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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED NOVEMBER 3, 2001

COMMISSION FILE NUMBER 000-27130

WESTAFF, INC.
(Exact name of registrant as specified in its charter)

301 LENNON LANE, WALNUT CREEK, CA 94598-2453
(Address of principal executive offices, including zip code)

(925) 930-5300
(Registrant's telephone number)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of class)

        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 /x/    No / /

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

        The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $23,312,230 as of December 31, 2001, based on the closing price of the Registrant's Common Stock on the Nasdaq National Market reported for that trading day. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        As of December 31, 2001 the Registrant had outstanding 15,913,656 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

        The following documents (or portions thereof) are incorporated herein by reference:

        Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 22, 2002 are incorporated by reference into Part III of this Form 10-K Report.

INDEX
WESTAFF, INC.

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PART I

ITEM 1. BUSINESS.

        The following Business Section contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including those set forth under "Factors Affecting Future Operating Results" beginning on page 14 below and elsewhere in, or incorporated by reference into, this Annual Report on Form 10-K. This Form 10-K for the fiscal year ended November 3, 2001 contains service marks of the Company.

General

        The Company provides temporary staffing services primarily in suburban and rural markets ("secondary markets"), as well as in the downtown areas of certain major urban centers ("primary markets") in the United States and selected international markets. Through its network of Company-owned, franchise agent and licensed offices, the Company offers a wide range of temporary staffing solutions, including replacement, supplemental and on-site programs to businesses and government agencies. The Company has over 50 years of experience in the staffing industry and, as of November 3, 2001, operated through over 340 business services offices in 45 states, the District of Columbia and six foreign countries. As of November 3, 2001, 72.8% of these offices were owned by the Company, 24.3% were operated by franchise agents and 2.9% were operated by licensees.

        The Company differentiates itself from other large temporary staffing companies by primarily focusing on recruiting and placing temporary office and light industrial support personnel in secondary markets. These personnel often fill clerical, light industrial and light technical positions such as word processing, data entry, reception, customer service, telemarketing, warehouse labor, manufacturing and assembly. These assignments can support either core or non-core functions of the customer's daily business operations.

        The Company was founded in 1948 and incorporated in California in 1954. In October 1995, the Company reincorporated in Delaware. The Company's corporate name was changed to Westaff, Inc. in September 1998. The Company's executive offices are located at 301 Lennon Lane, Walnut Creek, California 94598-2453, and its telephone number is (925) 930-5300. The Company transacts business through its subsidiaries, the largest of which is Westaff (USA), Inc., a California corporation, that is the primary operating entity.

        Effective May 1, 2001, the Company appointed Tom D. Seip as President and Chief Executive Officer, as successor to W. Robert Stover, who had been serving as interim President and Chief Executive Officer since May 3, 2000. Mr. Seip served in that capacity for approximately eight months until he resigned and was succeeded as President and Chief Executive Officer by Dwight S. Pedersen effective January 14, 2002. Mr. Pedersen had served as a non-employee director of the Company and as a member of the Audit Committee of the Board of Directors since May 1, 2001. He resigned from the Audit Committee upon becoming an employee of the Company.

        In November 1998, the Company announced its plan to sell its medical business, primarily operating through Western Medical Services, Inc., a wholly-owned subsidiary of the Company ("Western Medical"). As a result of this decision, the Company has classified its medical operations as discontinued operations in the Company's Consolidated Financial Statements and provides a separate discussion of the medical operations in this Business Section. See "—Medical Services" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Discontinued Operations."

        References in this Form 10-K to (i) the "Company" or "Westaff" refer to Westaff, Inc., its predecessor and their respective subsidiaries, unless the context otherwise requires, and (ii) "franchise

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agents" refer to the Company's franchisees in their roles as limited agents of the Company in recruiting job applicants, soliciting job orders, filling those orders and handling collection matters upon request, but otherwise refer to the Company's franchisees in their roles as independent contractors of the Company.

Business Strategy

        The Company's current objective is to enhance its position as a leading provider of temporary office and light industrial staffing services in secondary markets throughout the United States and in selected international markets. As a result of a strategic planning process undertaken in the fourth quarter of fiscal 2001 and concurrent with the Company's change in leadership, the key elements of the Company's business strategy were reevaluated and now include:

        Focus on Sales and Marketing Within the Temporary Office and Light Industrial Staffing Services Sector.    The Company focuses on placing temporary office and light industrial staffing personnel. The Company believes that temporary office and light industrial staffing services are the foundation of the staffing industry and will remain a significant market for the foreseeable future. The Company also believes that employees performing temporary office and light industrial staffing functions are, and will remain, an integral part of the labor market in local, regional and national economies around the world. Based on this, the Company is actively seeking to expand its service offerings into this marketplace, including direct placements, temp-to-hire placements and other services designed to aid personnel in securing employment. The Company believes that it is well-positioned to capitalize on these business segments because of its ability to attract and retain temporary office and light industrial staffing personnel and its specialized knowledge of the staffing needs of customers.

        Enhance Recruiting of Qualified Personnel.    The Company believes that a key component of the Company's success is its ability to recruit and maintain a pool of qualified office and light industrial staffing personnel and regularly place them into desirable positions. The Company uses comprehensive methods to assess, select and, when appropriate, train its temporary employees in order to maintain a pool of qualified personnel to satisfy ongoing customer demand. The Company believes one of its key competitive advantages in attracting and retaining temporary office and light industrial staffing personnel is its payroll system, which provides it with the ability to print payroll checks at most of its branch offices within 24 hours after receipt of a time card. The Company also offers its temporary employees comprehensive benefit, retention and recognition packages, including a service bonus, holiday pay and opportunities to participate in the Company's contributory 401(k) plan and discounted employee stock purchase plan.

        Emphasize Secondary Markets.    The Company's strategy is to capitalize on its presence in secondary markets and to build market share by targeting small to medium-sized customers, including divisions of Fortune 500 companies. The Company believes that in many cases, such markets are less competitive and less costly in which to operate than the more central areas of metropolitan markets, where a large number of staffing services companies frequently compete for business and occupancy costs are relatively high. In addition, the Company believes that secondary markets are more likely to provide the opportunity to sell retail and recurring business that is characterized by relatively higher gross margins. In certain circumstances, the Company augments this concentration on secondary markets by focusing on national contracts with customers having a large presence in these marketplaces. The Company's geographic alignment allows it to effectively compete for some of these contracts and, therefore, the Company intends to pursue these opportunities.

        Maintain Entrepreneurial Offices with Strong Corporate Support.    The Company seeks to foster an entrepreneurial environment by operating each office as a separate profit center, by providing certain managers considerable operational autonomy and financial incentives and by establishing franchise agent offices in appropriate markets. Managers focus on business opportunities within markets and are

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provided centralized support to achieve success in those markets. The Company believes that this structure allows it to recruit and retain highly motivated managers who have demonstrated the ability to succeed in a competitive environment. This structure also allows managers and staff to focus on market development while relying on centralized services for support in back-office operations, such as risk management programs and unemployment insurance, credit, collections, accounting, advice on legal and regulatory matters, quality standards and marketing.

        Improve Financial Performance of International Operations.    The Company currently has operations in the United Kingdom, Australia, New Zealand, Norway, Denmark and Mexico. The Company closely monitors financial performance and works aggressively with local management to improve the sales and operating performance of its international operations. Furthermore, the Company periodically evaluates the performance of each of these operations and may consider alternative strategies for these operations including possible sale or closure. Based on such evaluations, the Company plans to close its operations in Mexico in the second quarter of fiscal 2002.

