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

FORM 10-K

Commission File Number 000-24990

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

        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 ý    No o

        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. o

        Indicate by check mark whether Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o    No ý

        The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $23,084,694 as of January 23, 2004, 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 January 23, 2004, the Registrant had outstanding 16,033,229 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 2004 Annual Meeting of Stockholders are incorporated herein by reference to this Form 10-K Report.

INDEX

WESTAFF, INC.

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PART I

Cautionary Note

        This Annual Report contains forward-looking statements that involve risks and uncertainties regarding Westaff, Inc. (the "Company"). As discussed in greater detail under "Cautionary Statement" in Item 7, such statements are identified by terms expressing the Company's future expectations or projections. 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 the heading "Factors Affecting Future Operating Results" beginning on page 10 below and elsewhere in, or incorporated by reference into, this Annual Report on Form 10-K. Forward-looking statements speak only as of the date of this report, and the Company undertakes no obligation to update or revise such statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. This Form 10-K for the fiscal year ended November 1, 2003, contains service marks of the Company.

ITEM 1. BUSINESS.

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's primary focus is on recruiting and placing temporary light industrial and clerical/administrative personnel. The Company has over 50 years of experience in the staffing industry and, as of November 1, 2003, operated through 270 offices in 45 states and five foreign countries. As of November 1, 2003, 73% of these offices were owned by the Company and 27% were operated by franchise agents and a licensee.

        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 298 North Wiget 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, which is the primary operating entity.

        During fiscal 1999, the Company sold its medical business, primarily operated through Western Medical Services, Inc., a wholly-owned subsidiary of the Company. As a result, 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.

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

Services

        The Company's service offerings are focused primarily on placing temporary light industrial and clerical/administrative staffing personnel.

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        Light Industrial Services.    Light industrial services personnel are placed for a variety of assignments including general factory and manufacturing work (including production, assembly and support workers, merchandise packers and machine operators), warehouse work (such as general laborers, stock clerks, material handlers, order pickers, forklift operators and shipping/receiving clerks), technical work (such as lab technicians, inspectors, quality control technicians and drafters) and general services (such as maintenance and repair personnel, janitors and food service workers).

        Clerical/Administrative Services.    Clerical/administrative services personnel are placed for a broad range of general business positions including receptionists, administrative assistants, data entry operators, word processors, customer service representatives, telemarketers and various other general office, accounting, bookkeeping and clerical staff. Clerical/administrative positions also include call center agents, such as customer service, help desk and technical support staff.

        The Company believes that temporary light industrial and clerical/administrative 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 light industrial and clerical/administrative staffing functions are, and will remain, an integral part of the labor market in local, regional and national economies around the world.

        The Company also provides other services within the light industrial and clerical/administrative staffing market such as direct placement and temp-to-hire services, payrolling, on-site and on-location services, and other professional services including skills and behavioral assessments and coordination of drug testing and background checking:

•

Direct placement services are fee-based services to recruit and fill regular staff positions for customers.



•

Temp-to-hire services represent the placement of temporary staff with a customer with the option to convert the temporary staff to a regular customer employee at a later date.



•

Payrolling typically involves the transfer of a customer's short-term seasonal or special use employees to the Company's payroll for a designated period.



•

On-site programs provide administrative services for the Company's customers such as coordinating all temporary staffing services throughout a customer's location, including skills assessment and training.



•

On-location programs provide for an independent branch office located at the customer's facility. They are typically intended for large non-seasonal accounts with more than $500,000 in annual revenue. The branch office is typically staffed by at least one manager level employee.

        Both on-site and on-location 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 comparatively lower operating expenses and relatively longer customer relationships.

        In addition to these services, during fiscal 2002, the Company introduced two enhancements to its professional services programs. These service enhancements focus on increasing the pool of qualified candidates using advanced selection procedures for potential candidates (Talent Trak®) as well as technology-based management services that allow clients to maximize workforce productivity (Time Trak^sm.) The Company believes that these programs 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.

        To ensure high quality placements for customers and employees, Westaff introduced Talent Trak® to strengthen the quality of its selection process. This comprehensive selection process includes flexible recruiting methods, interviewing and reference checking. Westaff conducts advanced skills and behavioral

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assessments using Talent Trak®, and also provides the option for both background and drug testing that can be customized to meet a customer's specific needs.

        Time Trak^sm was introduced to provide customers with a web-based management system to assist in maximizing workforce productivity. Time Trak^sm is a flexible system allowing customers access to information to track a variety of performance measurements such as workforce hours, labor costs, attendance and staff performance. Time Trak^sm also includes features to automate timecard and payroll processing.

Markets

        The Company provides temporary staffing services primarily in "secondary markets", as well as in the downtown areas of certain "primary markets" in the United States and selected international 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 to operate than in the more central areas of primary 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.

