COMPUTER HORIZONS CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

	for the quarterly period ended September 30, 2004

	or

o	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	for the transition period from to

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 changed since last report)

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

		ý	o
		Yes	No

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

		ý	o
		Yes	No

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

COMPUTER HORIZONS CORP. AND SUBSIDIARIES

Index

Part I	Financial Information

Item 1	Consolidated Balance Sheets September 30, 2004 (unaudited) and December 31, 2003	3

	Consolidated Statements of Operations Three and Nine Months Ended September 30, 2004 and September 30, 2003 (unaudited)	4

	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2004 and September 30, 2003 (unaudited)	5

	Notes to Consolidated Financial Statements	6

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 4	Controls and Procedures	34

Part II	Other Information

Item 6	Exhibits and Reports on Form 8-K	35

	Signatures	36

Part I Financial Information

Item 1

COMPUTER HORIZONS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

	September 30, 2004			December 31, 2003
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	34,243		$	52,610
Accounts receivable, net of allowance for doubtful accounts of $6,260 and $5,432 at September 30, 2004 and December 31, 2003, respectively	55,083			48,295
Deferred income taxes	3,423			4,514
Refundable income taxes	3,534			—
Other	4,260			4,759
TOTAL CURRENT ASSETS	100,543			110,178

PROPERTY AND EQUIPMENT	42,695			42,252
Less accumulated depreciation	(35,602		)	(32,929		)
	7,093			9,323

OTHER ASSETS - NET:
Goodwill	45,466			34,218
Intangibles	3,737			2,408
Deferred income taxes	15,756			14,813
Other	8,674			9,386
TOTAL OTHER ASSETS	73,633			60,825

TOTAL ASSETS	$	181,269		$	180,326

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	8,856		$	8,287
Accrued payroll, payroll taxes and benefits	9,535			7,791
Income taxes payable	3,397			1,243
Tax benefit reserve	—			19,600
Restructuring reserve	1,139			2,620
Other accrued expenses	3,890			5,813
TOTAL CURRENT LIABILITIES	26,817			45,354

OTHER LIABILITIES	5,474			4,635

SHAREHOLDERS’ EQUITY:
Preferred stock, $.10 par; authorized and unissued 200,000 shares, including 50,000 Series A
Common stock, $.10 par, authorized 100,000,000 shares; issued 33,153,107 shares at September 30, 2004 and December 31, 2003 respectively	3,315			3,315
Additional paid-in capital	151,495			133,046
Accumulated comprehensive loss	(2,809		)	(2,789		)
Retained earnings	10,198			11,100
	162,199			144,672
Less shares held in treasury, at cost; 2,166,584 shares and 2,537,692 shares at September 30, 2004 and December 31, 2003, respectively	(13,221		)	(14,335		)
TOTAL SHAREHOLDERS’ EQUITY	148,978			130,337

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	181,269		$	180,326

COMPUTER HORIZONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(dollars in thousands, except per share data)

THREE MONTHS ENDED

NINE MONTHS ENDED

September 30, 2004

September 30, 2003

September 30, 2004

September 30, 2003

% of
revenue

REVENUES:
IT Services	$	33,791		48.7	%	$	32,235		50.0	%	$	95,668		49.1	%	$	103.738		56.5	%
Solutions Group	29,604			42.7	%	27,016			41.9	%	81,941			42.0	%	65,308			35.6	%
Chimes	6,002			8.6	%	5,208			8.1	%	17,284			8.9	%	14,499			7.9	%

	69,397			100.0	%	64,459			100.0	%	194,893			100.0	%	183,545			100.0	%

COSTS AND EXPENSES:
Direct costs	47,880			69.0	%	45,069			69.9	%	133,192			68.3	%	131,336			71.6	%
Selling, general and administrative	21,851			31.5	%	20,883			32.4	%	62,993			32.3	%	60,525			33.0	%
Amortization of intangibles	484			0.7	%	526			0.8	%	1,212			0.6	%	526			0.3	%
Restructuring charges	—			0.0	%	787			1.2	%	—			0.0	%	2,985			1.6	%
Special charges (credits)	—			0.0	%	800			1.2	%	(939		)	-0.5	%	8,778			4.8	%

