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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q   þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 2, 2005 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 0-5260 REMEDYTEMP, INC. (Exact Name of Registrant as Specified in Its Charter)
 California
    
    95-2890471(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)101 EnterpriseAliso Viejo, California
    
    92656(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code: (949) 425-7600   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 12 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. Yes þ No o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o As of February 3, 2005 the Registrant had 8,787,653 shares of Class A Common Stock and 800,312
shares of Class B Common Stock outstanding.




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RemedyTemp, Inc. INDEX Page No.PART IFINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets as of January 2, 2005 and October 3, 2004 (unaudited)
    
    
    3Consolidated Statements of Operations for the three fiscal months ended January 2, 2005 and December 28, 2003 (unaudited)
    
    
    4Consolidated Statements of Cash Flows for the three fiscal months ended January 2, 2005 and December 28, 2003 (unaudited)
    
    
    5Condensed Notes to Consolidated Financial Statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    *Item 3. Defaults Upon Senior Securities
    
    
    *Item 4. Submission of Matters to a Vote of Security Holders
    
    
    *Item 5. Other Information
    
    
    *Item 6. Exhibits
    
    
    28SIGNATURES
    
    
    30EXHIBIT 10.38EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
    *
    
    No information provided due to inapplicability of item. 2




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RemedyTemp, Inc. 
 PART IFINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS 
 CONSOLIDATED BALANCE SHEETS (amounts in thousands, except per share amounts)
 (unaudited)
 January 2,
    
    
    October 3,2005
    
    

2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,159
    
    
    $
    7,348Investments
    
    
    16,067
    
    
    
    66Restricted investments
    
    
    3,505
    
    
    
    19,161Accounts receivable, net of allowance for doubtful
accounts of $1,642 and $2,984, respectively
    
    
    61,147
    
    
    
    63,152Prepaid expenses and other current assets
    
    
    7,607
    
    
    
    8,913Prepaid income taxes
    
    
    87
    
    
    
    160Total current assets
    
    
    92,572
    
    
    
    98,800Fixed assets, net
    
    
    10,230
    
    
    
    10,589Restricted cash and investments
    
    
    21,919
    
    
    
    21,925Other assets
    
    
    270
    
    
    
    330Intangible assets, net of accumulated amortization of $836 and
$700, respectively
    
    
    2,138
    
    
    
    2,274Goodwill
    
    
    4,122
    
    
    
    3,703Total Assets
    
    $
    131,251
    
    
    $
    137,621LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,389
    
    
    $
    4,225Accrued
workers compensation, current portion (Note 9)
    
    
    14,694
    
    
    
    15,036Accrued payroll, benefits and related costs
    
    
    12,993
    
    
    
    17,938Accrued licensees share of gross profit
    
    
    2,093
    
    
    
    2,745Other accrued expenses
    
    
    3,701
    
    
    
    3,899Total current liabilities
    
    
    34,870
    
    
    
    43,843Other
liabilities (Note 9)
    
    
    32,565
    
    
    
    30,267Total liabilities
    
    
    67,435
    
    
    
    74,110Commitments and contingent liabilities (Note 4)Shareholders equity:Preferred Stock, $0.01 par value; authorized 5,000
shares; none outstanding
    
    
    
    
    
    
    Class A Common Stock, $0.01 par value; authorized
50,000 shares; 8,778 shares issued and outstanding at
January 2, 2005 and
October 3, 2004
    
    
    88
    
    
    
    88Class B Non-Voting Common Stock, $0.01 par value;
authorized 4,530 shares; 800 shares issued and
outstanding at January 2, 2005 and
October 3, 2004
    
    
    8
    
    
    
    8Additional paid-in capital
    
    
    41,523
    
    
    
    41,522Unearned compensation
    
    
    (3,399
    )
    
    
    (3,737
    )Accumulated other comprehensive loss
    
    
    (80
    )
    
    
    (68
    )Retained earnings
    
    
    25,676
    
    
    
    25,698Total shareholders equity
    
    
    63,816
    
    
    
    63,511Total Liabilities and Shareholders Equity
    
    $
    131,251
    
    
    $
    137,621
 See accompanying notes to consolidated financial statements. 3




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RemedyTemp, Inc. 
 CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands,
except per share amounts)

(unaudited)
 Three Months EndedJanuary 2,
    
    
    December 28,2005
    
    
    2003Company-owned office revenues
    
    $
    88,628
    
    
    $
    82,190Licensed franchise revenues
    
    
    48,406
    
    
    
    43,378Franchise royalties and initial franchise
fees
    
    
    322
    
    
    
    443Total revenues
    
    
    137,356
    
    
    
    126,011Cost of Company-owned office revenues
    
    
    71,821
    
    
    
    70,867Cost of licensed franchise revenues
    
    
    38,744
    
    
    
    34,654Licensees share of gross profit
    
    
    6,468
    
    
    
    5,817Selling and administrative expenses
    
    
    19,348
    
    
    
    16,292CIGA litigation
    
    
    98
    
    
    
    150Depreciation and amortization
    
    
    1,364
    
    
    
    1,748Loss from operations
    
    
    (487
    )
    
    
    (3,517
    )Other income (expense):Interest expense
    
    
    (128
    )
    
    
    (127
    )Interest income
    
    
    259
    
    
    
    258Other, net
    
    
    371
    
    
    
    194Income (loss) before income taxes
    
    
    15
    
    
    
    (3,192
    )Provision for income taxes
    
    
    37
    
    
    
    124Net loss
    
    $
    (22
    )
    
    $
    (3,316
    )Earnings per share  basic and diluted:Net loss  basic and diluted
    
    $
    (0.00
    )
    
    $
    (0.37
    )Weighted average shares:Basic and diluted
    
    
    9,033
    
    
    
    9,019
 See accompanying notes to consolidated financial statements. 4




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RemedyTemp, Inc. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands)
 (unaudited)
 Three Months EndedJanuary 2,
    
    
    December 28,2005
    
    
    2003Cash flows from operating activities:Net loss
    
    $
    (22
    )
    
    $
    (3,316
    )Adjustments to reconcile net loss to net cash from
operating activities:Depreciation and amortization
    
    
    1,364
    
    
    
    1,748Provision for losses on accounts receivable
    
    
    188
    
    
    
    903Restricted stock compensation expense
    
    
    338
    
    
    
    89Changes in assets and liabilities:Trading investments
    
    
    (344
    )
    
    
    (147
    )Accounts receivable
    
    
    1,860
    
    
    
    5,283Prepaid expenses and other current assets
    
    
    1,151
    
    
    
    137Other assets
    
    
    60
    
    
    
    158Accounts payable
    
    
    (2,836
    )
    
    
    (1,624
    )Accrued workers compensation
    
    
    1,955
    
    
    
    3,634Accrued payroll, benefits and related costs
    
    
    (4,953
    )
    
    
    (6,713
    )Accrued licensees share of gross profit
    
    
    (570
    )
    
    
    (374
    )Other accrued expenses
    
    
    (707
    )
    
    
    71Prepaid income taxes
    
    
    74
    
    
    
    (284
    )Other
    
    
    1
    
    
    
    Net cash used by operating activities
    
    
    (2,441
    )
    
    
    (435
    )Cash flows from investing activities:Purchase of fixed assets
    
    
    (716
    )
    
    
    (257
    )Purchase of available-for-sale investments
    
    
    (60
    )
    
    
    (8,067
    )Proceeds from maturity of available-for-sale investments
    
    
    
    
    
    
    5,998Restricted cash and investments
    
    
    6
    
    
    
    1,847Net cash used in investing activities
    
    
    (770
    )
    
    
    (479
    )Cash flows from financing activities:Proceeds from stock option activity
    
    
    
    
    
    
    8Proceeds from Employee Stock Purchase Plan activity
    
    
    
    
    
    
    58Net cash provided by financing activities
    
    
    
    
    
    
    66Effect of exchange rate changes in cash
    
    
    22
    
    
    
    9Net decrease in cash and cash equivalents
    
    
    (3,189
    )
    
    
    (839
    )Cash and cash equivalents at beginning of period
    
    
    7,348
    
    
    
    13,236Cash and cash equivalents at end of period
    
    $
    4,159
    
    
    $
    12,397
 Non-cash investing and financing activities: The Companys $16,000 certificate of deposit was reclassified from restricted investments to
investments at January 2, 2005. See accompanying notes to consolidated financial statements. 5




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RemedyTemp, Inc. 
 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (amounts in thousands, except per share amounts)
 (unaudited)
 1. Basis of Presentation The consolidated financial statements include the accounts of RemedyTemp, Inc. and its
wholly-owned subsidiaries (collectively referred to herein as the Company or Remedy). These
financial statements have been prepared in accordance with principles generally accepted in the
United States of America for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission (the SEC). In the opinion of management,
the accompanying unaudited consolidated financial statements contain all material adjustments
(consisting of normal recurring adjustments) necessary to fairly state the financial position of
the Company as of January 2, 2005, and its results of operations and cash flows for the thirteen
weeks ended January 2, 2005 and December 28, 2003. All significant intercompany accounts and
transactions have been eliminated in consolidation. As permitted under the applicable rules and
regulations of the SEC, these financial statements do not include all disclosures and footnotes
normally included with annual consolidated financial statements and, accordingly, should be read in
conjunction with the consolidated financial statements, and the notes thereto, included in the
Companys Annual Report on Form 10-K filed with the SEC on December 7, 2004 for the year ended
October 3, 2004. The results of operations for the three fiscal months ended January 2, 2005 may
not be indicative of the results of operations that can be expected for the full year. Fiscal quarter The Companys fiscal quarters include 13 or 14 weeks. The current quarter ended January 2,
2005 consisted of 13 weeks. The remaining quarters of fiscal 2005 include 13 weeks and will end on
April 3, 2005, July 3, 2005, and October 2, 2005. The fourth quarter of fiscal 2004, ended October
3, 2004 included 14 weeks. Reclassifications Certain amounts in the prior years consolidated financial statements have been reclassified
to conform to the current year presentation. The reclassifications did
not have a material impact on net loss or total shareholders equity. Use of estimates The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and

assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual results could
differ from those estimates. 2. Stock-based Incentive Compensation The Company follows the disclosure-only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, and, accordingly, accounts
for its stock-based compensation plans using the intrinsic value method under Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No.
25) and related interpretations. 6




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RemedyTemp, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands, except per share amounts)
(unaudited) The following table illustrates the effect on net loss and net loss per share had compensation
expense for the employee stock-based plans been recorded based on the fair value method using the
Black-Scholes option pricing model under SFAS No. 123, as amended: For the Three Months EndedJanuary 2,
    
    
    December 28,2005
    
    
    2003Net loss, as reported
    
    $
    (22
    )
    
    $
    (3,316
    )Add:
stock-based compensation expense included in net loss
    
    
    357
    
    
    
    127Deduct: total stock-based
compensation expense determined
under fair value based method
    
    
    (444
    )
    
    
    (242
    )Net loss, as adjusted
    
    $
    (109
    )
    