        The Company augments this concentration on secondary markets by also focusing on national contracts with customers having a large presence in these marketplaces. 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 continues to develop aggressive marketing programs to target and acquire additional clients that fit the Westaff branch system footprint. The Company believes that its geographic alignment allows it to effectively compete for some of these national contracts.

        The Company markets its temporary staffing and related services to local and regional customers through a network of Company-owned and franchise agent offices, as well as through its on-site and on-location service locations and through one licensed office. The Company coordinates significant amounts of its domestic sales and marketing efforts through its corporate headquarters in cooperation with branch and regional offices. New customers are obtained through consultative sales presentations, telemarketing, e-mail marketing, referrals from other customers and advertising in a variety of regional and local media.

Recruiting

        The Company believes that a key component of its success is the ability to recruit and maintain a pool of qualified light industrial and clerical/administrative 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 light industrial and clerical/administrative staffing personnel is its payroll system, which provides it with the ability to print payroll checks at virtually all of its branch offices within 24 hours after receipt of a timecard. Most Company-owned offices offer temporary employees a benefit package, including a service bonus and holiday pay. Franchise agent offices have the option to offer this benefit. All temporary employees have the option to participate in the Company's 401(k) plan and discounted employee stock purchase plan.

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Operations

        The Company operates each Company-owned office as a separate profit center and provides certain managers considerable operational autonomy and financial incentives. The Company also operates franchise agent offices in appropriate markets. Managers focus on business opportunities within markets and are 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.

        As of November 1, 2003, the Company operated through a network of 270 offices in 45 states and five 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 branch/market, district/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 offices in operation as of the dates indicated.

(1)

Excludes Company-owned recruiting offices.

        Company-Owned Offices.    Employees of each Company-owned office typically 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. Branch or market managers typically report to district or regional managers. District managers, regional managers and zone sales managers typically report to zone managers. As of December 31, 2003, there were three zone managers, three zone sales managers, six regional managers and eight district managers. 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, district, regional, zone sales 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 a 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

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agents to open multiple offices within their exclusive territories. As of November 1, 2003, the Company's 36 franchise agents operated 72 franchise agent offices. Sales generated by franchise agent operations and related costs are included in the Company's consolidated revenues and costs of services, respectively, and during fiscal 2001, 2002 and 2003 franchise agent sales represented 22.3%, 24.1% and 26.4% respectively, of the Company's revenues.

        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 assisting and cooperating with 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 and is responsible for 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.

        Franchise agents are required to follow the Company's operating procedures and standards in recruiting, screening, classifying and retaining temporary personnel.

        Licensed Offices.    During fiscal 2003, one of the Company's two remaining licensees converted to the Company's franchise agent program. As of November 1, 2003, the one remaining licensee operated one licensed office. The Company is no longer offering the license program. The licensee is the employer of the temporary employees and the owner of the customer accounts receivable. 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 agreement. Borrowings under the lines of credit bear interest at a rate equal to the reference rate of Bank of America, N.A. plus two percentage points. Interest is charged on the borrowings only if the outstanding balance exceeds certain specified limits. Licensees are required to operate within the framework of the Company's policies and standards, but must obtain their own workers' compensation, liability, fidelity bonding and state unemployment insurance coverage, which determines their payroll costs.

        The Company's franchise and license agreements have an initial term of five years and are renewable for multiple five-year terms. The agreements generally 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 and license agreements. In the past five fiscal years, the Company has commenced one action to enforce the non-competition covenants, which was resolved in the Company's favor.

        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.

        For financial information about our operating segments for fiscal years 2003, 2002 and 2001, see Note 15 to our consolidated financial statements included in this Annual Report.

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 and the availability of qualified temporary personnel. In addition, the Company's results of operations could be, and have in the

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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.

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 2003, no single customer accounted for more than 10.0% of the Company's revenues. The Company's 10 highest volume customers in fiscal 2003 accounted for an aggregate of approximately 15.6% of the Company's revenues.

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 segments), Manpower Inc., RemedyTemp, Inc. (clerical and light industrial services) and Express Personnel Services, Inc. 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 qualified temporary personnel in a timely manner, monitoring quality of job performance and pricing of services. Due to competitive pressures it has been difficult for the Company to raise prices even though its costs have increased. The Company believes that the primary competitive factors in obtaining qualified candidates for temporary employment assignments are wages, benefits and flexibility and responsiveness of work schedules. The Company believes that within its primary light industrial and clerical/administrative markets, timeliness of pay is also a key competitive factor.