	70,215			101.2	%	68,065			105.6	%	196,458			100.8	%	204,150			111.2	%

INCOME/(LOSS) FROM OPERATIONS	(818		)	-1.2	%	(3,606		)	-5.6	%	(1,565		)	-0.8	%	(20,605		)	-11.2	%

OTHER INCOME / (EXPENSE):
Gain/(loss) on sale of assets	—			0.0	%	—			0.0	%	—			0.0	%	(273		)	-0.1	%
Interest income	93			0.1	%	96			0.1	%	233			0.1	%	372			0.2	%

Interest expense	—			0.0	%	(18		)	0.0	%	(28		)	0.0	%	(36		)	0.0	%

	93			0.1	%	78			0.1	%	205			0.1	%	63			0.0	%

INCOME/(LOSS) BEFORE INCOME TAXES	(725		)	-1.1	%	(3,528		)	-5.5	%	(1,360		)	-0.7	%	(20,542		)	-11.2	%

INCOME TAXES / (BENEFIT):
Current	76			0.1	%	298			0.5	%	387			0.2	%	298			0.2	%
Deferred	(399		)	-0.6	%	(962		)	-1.5	%	(867		)	-0.4	%	(5,883		)	-3.2	%
	(323		)	-0.5	%	(664		)	-1.0	%	(480		)	-0.2	%	(5,585		)	-3.0	%

INCOME / (LOSS) BEFORE MINORITY INTEREST	(402		)	-0.6	%	(2,864		)	-4.4	%	(880		)	-0.5	%	(14,957		)	-8.1	%

Minority Interest	(58		)	-0.1	%	21			0.0	%	(22		)	0.0	%	(16		)	0.0	%

NET INCOME / (LOSS)	$	(460	)	-0.7	%	$	(2,843	)	-4.4	%	$	(902	)	-0.5	%	$	(14,973	)	-8.2	%

EARNINGS / (LOSS) PER SHARE (BASIC & DILUTED):

Net Loss Basic & Diluted	$	(0.01	)			$	(0.09	)			$	(0.03	)			$	(0.49	)

WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic & Diluted	30,931,000					30,548,000						30,806,000					30,403,000

COMPUTER HORIZONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollars in thousands)

	Nine months Ended
	September 30, 2004			September 30, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(902	)	$	(14,973	)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Deferred taxes	(867		)	(5,883		)
Depreciation	3,709			3,836
Provision for bad debts	982			4,252
Amortization of intangibles	1,212			526

Loss on sale of assets	—			273
Change in assets and liabilities, net of acquisitions:
Accounts receivable	(4,470		)	10,816
Other current assets	517			1,741
Other assets	(499		)	(2,544		)
Refundable income taxes	(3,534		)	19,051
Accrued payroll, payroll taxes and benefits	997			1,714
Accounts payable	169			(1,477		)
Income taxes payable	2,154			934
Other accrued expenses	(3,817		)	(1,389		)
Other liabilities	1,092			(347		)

NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES	(3,257		)	16,530

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment	(1,352		)	(1,683		)
Acquisitions, net of cash acquired	(14,710		)	(22,141		)
Proceeds received from the sale of assets	—			149
Additions to intangibles	—			(566		)

Additions to goodwill	—			(427		)
NET CASH (USED IN) INVESTING ACTIVITIES	(16,062		)	(24,668		)

CASH FLOWS FROM FINANCING ACTIVITIES
Payment of notes payable	—			(2,636		)
Stock options exercised	619			939
Purchase of treasury shares	—			(1,230		)
Stock issued on employee stock purchase plan	301			291
NET CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES	920			(2,636		)

Foreign currency gains/(losses)	32			1,753

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS	(18,367		)	(9,021		)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	52,610			59,769

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	34,243		$	50,748

Supplemental Disclosures of Cash Flow Information:
Details of acquisition:
Assets acquired (including cash of $1,168)	$	4,613
Liabilities assumed	(2,523		)
Goodwill	11,248
Intangibles	2,540
Cash paid	15,878
Less: cash received in acquisition	1,168
Net cash paid	$	14,710

Non-Cash Activities:

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

COMPUTER HORIZONS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

1. Basis of Presentation

The consolidated balance sheet as of September 30, 2004, the consolidated statements of operations for the three and nine months ended September 30, 2004 and September 30, 2003, respectively, and the statement of cash flows for the nine months ended September 30, 2004 and 2003 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2004 (and for all periods presented) have been made.

Certain information and note disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, which are not required for interim purpose, have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2003 filed by the Company. The results of operations for the periods ended September 30, 2004 and 2003 are not necessarily indicative of the operating results for the respective full years.

