-in capital.  Anyadjustments to the valuation allowance would be charged or credited 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.

 

**16.****      ****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 or qualificationunder federal securities laws.  As a result, the Company may have failedto comply with the registration or qualification requirements of federal andapplicable state securities laws because the Company did not register orqualify these stock issuances under either federal or applicable statesecurities 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 willexpire on August 27, 2004.  Assuming all of the shares subject to therescission offer (approximately 659,000) are tendered in the rescission offer,the aggregate purchase price, excluding interest is estimated to beapproximately $1.8 million.  This contingency payment is considered remoteby the Company, as the current price of the stock is above the price at whichthe shares would be repurchased.

 

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**17.****      ****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.

 

**18.****      ****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 itsJune 30, 2003 by-law agreement regarding special meeting procedures by,among other things, reducing from 75 to 50 the minimum number of days betweenthe time a 10 percent or more shareholder requests a special meeting ofshareholders and the date of that meeting.  In addition, Aquent enteredinto a standstill agreement pursuant to which, for a period of one year, itagreed not to request a special meeting of Computer Horizons’ shareholders forany purpose, or nominate anyone to serve as a member of CHC’s Board ofDirectors, or engage in any 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.

 

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**Item 2**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Forthe Periods Ended June 30, 2004 and June 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 Companies 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 June 30, 2004 of $65.8 million, a twelve percentincrease from the comparable period in 2003.  For the six months endedJune 30, 2004, revenues totaled $125.5 million, compared to $119.1 millionin the comparable period of 2003.  The revenue increases for the quarterand six months ended June 30, 2004 were attributable to growth in ourSolutions business due to the July 2003 acquisition of RGII and theApril 2004 acquisition, by RGII, of Automated Information Management, Inc.(AIM).  Also contributing to the revenue increase was growth achieved bythe Company’s Chimes subsidiary.  Revenue growth during the first sixmonths of 2004 was partially offset by revenue declines in our commercial(non-federal) Solutions business and declines in our IT Services (staffaugmentation) due to a decrease in demand for temporary technology workers andthe trend of companies to outsource technology jobs offshore.

 

Net income for thesecond quarter of 2004 totaled $125,000, or $0.00 per share, compared with anet loss of approximately $10.9 million, or $(0.36) per share, in thecomparable period of 2003.  Net loss for the six months endingJune 30, 2004 totaled $442,000, or $(0.01) per share, compared with a netloss of $12.1 million, or $(0.40) per share, in the comparable six monthsending June 30, 2003.  Net income for the six months endingJune 30, 2004 includes a one-time credit of approximately $0.02 per share,primarily relating to an insurance refund, and a $(0.01) per share chargepertaining to the amortization of intangibles.  The first half of 2003 netloss includes special charges of $(0.32) per share relating to severancecharges, the write-off of a terminated project, costs associated with theunilateral proposal and activities of Aquent and restructuring charges at theCompany’s Canadian facilities.

 

Management continues tofocus on maintaining a strong balance sheet, with approximately $36.7 millionin cash and cash equivalents at June 30, 2004, along with $73.4 million inworking 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.

 

Although the Companyreported net loss of $442,000 in the first half of 2004, 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 half of 2004, compared to the prior year.  The IT Services businessaccounted for approximately 49% of the Company’s total revenue in the firsthalf of 2004.  Although IT Services

 

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second quarter revenueincreased sequentially from the first quarter of 2004, the Company cannotpredict if these increases are sustainable and when the overall level ofbusiness activity in the IT market will improve.

 

**FORWARD-LOOKINGSTATEMENTS**

 

 The following sectionshould be read in conjunction with our consolidated financial statements andrelated notes appearing in this Form 10Q/A. Statements included in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and elsewhere in this documentthat do not relate to present or historical conditions are “forward-lookingstatements” within the meaning of that term in Section 27A of theSecurities Act of 1933, as amended, and in Section 21F of the SecuritiesExchange Act of 1934, as amended.  Additional oral or writtenforward-looking statements may be made by the Company from time to time, andsuch statements may be included in documents that are filed with the Securitiesand Exchange Commission (SEC).  Such forward-looking statements involverisks and uncertainties that could cause results or outcomes to differmaterially from those expressed in such forward-looking statements. Forward-looking statements may include, without limitation, statements relatingto the Company’s plans, strategies, objectives, expectations and intentions andare intended to be made pursuant to the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995.  Words such as “believes,” “forecasts,”“intends,” “possible,” “expects,” “estimates,” “anticipates,” or “plans”, andsimilar expressions, are intended to identify forward-looking statements. Among the important factors on which such statements are based are assumptionsconcerning the anticipated growth of the information technology industry, thecontinued need of current and prospective customers for the Company’s services,the availability of qualified professional staff, and price and wage inflation.