        Enhance Information Systems.    The Company believes its management information systems are instrumental to the success of its operations, as the Company's business is largely dependent on its ability to store, retrieve, process and manage significant amounts of data. The Company continually evaluates the quality, functionality and performance of its systems in an effort to ensure that these systems meet the operational needs of the Company. During fiscal 2001, the Company completed the rollout of the Westaff Automated Visionary Enterprise ("WAVE"), a full-featured branch office tool designed to assist in order management, candidate search and recruiting, customer service management, and sales management that also allows for sharing of information between offices. The Company continues to pursue efforts to upgrade and improve the functionality, performance and utility of its systems. However, the Company has recently determined to cease further development of the planned Lawson upgrade.—See "Management Information Systems", "Factors Affecting Future Operating Results—Reliance on Management Information Systems" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

        Control Costs Through Emphasis on Risk Management.    Workers' compensation and unemployment insurance premiums are significant expenses in the temporary staffing industry and are particularly high in the light industrial sector. Furthermore, there can be significant volatility in these costs as evidenced by the significant hardening of workers' compensation insurance markets following the September 11, 2001 tragedy. Workers' compensation costs as a percentage of direct labor were 3.0%, 4.0% and 4.0%, respectively, for fiscal 1999, 2000 and 2001. The Company estimates that workers' compensation costs as a percentage of direct labor will be in the range of 4.2% to 4.7% for fiscal 2002 as a result of increased workers' compensation costs across the industry. The Company has developed risk management programs and loss control strategies that it believes improve management's ability to control these employee-related costs through pre-employment safety training, safety assessment and precautions in the work place, post-accident procedures and return to work programs. The Company also has created financial incentives for branch offices to implement its risk management procedures and aggressively manage these costs. The Company believes that its emphasis on controlling employee-related costs enables market managers to price services more competitively and improve profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Growth Strategy

        The Company's current growth strategy focuses on internal growth and is contingent upon resolution of its financing challenges. The Company currently has no plans to pursue strategic external or complementary acquisitions within at least the next fiscal year.

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        Internal Growth.    The principal element of the Company's growth strategy has been, and continues to be, its focus on internal growth and consists of the following:

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Selectively Expand On-Site and On-Location Programs. The Company has taken advantage of industry trends by continuing to promote its "On-Location" program and its on-site (also referred to as "vendor-on-premises") programs. As of November 3, 2001, the Company had over 50 On-Location sites and on-site programs. Under these programs, the Company can assume administrative responsibility for coordinating all temporary staffing services throughout a customer's location, including skills testing and training.

The On-Location program provides for an independent branch office located at the customer's facility. It is generally intended for potentially large on-site accounts with more than $500,000 in annual revenue. A manager-level employee is assigned to the On-Location facility and this program is typically not seasonal. On-site relationships provide customers with dedicated account management which can more effectively meet the customer's changing staffing needs with high quality, consistent service. These programs tend to have lower gross margins than those for other customers, higher volumes, comparatively lower operating expenses and relatively longer customer relationships.

•

National Account Sales Strategy. The Company will focus on acquiring and servicing national accounts. Such accounts include large clients in multiple locations supported by a dedicated corporate-level business relationship manager. The Company currently has existing national accounts across many different business sectors such as manufacturing, government, financial services, technology and communications. During fiscal 2001, the Company established a professional sales team that services and leverages existing relationships to retain and grow these accounts. In addition, the Company is developing aggressive marketing programs to target and acquire additional clients that fit the Westaff branch system footprint.



•

Pursue Expansion by Establishment of New Offices. Currently, the Company is evaluating non-performing offices and has closed a number of unprofitable offices. Commencing in the third quarter of fiscal 2002, the Company will seek to expand its network of offices by actively marketing franchises in appropriate markets. The Company will focus its franchising efforts on proven industry professionals within appropriate geographic markets. The franchising model allows the Company to expand its markets and increase sales with a minimum of capital outlay. Furthermore, franchising allows the Company to diversify its overall risk with respect to swings in the economy. In addition, the Company may open a limited number of new Company-owned offices in existing markets to benefit from common area management, cross-marketing opportunities and leveraging of administrative expenses. The Company's corporate and operating management jointly develop expansion plans for new offices based upon various criteria, including market demand, availability of qualified personnel, the regulatory environment in the relevant market and whether a new office would complement or broaden the Company's current geographic network. The Company continues to support its current two licensees, but it no longer offers a license agreement to new prospects or to existing franchisees.



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Develop Value Added Service Offerings. The Company intends to develop several new service offerings designed to differentiate it from the competition. Development of these services will be through a combination of internal resources and outside alliances and may take advantage of current web based service delivery models. These service offerings will focus on increasing the pool of candidates and on advanced selection procedures for potential candidates as well as technology based management services that will allow clients to maximize workforce productivity. The Company believes that these service offerings will enhance its competitive edge and position it to more effectively pursue high growth market niches such as financial services, customer interaction centers and high end administrative placement.

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Services

        The Company's business services division places personnel in clerical, light industrial and light technical positions through an international network of offices. Personnel often fill positions such as word processing, data entry, reception, customer service and telemarketing, warehouse labor, manufacturing and assembly. As of November 3, 2001, the Company's domestic and international business services operations comprised over 340 offices.

        The Company markets its temporary and direct hire personnel services to local and regional customers through a network of Company-owned, franchise agent and licensed offices, as well as through its on-site and On-Location service locations. The Company coordinates significant amounts of its sales and marketing efforts through its corporate headquarters in cooperation with branch and regional offices and targets small to medium-size companies in secondary markets as well as national and regional accounts. New customers are obtained through personal sales presentations, telemarketing, direct mail solicitation, referrals from other customers and advertising in a variety of regional and local media, including the yellow pages, newspapers, magazines and trade publications. In addition, local radio, billboard and other creative advertising are used in certain markets to enhance the Company's name recognition.

        As of November 3, 2001, the Company's international operations comprised 58 Company-owned offices: 24 in the United Kingdom; 19 in Australia; four in New Zealand; six in Norway; four in Denmark; and one in Mexico. Through these offices, the Company provides regular, temporary and direct hire personnel services in the clerical and light industrial support areas. The Company employs several managing directors who oversee all operations in one or more countries. For fiscal 2000 and fiscal 2001, 13.9% and 14.7% respectively, of total system revenues from continuing operations were derived from the Company's international operations. A total of 24 offices in the United Kingdom, 19 offices in Australia and six offices in Norway have certification under ISO 9002, a total quality management program.

Operations

        As of November 3, 2001, the Company operated through a network of over 340 business services offices in 45 states, the District of Columbia and six foreign countries. In addition, the Company from time to time establishes recruiting offices both for recruiting potential temporary employees and for testing demand for its services in new market areas. The Company's operations are decentralized, with market, regional and zone managers and franchise agents and licensees enjoying considerable autonomy in hiring, determining business mix and advertising.

        The following table sets forth information as to the number of business services offices in operation as of the dates indicated.

(1)

Excludes Company-owned recruiting offices and medical services.

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        Company-Owned Offices.    Employees of each Company-owned office report to a branch or market manager who is responsible for day-to-day operations and the profitability of a market that consists of one to several offices. Market managers generally report to area and/or regional managers. As of December 31, 2001, there were three zone managers, nine regional managers, and 25 area managers for the domestic Company-owned offices. The Company has a variety of incentive plans in place for its domestic and international offices. One or more of these plans may be offered to branch staff as well as market, area, regional and zone managers. These plans are designed to motivate employees to maximize the growth and profitability of their offices. The Company believes that its incentive-based compensation plans encourage employees in its Company-owned offices to increase sales and profits, resulting in an entrepreneurial, creative and committed team.