    $
    (3,431
    )Basic and diluted net loss per share:As reported
    
    $
    (0.00
    )
    
    $
    (0.37
    )As adjusted
    
    $
    (0.01
    )
    
    $
    (0.38
    )
 Stock-based compensation expense of $357 included in net loss for the three fiscal months
ended January 2, 2005 included $338 and $19 for restricted stock compensation expense and Board of
Directors compensation expense, respectively. Stock-based compensation expense of $127 included
in net loss for the three fiscal months ended December 28, 2003 included $89 and $38 related to
restricted stock compensation expense and Board of Directors compensation expense, respectively. The tax benefit related to the options granted during the three fiscal months ended January 2,
2005 and December 28, 2003 would generally be recorded at the Companys federal and state statutory
rate of approximately 40%. However, due to the full valuation allowance on the deferred tax
assets, as discussed in Note 13, any expense related to stock options would result in a net zero
tax effect. In arriving at an option valuation, the Black-Scholes model considers, among other factors,
the expected life of an option and the expected volatility of the Companys stock price. For pro
forma purposes, the estimated fair value of the Companys stock-based awards to employees is
amortized over their respective vesting periods. 3. Shareholders Equity Comprehensive Loss The components of comprehensive loss, net of taxes are as follows: Three Fiscal Months EndedJanuary 2, 2005
    
    
    December 28, 2003Net loss
    
    $
    (22
    )
    
    $
    (3,316
    )Other comprehensive income (loss):Change in unrealized loss on investments
    
    
    (59
    )
    
    
    (55
    )Translation adjustments
    
    
    47
    
    
    
    9Total comprehensive loss
    
    $
    (34
    )
    
    $
    (3,362
    )
 7




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RemedyTemp, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands, except per share amounts)
(unaudited)  Accumulated Other Comprehensive Loss
 The components of accumulated other comprehensive loss are as follows: January 2, 2005
    
    
    October 3, 2004Accumulated unrealized loss on investments
    
    $
    (174
    )
    
    $
    (115
    )Accumulated translation adjustments
    
    
    94
    
    
    
    47Total accumulated other comprehensive loss
    
    $
    (80
    )
    
    $
    (68
    )
 Registration Statement The Company has in effect a universal shelf registration statement on Form S-3 filed with the
SEC. The universal shelf registration statement permits the Company to sell, in one or more public
offerings, shares of its Class A common stock, shares of preferred stock, debt securities,
depository shares and/or warrants, or any combination of such securities, for proceeds in an
aggregate amount of up to $30,000. Specific terms and prices will be determined at the time of any
offering and included in a related prospectus supplement to be filed with the SEC. To date no
securities have been issued pursuant to the universal shelf registration. 4. Commitments and Contingent Liabilities Litigation CIGA In early 2002, as a result of the liquidation of Remedys former workers compensation
insurance carrier, Reliance National Insurance Company (Reliance), the California Insurance
Guarantee Association (CIGA) began making efforts to join some of the Companys clients and their
workers compensation insurance carriers (collectively, Clients), in pending workers
compensation claims filed by Remedy employees. At the time of these injuries, from July 22, 1997
through March 31, 2001, Remedy was covered by workers compensation policies issued by Reliance.
The Company believes that, under California law, CIGA is responsible for Reliances outstanding
liabilities. On April 5, 2002, the California Workers Compensation Appeals Board (WCAB), at
Remedys request, consolidated the various workers compensation claims in which CIGA sought to
join Remedys Clients, and agreed to stay proceedings on those claims pending resolution of the
issue of CIGAs obligations to satisfy Reliances obligations to Remedys employees. The WCAB
selected a single test case from the consolidated pending cases in which to decide whether CIGA is
responsible for the claims of Remedys employees, or can shift such responsibility to the Clients.
The trial occurred on September 20, 2002. The WCAB Administrative Law Judge ruled in favor of
CIGA, thus allowing the pending workers compensation matters to proceed against the Clients.
Remedy then filed a motion for reconsideration of the Administrative Law Judges decision by the
entire WCAB. On March 28, 2003, the WCAB, en banc, affirmed the ruling of the Administrative Law
Judge. Thereafter, in May 2003, the Company filed a petition for writ of review of the WCABs
decision in the California Court of Appeal. The WCAB continued the stay in effect since April 5,
2002, thus preventing CIGA from proceeding until the writ proceeding was concluded. In January
2004, the Court of Appeal granted the Companys petition and undertook to review the WCABs
decision. The Court heard oral argument in the matter on July 9, 2004. On October 20, 2004, the Court of Appeal affirmed the WCABs decision. The Company intends to
seek further review of that decision by way of rehearing by the Court of Appeal and/or review by
the California Supreme Court. On November 18, 2004, the Court of Appeal granted the Companys
petition for rehearing and requested additional briefing on this
matter. The Court of Appeal scheduled oral argument for March 2,
2005. Both avenues of further
review are discretionary with the court such that the Company does not have an absolute right to
such review. Despite the Companys determination to further pursue the appellate review process, there can
be no assurance that such efforts will be successful in overturning the Court of Appeals decision.
In the event of a final unfavorable outcome, Remedy may be obligated to reimburse certain clients
and believes that it would consider reimbursement of
other clients for actual losses incurred as a result of an unfavorable ruling in this matter.
If CIGA is permitted to join Remedys clients, thus triggering the clients insurance carriers
obligation to respond to the claims of Remedys employees, the Company believes that the direct
financial exposure to Remedy becomes a function of the ultimate losses on the claims and the 8




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RemedyTemp, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands, except per share amounts)
(unaudited) impact
of such claims, if any, on the clients insurance coverage, potentially including but not limited
to the clients responsibility for any deductibles or retentions under their own workers
compensation insurance. The Company has received data from the Third Party Administrator (TPA)
handling the claims for CIGA. Such data indicates claims of $31.6 million as of January 2, 2005.
The losses incurred to date represent amounts paid to date by the trustee and the remaining claim
reserves on open files. Based on the Court of Appeals decision, the Company recorded a $5,877 charge to operating
income during the fourth quarter of fiscal 2004. This amount represents the Companys current
estimate based on review of known information and was established for costs associated with the
indemnification of certain clients for losses they may suffer as a result of the ruling. The
$5,877 charge was based on the Companys review of customer contracts, review of the loss run
received from the TPA handling the claims, actuarial development of the reported claim losses,
estimates of customer insurance coverage, and other applicable information. The amount of the
charge is therefore subject to change as more information becomes available to the Company. The
Company recorded $98 in legal expenses for CIGA litigation costs during the first quarter of fiscal
2005. Additionally, the Company reclassified $150 of legal expenses related to the CIGA matter
that were incurred during the first quarter of fiscal 2004 from selling and administrative expense
to CIGA litigation. The Company may also choose to reimburse clients that did not enter into
contracts with the Company or whose contracts may not have included indemnification language.
These costs will be treated as period costs and will be charged to the consolidated statements of
operations in the period management decides to make any goodwill payments to clients.
Managements current estimate of future goodwill payments is a range of $2,000 to $3,000. This
estimate is subject to change. Other Litigation From time to time, the Company becomes a party to other litigation incidental to its business
and operations. The Company maintains insurance coverage that management believes is reasonable
and prudent for the business risks that the Company faces. Based on current available information,
management does not believe the Company is party to any other legal proceedings that are likely to
have a material adverse effect on its business, financial condition, cash flows or results of
operations. Other Contingency On November 18, 2003, the Company was notified by the State of California Employment
Development Department (the EDD) that the Company allegedly underpaid its state unemployment
insurance by approximately $2,000 for the period January 1, 2003 through September 30, 2003. Based
on preliminary evaluations and on advice of its outside counsel, the Company believes that its
methodology in calculating its state unemployment insurance is in compliance with all applicable
laws and regulations. The Company is currently working with outside counsel to resolve this issue,
and has not accrued for this amount as of January 2, 2005. 5. Earnings Per Share Basic earnings per share (EPS) is calculated using net loss divided by the weighted average
number of common shares outstanding during the period. Diluted EPS is calculated similar to basic
EPS except that the weighted average number of common shares is increased to include the number of
additional common shares that would have been outstanding if the potential dilutive common shares,
such as options, had been issued and restricted shares had vested. Potential common shares (including applicable outstanding options, restricted shares and
shares in trust of 1,258 and 1,333 for the three fiscal months ended January 2, 2005 and December
28, 2003, respectively) have been excluded from the calculation of diluted shares because the
effect of their inclusion would be anti-dilutive. 6. Investments The Company accounts for its investments in accordance SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The Companys portfolio consists of commercial paper,
fixed income securities and mutual funds classified as available-for-sale. At the time of sale,
the cost of mutual fund investments are determined using the average cost method and fixed income
securities cost is based upon specific identification. The Companys portfolio of fixed income 9




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RemedyTemp, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands, except per share amounts)
(unaudited) securities have various maturity dates; $5,910 mature in fiscal 2006 and $9,388 mature in fiscal
2007. Unrealized gains and losses from available-for-sale securities are included in accumulated
other comprehensive loss within shareholders equity. The net unrealized gains (losses) for
available-for-sale securities were ($59) and $(55) for the three fiscal months ended January 2,
2005 and December 28, 2003, respectively. There were no realized gains or losses related to the
Companys available-for-sale securities for the three fiscal months ended January 2, 2005 and $5
realized gains for the three fiscal months ended December 28, 2003. Investments related to the Companys deferred compensation program are classified as trading
and total $3,505 and $3,161 at January 2, 2005 and October 3, 2004, respectively. The deferred
compensation investments are included in current restricted investments in the Companys
consolidated balance sheets at January 2, 2005 and October 3, 2004. The realized and unrealized
gains and losses relating to trading securities are recorded in other income and expense in the
consolidated statements of operations. Net realized and unrealized gains (losses) for trading
securities were $202 and $182 for the three fiscal months ended January 2, 2005 and December 28,
2003, respectively and are offset by the change in the deferred compensation liability which is
included in selling and administrative expenses in the consolidated statements of operations. All
investments are carried at fair value. The following table presents the classification of the Companys investments: January 2,
    
    
    October 3,2005
    
    

2004CurrentAvailable-for-sale securities (mutual funds)
    
    $
    67
    
    
    $
    66Trading securities, restricted investments
    
    
    3,505
    
    
    
    3,161Certificate of deposit*
    
    
    16,000
    
    
    
    16,000Total investments
    
    $
    19,572
    
    
    $
    19,227Long-term RestrictedCash
    
    $
    6,621
    
    
    $
    6,568Available-for-sale securities (U.S. government securities)
    
    
    15,298
    
    
    
    15,357Total restricted cash and investments
    
    $
    21,919
    
    
    $
    21,925
 *At October 3, 2004, the $16,000 certificate of deposit was classified as restricted
investments in the consolidated balance sheets in compliance with collateralization requirements
under the Companys bank agreement. As of January 2, 2005, the Company is no longer required to
maintain a $16,000 certificate of deposit as collateral and accordingly reclassified the amount
from restricted investments to investments. Gross unrealized gains and losses on our available-for-sale securities were as follows: For the Three Months EndedJanuary 2,
    