Management Information Systems

        The Company's management information systems provide support to both branch office locations and the corporate back-office. Branch office functionality includes a newly released, proprietary branch office application designed to assist in candidate search, recruiting, customer order management, customer service, sales management and payroll entry and submission. The application also provides for the sharing of information between branch offices and corporate headquarters. Utilizing this system, field offices capture and input customer, employee, billing and payroll information. This information is electronically captured on centralized servers where payroll, billing and financial information is processed overnight. These systems allow the Company to print checks at its branch offices within 24 hours after receipt of the timecard. Invoices are also processed daily and distributed from the Company's centralized corporate office. These systems also support branch office operations with daily, weekly, monthly and quarterly reports that provide information ranging from customer activity to office profitability. The Company has

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implemented the upgraded front-office application in approximately 58% of its domestic locations and plans to complete upgrading of the remainder of its domestic locations by the end of 2004.

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 provides workers' compensation insurance covering its regular and temporary employees through a long-term relationship with Travelers Indemnity Company ("Travelers"). The Company is self-insured in the states of Ohio and Washington. For fiscal years 2001, 2002 and 2003, the Company retained a $500,000 deductible per occurrence for these policies. This retention will increase to $750,000 per claim for fiscal 2004. The Company also purchases workers' compensation insurance coverage based upon actual payroll classifications in the monopolistic states of Wyoming, North Dakota and West Virginia.

        The Company is contractually required to collateralize its recorded obligations under the workers' compensation insurance contracts with Travelers through irrevocable letters of credit and surety bonds. As of November 1, 2003, the aggregate collateral requirements have been satisfied through $15.3 million of letters of credit and a $9.8 million surety bond.

        The Company's nationwide risk management program is managed by its Risk Management Department consisting of risk management and workers' compensation professionals and administrators who monitor the disposition of all claims and oversee, through an on-line system, all workers' compensation claim activity. The department utilizes a variety of creative and aggressive workers' compensation loss prevention and loss control strategies. The risk management program includes claim strategy reviews with the carrier and third party administrator, post-accident drug testing, a return-to-work modified duty program, pre-placement customer safety evaluations and light industrial job approvals, the use of personal protective equipment, and the use of individual local office expense allocation formulas.

Employees

        As of November 1, 2003, the Company had approximately 25,000 temporary employees on assignment and employed 846 regular staff. The Company's employees are not covered by any collective bargaining agreements. The Company believes that its relationships with its employees are good.

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, including its primary Westaff® service marks. Federal and state service mark registrations may be renewed indefinitely as long as the underlying mark remains in use. The Company has filed applications to register the service marks Learning Trak^sm, Time Trak^sm and Ms. Carmen Courtesy^sm, all of which the Company believes are important to its current business strategy.

        The Company also owns other service marks, including Westaff® (wave design), Talent Trak®, Accountants USA®, AUSA®, College Greens®, The Essential Support Services Leader®, E Team®, Job Squad®, On Location & Essential®, and Staff for Business Jobs for People® and has service marks related to its former name "Western," including Western Staff Services®, Western Temporary Services®, Western Accounting Services®, Western Legal Services®, Western Marketing Services® and Western Permanent Services Agency®.

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        The Company is no longer pursuing the marks, It's About Respect and Westaff People Matter and is not maintaining Western Temporary Services®, Western Staff Services Office and Light Industrial Division®, or 1-800-BE A TEMP®.

Medical Services

        During fiscal 1999, the Company discontinued its medical business (Western Medical) principally through a sale to Intrepid U.S.A. Inc. (Intrepid). Under the terms of the sale, the Company retained the majority of accounts receivable, including the trade and Medicare accounts receivable balances.

        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. Primarily due to the unfavorable arbitration award and related legal costs, the Company recorded an after-tax loss from discontinued operations of $1.8 million or $0.11 per share, in fiscal 2001.

        Prior to fiscal 2002, the Company appealed Western Medical's 1996 Medicare cost report settlement. During the first quarter of fiscal 2003, the appeal was settled and Western Medical received additional cost reimbursements. As a result of the favorable appeal settlement, the Company recorded $0.3 million in income from discontinued operations in the first fiscal quarter of 2003.

        As of November 1, 2003, the remaining net current liabilities of the discontinued operations of $0.6 million are primarily for pending legal and malpractice/liability claims. The Company believes it has adequately reserved for the reasonable outcome of future events; however, should actual costs differ materially from those estimated by management, the Company would record additional losses (or gains) in future periods.

Availability of Reports

        Westaff makes its financial reports on Form 10-K, 10-Q or 8-K available free of charge on its web site at www.westaff.com as soon as practicable after filing. Furthermore, Westaff will provide electronic or paper copies of filings free of charge upon written request to the Company's Chief Financial Officer or Investor Relations representative.

Factors Affecting Future Operating Results

        This Form 10-K contains forward-looking statements concerning the Company's future programs, products, expenses, revenues, 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.