        Franchise Agent Offices.    The Company's franchise agents have the exclusive right by contract to sell certain of the Company's services and to use the Company's service marks, business names and systems in a specified geographic territory. The Company's franchise agent agreements generally allow franchise agents to open multiple offices within their exclusive territories. As of November 3, 2001, the Company's 39 business services franchise agents operated 85 franchise agent offices. The Company designs its franchise agent program to provide attractive terms to franchise agents. Sales generated by franchise agent operations and related costs are included in the Company's consolidated sales of services and cost of services, respectively, and during fiscal 1999, 2000, and 2001, franchise agents offices represented 20.2%, 19.8%, and 22.5% respectively, of the Company's sales of services.

        Under the Company's franchise agent program, the franchise agent, as an independent contractor, is responsible for establishing and maintaining an office and paying related administrative and operating expenses, such as rent, utilities and salaries of its branch office staff. Each franchise agent functions as a limited agent of the Company in recruiting job applicants, soliciting job orders, filling those orders and handling collection matters upon request, but otherwise functions as an independent contractor. As franchisor, the Company is the employer of the temporary employees and the owner of the customer accounts receivable. The Company is responsible for providing start-up materials and supplies, training the franchise agent and occasionally assisting on-site, aiding in bids for national accounts and paying the wages of the temporary employees and all related payroll taxes and insurance. As a result, the Company provides a substantial portion of the working capital needed for the franchise agent operations. The Company also provides the use of the Company's payroll and information services to manage information regarding temporary employees and customers. Franchise agent agreements have an initial term of five years and are renewable for multiple five-year terms.

        Franchise agents are required to follow the Company's operating procedures and standards in recruiting, screening, classifying and retaining temporary personnel. Under the Company's name, the franchise agent solicits orders for temporary employees from customers and assigns the Company's temporary employees to customers in response to such orders. In an effort to control liability associated with workers' compensation claims, the Company's Risk Management Department works closely with franchise agent offices in evaluating job assignments and seeking to promote sales while effectively managing risks. The Company handles all government withholding, quarterly reports and W-2s, and maintains comprehensive insurance coverage for all temporary employees sent on assignment by franchise agent offices. In addition, through on-site safety and quality assurance inspections, franchise agent offices evaluate risks and check compliance with state and federal safety regulations. In some cases, the Company may, in conjunction with the Company's insurance carrier, employ the services of a professional loss control engineer.

        The Company's franchise agent and license agreements contain two-year non-competition covenants which the Company vigorously seeks to enforce. Efforts to enforce the non-competition covenants have resulted in litigation brought by the Company following termination of certain franchise agent or license agreements. In the past five fiscal years, the Company has commenced two actions to enforce the non-competition covenants. Both those actions were resolved in the Company's favor. See

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"Factors Affecting Future Operating Results—Risks Related to Franchise Agent and Licensed Operations."

        Licensed Offices.    Under the Company's license program, the licensee is the employer of the temporary employees and the owner of the customer accounts receivable. The Company typically grants licensees the exclusive right to establish an office to market and provide light industrial and clerical temporary personnel or light technical temporary personnel within a designated geographic area. Licensees receive the same basic training from the Company as franchise agents and attend seminars, participate in marketing programs and use the Company's sales literature. The Company also assists its licensees in obtaining business from its national accounts and provides them with national, regional and cooperative local advertising.

        Licensees operate within the framework of the Company's policies and standards. They recruit and employ temporary employees according to the Company's guidelines, and pay these employees using the Company's payroll procedures. However, licensees must obtain their own workers' compensation, liability, fidelity bonding and state unemployment coverage, which determine their payroll costs. The Company bills all licensees' customers and collects their remittances. License agreements are for a term of five years and are renewable for multiple five-year terms. As of November 3, 2001, the Company's three business services licensees operated 10 licensed offices. During fiscal 2001, two licensees purchased the Company's interest in their licensed operations and one licensee converted to the Company's franchise agent program. In the first quarter of fiscal 2002, the Company purchased the operations of one of its three remaining licensees.

        As a service to its licensees, the Company finances the licensees' temporary employee payroll, payroll taxes and insurance. This indebtedness is secured by a pledge of the licensees' accounts receivable, tangible and intangible assets, and the license agreements. Borrowings under the lines of credit bear interest at a rate equal to the reference rate of the Bank of America, N.A. plus two percentage points. Interest is charged on the borrowings only if the outstanding balance exceeds certain specified limits.

        The Company's sale of franchises and licenses is regulated by the Federal Trade Commission and by state business opportunity and franchise laws. The Company has either registered, or been exempted from registration, in 14 of the 15 states that require registration in order to offer franchises or licenses. In one of the 15 states, the Company has not yet sought registration and is therefore not currently authorized to offer franchise or license arrangements.

Management Information Systems

        The Company believes that its management information systems are instrumental to the success of its operations and the Company continually evaluates the quality, functionality and performance of its systems in an effort to ensure that these systems meet the operational needs of the Company.

        The Company's management information systems provide functionality in both the field offices and in the corporate back-office to support the operations of the Company. Field office functionality includes the WAVE, a full-featured branch office tool, designed to assist in order management, candidate search and recruiting, customer service management, and sales management that also allows for sharing of information between offices. The Company began implementing the WAVE in fiscal 1999. As of December 31, 2001, all branch offices were live on the WAVE. The Company also completed enhancements allowing customer and employee information in the WAVE to interface directly with the billing and payroll applications to improve efficiency. During fiscal 2001, the Company completed its first major upgrade of its thin-client technology environment. This design affords high efficiency through low-cost, low bandwidth data lines. Thin-client technology also affords the ability to deploy and upgrade applications quickly to all personnel. Since all applications reside within the two corporate data centers located in Reno, NV and Walnut Creek, CA, application upgrades can be done

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centrally at the corporate data centers at reduced cost. Furthermore, new or upgraded applications will be immediately available to all desktops within the Company's network.

        In addition, field offices use a billing and payroll application, which is designed to provide timely and accurate payment for temporary employees and billing to the Company's customers. Under this system, field offices capture and input customer, employee, billing and payroll information. This information is electronically transferred daily to centralized servers, where payroll, billing and financial information is processed overnight. These systems provide the Company with the ability to print checks at most of its offices within 24 hours after receipt of the time card. Invoices are also processed daily and distributed from the Company's centralized corporate offices. This system also supports branch office operations with daily, weekly, monthly and quarterly reports that provide information ranging from customer activity to office profitability.

        Most of the Company-owned, franchise agent and licensed offices are served by the Company's new systems architecture. The few offices that are not currently linked to the Company's corporate offices via the wide area network ("WAN") access these systems by either a dial-up virtual private network ("VPN") or via dial-up access to the Company's remote file transfer servers to transmit payroll data. All offices are supported by the Company's in-house Technical Support Department, which is responsible for computer installations, training and technical support.