    
    December 28,2005
    
    
    2003Mutual funds:Gross unrealized gains
    
    $
    
    
    
    $
    90Gross unrealized losses
    
    
    
    
    
    
    (16
    )U.S. government securities:Gross unrealized gains
    
    
    
    
    
    
    52Gross unrealized losses
    
    
    (59
    )
    
    
    (181
    )Net unrealized losses
    
    $
    (59
    )
    
    $
    (55
    )
 10




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RemedyTemp, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands, except per share amounts)
(unaudited) The following table summarizes the fair value and gross unrealized losses related to the
Companys available-for-sale securities that have been in a continuous unrealized loss position, at
January 2, 2005: In a Loss Position for Less Than 12 MonthsFair Value
    
    
    Gross Unrealized LossesU.S. government securities
    
    $
    15,298
    
    
    $
    (174
    )
 There have been no available-for-sale securities that have been in a continuous unrealized
loss position for more than twelve months. The Company periodically reviews its investment portfolio to determine if any investment is
other-than-temporarily impaired due to changes in credit risk or other potential valuation
concerns. At January 2, 2005, the Company believes that its investments are not impaired. While
certain available-for-sale debt securities have fair values that are below cost, the Company
believes that it is probable that principal and interest will be collected in accordance with
contractual terms, and that the decline in market value is due to changes in interest rates and not
due to increased credit risk. 7. Goodwill and Other Intangible Assets The following table summarizes the activity in goodwill: January 2, 2005
    
    
    October 3, 2004Beginning of year
    
    $
    3,703
    
    
    $
    3,030Additions
    
    
    419
    
    
    
    700Other adjustments
    
    
    
    
    
    
    (27
    )End of period
    
    $
    4,122
    
    
    $
    3,703
 The
change in goodwill for the quarter ended January 2, 2005 is
related to estimated additional purchase consideration for prior year
acquisitions. Other intangible assets with finite lives include franchise rights, client relationships and
non-competition agreements and are amortized on a straight-line basis. The weighted average
amortization period is 6.3 years for franchise rights; 3.5 years for client relationships; and 5.0
years for non-competition agreements. Amortization expense related to other intangible assets was
$136 and $81 for the three fiscal months ended January 2, 2005 and December 28, 2003, respectively. The following table presents the details of the Companys other intangible assets that are
subject to amortization: January 2, 2005
    
    
    October 3, 2004Franchise rights
    
    $
    2,090
    
    
    $
    2,090Client relationships
    
    
    470
    
    
    
    470Non-competition agreements
    
    
    414
    
    
    
    4142,974
    
    
    
    2,974Less accumulated amortization
    
    
    (836
    )
    
    
    (700
    )Total
    
    $
    2,138
    
    
    $
    2,274
 At January 2, 2005, $408 of the unamortized balance of intangible assets is expected to be
amortized in the remaining nine months of fiscal 2005; and $542, $493, $379, $242 and $74 in fiscal
years 2006 through 2010. 8. Capitalized Software Costs During the fourth quarter of fiscal 2003, the Company changed the estimated useful life of the
capitalized software used to manage revenues and track client activities. The primary factor
contributing to the change in the estimated useful life was that the softwares function was no
longer consistent with the Companys strategic plan and the Companys offices were not fully
utilizing the system. The Company discontinued use of the software in November 2003. The change
in accounting estimate resulted in additional amortization expense of $507 during the first quarter
of fiscal 2004. The 11




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RemedyTemp, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands, except per share amounts)
(unaudited) additional amortization expense is included in depreciation and amortization
expense for the three months ended December 28, 2003 in the accompanying consolidated statements of
operations. 9. Workers Compensation Remedy provides workers compensation insurance to its temporary associates and colleagues.
Effective April 1, 2001 and for workers compensation claims originating in the majority of states
(referred to as non-monopolistic states), the Company has contracted with independent, third-party
carriers for workers compensation insurance and claims administration. Each annual contract
covers all workers compensation claim costs greater than a specified deductible 12




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RemedyTemp, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands, except per share amounts)
(unaudited) amount, on a per
occurrence basis. The Company is self-insured for its deductible liability ($250 per individual
claim incurred from April 1, 2001 to March 31, 2002 and $500 for all subsequent claims). The
insurance carrier is responsible for incremental losses in excess of the applicable deductible
amount. Remedy establishes a reserve for the estimated remaining deductible portion of its workers
compensation claims, representing the estimated ultimate cost of claims and related expenses that
have been reported but not settled, and that have been incurred but not reported. The estimated
ultimate cost of a claim is determined by applying actuarially determined loss development factors
to current claims information. These development factors are determined based upon a detailed
actuarial analysis of historical claims experience of both the Company and the staffing industry.
The Company periodically updates the actuarial analysis supporting the development factors utilized
and revises those development factors, as necessary. Adjustments to the claims reserve are charged
or credited to expense in the periods in which they occur. The estimated remaining deductible
liability under the aforementioned contracts as of January 2, 2005 is approximately $38,391, of
which $12,003 is recorded as current and $26,388 is recorded as non-current in the accompanying
consolidated balance sheets. The Company also has an aggregate $2,691 and $2,677 current liability recorded at January 2,
2005 and October 3, 2004, respectively, for amounts due to various state funds related to workers
compensation. The following table presents the classification of the Companys workers compensation
liability, accrued CIGA litigation and other liabilities: January 2,
    
    
    October 3,2005
    
    
    2004CurrentLiability for various state funds and
previous guaranteed cost policies
    
    $
    2,691
    
    
    $
    2,677Accrued workers compensation
    
    
    12,003
    
    
    
    12,359Accrued workers compensation
    
    $
    14,694
    
    
    $
    15,036Long-termOther liabilities
    
    $
    300
    
    
    $

    300Accrued CIGA litigation
    
    
    5,877
    
    
    
    5,877Accrued workers compensation
    
    
    26,388
    
    
    
    24,090Other liabilities
    
    $
    32,565
    
    
    $
    30,267
 The Company is contractually required to collateralize its remaining obligation under each of
these workers compensation insurance contracts through the use of irrevocable letters of credit,
pledged cash and securities or a combination thereof. The level and type of collateral required
for each policy year is determined by the insurance carrier at the inception of the policy year and
may be modified periodically. As of January 2, 2005, the Company has outstanding letters of credit
of $34,661 and pledged cash and securities totaling $21,919. The pledged cash and securities are
restricted and cannot be used for general corporate purposes while the Companys remaining
obligations under the workers compensation program are outstanding. Accordingly, the Company has
classified these pledged cash and securities as restricted in the accompanying consolidated balance
sheets. From July 22, 1997 through March 31, 2001, the Company had a fully insured workers
compensation program with Reliance National Insurance Company (Reliance). The annual premium for
this program was based upon actual payroll costs multiplied by a fixed rate. Each year, the Company
prepaid the premium based upon estimated payroll levels and an adjustment was subsequently made for
differences between the estimated and actual amounts. Subsequent to March 31, 2001 (the end of
Companys final policy year with Reliance), Reliance became insolvent and was subsequently
liquidated. The Company is currently in litigation with the California Insurance Guaranty
Association regarding financial responsibility for all remaining open claims under the Reliance
workers compensation program. The Company recorded a $5,877 charge to operating income during the
fourth quarter of fiscal 2004 as a result of the October 2004 Court of Appeals decision (see Note
4 for further discussion). 13




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RemedyTemp, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands, except per share amounts)
(unaudited) 10. Line of Credit The Company amended and restated its credit facility with Bank of America dated February 4,
2004. The Amended and Restated Credit Agreement (Credit Agreement) with Bank of America was
effective December 1, 2004. The new Credit Agreement provides for borrowings up to $50,000 with a provision permitting the
Company to increase the aggregate amount of borrowings to $60,000. The Company has granted a
security interest to Bank of America in all its existing and future assets. The Credit Agreement
will expire two years from the closing date on December 1, 2006. The Credit Agreement bears
interest equal to LIBOR plus 1.75% to 2.75% based upon the Companys EBITDA or Bank of Americas
prime rate plus 0.00% to 0.50% based on EBITDA. The Company is also required to pay monthly fees
of 0.25% per annum on the unused portion of the line of credit and monthly fees of 0.75% to 1.50%
on outstanding letters of credit based on a pricing matrix. The Credit Agreement requires the
Company to comply with a minimum EBITDA covenant which will not go into effect unless the Companys
total liquidity drops below $15,000. Liquidity is defined by the Credit Agreement as unrestricted
domestic cash plus excess borrowing availability. Additionally, under the Credit Agreement, the
Company is no longer required to maintain a $16,000 Bank of America Certificate of Deposit as
collateral as required by its prior credit facility. The Company is in compliance with all
restrictive covenants as prescribed in the Credit Agreement at January 2, 2005. Prior to December 1, 2004, the Companys credit facility with Bank of America dated February
4, 2004 provided for aggregate borrowings not to exceed $40,000, including any letters of credit
existing under the prior credit agreement. The Companys obligation under the line of credit was
collateralized by certain assets of the Company. In addition, the Company was required to maintain
a $16,000 Bank of America Certificate of Deposit to satisfy the collateral requirement, which was
classified as restricted cash and investments at October 3, 2004 in the accompanying consolidated
balance sheets. The interest rate on the outstanding borrowings, was at the Companys discretion,
either the Bank of Americas prime rate plus 0.0% or 0.5% (depending on the amount of outstanding
borrowings) or LIBOR plus 0.75% or 1.5% (depending on the amount of outstanding borrowings) and was
paid monthly. The interest rate on outstanding letters of credit was 0.75% for amounts up to
$16,000 and 1.5% for amounts greater than $16,000. The Company was required to pay quarterly fees
of 0.25% per annum on the unused portion of the line of credit. Under the agreement, the Company
was also required to comply with certain restrictive covenants, the most restrictive of which
limited the Companys net loss for each fiscal quarter and on a fiscal year-to-date basis. The Company has no borrowings outstanding as of the fiscal quarters ended January 2, 2005 and
December 28, 2003. The Company had outstanding letters of credit totaling $34,661, at January 2,
2005 and October 3, 2004, to collaterize its remaining workers compensation deductible liability
discussed in Note 9. 11. Office Closures The Companys strategic plan focuses on increasing the percentage of business from higher
margin service lines, increasing sales through targeted sales force and distribution channel
expansion and enhancing operating margins through continuous productivity improvements. As a
result, and given overall industry and market conditions, the Company is continually reassessing
its current operating structure. Consequently, during the third quarter of fiscal 2003, the
Company implemented plans to close or consolidate certain Company-owned offices, specifically those
that were under-performing or primarily dedicated to recruiting activities. During the third and
fourth quarters of fiscal 2003, the Company recorded a $992 charge for costs in connection with
these plans, including $689 related to contractual lease obligations and $303 for severance
benefits, fixed asset disposals and other costs associated with these office closures. The $992
charge was included in selling and administrative expenses in the Companys consolidated statements
of operations for the fiscal year ended September 28, 2003. During the first three months of
fiscal 2005, the Company closed three under performing Company-owned offices. The Company incurred
$35 in costs related to fixed asset disposals in connection with the fiscal 2005 closures. There
were no charges related to the office closure plans for the three fiscal months ended December 28,
2003. At January 2, 2005 and October 3, 2004, the remaining liability resulting from the charges
in connection with this plan was $103 and $130, respectively, which is included in Other Accrued
Expenses, in the accompanying consolidated balance sheets, and relates to estimated losses on
subleases and the remaining net lease payments on closed locations that will be paid out through
fiscal 2008. 14