Westaff is out of compliance with certain financial covenants at November 1, 2003. The Company has significant working capital requirements and is near capacity of its current borrowing agreements which results in significant pressure on the liquidity of the Company and may threaten its ability to continue as a going concern unless it is able to raise additional capital.

        On January 27, 2004 the Company was notified by its lending agent that at November 1, 2003, it was in violation of its minimum earnings before interest, taxes, depreciation and amortization (EBITDA) covenant under its Multicurrency Credit Agreement. Furthermore, the lending agent informed the Company that it would be required to amend its credit agreement to waive the covenant violation as well as to address certain other aspects of the credit facility, including increasing the cost of funds and reducing the amount of borrowings available to the Company. As a result of the untimely notification to the

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Company of the covenant violation, which was inconsistent with previous representations made to the Company regarding the covenants, the Company filed for an extension for filing its Annual Report on Form 10-K to provide additional time to negotiate an acceptable amendment.

        Since January 27, 2004 the Company has been working with its lenders to amend the credit agreement, but no agreement has been reached on the final terms of the amendment. As of February 12, 2004, the proposed terms of the amendment would waive the covenant violation, reset EBITDA and fixed charge coverage covenants and establish a separate EBITDA covenant for the US operations on a stand-alone basis. The proposed terms of the amendment would also increase the cost of funds and place immediate and stringent reductions in the Company's borrowing capacity, with further reductions scheduled for April through July of 2004. The Company requires significant amounts of working capital to operate its business and to pay expenses relating to employment of temporary employees. Based on the proposed terms of the amendment and management's current operating and cash flow forecasts, management estimates that it would be reasonably likely that the Company may not be able to meet its working capital requirements in three to six months without additional sources of capital. The Company estimates that the additional capital that would be required to meet its working capital needs through the end of fiscal 2004 would be in the range of $3.0 million to $5.0 million. Additional capital may be required in fiscal 2005.

        The Company is aggressively seeking alternative financing to improve liquidity and is working with a financial advisor to explore this and other strategic alternatives to increase its available capital. The Company is currently involved in several discussions regarding such alternatives. However, there can be no assurance that the Company will be able to increase its available capital or obtain adequate alternative financing, and if alternative financing were obtained, that the cost of such financing would not have a material adverse effect on its results of operations and financial condition. Furthermore, there can be no assurance that the Company will be successful in completing an amendment on the terms as currently proposed by its lenders.

        While the Company currently believes that it will be successful in completing an amendment to its credit agreement based generally on the terms referred to above, should the Company not be successful in negotiating an amendment it would remain out of compliance with the agreement and its lenders could demand payment of all outstanding obligations. The Company would be forced to immediately seek refinancing to meet payment of these obligations and such financing may not be attainable, or the increased cost of obtaining such refinancing may have a material adverse effect on the Company's business.

        Due to the Company's inability to obtain the necessary amendment as of the date of the filing of this Form 10-K, and the financing issues discussed above, its ability to continue as a going concern may be impaired. The consolidated financial statements included in this Form 10-K do not include any adjustments that might result from the outcome of this uncertainty.

        During fiscal 2003, the Company experienced significant seasonal and other fluctuations in its borrowings and borrowing availability, particularly in the US, and was required to aggressively manage its cash to ensure adequate funds to meet working capital requirements. Such steps included working to improve collections and adjusting the timing of cash expenditures, reducing operating expenses where feasible and working to generate cash from a variety of other sources. Some of these sources of additional cash include loans from the Company's Chairman and Founder, sales and sale/leasebacks of property and equipment, and agreements reached with the Company's insurance carrier to reduce certain collateral requirements. The Company believes that opportunities to generate additional cash from the other sources referred to above will be limited during fiscal 2004. Accordingly, in addition to the efforts noted above to raise additional capital, the Company intends to continue to work to reduce operating costs where possible during fiscal 2004. In particular, the Company is focusing on the very high costs associated with operating as a public company and is evaluating opportunities to reduce these costs.

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        As of January 24, 2004, the Company's total borrowing availability was $5.8 million, with $3.0 million, $1.2 million and $1.6 million available in the US, UK and Australia, respectively. Under the terms of the proposed amendment, the Company estimates borrowing availability in the US would immediately be reduced by $2.6 million and borrowing availability in the UK would be increased by $2.0 million. The Company anticipates that the UK will utilize this increase in their borrowing capacity to declare and pay a dividend of approximately $1.5 million to the US in the second quarter of fiscal 2004.