        Currently, temporary payroll is processed on the Company's legacy payroll system. Enhancements to this system were completed in fiscal 2001 that have significantly reduced payroll processing times. During fiscal 1999 and fiscal 2000, the Company converted the majority of its back office functions to an application provided by Lawson Software. In August 2000, the Company entered into a beta test agreement with Lawson Software to develop an assignment billing module designed to meet the needs of the staffing industry. During fiscal 2001, the Company initiated plans to convert its front office temporary payroll functions to a seamlessly integrated front-to-back system. In September 2001, Lawson Software advised the Company that it was no longer going to support the assignment billing module of this system as general release software. In January 2002, concurrent with the Company's announcement of a change in executive leadership and implementation of a restructuring plan designed to improve the Company's profitability, the Company chose to cease further development of the assignment billing module and this entire project, and is considering its rights and remedies. Accordingly, a first quarter fiscal 2002 restructuring charge will include a write-off of approximately $1.0 million of expenditures capitalized to date, as well as $0.9 million related to office closures and severance costs.

        The Company continues to assess both short-term and long-term information systems needs and to invest in efforts to upgrade and improve the functionality, performance and utility of its systems. However, there can be no assurance that the Company will meet anticipated completion dates for its system initiatives, that such systems will be completed in a cost-effective manner or that such systems will support the Company's future growth or provide significant gains in efficiency and productivity. The failure of these systems to meet these expected goals could result in increased system costs and could have a material adverse effect on the Company's business, results of operations, cash flows or financial condition.

Risk Management Programs

        The Company is responsible for all employee-related expenses for the temporary staff employees of its Company-owned and franchise agent offices including workers' compensation, unemployment insurance, social security taxes, state and local taxes, and other general payroll expenses.

        The Company's risk management programs employ a variety of workers' compensation loss prevention and loss control strategies including: customer safety evaluations, individual local office expense allocation formulas, and aggressive claims management techniques to help control and reduce risks.

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        The Company's specific loss control strategies include a written screening process for light industrial work sites to ensure that temporary employees are placed within the Company's strict safety guidelines The Company requires general as well as site-specific safety orientation training and appropriate personal protective equipment in light industrial assignments. Safety equipment includes back supports, safety glasses, protective footwear and cut-proof gloves. Each accident is carefully reviewed by the Company to ensure that safety procedures were followed and that additional safety considerations are implemented to avoid any future injuries at a customer's work site. In addition, the Company carefully monitors the job assignments to prevent placing employees in certain high-risk jobs that prove too risky or are prohibited under the Company's guidelines.

        The Company has also developed financial incentives for field offices to ensure that risk management remains a high priority. Each Company-owned and franchise agent office is charged workers' compensation premiums through an internal experience modifier program that is now adjusted quarterly and is based heavily upon the local office's actual claims experience. The Company also employs a dividend program for its franchise agent offices that returns a portion of their premiums in the event of positive claims experience and a year-to-year cumulative over accrual of workers' compensation costs. The Company believes that its experience modifier and dividend programs provide strong incentives to the field offices to control workers' compensation risks.

        The Company also employs a number of creative and aggressive claims management techniques to help control losses. After each work-related injury requiring a medical examination, for example, post-accident drug testing is performed as part of the initial examination. In some circumstances, if the claimant tests positive for illegal drug usage, the claim may be denied in its entirety or benefits substantially reduced. If the injury prevents the employee from returning to work immediately, the Company moves forward with aggressive claims management. The Company has maintained a long-term relationship with its insurance carrier and claims administrator, and this intricate relationship has helped the Company to ensure consistency in carrying out its risk management programs.

        The Company's corporate claims management team, as well as all regional managers, have frequent meetings and conference calls with the claims administrator and can examine the claims adjusters' notes on-line. On an ongoing basis, the Company's workers' compensation specialists actively analyze claims to challenge compensability, the appropriateness of medical treatment and whether reserve balances are properly established. The Company also considers whether or not the customer or a third party may be a source for subrogation in the event civil recoveries are allowable to the injured employee.

        Due to the nature of temporary work, state unemployment insurance costs can rise to the maximum statutory rates if not properly managed. Through appropriate payroll tax planning, as well as utilization of a comprehensive claims management system, the Company believes it has developed methods to minimize these costs. There can be no assurance, however, that such methods will be successful. Any increase in such costs could have a material adverse effect on the Company's business, results of operations, cash flows or financial condition. See "Factors Affecting Future Operating Results—Variability of Employee-Related Costs."

Competition

        The temporary staffing industry is highly competitive with few barriers to entry. The Company believes that the majority of commercial temporary staffing companies are local, full-service or specialized operations with less than five offices. Within local markets, typically no single company has a dominant share of the market. The Company also competes for qualified temporary personnel and customers with larger, national full-service and specialized competitors in local, regional, national and international markets. The principal national competitors are Adecco SA, Spherion Corporation (commercial staffing segment), Kelly Services, Inc. (U.S. commercial staffing and international

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segments), Manpower Inc., RemedyTemp, Inc. (clerical and light industrial services), and Personnel Group of America, Inc. (commercial staffing services division). Many of the Company's principal competitors have greater financial, marketing and other resources than the Company. In addition, there are a number of medium-sized firms which compete with the Company in certain markets where they may have a stronger presence, such as regional or specialized markets.

        The Company believes that the competitive factors in obtaining and retaining customers include understanding customers' specific job requirements, providing temporary personnel in a timely manner, monitoring quality of job performance and pricing of services. The Company has experienced pricing pressure in all areas of its business and expects these pressures to continue. Furthermore, the United States economy is currently experiencing a recession and, consequently, competition for customers in the staffing industry has increased. The Company believes that the primary competitive factors in obtaining qualified candidates for temporary employment assignments are wages, benefits and flexibility of work schedules. Rising unemployment rates may increase the available pool of qualified candidates. There can be no assurance that the Company will not encounter increased competition in the future, which could limit the Company's ability to maintain or increase its market share or gross margin, and which could have a material adverse effect on the Company's business, results of operations, cash flows or financial condition. See "Factors Affecting Future Operating Results—Highly Competitive Market."

Employees

        The Company estimates that as of November 3, 2001 it had approximately 27,000 temporary employees on assignment through its business services division and employed 1,103 regular staff in its business services division. The Company's employees are not covered by any collective bargaining agreements. The Company believes that its relationships with its employees are good.

        The Company, as employer, is responsible for and pays the regular and temporary payrolls, Social Security taxes (FICA), federal and state unemployment taxes, workers' compensation insurance and other direct labor costs relating to its temporary employees (including temporary employees assigned by franchise agents). The Company offers various insurance programs and other benefits for certain of its temporary employees which are made available at the option of regional or market managers or franchise agents and licensees. As part of health care reform, federal and certain state legislative proposals have from time to time included provisions that would extend health insurance benefits to temporary employees who are not currently provided with such benefits. Due to the uncertainty associated with the ultimate enactment of any such health care reform initiatives and the form and content of any such initiatives once enacted, the Company is unable to estimate the impact any extension of health insurance benefits would have on its business, results of operations, cash flows or financial condition.

Service Marks

        The Company has various service marks registered with the United States Patent and Trademark Office, with the State of California and in various foreign countries. Federal and state service mark registrations may be renewed indefinitely as long as the underlying mark remains in use. The Company's service marks include Westaff®, Be a Temp®, Western Staff Services®, The Essential Support Services Leader®, On Location & Essential®, Accountants USA®, Westaff Wave® and It's About Respect®. The Company's applications to federally register Westaff People Matter^sm and AUSA^sm are pending. The Company is no longer pursuing a USA Temp service mark.

Medical Services

        In November 1998, the Company announced its plan to sell Western Medical. The Company's decision to sell the medical operations was prompted in large measure by the increasingly complex and

12

unfavorable regulatory environment affecting the Medicare business and the impact that changes in regulations had and likely would have had on the ability of the Company to operate profitably in the medical sector.