 

The Management’s Discussion andAnalysis of Financial Condition and Results of Operations set forth in thisItem 2 has been restated to reflect certain adjustments to the Company’sconsolidated financial statements for 2003 as previously reported in theCompany’s Form 10-Q for the quarters June 30, 2003, as amended and 2002.  Details of the adjustments are shown belowand address all quarterly periods affected by the adjustments, which includethe quarterly periods ending June 30 2003 through June 30, 2004.

 

Subsequent to the issuance of its financial statementsfor the year ended December 31, 2003, and in connection with an internalreview of accounting processes and procedures conducted in the third quarter of2004, the company discovered an 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 accruedpayroll on the balance sheet.

 

The aggregate amount forall periods affected was an understatement of consultant costs totaling$5,555,000, with an after-tax impact of $3,462,000 or $(0.12) per share.  The pre-tax, after tax and EPS effect of thisnon-cash charge for each period affected are shown below (dollarsinthousands, except per share data):

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

 

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

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

 

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*Represents cumulative effectof all previous quarterly periods deemed not material on an individual quarterbasis.

 

In addition, in the secondquarter of 2003, the Company made a balance sheet correction resulting in anincrease in shareholders’ equity and a decrease in accrued payroll of $41,000.In 2004, the Company made a balance sheet correction resulting in an increasein accounts receivable and shareholder’s equity (specifically accumulatedcomprehensive loss) of approximately $65,000 and $42,000 in the quarters endingMarch 31, 2004 and June 30, 2004 respectively.

 

Additional detail with respect to the impactof the restatement on the Company’s results of operations is reported in Note 2of the notes to the Consolidated Financial Statements included in Part I - Item1 of this Amendment No. 2 of Form 10-QA.

 

## **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.

 

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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 half ended June 30, 2004, this segmentrepresented approximately 49% of total revenues. The IT Services business tendsto be a lower risk, lower gross margin business with very competitive pricing.

 

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 halfended June 30, 2004, the Solutions Group (excluding Chimes) accounted for42% of consolidated revenues.

 

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-

 

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alone binding contractualdocument, typically outlining the project objectives, describing the personnelwho will work on the project, describing phases of the project, the timeframesfor work performance, and the rate of compensation, on a time and materialsbasis.  In the event that the parameters of the project expand orotherwise change, a Project Change Request is implemented, to memorializewhatever change has occurred to the deliverables, personnel and ortime/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 performedfor the client.  With regard to revenues expected in future periods, eachSOW has 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 half ended June 30, 2004, Chimes accounted forapproximately 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 93% ofconsolidated revenue in the quarter and first half ended June 30, 2004 andJune 30, 2003, respectively, was derived from time-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.  These unbilledamounts 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 isrecognized on the basis of the estimated percentage of completion based oncosts incurred relative to total estimated costs.  Each fixed fee contracthas different terms, milestones and deliverables.  The milestones anddeliverables primarily 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, revenue isaccrued 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 noimpairment had 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 OF OPERATIONS**

 

*Revenues*.  Revenues increased to$65.8 million in the second quarter of 2004 from $58.8 million in the secondquarter of 2003, an increase of $7.0 million or 12%.  Revenues increasedto $125.5 million in the first six months of 2004 from $119.1 million in thefirst six months of 2003, an increase of $6.4 million or 5.4%.

 

Solutions Group revenuesincreased to $27.8 million in the second quarter of 2004 from $18.7 million inthe second quarter of 2003, an increase of $9.1 million or 49%. ** **The increase in Solutions Grouprevenues is attributable to the Company’s federal government practice,including the July 2003 acquisition of RGII and the April 2004acquisition, by RGII, of AIM, with revenues in the second quarter of 2004totaling approximately $13.9 million.  This revenue increase for thequarter was partially offset by several commercial (non-federal) domesticsolutions projects ending and revenue declines attributable to projects withthe City of New York, totaling approximately $4.8 million, in comparison to thesecond quarter of 2003.  Solutions Group revenues increased to $52.3million in the first six months of 2004 from $38.3 million in the first sixmonths of 2003, an increase of $14.0 million or 36.7% **. **The increase in Solutions Grouprevenues is attributable to the Company’s federal government practiceexpansion, including the acquisition of RGII and AIM, with total first half2004 revenues of $23.4 million, partially offset by revenue declines incommercial domestic solutions projects and the City of New York, totalingapproximately $9.5 million, in comparison to the first six months of 2003.