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RemedyTemp, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands, except per share amounts)
(unaudited) 12. Restricted Stock Awards At January 2, 2005, the Company had 545 shares of restricted Class A Common Stock issued and
outstanding. The Leadership Development and Compensation Committee of the Board of Directors did
not approve the issuance of any additional shares of restricted Class A Common Stock (the
Restricted Stock) under the Companys 1996 Stock Incentive Plan during the first three months of
fiscal 2005 or during the fiscal year ended October 3, 2004. The Restricted Stock has no purchase
price and cliff vests after five years. However, the Restricted Stock is subject to accelerated
vesting after three years if certain performance goals are achieved. All unvested Restricted Stock
shall be forfeited upon voluntary termination or termination for cause. Upon retirement or
involuntary termination for other than cause, 20% vests one year from the grant date with the
remaining unvested shares vesting at 1.66% each month thereafter. At the time of issuance,
unearned compensation is recorded as a component of shareholders equity and is based upon the fair
market value of the Companys Class A Common Stock on the respective grant dates. The unearned
compensation is amortized and charged to operations over the initial five-year vesting period.
Amortization expense of $338 and $89 were included in operations for the three fiscal months ended
January 2, 2005 and December 28, 2003, respectively. 13. Income Taxes An income tax provision of $37 was recorded for the three fiscal months ended January 2, 2005
as compared to an income tax provision of $124 for the three fiscal months ended December 28, 2003.
The Companys overall annual effective tax rates of 249.1% and (3.9%) for the first fiscal
quarters of 2005 and 2004, respectively, differ from the statutory rate due to the respective
current periods valuation allowance against the deferred tax asset. The estimated annual effective
tax rate is revised quarterly based upon actual operating results, the tax credits earned to date
as well as current annual projections. The cumulative impact of any change in the estimated annual
effective tax rate is recognized in the period the change in estimate occurs. 14. New Accounting Standard In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R,
Share-Based Payment (SFAS 123R). Under the new standard, companies will no longer be able to
account for share-based compensation transactions using the intrinsic value method in accordance
with APB No. 25. Instead, companies will be required to account for such transactions using a fair
value method and to recognize the expense over the service period. SFAS 123R will be effective for
periods beginning after June 15, 2005 (the fourth quarter of fiscal 2005 for the Company) and
allows for several alternative transition methods. The Company expects to adopt SFAS 123R in its
fourth quarter on a prospective basis, which will require recognition of compensation expense for
all stock option or other equity-based awards that vest or become exercisable after the effective
date. The Company has not yet determined whether the adoption will result in amounts that are
similar to the current pro forma disclosures under SFAS 123, as amended. 15




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RemedyTemp, Inc. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to historical information, managements discussion and analysis includes certain
forward-looking statements, including, but not limited to, those related to the growth and
strategies, future operating results and financial position as well as economic and market events
and trends of RemedyTemp, Inc., including its wholly-owned subsidiaries, (collectively, the
Company). All forward-looking statements made by the Company, including such statements herein,
include material risks and uncertainties and are subject to change based on factors beyond the
control of the Company (certain of such statements are identified by the use of words such as
anticipate, believe, estimate, intend, plan, expect, will, future, or similar
words). Accordingly, the Companys actual results may differ materially from those expressed or
implied in any such forward-looking statements as a result of various factors, including, without
limitation, the success of certain cost reduction efforts, the continued performance of the RemX®
specialty division, the Companys ability to realize improvements in the months ahead, changes in
general or local economic conditions that could impact the Companys expected financial results,
the availability of sufficient personnel, various costs relating to temporary workers and
personnel, including but not limited to workers compensation and state unemployment rates, the
Companys ability to expand its sales capacity and channels, to open new points of distribution and
expand in core geographic markets, attract and retain clients and franchisees/licensees, the
outcome of litigation, software integration and implementation, application of deferred tax assets
and other factors described in the Companys filings with the Securities and Exchange Commission
regarding risks affecting the Companys financial condition and results of operations. The Company
does not undertake to publicly update or revise its forward-looking statements even if experience
or future changes make it clear that any projected results expressed or implied therein will not be
realized. The following should be read in conjunction with the Consolidated Financial Statements of
the Company and Notes thereto. Company Overview RemedyTemp, Inc. is a national provider of clerical, light industrial, information technology
and financial temporary staffing and direct hire services to industrial, service and technology
companies, professional organizations and governmental agencies. The Company provides its services
in 35 states, District of Columbia, Puerto Rico and Canada through a network of 237 offices, of
which 130 are Company-owned and 107 are independently-managed franchises. Executive Summary The staffing industry is a highly competitive industry, which has contributed to significant
price competition and lower margins as major staffing companies have attempted to maintain or gain
market share. Although it is likely that the pressure on margins will continue throughout fiscal
2005, the Companys focus on increasing its business mix with specialty staffing services and its
direct hire business will help mitigate the impact of the downward trend on margins throughout the
industry. During the last eighteen months, global economic conditions have continued to improve
which appears to signal a sustainable job-creating recovery. The demand for temporary staffing has
also continued to grow as demonstrated in recent surveys by the American Staffing Association
(ASA). According to ASA, staffing companies have almost regained the 28% loss in employment they
experienced as a result of the past U.S. economic recession. ASA further states that the staffing
industry added more than 200,000 jobs in 2004 with December 2004 marking the 19th consecutive month
of year-over-year growth for the industry. Management continues to be encouraged by the recent
economic data, as well as the steady job growth in the staffing industry. The increases in workers compensation costs and state unemployment insurance costs the
Company experienced in fiscal 2003 and 2004 were significant. However, the Company does not expect
the increases in state unemployment costs to continue at such a significant rate throughout fiscal
2005 and expects workers compensation costs to continue to stabilize throughout fiscal 2005. With long-term positive prospects, the staffing industry has always been inherently difficult
to forecast due to its dependence on economic factors and the strength of the labor market.
However, the Company has developed a forecasting tool jointly with the A. Gary Anderson Center for
Economic Research at Chapman University. The Quarterly Labor Forecast Report, which is based upon
Bureau of Labor Statistics (the BLS) and other economic
factors, helps to predict total demand for temporary labor. The Company has been utilizing
this tool for several years and has recently begun to publish the results on a quarterly basis. 16




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RemedyTemp, Inc. Taking advantage of its strong brand name and infrastructure, the Company has positioned
itself for profitable growth in fiscal 2005. The Companys long-term growth strategies include:  
    Increasing the proportion of revenue from its Company-owned offices;
    Increasing the proportion of revenue generated from outside of California to mitigate
rising state unemployment and workers compensation costs;
    Increasing Company-owned office revenues (Company-owned office revenue or direct
revenue) in its higher margin clerical business;
    Increasing direct hire revenue (whereby the Company earns a fee for placing an associate
in a permanent position);
    Targeting small (retail) to midsize clients which typically generate higher margins;
    Increasing the number of sales representatives in the field in the next several years
(referred to as the Companys investment hire goal); and
    Growing the niche sectors of the Companys business (financial staffing, information
technology services and officestaff services) to take advantage of higher gross margins. Operations The Company generated a 9.0% increase in revenues for the first quarter of fiscal 2005
compared to the same period in the prior year. Gross margins improved to 19.5% as compared to
16.3% for the same period in the prior year. The Companys revenues are derived from Company-owned offices and independently-managed
franchise offices. The Companys franchise arrangements are structured in either a traditional
franchise format or a licensed franchise format. The table below sets forth the number of Company-owned, traditional and licensed franchise
offices: January 2,
    
    
    December 28,2005
    
    
    2003Company-owned offices
    
    
    130
    
    
    
    126Licensed franchise offices
    
    
    10
    
    
    
    13Traditional franchise offices
    
    
    97
    
    
    
    102Total offices
    
    
    237
    
    
    
    241
 Revenues generated in California increased to 43.3% of total revenues for the three months
ended January 2, 2005 as compared to 42.6% for three months ended December 28, 2003. Traditional Franchise Under the Companys traditional franchise agreements, the franchisee pays all lease and
working capital costs relating to its office, including funding payroll and collecting clients
accounts. Generally, the franchisee pays the Company an initial franchise fee and continuing
franchise fees, or royalties, at a standard rate of 7.0% of its gross billings. Franchisees that
have renewed their franchise agreement could qualify for a reduced rate (ranging from 5.5%  6.5%)
based on gross billings. Additionally, a discounted rate is utilized with national accounts for
which the Companys fee is reduced. The average royalty rate was 6.4% for the three months ended
January 2, 2005. The Company processes payroll and invoices clients, and the franchisee employs
all management staff and temporary personnel affiliated with its office. The Company no longer
offers this form of franchise agreement. Licensed Franchise Under the Companys licensed franchise agreements, the licensee pays the Company an initial
franchise fee and pays all lease and operating costs relating to its office. The licensee employs
all management staff affiliated with its office, but the Company employs all temporary personnel
affiliated with the licensed franchise office, handles invoicing
and collecting clients accounts, and generally remits to the licensed franchisee 60%  70% of
the offices gross profit. The Companys share of the licensees gross profit, representing the
continuing franchise fees, is generally not less than 7.5% of the licensed franchisees gross
billings. However, the Companys share of the licensees gross profit is decreased for (i)
national accounts for which the Companys fee is reduced to compensate for lower gross margins,
(ii) sales incentive programs, and (iii) licensees that have renewed their franchise agreement and
qualify for a reduced rate (ranging from 6.0%  7.0%) based on gross revenues. For the three
months ended January 2, 2005 the average Companys share of licensees gross revenues was 17




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##### Table of Contents



RemedyTemp, Inc. 6.5%.
The percentage of gross profit paid to the licensee is generally based on the level of hours billed
during the contract year. Results of Operations (amounts in thousands) For the Three Fiscal Months Ended January 2, 2005 Compared to the Three Fiscal Months Ended
December 28, 2003 Revenue For the Three Months Ended
    
    
    Favorable (Unfavorable)January 2,
    
    
    December 28,2005
    
    
    2003
    
    
    $ Change
    
    
    % ChangeCompany-owned office revenues
    
    $
    88,628
    
    
    $
    82,190
    
    
    $
    6,438
    
    
    
    7.8
    %Licensed franchise revenues
    
    
    48,406
    
    
    
    43,378
    
    
    