2. Recent Accounting Pronouncements

In January 2003, the FASB issued Financial Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses consolidation by business enterprises of variable interest entities (VIEs). The accounting provisions and disclosure requirements of FIN 46 are effective immediately for VIEs created after January 31, 2003, and are effective for the Company’s fiscal period ending March 31, 2004, for VIEs created prior to February 1, 2003. In December 2003, the FASB published a revision to FIN 46 (“FIN 46R”) to clarify some of the provisions of the interpretation and to defer the effective date of implementation for certain entities. Under the guidance of FIN 46R, public companies that have interests in VIE’s that are commonly referred to as special purpose entities are required to apply the provisions of FIN 46R for periods ending after December 15, 2003. A public company that does not have any interests in special purpose entities but does have a variable interest in a VIE created before February 1, 2003, must apply the provisions of FIN 46R by the end of the first interim or annual reporting period ending after March 14, 2004. During the quarter ended March 31, 2004, the Company adopted the provisions of FIN 46R. Adoption of FIN 46R did not have a material effect on the Company’s financial statements.

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

3. Accounting for Stock Based Compensation

The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” as modified by FIN 44, “Accounting for Certain Transactions Involving Stock Compensation,” in accounting for stock-based employee compensation, whereby no compensation cost had been recognized for the plans. The exercise price per share on all options granted may not be less than the fair value at the date of the option grant. The Company expects to continue following the guidance under APB 25 for stock based compensation to employees. Had compensation cost for the plans been determined based on the fair value of the options at the grant dates and been consistent 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 forma amounts indicated below:

		Three Months Ended						Nine months Ended
(in 000’s)		September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
Net income / (loss)	As reported	$	(460	)	$	(2,843	)	$	(902	)	$	(14,973	)
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(199		)	(438		)	(1,456		)	(1,746		)

	Pro forma	$	(659	)	$	(3,281	)	$	(2,358	)	$	(16,719	)
Earnings / (loss) per share
Basic	As reported	$	(0.01	)	$	(0.09	)	$	(0.03	)	$	(0.49	)

	Pro forma	$	(0.02	)	$	(0.11	)	$	(0.08	)		(0.55	)

Diluted	As reported	$	(0.01	)	$	(0.09	)	$	(0.03	)	$	(0.49	)

	Pro forma	$	(0.02	)		(0.11	)	$	(0.08	)		(0.55	)

4. Restricted Cash

Included in cash and cash equivalents at September 30, 2004 and December 31, 2003 is restricted cash of approximately $487,000 and $2.2 million, respectively. Restricted cash represents funds received by Chimes and held in client-specific bank accounts, to be used to make payments to vendors of the applicable client.

5. Earnings Per Share

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

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

6. Segment Information

The Company has identified three business segments: IT Services, the Solutions Group and Chimes, Inc. The IT Services division provides highly skilled software professionals to augment the internal information management staffs of major corporations. IT Services is primarily staff augmentation. The Solutions division provides enterprise application services, e-business solutions, customized Web development and Web enablement of strategic applications, Customer Relationship Management (CRM), network services, strategic outsourcing and managed resourcing to major corporations, along with federal, state and local governments. Chimes, Inc., a wholly-owned subsidiary of CHC, provides workforce procurement and management services to Global 2000 companies, which, according to Forbes magazine, represents the biggest and most important companies, as measured by sales, profits, assets and market value. Income/(loss) before income taxes/(benefits) consists of income/(loss) before income taxes, excluding interest 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 expense of $0.4 million and $2.0 million for the third quarter of 2004 and 2003, respectively and expense of $0.1 million and $15.3 million for the first nine months of September 30, 2004 and 2003, respectively (see reconciliation of segments income/(loss) before income taxes/ (benefit) to consolidated income/(loss) before income taxes/(benefit)). Corporate services, consisting of general and administrative services are provided to the segments from a centralized location. Such costs are allocated to the applicable segments receiving Corporate services based on revenue.