 

IT Services revenues decreasedto $32.1 million in the second quarter of 2004 from $35.3 million in the secondquarter of 2003, a decrease of $3.2 million or 9%.  For the second quarterof 2004, headcount decreased by 9%, in comparison with the second quarter of2003.  IT Services revenues decreased to $61.9 million in the first halfof 2004 from $71.5 million in the first half of 2003, a decrease of $9.6million or 13.5%.  For the first six months of 2004, average headcountdecreased by 12% in comparison to the first six months of 2003, accounting forapproximately $8.5 million of the revenue decrease.  The balance of thedecrease in revenue (approximately $1.1 million) is attributable to a reductionin average bill rates.  The decrease in IT Services revenue for thequarter and the first six months, is the result of continued decreases in thedemand for temporary technology workers, the trend of companies to outsourcetechnology jobs offshore and the impact of pricing decreases by customers.

 

Chimes revenues increased to$5.9 million in the second quarter of 2004 from $4.8 million in the secondquarter of 2003, an increase of $1.1 million, or 23.0%.  Chimes revenues,for the first six months of 2004, increased to $11.3 million from $9.3 millionin the first six months of 2003, an increase of $2.0 million or 21.4%. Thisincrease in Chimes revenue for the first half of 2004 is due to the expansionof managed spend at existing customers (accounting for $1.3 million of therevenue increase) and the addition of new customers (accounting for $0.7million of the revenue increase) in this segment.

 

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*Direct Costsand Gross margins*. Direct costs were $44.5 million and $85.3 million in the second quarter andfirst half of 2004, respectively, and $43.5 million and $86.3 million in thesecond quarter and first half of 2003, respectively.  Gross margin,revenues less direct costs, increased to 32.3% in the second quarter of 2004from 26.1% in the same period of 2003.  Gross margin increase to 32.0% inthe first six months of 2004 from 27.6% in the same period of 2003. In theCompany’s Solutions Group, gross profit totaled $17.0 million, or 32.4% for thesix months ending June 30, 2004 compared to $10.0 million, or 26.2%. Thisincrease is primarily attributable to the RGII and AIM acquisitions.  ITServices gross margins for the six months ended June 30, 2004 were $12.6million, or 20.3%, compared to $14.2 million, or 20.0% for the comparableperiod of 2003.  Chimes gross margins approximated 94.1% for the sixmonths ended June 30, 2004, compared to 92.1% in 2003, due to improvedleveraging 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 six months of 2004, Chimes and Solutions Group revenue totaledapproximately 50% of consolidated revenue, compared to approximately 40% ofconsolidated revenue for the comparable period in 2003.

 

*Costs andExpenses. *Selling,general and administrative expenses increased to $21.6 million and $41.1million in the second quarter and first half of 2004, respectively, from $20.7million and $39.6 million in the comparable periods of 2003.  For thequarter ending June 30, 2003, SG&A expenses include 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,the Company’s SG&A expenses were 32.8% and 32.8% in the second quarter andfirst half of 2004, respectively; an increase from 30.0% and 30.7% in thecomparable periods of 2003.  The increase in the second quarter and firsthalf of 2004 SG&A expenses is primarily attributable to the acquisitions ofRGII and AIM in July 2003 and April 2004, respectively.

 

*Income /(Loss) from Operations*.  The Company’s income from operations totaled $148,000in the second quarter of 2004, including amortization expense totaling $520,000and special credits (insurance refund) of $939,000.  This compares to aloss from operations of $15.3 million in the second quarter of 2003, whichincludes restructuring charges of $1.9 million, special charges of $8.0 millionpertaining to costs associated with the unilateral proposal and activities ofAquent and the write-off of a terminated project with ATEB, for financialreasons, of approximately $3.1 million.

 

The composition of theoperating profit for the quarter ending June 30, 2004, excluding allspecial charges/(credits), interest income/(expense) and amortization expense,of $1.0 million included a loss of $1.4 million in IT Services, income of $2.3million in the Solutions Group and income of $0.1 million in Chimes.

 

The Company’s loss fromoperations totaled $747,000 in the first six months of 2004, includingamortization expense of $728,000 and special credits of $939,000.  Thiscompares to a loss from operations of $16.1 million in the first half of 2003,which includes restructuring charges of $2.2 million, special charges of $8.0million pertaining to costs associated with the unilateral proposal andactivities of Aquent and the write-off of a terminated project with ATEB, forfinancial reasons, of approximately $3.1 million.  The composition of the2004 operating income excluding all special charges/(credits), interestincome/(expense) and amortization expense, of $1.2 million included a loss of$2.3 million in IT Services, income of $3.8 million in the Solutions Group anda loss of $0.3 million in Chimes.