    5,028
    
    
    
    11.6
    %Franchise royalties and
initial franchise fees
    
    
    322
    
    
    
    443
    
    
    
    (121
    )
    
    
    (27.3
    %)Total revenues
    
    $
    137,356
    
    
    $
    126,011
    
    
    $
    11,345
    
    
    
    9.0
    %
  
    Direct revenue increased 7.8% for the three fiscal months ended January 2, 2005 as
compared to the three fiscal months ended December 28, 2003. The increase is primarily
attributable to the Companys RemX® specialty staffing division which generated a $5,986
increase in revenue to $10,862 for the three fiscal months ended January 2, 2005 as
compared to the same period in the prior year; $850 of the increase in RemX® is
attributable to the acquisition of the traditional franchise office during the second
quarter of fiscal 2004. The Company also experienced increased revenue from the addition of several
large new customers and increased revenue from existing customers.
    The $5,028 or 11.6% increase in the licensed franchise revenue is due to the addition of
several new customers and increased revenue from existing customers, offset by the loss of
two significant customers.
    The mix between direct, licensed franchise and traditional royalty revenues shifted with
direct revenues accounting for 64.5% of total revenues for the three fiscal months ended
January 2, 2005 as compared to 65.2% for the three fiscal months ended December 28, 2003. The following table summarizes the Companys business mix as a percent of revenue: For the Three Months EndedJanuary 2,
    
    December 28,2005
    
    2003Light Industrial
    
    
    65.5
    %
    
    
    68.8
    %Clerical
    
    
    26.4
    %
    
    
    27.0
    %RemX®
    
    
    7.9
    %
    
    
    3.9
    %
  
    Although overall light industrial revenue increased, the
decrease in light industrial revenues as a percent of total revenue during the three
fiscal months ended January 2, 2005 is primarily due to decreased volume from existing
customers as a result of various business reasons.
    The decreased revenue from the clerical sector is a result of decreased business with
existing large volume customers, a significant portion was attributed to the financial
services industry, offset somewhat by increased business with existing smaller customers.
    The increase in the revenues generated from the RemX® division is consistent with the
Companys long-term strategic plan to shift its overall business mix to higher margin
services. 18




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RemedyTemp, Inc. Cost of Revenues For the Three Months Ended
    
    
    Favorable (Unfavorable)January 2, 2005
    
    
    December 28, 2003
    
    
    $ Change
    
    
    % ChangeCost of Company-owned office revenues
    
    $
    71,821
    
    
    $
    70,867
    
    
    $
    (954
    )
    
    
    (1.3
    %)Cost of licensed franchise revenues
    
    
    38,744
    
    
    
    34,654
    
    
    
    (4,090
    )
    
    
    (11.8
    %)Total cost of revenues
    
    $
    110,565
    
    
    $
    105,521
    
    
    $
    (5,044
    )
    
    
    (4.8
    %)
  
    Total cost of direct and licensed franchise revenues consists of wages and other
expenses related to temporary associates and as a percentage of revenues was 80.5% and
83.7% for the three fiscal months ended January 2, 2005 and December 28, 2003,
respectively. Overall consolidated gross margin improved to 19.5% for the three fiscal
months ended January 2, 2005 as compared to 16.3% for the three fiscal months ended
December 28, 2003. The 3.2 percentage point increase in margin is primarily attributable
to the Companys success in its efforts to increase markup (defined as the bill rate/wage
rate). Markup contributed 2.1 percentage points to the increase. The decrease in workers
compensation expense contributed 1.0 percentage point to the improved margins and was
partially offset by an increase in state unemployment insurance costs. Additionally, a
$1.3 million increase in direct hire revenues, whereby the Company earns a fee for placing
an associate in a permanent position contributed 0.6 percentage points to the improved
margins. Direct hire revenue as a percentage of total revenue increased to 1.9% for the
three fiscal months ended January 2, 2005, as compared to 1.0% for the three fiscal months
ended December 28, 2003.
    Company-owned office gross margin was 19.0% for the three months ended January 2, 2005
as compared to 13.8% for the same period in the prior year. The 5.2 percentage point
increase in Company-owned office gross margin is primarily attributable to markup. Markup
contributed 3.1 percentage points of the improved margins while the decrease in workers
compensation expense contributed 1.5 percentage points. The decrease in workers
compensation expense was partially offset by an increase in state unemployment insurance
costs. The Company believes that the increase in state unemployment insurance costs will
continue for the remainder of fiscal 2005, both within and outside of California.
Additionally, the increase in direct hire business contributed 0.9 percentage points to the
overall 5.2 percentage point increase.
    The increase in cost of licensed franchise revenues is consistent with the 11.6%
increase in licensed franchise revenue. Operating Expenses For the Three Months Ended
    
    
    Favorable (Unfavorable)January 2,
    
    
    December 28,2005
    
    
    2003
    
    
    $ Change
    
    
    % ChangeLicensees share of gross profit
    
    $
    6,468
    
    
    $
    5,817
    
    
    $
    (651
    )
    
    
    (11.2
    %)Selling and administrative
expenses
    
    
    19,348
    
    
    
    16,292
    
    
    
    (3,056
    )
    
    
    (18.8
    %)CIGA litigation
    
    
    98
    
    
    
    150
    
    
    
    52
    
    
    
    34.7
    %Depreciation and amortization
    
    
    1,364
    
    
    
    1,748
    
    
    
    384
    
    
    
    22.0
    %Total operating expenses
    
    $
    27,278
    
    
    $
    24,007
    
    
    $
    (3,271
    )
    
    
    (13.6
    %)
  
    Licensees share of gross profit represents the net payments to licensed franchisees
based upon a percentage of gross profit generated by the licensed franchise operation. The
increase in licensees share of gross profit is consistent with the increase in licensed
franchise revenues and cost of licensed franchise revenues. Licensees share of gross
profit as a percentage of licensed gross profit increased to 66.9% for the three fiscal
months ended January 2, 2005 as compared to 66.7% for the three fiscal months ended
December 28, 2003. 19




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##### Table of Contents



RemedyTemp, Inc.  
    The following table summarizes the significant changes in selling and administrative
expenses for the three fiscal months ended January 2, 2005 as compared to the three fiscal
months ended December 28, 2003: Consolidated
    
    
    RemX®
    
    
    OtherChange
    
    
    Change
    
    
    Offices*Colleague salary and related taxes
    
    $
    (2,045
    )
    
    $
    (841
    )
    
    $
    (1,204
    )Profit Sharing
    
    
    (684
    )
    
    
    (306
    )
    
    
    (378
    )Colleague travel and business conferences
    
    
    (323
    )
    
    
    (60
    )
    
    
    (263
    )Rent
    
    
    (170
    )
    
    
    (102
    )
    
    
    (68
    )Insurance
    
    
    (133
    )
    
    
    (65
    )
    
    
    (68
    )Professional fees
    
    
    (131
    )
    
    
    
    
    
    
    (131
    )Legal fees
    
    
    (105
    )
    
    
    
    
    
    
    (105
    )Bad debt
    
    
    716
    
    
    
    
    
    
    
    716Royalty payments
    
    
    175
    
    
    
    
    
    
    
    175Other SG&A
    
    
    (356
    )
    
    
    (154
    )
    
    
    (202
    )Net increase
    
    $
    (3,056
    )
    
    $
    (1,528
    )
    
    $
    (1,528
    )
   *
    
    Other Offices category includes the corporate office  
    Selling and administrative expenses as a percentage of total revenues were 14.1% for the
three fiscal months ended January 2, 2005 as compared to 12.9% for the three fiscal months
ended December 28, 2003. The primary factor contributing to the net increase was a $2,045
increase in colleague salaries due to the Companys investment hire goal and the expansion
of the RemX® specialty staffing division. The increase was offset by a $716 decrease in
the Companys bad debt expense. During the first quarter of fiscal 2004 the Company
recorded approximately $500 to bad debt expense as a result of a large customer filing for
bankruptcy.
    The $384 decrease in depreciation and amortization for the three months ended January 2,
2005 as compared to the three months ended December 28, 2003 is due to an increase in fully
depreciated fixed assets at January 2, 2005 as compared to December 28, 2003 which included
the write-off and change in useful life of certain capitalized software costs during the
fourth quarter of fiscal 2003 resulting in additional amortization expense of $507 during
the first quarter of fiscal 2004. The decrease in depreciation and amortization was offset
by the incremental amortization expense from identifiable intangible assets resulting from
the franchise acquisition during the second quarter of fiscal 2004. Loss from operations improved $3,030 to an operating loss of $487 for the three fiscal months
ended January 2, 2005 from an operating loss of $3,517 for the three fiscal months ended December
28, 2003. Improvement in the Companys operating loss is due to the increase in direct revenues in
conjunction with gross margin improvement. The decrease in depreciation and amortization also
contributed to the improved operating profits. An income tax provision of $37 was recorded in the first quarter of fiscal 2005 as compared
with an income tax provision of $124 for the first quarter of fiscal year 2004. The Companys
overall effective tax rates of 249.1% and (3.9%) for the first fiscal quarters of 2005 and 2004,
respectively, differ from the statutory rate due to the respective current periods valuation
allowance against the deferred tax asset. The estimated annual effective tax rate is revised
quarterly based upon actual operating results, the tax credits earned to date as well as current
annual projections. The cumulative impact of any change in the estimated annual effective tax rate
is recognized in the period the change in estimate occurs. The Company generated a net loss of $22 for the three months ended January 2, 2005 as compared
to a net loss of $3,316 for the three fiscal months ended December 28, 2003. Liquidity and Capital Resources (amounts in thousands) The Companys balance sheet includes $45,650 in cash and investments as of January 2, 2005
(including restricted cash and investments discussed below), and it continues to be debt free,
although significant letters of credit are outstanding. Historically, the Company has financed its
operations through cash generated by operating activities and its credit facility, as necessary.
Generally, the Companys principal uses of cash are working capital needs and capital
expenditures (including management information systems initiatives and direct office openings)
and franchise acquisitions. 20




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RemedyTemp, Inc. Beginning in the third quarter of fiscal 2003, the Company
collateralized $21,615 of its workers compensation liability with pledged cash and securities, as
opposed to issuing additional letters of credit. During the second quarter of fiscal 2004, the
Company used $16,000 in cash to collateralize its $40,000 line of credit as required by its credit
facility (Note 10 to the condensed notes to consolidated financial statements). As of December 1,
2004, under the Companys new Credit Agreement, the Company is no longer required to maintain the
$16,000 collateralization of its line of credit and accordingly, the certificate of deposit was
reclassified from restricted investment to investments. The following table summarizes the Companys cash and investments and letters of credit at
January 2, 2005 and October 3, 2004: January 2,
    
    
    October 3,2005
    
    
    2004Cash and cash equivalents
    
    $
    4,159
    
    
    $
    7,348Investments
    
    
    16,067
    
    
    
    66Collateralized certificate of deposit related to bank agreement
    
    
    
    
    
    
    16,000Deferred compensation investments
    
    
    3,505
    
    
    