(In thousands)

	THREE MONTHS ENDED						NINE MONTHS ENDED
	September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
Revenues:
IT Services	$	33,791		$	32,235		$	95,668		$	103,738
Solutions Group	29,604			27,016			81,941			65,308
Chimes	6,002			5,208			17,284			14,499
Total Revenues	69,397			64,459			194,893			183,545

Gross Profit:
IT Services	5,722			6,514			18,304			20,763
Solutions Group	10,140			7,993			27,120			18,009
Chimes	5,655			4,882			16,277			13,436
Total Gross Profit	21,517			19,389			61,701			52,208
%	31.0		%	30.1		%	31.7		%	28.4		%

Operating Income:
IT Services	701			1,975			4,704			6,150
Solutions Group	2,936			2,143			7,504			6,525
Chimes	395			(113		)	1,217			(2,377		)
Total Operating Income/ (Loss):	4,032			4,005			13,425			10,298
%	5.8		%	6.2		%	6.9		%	5.6		%

Corporate Allocation:
IT Services	2,629			3,213			8,908			9,249
Solutions Group	1,271			1,767			4,197			4,999
Chimes	467			519			1,613			1,303
Total Corporate Allocation	4,367			5,499			14,718			15,551
%	6.3		%	8.5		%	7.6		%	8.5		%

Total Income/ (loss) before Income Taxes (benefit):
IT Services	(1,928		)	(1,238		)	(4,204		)	(3,099		)
Solutions Group	1,665			376			3,307			1,526
Chimes	(72		)	(632		)	(396		)	(3,680		)
Total Income/ (loss) before Income Taxes (benefit)	$	(335	)	$	(1,494	)	$	(1,293	)	$	(5,253	)

%	(0.5		)%	(2.3		)%	(0.7		)%	(2.9		)%

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

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

7. Restructuring Charges

During the fourth quarter 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 related severance. The Company decided to continue business in this area through virtual offices and therefore recorded the charge after the building was closed. The lease obligation of $90,000 was calculated based on current rent commitments less a calculated sublease amount based on current market conditions.

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

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

	Remaining at December 31, 2003		Paid			Exchange Rate Fluctuation		Remaining at September 30, 2004

Severance	$	47	$	—		$	1	$	48

Lease Obligations	$	150	$	(26	)	$	1	$	125

General Office Closure	$	49	$	(7	)	$	1	$	43

Total	$	246	$	(33	)	$	3	$	216

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

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

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

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

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

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

	Remaining at Dec. 31, 2003		Paid			Remaining at September 30, 2004

Lease Obligations:
United States	$	78	$	(78	)	$	0

	Remaining at Dec. 31, 2002		Paid			Remaining at September 30, 2003

Lease Obligations:
United States	$	294	$	(153	)	$	141

At the end of 2003, the Company had $308,000 of one lease obligation remaining on the restructure expense recorded in 2000, with the lease terminating in 2005. The balance remaining at September 30, 2004 was $172,000.

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

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

8. Comprehensive Income/(Loss)

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (“SFAS No.130”), requires that items defined as other comprehensive income/ (loss), such as foreign currency translation adjustments and unrealized gains and losses, be separately classified in the financial statements and that the accumulated balance of other comprehensive income/ (loss) be reported separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The components of comprehensive loss for the three and nine months ended September 30, 2004 and September 30, 2003 are as follows:

	Three Months Ended						Nine months Ended
	September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003

Comprehensive Income/(Loss):

Net Income/(Loss)	$	(460	)	$	(2,843	)	$	(902	)	$	(14,973	)
Other comprehensive income/ (loss) – foreign currency adjustment	397			214			32			1,753
Unrealized gain /(loss) on SERP investments	(102		)	(112		)	(52		)	621
Comprehensive Income/(Loss)	$	(165	)	$	(2,741	)	$	(922	)	$	(12,599	)

9. Acquisitions

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

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

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

	Allocation of Purchase Price

Cash	$	1,168

Accounts Receivable	3,300

Other Current Assets	18

Goodwill	11,248

Intangibles	2,540

Property and Equipment	127

Total Assets	18,401

Accounts Payable	400

Accrued Payroll	747

Other Accrued Expenses	361

Deferred Tax Liabilities	1,015

Total Liabilities	2,523

Net Assets	$	15,878

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

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

Pro Forma Results

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

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

The unaudited pro forma financial information above reflects the following adjustments to the historical consolidated financial statements for the three months ended September 30, 2003: $313,000 amortization expense on purchased intangible assets, $43,500 reduction of interest income for cash consideration paid and $50,000 adjustment to record income taxes for AIM as if it was a C-Corporation and to record income tax effect of pro forma adjustments.

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

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

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

On September 12, 2003, the Company acquired, from Commerce One, the Xpress solution, a suite of software and services designed to rapidly facilitate product data synchronization between trading partners. The purchase price of the software was $566,000, recorded as intangible assets, and is being amortized over a three-year period.