        The amount the Company is entitled to borrow under its current and proposed amended US revolving credit facility is calculated each day and is dependent on the trade accounts receivable generated from operations, which are affected by financial, business, economic and other factors, as well as by the daily timing of cash collections and cash outflows. If the Company is unable to achieve its operating forecasts for the year, or if there are unanticipated reductions in cash inflows or increases in cash outlays, the Company may be subject to cash shortfalls. If such a shortfall were to occur, for even a brief period of time, it may have a significant adverse effect on the Company's business. Furthermore, the Company's receivables may not be adequate to allow for borrowings for other corporate purposes, such as capital expenditures or growth opportunities, and the Company would be less able to react to changes in the market or industry conditions.

        Any failure to comply with the covenants under the Company's credit facility could result in an event of default which, if not cured or waived, could trigger prepayment obligations. If the Company were forced to refinance borrowings under the current facility, there can be no assurance that such financing would be available or that such financing would not have a material adverse effect on the Company's business and financial condition. Even if such refinancing were available, the terms could be less favorable and the Company's results of operations and financial condition could be adversely affected by increased costs and rates.

        See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the Company's financing issues.

Price competition in the staffing industry continues to be intense and pricing pressures from both competitors and customers may result in reduced sales and margins to the Company.

        The temporary staffing industry is highly competitive with limited barriers to entry and continues to undergo consolidation. The Company expects the level of competition to remain high in the future, and increasing competitive pricing pressures will continue to make it difficult for the Company to raise its prices even though its costs have increased, and may have an adverse effect on the Company's market share and operating margins. The Company competes in national, regional and local markets with full service agencies and with specialized temporary services agencies. Many competitors are smaller than the Company but may enjoy an advantage over the Company in discrete geographic markets because of their stronger local presence. Other competitors have greater marketing, financial and other resources than the Company, that among other things could enable them to attempt to maintain or increase their market share by reducing prices. Furthermore, there has been an increase in the number of customers consolidating their staffing services purchases with a single provider or with a small number of providers. The trend to consolidate staffing services purchases has in some cases made it more difficult for Westaff to obtain or retain business.

Any significant recurrent economic downturn could result in the Company's customers using fewer temporary employees, which could materially adversely affect the Company.

        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. Frequently, customers 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 customers reduce their utilization of temporary employees

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before releasing regular full-time employees. Typically, the Company may experience less demand for its services and more competitive pricing pressure during periods of economic downturn. The recent domestic economic recession and continuing economic uncertainty has had a material adverse effect on the Company's business, results of operations, cash flows and financial condition. A recurrent recession or a significant lag in economic recovery would likely have a further material adverse effect on the Company's business, results of operations, cash flows or financial position.

The cost of unemployment insurance premiums and workers' compensation costs for Westaff's temporary employees may continue to rise and reduce Westaff's margins and create liquidity problems.

        Westaff is responsible for and pays unemployment insurance premiums and workers' compensation costs for its temporary employees. Recently, these costs have risen as a result of increased claims, general economic conditions and governmental regulation. There can be no assurance that Westaff will be able to increase the fees charged to its customers in the future to keep pace with increased costs. As noted previously, price competition in the staffing industry is intense. There can be no assurance that Westaff will be able to maintain or improve its margins, and if it does not, its results of operations, financial condition and liquidity could be adversely affected.

        Westaff retains a portion of the risk under its workers' compensation program (see "Business—Risk Management Programs"). The estimated remaining deductible liability for all existing and incurred but not reported claims is accrued based upon actuarial methods using current claims information, as well as prior experience, and may be subsequently revised each quarter based on new developments related to such claims. Changes in the estimates underlying the claims reserve are charged or credited to earnings in the period determined, and therefore large fluctuations in any given quarter could materially adversely affect earnings in that period.

        The Company is contractually required to collateralize its recorded obligations under these workers' compensation insurance contracts through irrevocable letters of credit, surety bonds or cash. As of November 1, 2003, the Company's aggregate collateral requirements have been satisfied through $15.3 million of letters of credit and $9.8 million of surety bonds. For the fiscal 2003 workers' compensation policy year, Westaff changed its funding program such that Westaff funded the 2003 policy year through monthly cash installments totaling $16.0 million. A similar program is in place for fiscal 2004 whereby Westaff will make monthly cash installments totaling $17.9 million. Accordingly, during fiscal 2003 and 2004, Westaff will not only fund the full 2003 and 2004 policy years, but will also make ongoing cash payments associated with claims paid for all prior policy years. This has and will continue to increase the Company's cash flow requirements. The 2004 policy agreement allows for a reduction in the surety bond collateral of $4.0 million as of the end of January 2004, and a reduction to the letters of credit of $1.0 million as of February 29, 2004. However, as the bond is not collateralized with any assets of the Company, the bond reduction will not impact the Company's borrowing availability.