    3,161Total restricted investments
    
    
    3,505
    
    
    
    19,161Total cash and investments  current
    
    
    23,731
    
    
    
    26,575Total restricted cash and investments long-term
    
    
    21,919
    
    
    
    21,925Total cash and investments
    
    $
    45,650
    
    
    $
    48,500Letters of credit
    
    $
    34,661
    
    
    $
    34,661
 Cash flows from operating, investing and financing activities, as reflected in the
accompanying consolidated statements of cash flows, are summarized below: For the Three Months EndedJanuary 2,
    
    
    December 28,2005
    
    
    2003Cash provided by (used in):Operating activities
    
    $
    (2,441
    )
    
    $
    (435
    )Investing activities
    
    
    (770
    )
    
    
    (479
    )Financing activities
    
    
    
    
    
    
    66Effect of exchange rate on cash
    
    
    22
    
    
    
    9Net decrease in cash and cash equivalents
    
    
    (3,189
    )
    
    
    (839
    )Cash and cash equivalents at beginning of period
    
    
    7,348
    
    
    
    13,236Cash and cash equivalents at end of period
    
    $
    4,159
    
    
    $
    12,397
  
    Cash flows from operating activities, compared to the preceding year, were primarily
impacted by the timing of receivables collections, the timing of payroll disbursements
(including incentive compensation payments), as well as the timing of vendor payments. The
nature of the Companys business requires payment of wages to its temporary associates on a
weekly basis, while payments from clients are generally received 30-45 days after the
related billing.
    During the first quarter of fiscal 2005, cash used in investing activities was primarily
related to capital expenditures. Cash used for purchases of fixed assets, including
information systems development costs, was $716 for three fiscal months ended January 2,
2005 and $257 for three fiscal months ended December 28, 2003. During the first quarter of
fiscal 2004, cash used in investing activities was primarily related to the Companys
investment portfolio, which includes highly rated debt securities with various maturity
dates through fiscal 2007. Net cash outflows related to available-for-sale investments
were $60 for three fiscal months ended January 2, 2005 as compared to $2,069 of net cash
outflows in the three fiscal months ended December 28, 2003. The Company continues to
invest in computer-based technologies and direct office openings and anticipates
approximately $3,300 in related capital expenditures for the remaining nine months of
fiscal 2005. 21




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RemedyTemp, Inc.  
    There was no cash used in or provided by financing activities for the first quarter of
fiscal 2005. During the first quarter of fiscal 2004, cash provided by financing
activities was primarily a result of shares of the Companys Class A Common Stock issued
through the Employee Stock Purchase Plan. Cash and cash equivalents decreased $8,238 from the prior year as a result of the timing of
payroll disbursements and vendor payments as well as delayed cash payments from several large
customers related to December 2004 sales. As
discussed in Note 9 to the condensed notes to consolidated financial statements, Remedy
provides workers compensation insurance to its temporary associates and colleagues. The Company
establishes a reserve for the deductible portion of its workers compensation claims using
actuarial estimates of the ultimate cost of claims and related expenses that have been reported but
not settled, and that have been incurred but not reported. The estimated remaining deductible
liability under the aforementioned contracts as of January 2, 2005 is approximately $38,391 of
which $12,003 is recorded as current and $26,388 is recorded as non-current in the consolidated
balance sheets. The Company also has an aggregate $2,691 current liability recorded at January 2,
2005 for amounts due to various state funds related to workers compensation. The Company is contractually required to collateralize its obligation under each of these
workers compensation insurance contracts through the use of irrevocable letters of credit, pledged
cash and securities or a combination thereof. The level and type of collateral required for each
policy year is determined by the insurance carrier at the inception of the policy year and may be
modified periodically. The Company had outstanding letters of credit totaling $34,661 as of
January 2, 2005 and October 3, 2004 and will most likely be required to increase the amount of
letters of credit for its new workers compensation program commencing April 4, 2005. At January
2, 2005, the Company had $14,119 available under its line of credit. The Company believes that
this amount plus the letter of credit reductions for previous year programs and the new Credit
Agreement described below will be sufficient for the new insurance policy. The Company amended and restated its credit facility with Bank of America dated February 4,
2004. The Amended and Restated Credit Agreement (Credit Agreement) with Bank of America was
effective December 1, 2004. The new Credit Agreement provides for borrowings up to $50,000 with a
provision permitting the Company to increase the aggregate amount of borrowings to $60,000. The
Company has granted a security interest to Bank of America in all its existing and future assets.
The Credit Agreement will expire two years from the closing date on December 1, 2006. The Credit
Agreement bears interest equal to LIBOR plus 1.75% to 2.75% based upon the Companys EBITDA or Bank
of Americas prime rate plus 0.00% to 0.50% based on EBITDA. The Company is also required to pay
monthly fees of 0.25% per annum on the unused portion of the line of credit and monthly fees of
0.75% to 1.50% on outstanding letters of credit based on a pricing matrix. The Credit Agreement
requires the Company to comply with a minimum EBITDA covenant which will not go into effect unless
the Companys total liquidity drops below $15,000. Liquidity is defined by the Credit Agreement as
unrestricted domestic cash plus excess borrowing availability. Additionally, under the Credit
Agreement, the Company is no longer required to maintain a $16,000 Bank of America Certificate of
Deposit as collateral as required by its prior credit facility. The Company is in compliance with
all restrictive covenants as prescribed in the Credit Agreement at January 2, 2005. The Company has no borrowings outstanding as of January 2, 2005 and October 3, 2004. As discussed in Part II, Item 1, Legal Proceedings and Note 4 to the condensed notes to
consolidated financial statements, the Company recorded a $5,877 charge during the fourth quarter
of fiscal 2004 for the costs of indemnifying certain clients for losses they may suffer as a result
of a Court of Appeals October 2004 decision. This charge is based upon various estimates and is
subject to change as more information becomes available to the Company. The Company may also
choose to reimburse clients that did not enter into contracts with the Company or whose contracts
may not have included indemnification language. These costs will be treated as period costs and
will be charged to the consolidated statements of operations in the period management decides to
make any goodwill payments to clients. Managements current estimate of future goodwill
payments is a range of $2,000 to $3,000. This estimate is subject to change. The Company has in effect a universal shelf registration statement on Form S-3 filed with the
Securities and Exchange Commission (SEC). The universal shelf registration statement permits the
Company to sell, in one or more public offerings, shares of its Class A common stock, shares of
preferred stock, debt securities, depository shares and/or warrants, or any combination of such
securities, for proceeds in an aggregate amount of up to $30,000. Specific terms and prices will
be determined at the time of any offering and included in a related prospectus supplement to be
filed with the SEC. To date no securities have been issued pursuant to the universal shelf
registration. 22




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RemedyTemp, Inc. On November 18, 2003, the Company was notified by the State of California Employment
Development Department (the EDD) that the Company allegedly underpaid its state unemployment
insurance by approximately $2,000 for the period January 1, 2003 through September 30, 2003. Based
on preliminary evaluations and on advice of its outside counsel, the Company believes that its
methodology in calculating its state unemployment insurance is in compliance with all applicable
laws and regulations. The Company is currently working with outside counsel to resolve this issue,
and has not accrued for this amount as of January 2, 2005. From time to time, the Company may selectively purchase licensed and traditional franchise
offices in certain territories with the intent of expanding the Companys market presence in such
regions. The Company may continue evaluating certain strategic acquisitions which may have an
impact on liquidity depending on the size of the acquisition. The Company believes that its current and expected levels of working capital of $57,702 and
line of credit are adequate to support present operations and to fund future growth and business
opportunities for the foreseeable future. Should it be necessary, the Company may issue
securities under its effective Form S-3. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements as defined in Regulation S-K 303(a) (4)
(ii). Contractual Obligations The Company has no significant contractual obligations not fully recorded in the consolidated
balance sheets or fully disclosed in the condensed notes to consolidated financial statements. The
Companys estimated workers compensation obligation which represents the remaining deductible
liability under the Companys current workers compensation contracts increased $1,942 to $38,391
at January 2, 2005 as compared to $36,449 at October 3, 2004. Critical Accounting
Policies and Estimates The discussions and analyses of the Companys consolidated financial condition and results of
operations were based on the Companys consolidated financial statements, which have been prepared
in conformity with accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and
liabilities at the financial statement date, and reported amounts of revenue and expenses during
the reporting period. On an ongoing basis, the Companys management reviews and evaluates these
estimates and assumptions, including those that relate to revenue recognition, accounts receivable,
workers compensation costs, goodwill, intangible and other long-lived assets, income taxes
including the valuation allowance for deferred tax assets, contingencies and litigation. These
estimates are based on historical experience and a variety of other assumptions believed reasonable
under the circumstances. Actual results could differ from these estimates under different
assumptions or conditions. Management believes the following critical accounting policies are those most significantly
affected by the judgment, estimates and/or assumptions used in the preparation of Remedys
consolidated financial statements. Revenue
Recognition The Company generates revenue from the sale of temporary staffing and
direct hire placements by its Company-owned and licensed franchise operations and from royalties on
revenues of such services by its traditional franchise operations. Temporary staffing revenues and
the related labor costs and payroll taxes are recorded in the period in which the services are
performed. Direct hire revenues are recognized when the direct hire candidate begins full-time
employment. Sales allowances are established to estimate losses due to placed candidates not
remaining employed for the Companys direct hire guarantee period, typically 30-100 days and have
historically been insignificant to the Companys overall results of operations. The Company accounts for the revenues and the related direct costs in accordance with
Emerging Issues Task Force 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent.
The Company is required to assess whether it acts as a principal in its transactions or as an
agent acting on the behalf of others. Where the Company is the principal in a transaction and has
the risks and rewards of ownership, the transaction is recorded gross in the consolidated
statement of operations, and where the Company acts merely as an agent, only the net fees earned
are recorded in the income statement. Under the Companys traditional franchised agreement, the
franchisee has the direct contractual
relationship with clients, holds title to the related customer receivables and is the legal
employer of the temporary employees. Accordingly, the Company does not include the revenues and
direct expenses from these transactions in its consolidated statements of operations and only
records the royalty fee earned. Alternatively, under the Companys licensed franchise
agreements the Company has the direct contractual relationship with clients, holds title to the
related customer receivables and is the 23