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

The Company completed the allocation of the purchase price to assets and liabilities acquired utilizing outside valuation consultants to assist in this process.

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

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

10. Goodwill

The changes in the carrying amount of goodwill for the nine months ended September 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*	11,248		—		—		—		11,248
Balance as of September 30, 2004	$	45,466	$	—	$	—	$	—	$	45,466

* reflects goodwill resulting from AIM acquisition. See Note 9.

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

11. Sale of Subsidiaries

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

12. Purchase of Treasury Stock

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

13. Asset-Based Lending Facility

The Company has a $40 million line of credit facility with availability based primarily on eligible customer receivables. The interest rate is LIBOR plus 2.75% based on unpaid principal. The borrowing base less outstanding loans must equal or exceed $5.0 million. As of September 30, 2004, the Company had no outstanding loan balance against the facility. Based on the Company’s eligible customer receivables and cash balances, $19.5 million was available for borrowing as of September 30, 2004. The fee for the unused portion of the line of credit is 0.375% per annum charged to the Company monthly. This charge was approximately $77,500 and $84,000 for the nine month periods ended September 30, 2004 and 2003, respectively. This line of credit includes covenants relating to the maintenance of cash balances and providing for limitations on incurring obligations and spending limits on capital expenditures. The Company did not satisfy this covenant for the quarter ended March 31, 2004. A waiver was received from the lending institution for the quarter ended March 31, 2004 along with an amendment to the loan agreement lowering the three-month average minimum collections covenant to $10 million. At September 30, 2004, the Company is in compliance with the covenant. The facility was scheduled to expire in July 2004; however, on July 14, 2004, the Company signed a one-year extension of the facility, which will remain in effect until July 2005.

14. Tax Benefit Reserve

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

During 1998, the Company completed a business combination, which for financial statement purposes, was accounted for as a pooling-of-interests. For income tax purposes, the transaction was treated as a taxable purchase that gave rise to future tax deductions. Upon the sale of the acquired business in 2001, these deductions were recognized for tax purposes. The tax benefit of $19.6 million relating to the part of these deductions that was carried back to prior years was included in refundable income taxes in 2002. Since the tax structure of the transaction was subject to review by the tax authorities, the Company recorded a reserve for the tax benefits resulting from the carryback and did not record deferred tax assets for the tax benefits being carried forward. The Company intended that upon conclusion of review of the relevant tax returns by the authorities, it would record a deferred tax asset for the part of the tax benefits being carried forward and a tax benefit for the portion that was carried back, net of an appropriate valuation allowance. The tax benefit would be reflected as an increase in additional paid-in capital. Any adjustments to the valuation allowance would be charged or credited to income.

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

15. Rescission Offer

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

As a result, the Company made a rescission offer, effective July 27, 2004, to all those persons who purchased shares of common stock pursuant to the Employee Stock Purchase Plan during the affected periods. The rescission offer was made pursuant to a registration statement filed under the Securities Act and pursuant to applicable state securities laws. In this rescission offer, the Company is offering to repurchase the shares, subject to our rescission offer, for the price paid per share plus interest from the date of purchase until the rescission offer expires, at the current statutory rate per year mandated by the state in which the shares were purchased. The rescission offer expired on August 27, 2004, with no individuals accepting the rescission offer.

16. Special Items

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

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

17. Aquent/Legal Matters

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

On May 27, 2003, the Company brought an action in the Supreme Court of the State of New York, New York County, seeking an order invalidating votes for directors Karl Meyer and Robert Trevisani cast at the Annual Meeting by stockholders of record who sold their shares between the record date and the date of the Annual Meeting.

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

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

18. Balance Sheet Reclassification

During the third quarter of 2004, the Company recorded a reclassification reducing other assets and additional paid-in capital by approximately $1.2 million to adjust the elimination of an investment in a subsidiary company.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The following detailed discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the December 31, 2003 financial statements and related notes included in the Company's Form 10-K and the 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 management company with more than thirty-six years of experience, specifically in information technology. The Company’s clients are primarily Global 2000 companies, serviced by over 20 offices in the United States, Canada, and India.

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

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

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

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

The Company reported net loss of $0.9 million during the nine months of 2004, and, the level of business activity in the IT market remains uncertain, primarily in the Company’s IT Services and commercial solutions business. This uncertainty significantly reduced revenues in the Company’s IT Services business in the first nine months of 2004, compared to the prior year. The IT Services business accounted for approximately 49% of the Company’s total revenue in the first nine months of 2004. Although IT Services

third quarter revenue increased sequentially from the second quarter of 2004, the Company cannot predict if these increases are sustainable and when the overall level of business activity in the IT market will improve.