        As noted above, the Company currently faces significant pressure on its liquidity. In the event that cash flow and borrowing capacity under the existing credit facilities, and any potential amendments to such facilities, are insufficient to meet these cash and collateral obligations, the Company will be required to seek additional sources of funding to satisfy its liquidity needs which could have a material adverse effect on the Company's business. As noted above, the Company is aggressively seeking additional financing to increase its available capital. There can be no assurance that the Company will be successful in raising such funds.

Westaff's information technology systems are critical to its daily operations.

        The Company's domestic information management systems, located at a co-location facility and corporate headquarters, are critical to daily operations of the Company's business. While backup and recovery systems are in place, should any of these key systems fail, it could severely impact the Company's business and operations, specifically its ability to timely and accurately pay employees and bill customers.

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        The Company's domestic back office payroll and billing systems are at the end of their life cycle and are no longer supported by the companies who originally supplied them. Westaff currently utilizes internal support to maintain and update these systems. This includes the process of applying updates to remain in compliance with tax mandates and other additional regulatory requirements. This potentially creates exposure should an update not occur in a timely fashion, which could have a material adverse effect on the Company's business. Furthermore, the Company will likely be required to migrate to newer technology platforms in fiscal 2005 which will require investments in new hardware and software which may further strain the Company's capital resources.

Westaff's success depends upon its ability to attract and retain qualified temporary personnel.

        Westaff depends upon its ability to attract and retain qualified temporary personnel who possess the skills and experience necessary to meet the staffing requirements of its customers. Westaff must continually evaluate and upgrade its base of available qualified personnel to keep pace with changing client 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 and accept regular staff employment with customers of the Company. Competition for individuals with proven skills remains intense, and demand for these individuals is expected to remain strong for the foreseeable future. There can be no assurance that qualified personnel will continue to be available to Westaff in sufficient numbers and on terms of employment acceptable to the Company. The failure to recruit, train and retain qualified temporary employees could materially adversely affect the Company's business.

Westaff may be exposed to employment-related claims and costs that could materially adversely affect its business.

        Westaff is in the business of employing people and placing them in the workplace of other businesses. Attendant risks of these activities include:

•

possible claims by customers of employee misconduct or negligence,



•

claims by employees of discrimination or harassment (including claims relating to actions of Westaff's customers),



•

fines and costs related to the inadvertent employment of illegal aliens,



•

payment of workers' compensation claims and other similar claims,



•

violations of wage and hour requirements,



•

errors and omissions of temporary employees, and



•

claims by customers relating to employees' misuse of customer propriety information, misappropriation of funds, other criminal activity or torts or similar claims.

        In addition, some or all of these claims may give rise to litigation, which could be time-consuming to the Company's management team as well as costly and therefore could have a negative effect on its business. In some instances, Westaff has agreed to indemnify its customers against some or all of these types of liabilities. Westaff has policies and guidelines in place to help reduce its exposure to these risks and has purchased insurance policies against certain risks in amounts that it believes to be adequate. However, there can be no assurance that Westaff's insurance will be sufficient in amount or scope to cover these types of risks in the future. Furthermore, there can be no assurance that Westaff will not experience these problems in the future or that Westaff will not incur fines or other losses or negative publicity with respect to these problems that could have a material adverse effect on Westaff's business.

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Westaff's Founder and Chairman controls more than 50% of the Company's outstanding stock thus allowing him to exert significant influence on the Company's management and affairs.

        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. For example, Mr. Stover has the ability to control the election of the Board of Directors and the appointment of executive management. He also has the ability to control any merger, consolidation, sale of substantially all of the assets or other strategic decisions affecting the Company or the market value of the stock. This concentration of voting power may delay or prevent an acquisition of the Company or other strategic action or result in strategic decisions that could negatively impact the value and liquidity of the outstanding stock.

The market for Westaff's stock may be limited and the stock price may continue to be extremely volatile.

        The average daily trading volume for Westaff's common stock on the Nasdaq National Market was approximately 2,600 shares from January 1, 2003 through December 31, 2003, and there have been numerous days with virtually no trading in the stock. Accordingly, the market price of Westaff's common stock is subject to significant fluctuations that have been, and may continue to be, exaggerated because an active trading market has not developed for the stock. The Company believes that the common stock price has also been negatively affected by the fact that the Company's stock is thinly traded and the absence of analyst coverage. The lack of analyst reports about the Company's stock may make it difficult for potential investors to make decisions about whether to purchase the Company's stock and may make it less likely that investors will purchase the stock, thus further depressing the stock price. These negative factors may make it difficult for stockholders to sell the Company's common stock, which may result in losses for investors.

Westaff's business may suffer if it loses its key personnel.