 

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*OtherIncome/(Expense)*. Other income was $29,000 in the second quarter of 2004, compared to otherincome of $90,000 in the comparable period of 2003.  This decrease ofother income during the second quarter of 2004 was due to decreased interestincome primarily resulting from lower balances on cash investments.  Otherincome was $112,000 in the first six months of 2004, compared to other expenseof $15,000 in the comparable period of 2003, which included a loss on sale ofassets of $273,000.

 

*Provision forIncome Taxes*. The effective tax rates for Federal, state and local income taxes were taxexpense of 55% for the second quarter of 2004 and tax benefit of 25% for thefirst six months of 2004, compared with a tax benefit of 29% for the comparableperiods of 2003.

 

*Net Income /(Loss)*. Net income for the second quarter of 2004 was $125,000, or $0.00 per dilutedshare, compared to net loss of $10.9 million, or $(0.36) loss per diluted sharefor the second quarter of 2003, an increase of $11.0 million.  The effectof special credits and amortization expense amounted to $0.01 income per sharein the second quarter of 2004.  The second quarter of 2003 net lossincludes special charges of $(0.31) per share relating to severance charges,the write-off of a terminated project with ATEB for financial reasons, costsassociated with the unilateral proposal and activities of Aquent andrestructuring costs at our Canadian facilities.  For the first half of2004, the net loss was $442,000, or $(0.01) per diluted share, compared to anet loss of $12.1 million, or $0.40 loss per diluted share for the first halfof 2003.

 

**Liquidity andCapital Resources**

 

Computer Horizons hashistorically financed its operations through cash generated from operations,borrowings against bank lines of credit and the public sale of its commonstock. At June 30, 2004, the Company had approximately $73.4 million inworking capital, of which $36.7 million was cash and cash equivalents. AtJune 30, 2004, the Company had a current ratio position of 3.8 to 1.

 

Net cash used in operatingactivities in the first six months of 2004 was $654,000, primarily attributableto net income, the effect of non-cash charges totaling approximately $4.5million, offset by an increase in accounts receivable of $3.6 million and adecrease in accrued expenses.

 

Total accounts receivableincreased $6.2 million to $54.5 million at June 30, 2004 (including $3.3million of accounts receivable acquired from AIM), from $48.3 million atDecember 31, 2003.  Accounts receivable days sales outstanding (“DSO”)were 74 days at June 30, 2004 compared to 77 days at March 31, 2004and 70 days at December 31, 2003.  The increase in DSO’s fromDecember 31, 2003, is primarily attributable to the seasonal slowdown ofpayments from clients, which historically occurs in the first quarter of eachyear.  A three-day improvement in DSO’s was noted in the second quarterand DSO’s are expected to decrease for the remainder of 2004.  All clientreceivable collectibility and billing issues identified by management have beenadequately reserved.  For the period ending June 30, 2004, there wereno significant changes in credit terms, credit policies or collection efforts.

 

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Net cash used in investingactivities in the first six months of 2004 was $15.5 million, consistingprimarily of capital expenditures totaling $0.8 million and the acquisition ofAIM for cash, totaling approximately $14.7 million, net of cash acquired.

 

Net cash provided by financingactivities in the first six months of 2004 was $656,000, 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 June 30, 2004, the Company had no outstandingloan balance against the facility.  Based on the Company’s eligiblecustomer receivables and cash balances, $16.3 million was available forborrowing as of June 30, 2004.  The fee for the unused portion of theline of credit is 0.375% per annum charged to the Company monthly.  Thischarge was approximately $52,000 and $62,000 for the six month periods endedJune 30, 2004 and 2003, respectively.  This line of credit includescovenants relating to the maintenance of cash balances and providing forlimitations on recurring obligations and spending limits on capitalexpenditures.  The Company did not satisfy this covenant for the quarterended March 31, 2004.  A waiver was received from the lendinginstitution for the quarter ended March 31, 2004 along with an amendment to theloan agreement lowering the three-month average minimum collections covenant to$10 million.  At June 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 are assessing the impact of RGII EBIT targets related tocontingent payments.  Although not finalized for the entire earn-outperiod, the agreement could result in payments of a maximum of $667,000 forfiscal year 2004, and a maximum of $2.0 million (which includes the $667,000)over the period ending June 30, 2006.