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##### Table of Contents



RemedyTemp, Inc. legal employer of the temporary employees. As the Company
retains the risks and rewards of ownership (such as the liability for the cost of temporary
personnel and the risk of loss for collection), the revenues and direct expenses of its licensed
franchise operations are included in the Companys results of operations. The Company remits to
each licensed franchisee a portion of the gross margin generated by its office(s). Accounts
Receivable Remedy provides an allowance for doubtful accounts on its accounts
receivable for estimated losses resulting from the inability of its clients to make required
payments. This allowance is based upon managements analysis of historical write-off levels,
current economic trends, routine assessment of its clients financial strength and any other known
factors impacting collectibility. If the financial condition of its clients were to deteriorate,
which may result in the impairment of their ability to make payments, additional allowances may be
required. Remedys estimates are influenced by the following considerations: the large number of
clients and their dispersion across wide geographic areas, the fact that no single client accounts
for 10% or more of its net revenues and its continuing credit evaluation of its clients financial
conditions. Workers
Compensation Costs The Company maintains reserves for its workers compensation
obligations using actuarial methods to estimate the remaining undiscounted liability for the
deductible portion of all claims, including those incurred but not reported. This process includes
establishing loss development factors, based on the historical claims experience of the Company and
the industry, and applying those factors to current claims information to derive an estimate of the
Companys ultimate claims liability. The calculated ultimate liability is then reduced by
cumulative claims payments to determine the required reserve. Management evaluates the reserve,
and the underlying assumptions, regularly throughout the year and makes adjustments as needed.
While management believes that the recorded amounts are adequate, there can be no assurance that
changes to managements estimates will not occur due to limitations inherent in the estimation
process. Goodwill and Other Intangible Assets Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets, requires that goodwill and intangible assets
deemed to have indefinite lives are not amortized but are to be tested for impairment at the
reporting unit level on an annual basis (at fiscal year end for the Company) and between annual
tests if an event occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying value. These events or circumstances could include a
significant change in the business climate, legal factors, operating performance indicators,
competition, or sale or disposition of a significant portion of a reporting unit. Application of
the goodwill impairment test requires judgment, including the identification of reporting units
(reporting units are determined based on geographic groupings of Company-owned offices), and
determination of the fair value of each reporting unit. The fair value of each reporting unit is
estimated using similar transactions and the guideline public company method which develops and
utilizes multiples of revenue and gross profit. Changes in the estimates and assumptions used in
the determination of the fair value of the reporting units could materially affect the fair value
and/or goodwill impairment for each reporting unit. Other
Long-Lived Assets In accordance with SFAS No. 144, Accounting for the Impairment or
disposal of Long-Lived Assets, the Company assesses the fair value and recoverability of its
long-lived assets, whenever facts and circumstances indicate the carrying value of an asset may not
be recoverable from estimated future cash flows expected to result from its use and eventual
disposition. In doing so, the Company makes assumptions and estimates regarding future cash flows
and other factors. The fair value of the long-lived assets is affected by factors such as the
ongoing maintenance and improvements of the assets, recent operating results, forecasted
performance of the Companys business and the overall economic environment. When the Company
determines that the carrying value of the long-lived assets exceeds the fair value and may not be
recoverable, an impairment loss is recognized. The Company measures impairment based upon a
forecasted discounted cash flow method. Income Taxes In preparing the Companys consolidated financial statements, management
estimates the Companys income taxes in each of the taxing jurisdictions in which it operates. This
includes estimating the Companys actual current tax expense together with any temporary
differences resulting from the different treatment of certain items, such as the timing for
recognizing revenues and expenses, for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included in the Companys consolidated balance
sheets. Deferred tax assets and liabilities are determined based on temporary differences between
income and expenses reported for financial reporting and tax reporting. The Company is required to
record a valuation allowance to reduce its deferred tax assets to the amount that it believes is
more likely than not to be realized. In assessing the need for a valuation allowance, the Company
considers all positive and negative evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning strategies and recent financial
performance. 24




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##### Table of Contents



RemedyTemp, Inc. As a result of the Companys recent cumulative losses, management concluded that a full
valuation allowance was appropriate at January 2, 2005 and for the fiscal years ended October 3,
2004 and September 28, 2003. While the Company expects to be profitable in fiscal 2005 and beyond,
in view of the recent losses there is no assurance that there will be sufficient future taxable
income to realize the benefit of the deferred tax asset. If, after future assessments of the
realizability of the deferred tax assets, the Company determines a lesser allowance is required it
would record a reduction to income tax expense and the valuation allowance in the period of such
determination. Contingencies
and Litigation There are various claims, lawsuits and pending actions against
the Company incident to its operations. If a loss arising from these actions is probable and can be
reasonably estimated, the Company must record the amount of the estimated liability. With the
exception of the $5,877 charge recorded in the fourth quarter of fiscal 2004 related to the CIGA
matter, and based on current available information, management believes that the ultimate
resolution of these actions will not have a material adverse effect on the Companys consolidated
financial statements. As additional information becomes available, management will continue
assessing any potential liability related to these actions and may need to revise its estimates. Seasonality The Companys quarterly operating results are affected by the number of billing days in the
quarter and the seasonality of its clients businesses. The first fiscal quarter has historically
been relatively strong as a result of manufacturing and retail emphasis on holiday sales.
Historically, the second fiscal quarter shows a decline in comparable revenues from the first
fiscal quarter. Revenue growth has historically accelerated in each of the third and fourth fiscal
quarters as manufacturers, retailers and service businesses increase their level of business
activity. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk resulting from changes in interest rates and equity
prices and, to a lesser extent, foreign currency rates. Under its current policy, the Company does
not engage in speculative or leveraged transactions to manage exposure to market risk. There were
no material changes to the disclosures made in Item 7A in the Companys Annual Report on Form 10-K
for the year ended October 3, 2004 regarding quantitative and qualitative disclosures about market
risk. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As
of January 2, 2005, the Company carried out an evaluation, under
the supervision and with the participation of the Companys
management, including the Companys principal executive officer
and principal financial officer, of the effectiveness of the design
and operation of the Companys disclosure controls and
procedures as defined in Exchange Act Rules 13a-15(e) and
15d-15(e). These disclosure controls and procedures are designed to
provide reasonable assurance that the information required to be
disclosed by the Company in its periodic reports filed with the
Commission is recorded, processed, summarized and reported within the
time periods specified by the Commissions rules and forms, and
that the information is accumulated and communicated to the
Companys management, including the principal executive officer
and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure. The design of any disclosure
controls and procedures also is based in part on certain assumptions
about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all
potential future conditions. Based
upon their evaluation, the principal executive officer and principal
financial officer concluded that the Companys disclosure
controls and procedures are effective at the reasonable assurance
level. Changes in Internal Control over Financial Reporting There was no change in the Companys internal controls over financial reporting during the
period covered by this report on Form 10-Q that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. 25




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##### Table of Contents



RemedyTemp, Inc. 
 PART IIOTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS Litigation CIGA In early 2002, as a result of the liquidation of Remedys former workers compensation
insurance carrier, Reliance National Insurance Company (Reliance), the California Insurance
Guarantee Association (CIGA) began making efforts to join some of the Companys clients and their
workers compensation insurance carriers (collectively, Clients), in pending workers
compensation claims filed by Remedy employees. At the time of these injuries, from July 22, 1997
through March 31, 2001, Remedy was covered by workers compensation policies issued by Reliance.
The Company believes that, under California law, CIGA is responsible for Reliances outstanding
liabilities. On April 5, 2002, the California Workers Compensation Appeals Board (WCAB), at
Remedys request, consolidated the various workers compensation claims in which CIGA sought to
join Remedys Clients, and agreed to stay proceedings on those claims pending resolution of the
issue of CIGAs obligations to satisfy Reliances obligations to Remedys employees. The WCAB
selected a single test case from the consolidated pending cases in which to decide whether CIGA is
responsible for the claims of Remedys employees, or can shift such responsibility to the Clients.
The trial occurred on September 20, 2002. The WCAB Administrative Law Judge ruled in favor of
CIGA, thus allowing the pending workers compensation matters to proceed against the Clients.
Remedy then filed a motion for reconsideration of the Administrative Law Judges decision by the
entire WCAB. On March 28, 2003, the WCAB, en banc, affirmed the ruling of the Administrative Law
Judge. Thereafter, in May 2003, the Company filed a petition for writ of review of the WCABs
decision in the California Court of Appeal. The WCAB continued the stay in effect since April 5,
2002, thus preventing CIGA from proceeding until the writ proceeding was concluded. In January
2004, the Court of Appeal granted the Companys petition and undertook to review the WCABs
decision. The Court heard oral argument in the matter on July 9, 2004. On October 20, 2004, the Court of Appeal affirmed the WCABs decision. The Company intends to
seek further review of that decision by way of rehearing by the Court of Appeal and/or review by
the California Supreme Court. On November 18, 2004, the Court of Appeal granted the Companys
petition for rehearing and requested additional briefing on this
matter. The Court of Appeal scheduled oral argument for
March 2, 2005. Both avenues of further
review are discretionary with the court such that the Company does not have an absolute right to
such review. Despite the Companys determination to further pursue the appellate review process, there can
be no assurance that such efforts will be successful in overturning the Court of Appeals decision.
In the event of a final unfavorable outcome, Remedy may be obligated to reimburse certain clients
and believes that it would consider reimbursement of other clients for actual losses incurred as a
result of an unfavorable ruling in this matter. If CIGA is permitted to join Remedys clients,
thus triggering the clients insurance carriers obligation to respond to the claims of Remedys
employees, the Company believes that the direct financial exposure to Remedy becomes a function of
the ultimate losses on the claims and the impact of such claims, if any, on the clients insurance
coverage, potentially including but not limited to the clients responsibility for any deductibles
or retentions under their own workers compensation insurance. The Company has received data from
the Third Party Administrator (TPA) handling the claims for CIGA. Such data indicates claims of
$31.6 million as of January 2, 2005. The losses incurred to date represent amounts paid to date by
the trustee and the remaining claim reserves on open files. Based on the Court of Appeals decision, the Company recorded a $5.9 million charge to
operating income during the fourth quarter of fiscal 2004. This amount represents the Companys
current estimate based on review of known information and was established for costs associated with
the indemnification of certain clients for losses they may suffer as a result of the ruling. The
$5.9 million charge was based on the Companys review of customer contracts, review of the Loss Run
received from the TPA handling the claims, actuarial development of the reported claim losses,
estimates of customer insurance coverage, and other applicable information. The amount of the
charge is therefore subject to change as more information becomes available to the Company. The
Company recorded $0.1 million in legal expenses for CIGA litigation costs during the first quarter
of fiscal 2005. Additionally, the Company reclassified $0.2 million of legal expenses related to
the CIGA matter that were incurred during the first quarter of fiscal 2004 from selling and
administrative expense to CIGA litigation costs. The Company may also choose to reimburse clients
that did not enter
into contracts with the Company or whose contracts may not have included indemnification
language. These costs will be treated as period costs and will be charged to the consolidated
statements of operations in the period management decides 26




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##### Table of Contents



RemedyTemp, Inc. to make any goodwill payments to
clients. Managements current estimate of future goodwill payments is a range of $2.0 million to
$3.0 million. This estimate is subject to change. Other Litigation From time to time, the Company becomes a party to other litigation incidental to its business
and operations. The Company maintains insurance coverage that management believes is reasonable
and prudent for the business risks that the Company faces. Based on current available information,
management does not believe the Company is party to any other legal proceedings that are likely to
have a material adverse effect on its business, financial condition, cash flows or results of
operations. Other Contingency On November 18, 2003, the Company was notified by the State of California Employment
Development Department (the EDD) that the Company allegedly underpaid its state unemployment
insurance by approximately $2.0 million for the period January 1, 2003 through September 30, 2003.
Based on preliminary evaluations and on advice of its outside counsel, the Company believes that
its methodology in calculating its state unemployment insurance is in compliance with all
applicable laws and regulations. The Company is currently working with outside counsel to resolve
this issue, and has not accrued for this amount as of January 2, 2005. 27




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##### Table of Contents



RemedyTemp, Inc. 
 ITEM 6. EXHIBITS Set forth below is a list of the exhibits included as part of this
Quarterly Report: Exhibit No.
    