        Westaff's operations are dependent on the continued efforts of its executive officers and senior management. Additionally, Westaff is dependent on the performance and productivity of its local managers and field personnel. Westaff's ability to attract and retain business is significantly affected by local relationships and the quality of service rendered. The loss of those key executive officers and senior management who have acquired experience in operating a staffing service company may cause a significant disruption to Westaff's business. Moreover, the loss of Westaff's key local managers and field personnel may jeopardize existing customer relationships with businesses that continue to use Westaff's staffing services based upon past direct relationships with these local managers and field personnel. Either of these types of losses could adversely affect Westaff's operations, including Westaff's ability to establish and maintain customer relationships.

Westaff derives a significant portion of its revenues from affiliate (franchise agent and licensed) operations.

        Affiliate operations comprise a significant portion of the Company's revenues. For fiscal 2003, 26.4% of the Company's total revenues were derived from affiliate operations. In addition, the Company's ten largest franchise agents for fiscal 2003 (based on sales volume) accounted for 14.9% of the Company's revenues. 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 results of operations.

Westaff is subject to business risks associated with international operations.

        The Company presently has operations in the United Kingdom, Australia, New Zealand, Norway and Denmark, which comprised 19.5% of the Company's revenues during fiscal 2003. 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, compliance issues

15

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.

Westaff is a defendant in a variety of litigation and other actions from time to time, which may have a material adverse effect on the Company's business, financial condition and results of operations.

        Westaff is regularly involved in a variety of litigation arising out of its business. The Company does not have insurance for some of these claims and there can be no assurance that the insurance coverage it has will cover all claims that may be asserted against the Company. Should the ultimate judgments or settlements not be covered by insurance or exceed its insurance coverage, they could have a material adverse effect on the Company's results of operations, financial position and cash flows. There can also be no assurance that the Company will be able to obtain appropriate and sufficient types or levels of insurance in the future or that adequate replacement policies will be available on acceptable terms, if at all.

The cost of mandated health insurance cost may not be able to be passed onto customers.

        On October 5, 2003, the State of California passed the California Health Insurance Act of 2003 "SB2" that requires California employers with more than 200 employees to either provide health coverage for their employees and their dependents, or to pay into a state fund for the provision of health coverage by January 1, 2006. The law requires employers to cover a minimum of 80% of the cost of insurance. The Company's temporary payroll for its California employees currently represents approximately 12% of total domestic payroll. These employees are typically not covered under employer paid health policies. The Company currently pays approximately 52% to 79% of the cost of regular employee insurance depending on the type of coverage. As a result of the changing business and governmental environment in California, some believe that this law may be repealed prior to the required implementation date. In the event that this law is not repealed, these costs may be substantial and, with regard to temporary employees, there can be no assurance made that the Company will be able to pass them on to customers and maintain its current margins. In addition, there can be no assurance made that other states will not enact similar health insurance legislation that could have a material impact on the Company. However, since the adoption of Employee Retirement Income Security Act (ERISA) several states have attempted to pass mandatory health-coverage bills that failed legal challenges under ERISA. Currently, Hawaii, which adopted mandatory health coverage before the passage of ERISA and received a "grandfather clause" exempting the state from the regulation, is the only other state with mandated employer provided health care.

ITEM 2. PROPERTIES.

        The Company previously owned one building located in Walnut Creek, California, consisting of approximately 16,000 square feet, where the executive offices were once located. On February 12, 2004 the Company completed the sale of this building for estimated cash proceeds of $1.9 million.

        The Company moved its executive offices at the end of January 2003, to its present location at 298 North Wiget Lane, Walnut Creek, California. This building is one of the three adjacent buildings located in Walnut Creek, California, which house its administrative offices. These buildings were sold by the Company in December 2002. The Company has leased back all three of these buildings, consisting of approximately 50,000 square feet, for a term of seven years commencing on December 12, 2002, with an additional five-year option to renew.

        In addition, the Company leases space for its Company-owned offices in the United States and abroad. The majority of the leases are for fixed terms of one to five years and contain customary terms and

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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, automobile liability, property damage, alternative staffing errors and omissions, fiduciary liability and fidelity losses.

        On March 9, 2000, Synergy Staffing, Inc. ("claimant") 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. and several corporate officers. The complaint alleged, among other things, that the defendants fraudulently induced the plaintiff to sell the assets of The Personnel Connection, Inc. The Company's petition for an order compelling arbitration was granted and the Superior Court lawsuit was stayed. The arbitration proceeded under the auspices of the American Arbitration Association. The Company's earlier motion for partial summary judgment was granted at the outset of the arbitration hearing, resulting in the dismissal of all the individual defendants except Paul Norberg. 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 in the principal amount of $2,224,327 plus interest. 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 amount of the award to $1,424,327. The Company paid the principal plus interest as well as the claimant's attorney fees and reimbursement of litigation costs. The claimant thereafter asked the Los Angeles County Superior Court to correct and confirm the interim award. On September 25, 2002, the Court denied the plaintiff's motion. The claimant then filed an appeal of the denial with the Court of Appeal, Second Appellate District. The Company filed its response brief on June 12, 2003. On October 21, 2003, the Court of Appeal reversed the Superior Court's denial of the claimant's motion. On November 5, 2003, Westaff filed a petition for rehearing with the Court of Appeal. Westaff's petition was denied on November 7, 2003. Accordingly, Westaff resolved the matter for $930,000 paid to the claimant on December 23, 2003.