        As a result of this decision, the Company has classified its medical operations as discontinued operations and, accordingly, segregated the net assets of the discontinued operations in the accompanying Consolidated Financial Statements and Notes thereto. During fiscal 1999, the Company sold certain of its franchise agent and Company-owned medical offices and entered into a termination agreement with one of its medical licensees. During the fourth quarter of fiscal 1999, the Company completed the sale of the remaining medical business to Intrepid U.S.A. Inc. (Intrepid). Under the terms of the sale, the Company retained the trade and Medicare accounts receivable as well as due from licensee balances. In fiscal 1999, the Company recorded after-tax losses relating to discontinued operations of $6.6 million or $0.42 per share. These losses represented reserves for trade and Medicare accounts receivable and due from licensee balances, and also included additional operating losses resulting from the extended period required to close the sale and a reduction in estimated proceeds from the sale.

        During fiscal 2000, the Company recorded additional after-tax losses related to discontinued operations of $784,000 or $0.05 per share. This charge was primarily due to lower than expected settlements of Medicare cost reports. The Company has appealed a number of cost report settlements and hopes to recover additional funds in the future; however, there can be no assurance that the Company will be successful in its appeals.

        From fiscal 1999 through fiscal 2001, the Company had received $1.7 million in cash proceeds from the sale of its medical operations with an additional $1.0 million due from Intrepid as the balance of the purchase price under a guaranteed promissory note which was in default. In August 2000, Intrepid filed a demand for arbitration seeking compensatory and punitive damages alleging, among other things, that the Company made misrepresentations and otherwise breached the asset purchase agreement. In fiscal 2001, the arbitrator awarded Intrepid $1.1 million, mainly for breaches of certain representations, warranties and covenants in the asset purchase agreement, plus arbitration expenses and legal and accounting fees of approximately $0.4 million. The Company was awarded the $1.0 million due on the promissory note, plus interest. In addition, the arbitrator did not find fraud and denied Intrepid's claim for punitive damages. The Company has paid the amounts awarded to the claimant in full, except for certain indemnity claims that may be subject to future determination. Primarily due to the unfavorable arbitration award, the Company recorded an after-tax loss from discontinued operations of $1.8 million or $0.11 per share, in the second quarter of fiscal 2001. The after-tax loss included additional reserves for potential liabilities, Medicare and other contingencies, as well as reserves for medical operations' net operating loss carryforwards which the Company believes will expire unused over the next three years.

        Recorded estimated losses on the disposal of the medical operations are based on a number of assumptions. These include the estimated costs and write-offs required to collect the remaining Medicare accounts receivable and due from licensee balances, and estimated costs to be incurred in filing and settling all remaining Medicare cost reports and other estimated legal and incidental costs. Currently, the Company believes it has adequately reserved for the reasonable outcome of future events, as evidenced by the net liability position existing at November 3, 2001. However, should actual costs differ materially from those estimated by management, the Company would record additional losses (or gains) in future periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Discontinued Operations."

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Factors Affecting Future Operating Results

        This Form 10-K contains forward-looking statements concerning the Company's future programs, products, expenses, revenue, liquidity and cash needs as well as the Company's plans and strategies. These forward-looking statements are based on current expectations and the Company assumes no obligation to update this information. Numerous factors could cause actual results to differ significantly from the results described in these forward-looking statements, including the following risk factors.

        Financing Risks.    The Company is faced with significant financing challenges during calendar year 2002. At November 3, 2001 the Company had $30.0 million outstanding principal under its 10-year senior secured notes, payable in equal annual installments beginning in the third quarter of fiscal 2002. The Company was out of compliance with certain covenants of these senior notes as well as with certain covenants of its revolving credit facility at the end of fiscal 2001. The Company is currently negotiating with the bank syndicate holding the revolving credit facility to amend and restate the credit facility agreement thereby waiving default attributable to the covenant violations that existed at November 3, 2001. Although the Company had no amounts outstanding under the revolving credit facility at that date, it relies on the facility for purposes of meeting letter of credit requirements in connection with its workers' compensation program and for working capital, if required. As of the date of this filing on Form 10-K, the Company had $11.8 million in outstanding letters of credit, needs to arrange for an increase of $5.5 million in the letters of credit by March 15, 2002 and had no borrowings available to it under the existing facility. The senior noteholders have indicated they are awaiting the outcome of the credit facility negotiations and if those are completed in a satisfactory manner, they have indicated that they are willing to realign the covenants of the senior notes on a prospective basis and waive the covenant violations that existed at November 3, 2001. As of the date of this filing on Form 10-K, the senior noteholders have not delivered a notice of default to the Company, as is their right due to the covenant violations. However, because these covenant violations have not been cured, the Company has reclassified the entire $30.0 million of principal outstanding under the senior notes to a current liability on its balance sheet at November 3, 2001 since the notes are currently callable.

        As noted above, the Company is currently negotiating with its bank syndicate as well as its senior noteholders to amend and restate its existing agreements, and has received proposed terms for the amended and restated agreements. While there can be no assurance that the Company will be successful in closing the amended and restated agreements or that the proposed terms will remain as is, the Company anticipates that the amended and restated agreements will result in significant up-front fees as well as higher borrowing rates and letter of credit fees as compared to the current agreement.

        In addition to its outstanding senior notes and revolving credit facility, the Company has an outstanding financial guarantee bond in the amount of $11.8 million that secures a portion of its workers' compensation premium and deductible obligations. This bond is renewable annually on November 1 and 90 days' advance written notice of non-renewal is required. The bondholder has expressed its intent to exit the surety bond market and, consequently, not renew the bond. Although no formal notice of non-renewal has been received, the bondholder has expressed its desire to cancel this bond prior to November 1, 2002, if feasible. Discussions are underway for the purpose of reducing the bond to $9.0 million by April 30, 2002, which will require the Company to either increase its outstanding letters of credit under the revolving credit facility or cash collateralize the net decrease of $2.8 million. Should non-renewal of the bond occur as of November 1, 2002, the Company projects it will be required to either restructure its workers' compensation program to reduce its letter of credit requirements, obtain additional letters of credit or financial guarantee bonds to replace the expiring financial guarantee bond, or seek alternative financing.

        The Company's financing challenges present significant risks to investors, including the possibility that it may be unable to generate sufficient cash to pay the principal and interest due on the senior

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secured notes. The Company's ability to make principal and interest payments on its debt will be dependent on its future operating performance and/or obtaining additional sources of capital, which are dependent on a number of factors many of which are beyond its control. These factors include prevailing economic conditions and financial, competitive, regulatory and other elements affecting the Company's business and operations, and may be dependent on the availability of borrowings. If the Company does not have sufficient available resources to repay the outstanding debt when it becomes due and payable, it may find it necessary to refinance the debt, and such refinancing may not be available, or available on reasonable terms. A failure to negotiate an amended credit facility, or to obtain alternative financing could have a material adverse effect on the Company's results of operations and financial condition, and may adversely affect the trading price of its stock.

        Additionally, the Company has not met certain covenant requirements of the existing senior notes or the existing revolving credit facility for periods subsequent to November 3, 2001. The Company considers it unlikely that it can meet existing covenant requirements for periods subsequent to that date. Therefore, if the Company is unable to timely secure an amended credit facility and an amended senior note agreement, which provide relief from existing covenants, or secure alternate sources of financing with less restrictive covenants, there would be a material adverse effect on the Company's results of operations and financial condition which may adversely affect the trading prices of its stock. There can be no assurance that the Company will be able to successfully negotiate and implement an amended credit facility, an amended senior notes agreement or alternate financing.