FORWARD-LOOKING STATEMENTS

Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this document that do not relate to present or historical conditions are “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and in Section 21F of the Securities Exchange Act of 1934, as amended. Additional oral or written forward-looking statements may be made by the Company from time to time, and such statements may be included in documents that are filed with the Securities and Exchange Commission (SEC). Such forward-looking statements involve risks and uncertainties that could cause results or outcomes to differ materially from those expressed in such forward-looking statements. Forward-looking statements may include, without limitation, statements relating to the Company’s plans, strategies, objectives, expectations and intentions and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “forecasts,” “intends,” “possible,” “expects,” “estimates,” “anticipates,” or “plans”, and similar expressions, are intended to identify forward-looking statements. Among the important factors on which such statements are based are assumptions concerning the anticipated growth of the information technology industry, the continued need of current and prospective customers for the Company’s services, the availability of qualified professional staff, and price and wage inflation.

Revenue Generating Activities

The majority of the Company’s revenues are derived from professional services rendered in the information technology sector.

The Company operates its business in three basic segments: IT Services, the Solutions Group and Chimes, Inc. The distinctions between the IT Services and Solutions Group segments primarily relate to the management and supervision of services performed and related gross margins. Chimes, Inc., a wholly-owned subsidiary of CHC, provides workforce procurement and management services to Global 2000 companies.

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

The Solutions Group, tends to be a higher margin, higher risk business, due to the fact that the Company is responsible for project deliverables and other conditions contained in statements of work and/or contracts with customers. Virtually all projects performed by the Solutions Group are IT related and consist of practices such as 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 nine months ended September 30, 2004, the Solutions Group (excluding Chimes) accounted for 43% and 42% of consolidated revenues respectively.

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

binding contractual document, typically outlining the project objectives, describing the personnel who will work on the project, describing phases of the project, the timeframes for work performance, and the rate of compensation, on a time and materials basis. In the event that the parameters of the project expand or otherwise change, a Project Change Request is implemented, to memorialize whatever change has occurred to the deliverables, personnel and or time/materials.

The master agreements, in conjunction with the SOW’s, are written to define, with as much detail as possible, the client relationship and all aspects of the work to be performed for the client. With regard to revenues expected in future periods, each SOW 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 the agreement was renewable. Generally, Solutions engagements are for a year or less. Staffing engagements can and do last for more than a year, with variations in the number of consultants being provided at any given time. Staffing engagements are generally cancelable by clients with a two to four week notice period.

Chimes, Inc. is a human capital management solution company that, through the use of proprietary software and processes, manages the temporary workforce of large organizations. During the quarter and first nine months ended September 30, 2004, Chimes accounted for approximately 9.0% of total revenues.

Critical Accounting Policies

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

Revenue Recognition

Approximately 95% and 92% of consolidated revenue in the quarter and nine months ended September 30, 2004 and September 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 material contracts. Under a typical time and materials billing arrangement, our customers are billed on a regularly scheduled basis, such as biweekly or monthly. At the end of each accounting period, revenue is estimated and accrued for services performed since the last billing cycle. These unbilled amounts are billed the following month.

The Solutions Group recognizes revenue either on a time and material basis or on a fixed fee basis, however, principally on a time and material basis. For fixed-fee contracts, revenue is recognized on the basis of the estimated percentage of completion based on costs incurred relative to total estimated costs. Each fixed fee contract has different terms, milestones and deliverables. The milestones and deliverables primarily relate to the work to be performed and the timing of the billing. At the end of each reporting period an assessment of revenue recognized on the percentage of completion and milestones achieved criteria is made. If it becomes apparent that estimated cost will be exceeded or required milestones or deliverables will not have been obtained, an adjustment will be made. The cumulative effect of revisions in estimated revenues and costs are recognized in the period in which the facts that give rise to the impact of any revisions become known.

Unbilled accounts receivable, in the IT Services and Solutions Group, represent amounts recognized as revenue based on services performed in advance of customer billings principally on a time-and- material basis. At the end of each accounting period, revenue is accrued for services performed since the last billing cycle. These unbilled amounts are billed the following month. Costs and estimated earnings in excess of billings on fixed fee contracts arise when percentage of completion accounting is used. Such amounts are billed at specific dates or at contract completion.