 

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 June 30, 2004:

 
| ** **                   | ** ** | **Obligation Due** | ** ** |
|------------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **Total  Amount**  | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **Over 5 Years** | ** ** |
| ** **                   | ** ** | **(in thousands)** | ** ** |
| Operating leases             |       | $                  | 12,659     |   | $ | 3,205 |   | $ | 7,632 |   | $ | 1,822 | ** ** | $ | **—** | ** ** |
| RGII Contingent Note         |       | 9,369              |       | 3,300 |   | 6,069 |   |   |   |   |   |
| Deferred Compensation        |       | 2,288              |       |   |   |   |   |   |   | 2,288 |   |
| Supplemental Retirement Plan |       | 12,318             |       |   |   |   |   |   |   | 12,318 |   |
| Other                        |       | 2,937              |       | 1,604 |   | 1,333 |   | — |   |   |   |
| Total Cash Obligations       |       | $                  | 39,571     |   | $ | 8,109 |   | $ | 15,034 |   | $ | 1,822 |   | $ | 14,606 |   |

 

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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.

 

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Item4.    Controls and Procedures

 

Disclosure Controls andProcedures

 

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

 

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

 

The aggregate amount forall periods affected was an understatement of consultant costs totaling$5,555,000, with an after-tax impact of $3,462,000 or $(0.12) per share.

 

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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 accumulated comprehensive income).

 

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

 

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

 

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

 

•                  Management will implement animproved intercompany transaction process, including foreign currencytranslation and financial reporting/consolidation procedures, which will bedocumented, with all key controls identified.

•                  All intercompany eliminationentries will require two levels of approval (Accounting Manager andController), as opposed to the previous one level of approval.

•                  Monthly, the CorporateController will review and approve all intercompany elimination entries toensure amounts are properly recorded.

•                  Canadian intercompany accounts,which currently record all receivable and payable activity in the same balancesheet account, will be divided into two intercompany accounts – one to recordonly intercompany invoicing transactions, one to record other (funding)transactions.  This will allow bettertracking of intercompany transactions and more easily highlight incorrectentries, if any.

•                  A more detailed review of grossmargins by line of business will be completed by the Controller (and reviewedby the CFO) on a quarterly basis.

•                  Additional training (internaland external) will be provided to all General Accounting personnel with anemphasis on Consolidation accounting.

•                  Internal Audit will conduct areview of intercompany transactions and the consolidation process during thefourth quarter of 2004 to ensure that newly designed controls are functioningproperly.

 

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 4. Submission of Matters to a Vote of Security Holders

 

On May 19, 2004, the Company held its Annual Meeting ofStockholders.

 

(1)  The followingdirectors were elected to serve on the Company’s Board of Directors:

 
| ** **             | ** ** | **For**    | ** ** | **Against** | ** ** |
|------------------------|------------|------------|------------|-------------|------------|
| William M. Duncan      |       | 23,733,555 |       | 3,003,528   |       |
| Eric P. Edelstein      |       | 23,626,058 |       | 3,111,025   |       |
| William J. Marino      |       | 23,632,620 |       | 3,104,463   |       |
| Earl L. Mason          |       | 23,623,875 |       | 3,113,208   |       |
| L. White Matthews, III |       | 23,608,844 |       | 3,128,239   |       |
| William J. Murphy      |       | 23,800,923 |       | 2,936,160   |       |
| Edward J. Obuchowski   |       | 23,608,814 |       | 3,128,269   |       |

 

(2)  The appointment ofGrant Thornton LLP as independent auditors of the Company for fiscal year 2004was ratified.

 
| For:     |   | 25,790,388 |   |
|----------|--------|------------|--------|
| Against: |   | 893,891    |   |
| Abstain: |   | 52,804     |   |

 

(3)  The Company’s 2004Omnibus Incentive Compensation Plan was approved.

 
| For:     |   | 10,287,495 |   |
|----------|--------|------------|--------|
| Against: |   | 6,913,056  |   |
| Abstain: |   | 207,714    |   |

 

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Item6.                                     Exhibits and Reports on Form8-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 April 2, 2004,reporting that Computer Horizons subsidiary, RGII Technologies, Inc., hasacquired all of the common stock of Automated Information Management, Inc.

 

Two reports on Form 8-K were filed on April 28, 2004,reporting the issuance of a press release reporting the financial results ofComputer Horizons for its first quarter, along with a regulation FD disclosureresulting from the Company conference call held to discuss first quarter 2004financial results.

 

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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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