        Furthermore, the Company may not be successful in implementing a new workers' compensation program prior to the anticipated expiration of the existing financial guarantee bond. Even if it does implement such a new program, it may require similar or even increased amounts of letters of credit, financial guarantee bonds or cash collateralization. There can be no assurance that the Company will be successful in restructuring its workers' compensation program. If the Company loses workers' compensation insurance program coverage or is forced to reduce the amount of coverage available, there would be a material adverse effect on the Company's results of operations and financial condition which may adversely affect the trading price of its stock.

        Moreover, the Company's indebtedness or a lack of financing availability could significantly hamper its future operating performance, including, but not limited to, the following:

•

a significant portion of its cash flow from operations may be dedicated to debt service payments, thereby reducing the funds available for other purposes;



•

the ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be significantly impaired;



•

its leverage or lack of financing availability may place it at a competitive disadvantage;



•

its leverage or lack of financing availability may limit its ability to expand; and



•

its leverage or lack of financing availability may hinder its ability to adjust rapidly to changing market conditions and, therefore, could make it more vulnerable in the event of a continuing downturn in general economic conditions or its business.

        If the Company is unable to satisfactorily resolve its financing, workers' compensation and other associated business issues, its ability to continue as a going concern may be impaired.

        The Company's Accountants Have Issued a Going Concern Opinion.    The Company's accountants have issued a report relating to the audited financial statements of the Company which contains an explanatory paragraph with respect to the Company's ability to continue as a going concern because, among other things, it was out of compliance with its debt covenants as of November 3, 2001, was unable to finalize amended agreements and the issuer of the Company's financial guarantee bond has

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indicated it does not intend to renew this bond. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

        Possible Adverse Effects Of Fluctuations in the General Economy.    Demand for the Company's staffing services is significantly affected by the general level of economic activity and unemployment in the United States and the countries in which the Company operates. Companies use temporary staffing services to manage personnel costs and staffing needs. When economic activity increases, temporary employees are often added before full-time employees are hired. However, as economic activity slows, many companies reduce their utilization of temporary employees before releasing full-time employees. In addition, the Company may experience less demand for its services and more competitive pricing pressure during periods of economic downturn. The current economic downturn has had a material adverse effect on the Company's business, results of operations, cash flows and financial condition and a continued downturn would likely have a further material adverse effect. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

        During fiscal 2001, the Company experienced significant declines in its sales of services, license fees and profitability as a result of the current economic recession. These sales declines have continued into the first quarter of fiscal 2002. As a result, the Company expects to incur an operating loss in the first quarter of fiscal 2002 and possibly beyond. The Company has implemented a number of cost reduction programs including layoffs and office closures in an effort to return the Company to profitability. However, there can be no assurance that the Company will be successful in reducing costs sufficiently to return the Company to profitability. In addition, further decreases in sales of services and license fees could have a material adverse effect on the Company's business, results of operations, cash flows or financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

        Reliance on Executive Management.    The Company has experienced turnover in the position of Chief Executive Officer since May 3, 2000, when the termination of a management-led recapitalization transaction was announced and the then current President and Chief Executive Officer resigned. Three individuals have served as Chief Executive Officer since then. The failure to retain the current incumbent or find a suitable successor candidate for the position of Chief Executive Officer, should the need arise, or the result of a prolonged search for that candidate, could have a material adverse effect on the Company's ability to manage its personnel and efficiently address changes in the business and its operations. In addition, without a Chief Executive Officer, the Company would be even more dependent on its senior executives and outside directors. The Company is highly dependent on its senior executives, including W. Robert Stover, its Chairman and Founder; Dwight S. Pedersen, who has been serving as the newly hired President and Chief Executive Officer since January 14, 2002; and Dirk A. Sodestrom, Senior Vice President and Chief Financial Officer, who has been serving in that capacity since January 1, 2001; and on the other members of its senior management team. The Company entered into an employment agreement with Mr. Stover effective January 1, 1999 for continuing employment until he chooses to retire or until his death and that agreement remains in effect. The Company has an employment agreement with Mr. Pedersen that provides for six months' salary in the event of termination without cause. The Company has entered into an employment agreement with Mr. Sodestrom that contains a requirement for six-months' advance notice of termination. Employment arrangements with all of the Company's executive officers other than Mr. Stover are at-will. The loss of the services of Mr. Stover, Mr. Pedersen, or Mr. Sodestrom and other senior executives or other key executive personnel could have a material adverse effect on the Company's business, results of operations, cash flows or financial condition.

        Uncertain Ability to Continue and Manage Growth.    The Company has historically experienced significant growth, principally through both internal growth and acquisitions. However, during recent fiscal years, internal growth rates have been slowing and the Company experienced a significant

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decrease in sales during fiscal 2001. Growth through acquisitions occurred prior to fiscal 1999, when the Company scaled back its near-term acquisition plans other than franchise buybacks. The Company's ability to return to growth and profitability will depend on a number of factors, including: (i) the strength of demand for temporary employees in the Company's markets; (ii) the availability of capital to fund operations; (iii) the ability to maintain or increase profit margins despite pricing pressures; and (iv) existing and emerging competition. The Company must also adapt its infrastructure and systems to accommodate growth and recruit and train additional qualified personnel. Furthermore, the United States economy is currently experiencing an economic recession. Should the economic recession continue, competition for customers in the staffing industry would increase and may adversely impact management's allocation of the Company's resources and result in declining revenues. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business—Growth Strategy."

        Control by Significant Stockholder.    The Company's Chairman and Founder, W. Robert Stover, beneficially owns directly or indirectly, or has voting power over, more than 50% of the Company's outstanding stock. As the principal stockholder of the Company, Mr. Stover has the ability to control substantially all matters submitted to the stockholders for approval and to exert significant influence on the Company's management and affairs, including appointments to the Board of Directors and executive management positions.

        Reliance on Management Information Systems.    The Company believes its management information systems are instrumental to the success of its operations, as the Company's business is largely dependent on its ability to store, retrieve, process and manage significant amounts of data. The Company continually evaluates the quality, functionality and performance of its systems in an effort to ensure that these systems meet the operational needs of the Company. The Company continues to pursue efforts to upgrade and improve the functionality, performance and utility of its systems. The Company has, in the past, discovered problems in implementing, upgrading or enhancing systems and may, in the future, experience delays or increased costs to correct such defects. There can be no assurance that the Company will meet anticipated completion dates for system replacements, upgrades or enhancements, that such work will be completed in a cost-effective manner, or that such replacements, upgrades and enhancements will support the Company's future growth or provide significant gains in efficiency. The failure of the replacements, upgrades and enhancements to meet these expected goals could result in increased system costs and could have a material adverse effect on the Company's business, results of operations, cash flows or financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business—Management Information Systems."

        Risks Related to International Operations.    The Company presently has operations in the United Kingdom, Australia, New Zealand, Norway, Denmark, and Mexico. The Company is planning to close its operations in Mexico during the second quarter of fiscal 2002. Operations in foreign markets are inherently subject to certain risks, including, in particular, different cultures and business practices, overlapping or differing tax structures, economic and political uncertainties and compliance issues associated with accounting and reporting requirements and changing, complex or ambiguous foreign laws and regulations, particularly as they relate to employment. All of the Company's sales outside of the United States are denominated in local currencies and, accordingly, the Company is subject to risks associated with fluctuations in exchange rates which could cause a reduction in the Company's profits. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, results of operations, cash flows or financial condition.