The Company’s Chimes subsidiary recognizes revenue on a transaction fee basis. The Chimes service offering aggregates the suppliers of temporary workers to the customer and renders one invoice to the customer. Upon payment from the customer, Chimes deducts a transaction fee and remits the balance of the client payment to the applicable vendor. Chimes recognizes only their fee for the service, not the aggregate billing to the customer. The gross amount of the customer invoicing is not considered revenue or receivable to Chimes because there is no earnings process for the gross amount and by contract terms, Chimes is not obligated to pay the vendor until paid by the customer .

Evaluation of Bad Debt Reserve

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

Goodwill

For the years ended December 31, 2003 and 2002, the Company completed valuations of the carrying value of the remaining goodwill and it was determined that no impairment had occurred at either date.

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

The fair value conclusion of the reporting units reflects an appropriately weighted value of the market multiple approach and the income approach discussed above. An asset approach was not used because the asset approach is most relevant for liquidation approaches, investment company valuations and asset rich company valuations (i.e. real estate entities) and was not deemed relevant for manufacturing and service company going-concern valuations. When either the income approach or the market approach was used, each indicated value of the Solutions entity’s equity exceeded the carrying value of the Solutions entity by at least $12 million and $15 million as of December 31, 2003 and 2002, respectively. Since each of the two approaches yielded values in excess of carrying value, any weighting of the two approaches or either approach used alone results in the same conclusion, that the goodwill was not impaired.

Valuation of the Deferred Tax Asset

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

RESULTS OF OPERATIONS

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

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

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

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

Direct Costs and Gross margins . Direct costs were $47.9 million and $133.2 million in the third quarter and first nine months of 2004, respectively, and $45.1 million and $131.3 million in the third quarter and first nine months of 2003, respectively. Gross margin, revenues less direct costs, increased to 31.0% in the third quarter of 2004 from 30.1% in the same period of 2003. Gross margin increased to 31.7% in the first nine months of 2004 from 28.4% in the same period of 2003. In the Company’s Solutions Group, gross profit totaled $27.1 million, or 33.1% for the nine months ending September 30, 2004 compared to $18.0 million, or 27.6% in 2003. This increase is primarily attributable to the RGII and AIM acquisitions. IT Services gross margins for the nine months ended September 30, 2004 were $18.3 million, or 19.1%, compared to $20.8 million, or 20.0% for the comparable period of 2003. This decrease is attributable to a reduction in average bill rates. Chimes gross margins approximated 94.2% for the nine months ended September 30, 2004, compared to 92.7% in 2003, due to improved leveraging of direct costs.

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

Computer Horizons has historically financed its operations through cash generated from operations, borrowings against bank lines of credit and the public sale of its common stock. At September 30, 2004, the Company had approximately $73.7 million in working capital, of which $34.2 million was cash and cash equivalents. At September 30, 2004, the Company had a current ratio position of 3.7 to 1.

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

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

Net cash used in investing activities in the first nine months of 2004 was $16.1 million, consisting primarily of capital expenditures totaling $1.3 million and the acquisition of AIM for cash, totaling approximately $14.7 million, net of cash acquired.

Net cash provided by financing activities in the first nine months of 2004 was $920,000, primarily consisting of shares issued pursuant to the employee stock option plan and employee stock purchase plan.

The Company has a $40 million line of credit facility with availability based primarily on eligible customer receivables. The interest rate is LIBOR plus 2.75% based on unpaid principal. The borrowing base less outstanding loans must equal or exceed $5.0 million. As of September 30, 2004, the Company had no outstanding loan balance against the facility. Based on the Company’s eligible customer receivables and cash balances, $19.5 million was available for borrowing as of September 30, 2004. The fee for the unused portion of the line of credit is 0.375% per annum charged to the Company monthly. This charge was approximately $77,500 and $84,000 for the nine month periods ended September 30, 2004 and 2003, respectively. This line of credit includes covenants relating to the maintenance of cash balances and providing for limitations on recurring obligations and spending limits on capital expenditures. The Company did not satisfy this covenant for the quarter ended March 31, 2004. A waiver was received from the lending institution for the quarter ended March 31, 2004 along with an amendment to the loan agreement lowering the three-month average minimum collections covenant to $10 million. At September 30, 2004, the Company is in compliance with the covenant. The facility was scheduled to expire in July 2004; however, on July 14, 2004, the Company signed a one-year extension of the facility, which will remain in effect until July 2005.