        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 litigation brought by former franchisees or licensees, and administrative claims and lawsuits brought by employees or former employees. Management believes the resolution of these matters will not have a material adverse effect on the Company's financial statements.

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

        None.

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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT^*.

        The executive officers of the Company and their respective ages as of January 29, 2004 are set forth below.

^*

Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.

        Dwight S. Pedersen.    Mr. Pedersen was appointed as President and Chief Executive Officer of the Company effective January 14, 2002. He has been a director of the Company since May 1, 2001. He served on the Audit Committee of the Board of Directors from and after that date until he resigned from that committee upon becoming an employee of the Company. Prior to joining the Company, he was the Executive Vice President of Pinkertons, Inc., where he was employed since January 1, 2000, following the acquisition of American Protective Services, Inc. He was employed by American Protective Services, Inc. for twenty-six years, having started as its first Controller in 1974. After a series of promotions, including service as Vice President-Finance, Senior Vice President and Executive Vice President of that company, he was named President and a director in 1988 and he became its Chief Executive Officer in 1992. His previous work history includes approximately four years with Wolf & Co., an accounting firm. He is a certified public accountant on inactive status.

        Dirk A. Sodestrom.    Mr. Sodestrom joined the Company as Controller in February 1991. In December 1992, he was elected to the additional position of Vice President. In June 1998, Mr. Sodestrom was named a Senior Vice President of the Company. Effective January 1, 2001, Mr. Sodestrom was appointed as Chief Financial Officer. Mr. Sodestrom was employed from 1980 to 1991 by Price Waterhouse LLP, most recently as a Senior Audit Manager. He is a certified public accountant on inactive status.

        Christa C. Leonard.    Ms. Leonard was hired as Vice President and Treasurer of the Company in November 2000. Ms. Leonard was previously employed by USI Insurance Services Corp. as Vice President, Treasury and Tax, from 1996 to 2000. She has approximately nine years' prior work experience in the public accounting field, most recently from 1995 to 1996 with Roberts Schultz & Co., and also with Wallace Meyer & Co. from 1992 to 1994 and KPMG Peat Marwick & Co. from 1987 to 1992. She is a certified public accountant on inactive status.

        Richard G. Gross.    Mr. Gross was hired on October 7, 2002, as Senior Vice President, Director of Strategic Business Solutions. He was previously employed by Spherion as Group Vice President from 2000 to 2002. From 1997 to 2000, he was employed by Tandem Staffing for Industry as District Sales Manager and then promoted to Director of Sales Operations and Personnel. From 1996 to 1997, he was employed by Professional Detailing Network as District Sales Manager. From 1994 to 1996, he was employed by The Advantage Medical Group, Inc. as Chief Operating Officer. From 1991 to 1994, he was self-employed as a sales and marketing consultant. He was employed from 1978 to 1991 by Allergan Pharmaceuticals and most recently was its Senior Product Manager.

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        Joseph R. Coute.    Mr. Coute has been employed by the Company since January 1997, as Vice President and Director of Human Resources. His previous employer was Bank of America for approximately 26 years, including 16 years in human resources and ten years in branch operations.

        David P. Wilson.    Mr. Wilson was hired in December 1997, as Field Automation Manager, focusing on the field automation process. In June 1998, he was assigned the additional task of managing the customer service and help desk functions of the Company's Information Services Department. Mr. Wilson was promoted to Vice President, Information Services in January 2001.

PART II

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

        Market Information.    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 December 31, 2003, the last reported sales price on Nasdaq for the Common Stock was $2.34 per share. As of December 31, 2003, there were approximately 80 shareholders of record and 905 beneficial owners of the Common Stock.

        Sales of Unregistered Securities.    During fiscal year 2003, the Company did not sell any unregistered securities.

        Dividends.    The Company did not declare or pay dividends during fiscal 2002 and fiscal 2003. Further, the Company's current credit facilities prohibit payment of dividends so the Company is not currently contemplating a dividend declaration.

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        Securities Authorized Under Equity Plans.    The following table sets forth securities authorized for issuance under equity compensation plans as of November 1, 2003. All applicable equity compensation plans were previously approved by security holders.

ITEM 6. SELECTED FINANCIAL DATA.