        Variability of Employee-Related Costs.    The Company is responsible for all employee-related expenses for the temporary employees of its Company-owned and franchise agent offices, including workers' compensation, unemployment insurance, social security taxes, state and local taxes and other

17

general payroll expenses. The Company maintains workers' compensation insurance for all claims in excess of a loss cap of $500,000 per incident, except with respect to locations in states where private insurance is not permitted and which are covered by state insurance funds. The Company accrues for workers' compensation costs based upon payroll dollars paid to temporary employees. The accrual rates vary based upon the specific risks associated with the work performed by the temporary employee. At the beginning of each policy year, the Company reviews the overall accrual rates with its outside actuaries and makes changes to the rates as necessary based primarily upon historical loss trends. Periodically, the Company evaluates its historical accruals based on an actuarially developed estimate of the ultimate cost for each open policy year and adjusts such accruals as necessary. These adjustments can either be increases or decreases to workers' compensation costs, depending upon the actual loss experience of the Company. Although management believes that the Company's accruals for workers' compensation obligations are adequate, there can be no assurance that the actual cost of workers' compensation obligations will not exceed the accrued amounts. In addition, there can be no assurance that the Company's programs to control workers' compensation and other payroll-related expenses will be effective or that loss development trends will not require a charge to costs of services in future periods to increase workers' compensation accruals. Unemployment insurance premiums are set by the states in which the Company's employees render their services. A significant increase in these premiums or in workers' compensation-related costs could have a material adverse effect on the Company's business, results of operations, cash flows or financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business—Risk Management Programs."

        Risks Related to Customers.    As is common in the temporary staffing industry, the Company's engagements to provide services to its customers are generally of a non-exclusive, short-term nature and subject to termination by the customer with little or no notice. During fiscal 2000 and 2001, no single customer of the Company accounted for more than 3.0% and 5.6%, respectively, of the Company's sales of services. Nonetheless, the loss of any of the Company's significant customers could have an adverse effect on the Company's business, results of operations, cash flows or financial condition. The Company is also subject to credit risks associated with its trade receivables. During fiscal 2000 and fiscal 2001, the Company incurred costs of $4.0 million and $1.4 million, respectively, for bad debts. Should any of the Company's principal customers default on their large receivables, the Company's business, results of operations, cash flows or financial condition could be adversely affected. See "Business—Services."

        Variability of Operating Results; Seasonality.    The Company has experienced significant fluctuations in its operating results and anticipates that these fluctuations may continue. Operating results may fluctuate due to a number of factors, including the demand for the Company's services, the level of competition within its markets, the Company's ability to increase the productivity of its existing offices, control costs and expand operations, the timing and integration of acquisitions and the availability of qualified temporary personnel. In addition, the Company's results of operations could be, and have in the past been, adversely affected by severe weather conditions. The Company's fourth fiscal quarter consists of 16 or 17 weeks, while its first, second and third fiscal quarters consist of 12 weeks each. Moreover, the Company's results of operations have also historically been subject to seasonal fluctuations. Demand for temporary staffing historically has been greatest during the Company's fourth fiscal quarter due largely to the planning cycles of many of its customers. Furthermore, sales for the first fiscal quarter are typically lower due to national holidays as well as plant shutdowns during and after the holiday season. These shutdowns and post-holiday season declines negatively impact job orders received by the Company, particularly in the light industrial sector. Due to the foregoing factors, the Company has experienced in the past, and may possibly experience in the future, results of operations below the expectations of public market analysts and investors. The occurrence of such an event could likely have a material adverse effect on the price of the Common Stock. See "—Variability

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of Employee—Related Costs" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Continuing Operations."

        Ability to Attract and Retain the Services of Qualified Temporary Personnel.    The Company depends upon its ability to attract and retain qualified personnel who possess the skills and experience necessary to meet the staffing requirements of its customers. During periods of increased economic activity and low unemployment, the competition among temporary staffing firms for qualified personnel increases. Many regions in which the Company operates have in the past and may continue to experience historically low rates of unemployment and the Company has experienced, and may continue to experience, significant difficulties in hiring and retaining sufficient numbers of qualified personnel to satisfy the needs of its customers. Furthermore, the Company may face increased competitive pricing pressures during such periods. There can be no assurance that qualified personnel will continue to be available to the Company in sufficient numbers and on terms of employment acceptable to the Company. The Company must continually evaluate and upgrade its base of available qualified personnel to keep pace with changing customer needs and emerging technologies. Furthermore, a substantial number of the Company's temporary employees during any given year will terminate their employment with the Company to accept regular staff employment with customers of the Company. The inability to attract and retain qualified personnel could have a material adverse effect on the Company's business, results of operations, cash flows or financial condition. See "Business—Operations."

        Highly Competitive Market.    The temporary staffing industry is highly competitive with few barriers to entry. The Company believes that the majority of clerical, light industrial and light technical temporary staffing companies are local, full-service or specialized operations with fewer than five offices. Within local markets, typically no single company has a dominant share of the market. The Company also competes for qualified temporary personnel and customers with larger, national, full-service and specialized competitors in local, regional, national and international markets. Many of the Company's principal competitors have greater financial, marketing and other resources than the Company. In addition, there are a number of medium-sized firms which compete with the Company in certain regional or specialized markets where such firms may have a stronger presence. Furthermore, certain of its current and prospective customers may decide to fulfill their staffing needs independently. The Company believes that the competitive factors in obtaining and retaining customers include understanding customers' specific job requirements, providing temporary personnel in a timely manner, monitoring quality of job performance and pricing of services. The Company has experienced pricing pressures in virtually all areas of its business and expects these pressures to continue. The Company believes that the primary competitive factors in obtaining qualified candidates for temporary employment assignments are wages, benefits and flexibility of work schedules. There can be no assurance that the Company will not encounter increased competition in the future, which could limit the Company's ability to maintain or increase its market share or gross margin, and which could have a material adverse effect on the Company's business, results of operations, cash flows or financial condition. See "Business—Competition."

        Reliance on Field Management.    The Company is dependent on the performance and productivity of its local managers, particularly market, area, regional and zone managers. The loss of some of the Company's key managers could have an adverse effect on the Company's operations, including the Company's ability to establish and maintain customer relationships. The Company's ability to attract and retain business is significantly affected by local relationships and the quality of services rendered by market, area, regional and zone managerial personnel. If the Company is unable to attract and retain key employees to perform these services, the Company's business, results of operations, cash flows or financial condition could be adversely affected. If any of these individuals do not continue in their management roles, there could be a material adverse effect on the Company's business, results of operations, cash flows or financial condition. See "Business—Operations."

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        Employer Liability Risks.    Providers of staffing services place people in the work places of other businesses. An inherent risk of such activity includes possible claims of errors and omissions, discrimination or harassment, theft of customer property, misappropriation of funds, misuse of customers' proprietary information, employment of undocumented workers, other criminal activity or torts, claims under health and safety regulations and other claims. There can be no assurance that the Company will not be subject to these types of claims, which may result in negative publicity and the payment by the Company of monetary damages or fines which, if substantial, could have a material adverse effect on the Company's business, results of operations, cash flows or financial condition.