    Description3.1
    
    
    Amended and Restated Articles of Incorporation of the Company (a)3.2
    
    
    Amended and Restated Bylaws of the Company (e)4.1
    
    
    Specimen Stock Certificate (a)4.2
    
    

    Shareholder Rights Agreement (a)10.1
    
    
    *Robert E. McDonough, Sr. Amended and Restated Employment Agreement (f)10.2
    
    
    *Paul W. Mikos Employment Agreement, as amended (g)10.3
    
    
    *Robert E. McDonough, Sr. Amendment No. 1 to Amended and Restated Employment Agreement (i)10.7
    
    
    *Deferred Compensation Agreement for Alan M. Purdy (a)10.9
    
    
    Form of Indemnification Agreement (a)10.11
    
    
    *Amended and Restated RemedyTemp, Inc. 1996 Stock Incentive Plan (h)10.12
    
    
    *Amended and Restated RemedyTemp, Inc. 1996 Employee Stock Purchase Plan (h)10.13
    
    
    Form of Franchising Agreement for Licensed Offices (k)10.14
    
    
    Form of Franchising Agreement for Franchised Offices (a)10.15
    
    
    Form of Licensing Agreement for IntelliSearch® (a)10.18
    
    
    *Additional Deferred Compensation Agreement for Alan M. Purdy (b)10.19
    
    
    Lease Agreement between RemedyTemp, Inc. and Parker-Summit, LLC (c)10.22
    
    
    *RemedyTemp, Inc. Deferred Compensation Plan (d)10.23
    
    
    *Amended and Restated Employment Agreement for Greg Palmer (m)10.24
    
    
    *1998 RemedyTemp, Inc. Amended and Restated Deferred Compensation and Stock
Ownership Plan for Outside Directors (r)10.25
    
    
    Form of Licensing Agreement for i/Search 2000®(e)10.27
    
    
    *Paul W. Mikos Severance Agreement and General Release (j)10.28
    
    
    *Gunnar B. Gooding Employment and Severance Letter (l)10.29
    
    
    *Cosmas N. Lykos Employment and Severance Letter (l)10.30
    
    
    *Alan M. Purdy Retirement Agreement and General Release (n)10.31
    
    
    *Monty Houdeshell Employment Letter (o)10.32
    
    
    *Monty Houdeshell Change in Control Severance Agreement (p)10.34
    
    
    Amendment No. 2 to the Lease Agreement between RemedyTemp, Inc. and Parker  Summit, LLC (q)10.36
    
    
    Business Loan Agreement between Bank of America N.A. and RemedyTemp, Inc. (s)10.37
    
    
    Amended and Restated Credit Agreement between Bank of America, N.A. and Remedy Temp, Inc. (t)10.38
    
    
    *Robert E. McDonough, Sr. Amended
and Restated Employment Agreement
 28




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##### Table of Contents



RemedyTemp, Inc. Exhibit No.
    
    Description31.1
    
    
    Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    
    Chief Executive Officer and Chief Financial Officer Certifications Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    Indicates a management contract or a compensatory plan, contract or arrangement.(a)
    
    Incorporated by reference to the exhibit of same number to the Registrants Registration
Statement on Form S-1 (Reg. No. 333-4276), as amended.(b)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended December 29, 1996.(c)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended March 30, 1997.(d)
    
    Incorporated by reference to the exhibit of same number to the Registrants Annual Report
on Form 10-K for the yearly period ended September 28, 1997.(e)
    
    Incorporated by reference to the exhibit of same number to the Registrants Annual Report
on Form 10-K for the yearly period ended September 27, 1998.(f)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Reports on Form 10-Q for the quarterly period ended December 27, 1998.(g)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Reports on Form 10-Q for the quarterly period ended June 27, 1999 (original agreement) and
for the quarterly period ended December 31, 2000 (amendment).(h)
    
    Incorporated by reference to the exhibit of same number to the Registrants Annual Report
on Form 10-K for the yearly period ended October 3, 1999.(i)
    
    Incorporated by reference to exhibit number 10.1 to the Registrants Quarterly Report on
Form 10-Q for the quarterly period ended December 31, 2000.(j)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended April 1, 2001.(k)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended July 1, 2001.(l)
    
    Incorporated by reference to the exhibit of same number to the Registrants Annual Report
on Form 10-K for the yearly period ended September 30, 2001.(m)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended December 30, 2001.(n)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2002.(o)
    
    Incorporated by reference to the exhibit of same number to the Registrants Annual Report
on Form 10-K for the yearly period ended September 29, 2002.(p)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended June 29, 2003.(q)
    
    Incorporated by reference to the exhibit of same number to the Registrants Annual Report
on Form 10-K for the yearly period ended September 28, 2003.(r)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended December 28, 2003.(s)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended March 28, 2004.(t)
    
    Incorporated by reference to the exhibit of same number to Registrants Current Report on
Form 8-K on December 3, 2004. 29




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##### Table of Contents



RemedyTemp, Inc. 
 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. REMEDYTEMP, INC.February 7, 2005
    
    /s/ GREG D. PALMERGreg D. Palmer, President and ChiefExecutive OfficerFebruary 7, 2005
    
    /s/ MONTY A. HOUDESHELLMonty A. Houdeshell, Senior VicePresident Chief Administrative Officer andCorporate Secretary(Principal Financial Officer)February 7, 2005
    
    /s/ JOHN D. SWANCOATJohn D. Swancoat, Vice President and Controller(Principal Accounting Officer)
 30




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##### Table of Contents



RemedyTemp, Inc. 
 Exhibit Index Exhibit No.
    
    Description3.1
    
    
    Amended and Restated Articles of Incorporation of the Company (a)3.2
    
    
    Amended and Restated Bylaws of the Company (e)4.1
    
    
    Specimen Stock Certificate (a)4.2
    
    
    Shareholder Rights Agreement (a)10.1
    
    
    *Robert E. McDonough, Sr. Amended and Restated Employment Agreement (f)10.2
    
    
    *Paul W. Mikos Employment Agreement, as amended (g)10.3
    
    
    *Robert E. McDonough, Sr. Amendment No. 1 to Amended and Restated Employment Agreement (i)10.7
    
    
    *Deferred Compensation Agreement for Alan M. Purdy (a)10.9
    
    
    Form of Indemnification Agreement (a)10.11
    
    
    *Amended and Restated RemedyTemp, Inc. 1996 Stock Incentive Plan (h)10.12
    
    
    *Amended and Restated RemedyTemp, Inc. 1996 Employee Stock Purchase Plan (h)10.13
    
    
    Form of Franchising Agreement for Licensed Offices (k)10.14
    
    
    Form of Franchising Agreement for Franchised Offices (a)10.15
    
    
    Form of Licensing Agreement for IntelliSearch® (a)10.18
    
    
    *Additional Deferred Compensation Agreement for Alan M. Purdy (b)10.19
    
    
    Lease Agreement between RemedyTemp, Inc. and Parker-Summit, LLC (c)10.22
    
    
    *RemedyTemp, Inc. Deferred Compensation Plan (d)10.23
    
    
    *Amended and Restated Employment Agreement for Greg Palmer (m)10.24
    
    
    *1998 RemedyTemp, Inc. Amended and Restated Deferred Compensation and Stock
Ownership Plan for Outside Directors (r)10.25
    
    
    Form of Licensing Agreement for i/Search 2000®(e)10.27
    
    
    *Paul W. Mikos Severance Agreement and General Release (j)10.28
    
    
    *Gunnar B. Gooding Employment and Severance Letter (l)10.29
    
    
    *Cosmas N. Lykos Employment and Severance Letter (l)10.30
    
    
    *Alan M. Purdy Retirement Agreement and General Release (n)10.31
    
    
    *Monty Houdeshell Employment Letter (o)10.32
    
    
    *Monty Houdeshell Change in Control Severance Agreement (p)10.34
    
    
    Amendment No. 2 to the Lease Agreement between RemedyTemp, Inc. and Parker  Summit, LLC (q)10.36
    
    
    Business Loan Agreement between Bank of America N.A. and RemedyTemp, Inc. (s)10.37
    
    
    Amended and Restated Credit Agreement between Bank of America, N.A. and Remedy Temp, Inc. (t)10.38
    
    
    *Robert E. McDonough, Sr. Amendment
No. 2 to Amended and Restated Employment Agreement




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##### Table of Contents



RemedyTemp, Inc. Exhibit No.
    
    Description31.1
    
    
    Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    
    Chief Executive Officer and Chief Financial Officer Certifications Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    Indicates a management contract or a compensatory plan, contract or arrangement.(a)
    
    Incorporated by reference to the exhibit of same number to the Registrants Registration
Statement on Form S-1 (Reg. No. 333-4276), as amended.(b)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended December 29, 1996.(c)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended March 30, 1997.(d)
    
    Incorporated by reference to the exhibit of same number to the Registrants Annual Report
on Form 10-K for the yearly period ended September 28, 1997.(e)
    
    Incorporated by reference to the exhibit of same number to the Registrants Annual Report
on Form 10-K for the yearly period ended September 27, 1998.(f)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Reports on Form 10-Q for the quarterly period ended December 27, 1998.(g)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Reports on Form 10-Q for the quarterly period ended June 27, 1999 (original agreement) and
for the quarterly period ended December 31, 2000 (amendment).(h)
    
    Incorporated by reference to the exhibit of same number to the Registrants Annual Report
on Form 10-K for the yearly period ended October 3, 1999.(i)
    
    Incorporated by reference to exhibit number 10.1 to the Registrants Quarterly Report on
Form 10-Q for the quarterly period ended December 31, 2000.(j)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended April 1, 2001.(k)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended July 1, 2001.(l)
    
    Incorporated by reference to the exhibit of same number to the Registrants Annual Report
on Form 10-K for the yearly period ended September 30, 2001.(m)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended December 30, 2001.(n)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2002.(o)
    
    Incorporated by reference to the exhibit of same number to the Registrants Annual Report
on Form 10-K for the yearly period ended September 29, 2002.(p)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended June 29, 2003.(q)
    
    Incorporated by reference to the exhibit of same number to the Registrants Annual Report
on Form 10-K for the yearly period ended September 28, 2003.(r)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended December 28, 2003.(s)
    
    Incorporated by reference to the exhibit of same number to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended March 28, 2004.(t)
    
    Incorporated by reference to the exhibit of same number to Registrants Current Report on
Form 8-K on December 3, 2004.