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

As a result of the Company’s acquisition of RGII, the seller of RGII may be entitled to contingent payments based on RGII’s performance against profitability objectives over the next three years. The contingent payments are evidenced by a contingent note with a face value of $10 million that is payable over three years, only if certain financial performance objectives are met. These financial performance objectives are based on earnings before interest and taxes (“EBIT”) targets totaling $19.8 million over a three-year period. There are no minimum or maximum payment obligations under the terms of the contingent note. The contingent payment will be reduced on a dollar for dollar basis for financial performance below EBIT targets and increased by 29 cents ($0.29) for each dollar exceeding EBIT targets. The Company made a payment of $631,000 during the first quarter of 2004. Future payments, if the applicable 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 performance over the three-year period.

On April 1, 2004, the Company’s subsidiary, RGII Technologies Inc., closed on its acquisition of Automated Information Management Inc. (AIM), a federal government IT Services company with 2003 revenues of approximately $18.5 million. The all-cash transaction totaled approximately $15.8 million, including a working capital adjustment. As a result of the integration of AIM into RGII, the Company and the seller of RGII have agreed that the operating results of AIM shall remain separate from and not be included in the RGII EBIT targets related to contingent payments. RGII, however shall be permitted an intercompany charge to AIM for AIM’s share of combined operating overhead expenses. In addition, the seller of RGII will be eligible to receive a five percent bonus based on the operating income of AIM.

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

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

Contractual Obligations and Commercial Commitments

The Company does not utilize off balance sheet financing other than operating lease arrangements for office premises and related equipment. The following table summarizes all commitments under contractual obligations as of September 30, 2004:

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

Recent Accounting Pronouncements

In January 2003, the FASB issued Financial Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses consolidation by business enterprises of variable interest entities (VIEs). The accounting provisions and disclosure requirements of FIN 46 are effective immediately for VIEs created after January 31, 2003, and are effective for the Company’s fiscal period ending March 31, 2004, for VIEs created prior to February 1, 2003. In December 2003, the FASB published a revision to FIN 46 (“FIN 46R”) to clarify some of the provisions of the interpretation and to defer the effective date of implementation for certain entities. Under the guidance of FIN 46R, public companies that have interests in VIE’s that are commonly referred to as special purpose entities are required to apply the provisions of FIN 46R for periods ending after December 15, 2003. A public company that does not have any interests in special purpose entities but does have a variable interest in a VIE created before February 1, 2003, must apply the provisions of FIN 46R by the end of the first interim or annual reporting period ending after March 14, 2004. Adoption of FIN 46R did not have a material effect on the Company’s financial statements.

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

Internal Controls over Financial Reporting

There have not been any changes in the Company’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. However, subsequent to September 30, 2004, the audit committee was advised by management that, based on an internal review of accounting processes and procedures, management had discovered an accounting error pertaining to the incorrect adjustment of consulting costs relating to intercompany transactions between the Company and its Canadian subsidiary. This error caused an understatement of consolidated consultant costs (i.e. direct costs) in the Company’s consolidated income statement and an under accrual of consolidated accrued payroll on the balance sheet. The aggregate amount for all 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.

As part of management’s investigation of this accounting error, an extensive review of intercompany transactions was completed. As a result, other adjustments, not affecting operating results, were recorded. These adjustments to the balance sheet corrected an overstatement of accrued expenses and an understatement of shareholders’ equity (specifically the overstatement of accumulated comprehensive loss).

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

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

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

• Management will implement an improved intercompany transaction process, including foreign currency translation and financial reporting/consolidation procedures, which will be documented, with all key controls identified.

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

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

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

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

• Additional training (internal and external) will be provided to all General Accounting personnel with an emphasis on Consolidation accounting.

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

Management and the Audit Committee intend to closely monitor the implementation of the remediation actions noted above and are prepared to take additional measures where necessary to strengthen internal controls and procedures to meet the internal control reporting requirements of Section 404 of the Sarbanes-Oxley Act and the rules adopted thereunder. Other than the foregoing initiatives, since the date of management’s evaluation, there have been no material changes in our disclosure controls and procedures, including our internal controls over financial reporting, which have materially affected, or are reasonably likely to materially affect, our disclosure controls and procedures, including our internal controls over financial reporting.

PART II - Other Information

Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

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

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

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

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

b) Report on Form 8-K

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

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

Signatures

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