        Risks Related to Franchise Agent and Licensed Operations.    Franchise agent and licensed operations comprise a significant portion of the Company's sales of services and license fees. For fiscal 2000 and fiscal 2001, 20.1% and 22.7% respectively, of the Company's total sales of services and license fees were derived from franchise agent and licensed operations. In addition, the Company's ten largest franchise agents for fiscal 2001 (based on sales volume) accounted for 13.0% of the Company's sales of services. The loss of one or more of the Company's franchise agents and any associated loss of customers and sales, could have a material adverse effect on the Company's business, results of operations, cash flows or financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

        The Company's franchise agent and license agreements contain two-year non-competition covenants, which the Company vigorously seeks to enforce. Efforts to enforce the non-competition covenants have resulted in litigation brought by the Company following termination of certain franchise agent or license agreements. In the past five fiscal years, the Company has commenced two actions to enforce the non-competition covenants. Both actions were resolved in the Company's favor. Should former franchise agents prevail at trial of such actions, or successfully appeal, the Company's ability to prevent franchise agents or licensees from operating competitive temporary staffing businesses, could be adversely affected. The Company has incurred, and may continue to incur, substantial attorneys' fees and litigation expenses for such lawsuits, both in furtherance of the Company's role as plaintiff and in defense of counterclaims or cross-complaints, for which insurance coverage typically is not available.

        Risk of Nasdaq Delisting.    There are several requirements for continued listing on the Nasdaq National Market ("Nasdaq") including, but not limited to, a minimum stock price of one dollar per share and $4.0 million in tangible net worth. If the Company's Common Stock price closes below one dollar per share for 30 consecutive days, the Company may receive notification from Nasdaq that its Common Stock will be delisted from the Nasdaq unless the stock closes at or above one dollar per share for at least ten consecutive days during the 90-day period following such notification. In the future, the Company's Common Stock price or tangible net worth may fall below the Nasdaq listing requirements, or the Company may not comply with other listing requirements, with the result being that its Common Stock might be delisted. If its Common Stock is delisted, the Company may list its Common Stock for trading over-the-counter or may apply for listing on the Nasdaq Smallcaps Market, subject to Nasdaq's approval. Delisting from the Nasdaq could adversely affect the liquidity and price of the Company's Common Stock and it could have a long-term impact on the Company's ability to raise future capital through a sale of its Common Stock. In addition, it could make it more difficult for investors to obtain quotations or trade this stock.

        Risks Related to Acquisitions.    In fiscal 2001, the Company did not make any strategic external acquisitions. The Company did acquire the interest of one franchise agent and it also bought out the interest of one licensee; however, these transactions were not significant. The Company has no near-term acquisition plans other than possible franchise agent buybacks or other licensee buyouts.

        Management of the Company assesses the recoverability of its long-lived assets, including goodwill and other intangible assets, by determining whether the amortization of the assets' balance over its remaining life can be recovered through projected undiscounted future cash flows from operations.

20

During fiscal 2001, a number of businesses the Company acquired over the past several years were negatively impacted by the economic recession. Based on management's assessment of projected undiscounted future cash flows and estimates of market value based on industry specific multiples, it was determined that a portion of the carrying amount of goodwill and other intangibles related to specific acquisitions had been permanently impaired in the fourth quarter of fiscal 2001. As a result, the Company recorded a pre-tax charge of approximately $19.1 million to write down these assets to estimated current net realizable values. Should the adverse effect of the economic recession continue to impact the profitability of the remaining businesses the Company has acquired, it is possible that further impairment may be assessed and that additional write downs may be recorded.

ITEM 2. PROPERTIES.

        The executive offices of the Company are located at 301 Lennon Lane, Walnut Creek, California. As of December 31, 2001, the Company owned four buildings, totaling approximately 66,000 square feet, which house its corporate headquarters. Certain of these buildings were subject to a trust deed that has been fully repaid. In fiscal 2000, the Company sold two buildings consisting of approximately 10,000 total square feet for cash proceeds of $1.0 million and consolidated its corporate operations utilizing office space made available from the discontinuation of its medical operations.

        In addition, the Company leases space for its Company-owned offices in the United States and abroad. The leases generally are for terms of one to five years and contain customary terms and conditions. The Company believes that its facilities are adequate for its current needs and does not anticipate any difficulty replacing such facilities or locating additional facilities, if needed.

ITEM 3. LEGAL PROCEEDINGS.

        In the ordinary course of its business, the Company is periodically threatened with or named as a defendant in various lawsuits. The principal risks that the Company insures against are workers' compensation, general liability, property damage, errors and omissions, fidelity losses and fiduciary liability.

        On March 9, 2000, Synergy Staffing, Inc. filed a complaint in the Superior Court of the State of California for the County of Los Angeles, Central District. The defendants named in the case were Westaff, Inc., W. Robert Stover, Michael K. Phippen, Paul A. Norberg, Jack D. Samuelson, Gilbert L. Sheffield, Mike Ehresman and Does 1-10. The complaint alleged, among other things, that the defendants fraudulently induced the plaintiff to sell the assets of The Personnel Connection, Inc. The plaintiff sought to have the court grant a jury trial, and award the plaintiff compensatory and punitive damages and attorneys' fees and other costs. The Company's petition for an order compelling arbitration was granted, the Superior Court lawsuit was stayed, and a demand for arbitration was made that asserted the legal theories of interference with prospective economic advantage and fraud. Discovery was completed in mid November 2001, and an arbitration hearing before a three-member panel commenced on December 3, 2001. The Company's earlier motion for partial summary judgment was granted at the outset of the hearing, resulting in the dismissal of all the individual defendants except Mr. Norberg. The hearing proceeded against the Company and Mr. Norberg, and closing arguments were made on December 10, 2001. The majority of the arbitrators on the panel rendered an interim award on January 9, 2002 in favor of the claimant and against the Company and Mr. Norberg on the fraud theory, jointly and severally, with one arbitrator dissenting. The interim award was for the principal amount of $2,224,327 plus interest at the legal rate from the date of the award. The panel reserved jurisdiction to issue a final award which will include reasonable attorneys' fees and costs to which the claimant is entitled, subject to an application process. The Company moved to modify the principal amount of the award. The panel granted the Company's motion and issued an Order Modifying Interim Award on February 11, 2002, crediting the respondents for $800,000 previously paid under a price protection clause in the asset purchase agreement and thereby reducing the principal

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amount of the award to $1,424,327. The Company has paid the principal plus interest at the legal rate from January 9, 2002. The claimant's application for an award of reasonable attorneys' fees and reimbursement of litigation costs was due to be filed by February 18, 2002 and respondents will have 20 days from that date in which to respond. A charge of $3.6 million was recorded as of November 3, 2001 as the estimated cost of the modified award plus expenses. Except as disclosed above, the Company is not currently a party to any material litigation. However, from time to time the Company has been threatened with, or named as a defendant in, lawsuits, including countersuits brought by former franchise agents or licensees, and administrative claims and lawsuits brought by employees or former employees.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

        The Company's Common Stock has been included for quotation in the Nasdaq National Market ("Nasdaq") under the symbol "WSTF" since April 30, 1996. The following table sets forth, for the periods indicated, the high and low closing sales prices of the Common Stock as reported on Nasdaq.

        On January 25, 2002, which was the last trading day of the first quarter of fiscal 2002, the last reported sales price on Nasdaq for the Common Stock was $2.32 per share. As of January 25, 2002, there were approximately 1,292 beneficial owners of the Common Stock.

        On June 20, 2000, the Company's Board of Directors declared a special cash dividend of $0.30 per share of Common Stock payable to shareholders of record as of July 5, 2000. The distribution, totaling $4.7 million, was paid on July 18, 2000.

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ITEM 6. SELECTED FINANCIAL DATA.