Directors’ report

The directors have pleasure in submitting their report and financial statements for the year ended 28 February 2009.

NATURE OF BUSINESS

Adcorp Holdings Limited is an investment holding company whose subsidiaries and associates carry on business, mainly in South Africa, in the permanent recruitment and flexible staffing sectors as well as business process outsourcing.

OVERVIEW

Shareholders are reminded, as announced in March 2007, that the company has changed its financial year-end from December to February. As such, the financial results presented herewith for the previous period are for the 14 months ended 29 February 2008, while the current reporting period is for the year ended 28 February 2009.

IFRS non-cash flow adjustments have significantly impacted the reported results, whilst the change in the reporting period makes comparison difficult. The table below sets out the normalised earnings for the year ended 28 February 2009 as well as the comparative figures for the 12 months ended February 2008.

The Adcorp Group once again produced a solid financial performance for the year ended 28 February 2009, despite tougher overall trading conditions.

In this regard, diluted core headline earnings for the year of 389,4 cents per share (2008: 327,4 cents per share) were some 19% ahead of diluted core headline earnings per share for the comparable prior year.

This result has been achieved due to the relatively strong positioning of the Group with regard to the relevance of its product and service offerings as well as the efficiency of its operations in relatively challenging economic times.

The strong blue-collar bias of the flexible staffing operations, the ongoing skills shortage, the sustainably differentiating value-adding product and service offerings, the blue-chip client base, selective industry exposure, proactive leadership focused on continuous productivity and efficiency improvement initiatives,coupled with certain recent quality acquisitions, have all contributed to a financial performance that has been far more robust than general South African economic and employment data would suggest.

In this regard, the blue-collar flexible staffing, permanent recruitment and business process outsourcing (BPO) operations of the Group continued to perform well and to deliver strong earnings growth.

The financial performance of the white-collar flexible staffing businesses, however, was negatively affected by sustained volume and margin pressure emanating principally from the retail banking sector. In response, these businesses implemented timely downsizing and cost-cutting initiatives in order to limit the negative impact on Group profitability.

The EBITDA margin improved to an average 6,7% compared to the prior year average of 6,5%. This has been achieved by way of a sustained focus on improving operating margins as well as an improved mix of business, despite the adverse margin impact of the white-collar flexible staffing businesses.

Debtors days outstanding slipped to an average 35 days outstanding compared to the previous year-end level of 30 days outstanding due primarily to late payment by three large public sector clients which skewed the result. The collectability of these balances is not considered to be at risk but rather is the result of inefficiencies and processing problems on the client side. Were these debtors to be excluded from the calculation, average debtors days outstanding would have been 32 days, generally indicating a healthy collections pattern within the Group.

As reported to shareholders earlier in the year, the acquisition of Staff-U-Need became unconditional at the end of July 2008. Given the specific focus of the business on the power-generation and engineering industries, it is expected to be an important contributor to the Group in the future. The business has integrated well into the Adcorp Group and is performing in line with expectations.

Other relatively recent acquisitions of the past two years, namely Capital Outsourcing Group and FMS Marketing Solutions are performing well and according to expectations. Employrite, which focuses on the automotive industry, had a difficult year due to the severe downturn in that industry. The impact of this on the Group was, however, limited due to its relatively small contribution to Group profits.

The implementation of the new Microsoft Dynamics AX ERP system has been successful with the majority of Group companies having now gone live on the system. The system will contribute positively to the quality, extent and relevance of management information as well as to operating efficiencies.

There has been much public debate recently, emanating principally from the trade union movement, with regard to the prospect of further regulation governing the a-typical or contract labour market.

The debate has primarily focused on the need to eradicate certain exploitative labour broking practices carried on by various operatives within the industry as well as the entrenchment of the principle of "decent work" as defined by the International Labour Organisation (ILO).

Adcorp has taken an active role in these deliberations and is generally supportive of certain of the recommendations which, if dealt with appropriately, could be positive for the staffing industry as a whole.

The industry plays a leading role in the South African economy in terms of job creation by way of introducing a significant number of first-time job-seekers into the formal job market as well as by playing a leading role in the upskilling of thousands of employees through the formal learnership process.

Given a scarcity of reliable employment data, Adcorp, in conjunction with the Sunday Times, recently initiated the "Adcorp Employment Index" which was first published in March 2009. It is the intention to publish this index on a quarterly basis thus facilitating a better, holistic understanding of the complex South African employment environment.

For the second year running the Adcorp Group was recently voted the most empowered company listed on the JSE in terms of the Financial Mail Top Empowerment Company Survey for 2009. In terms of this survey, Adcorp was the only company ranked as a Level 2 contributor.

FINANCIAL OVERVIEW

International Financial Reporting Standards ("IFRS") adjustments have had a significant impact on the figures presented for the year ended February 2009 mainly due to the non-cash flow amortisation of intangibles arising from acquisitions made during the past two years. The comparative year ending 29 February 2008 has been similarly affected but, in addition, non-cash flow share-based payments arising from the BBBEE deal concluded in May 2007 further impacted these profits. In order to make the figures comparable, non-cash flow IFRS adjustments have been eliminated in "Normalised core headline earnings" for the current year as well as the prior financial year and period.

For the year ended 28 February 2009 diluted core headline earnings amounted to 389,4 cents per share, which equates to a 19% increase year on year compared with 327,4 cents per share for the comparative year. Core headline earnings for the current year were 390,8 cents per share, which is a 17% increase compared with the 334,0 cents per share for the prior year. Headline earnings per share at 271,9 cents represents an increase of 63% over the 166,5 cents for the previous year, however this percentage has been impacted by IFRS adjustments.

The table below sets out the abridged cash flow for the year ended 28 February 2009 as well as the 12-month comparative period.

The reduction in cash generated by operations of R242,3 million compared with R329,6 million for the prior year was largely due to non-payment by three large public sector clients as mentioned above. The resultant cash conversion ratio was 81%. Group borrowings, including the preference share loan, as at 28 February 2009 of R302,1 million compared with R205,2 million for the previous year, resulted in an increase in the Group's gearing from 31% to 38%.

Staff-U-Need ("SUN") was acquired with effect from 27 July 2008 and, as previously advised, was funded by a combination of borrowings and shares issued. As at 28 February 2009, R35 million is owing to the SUN vendors and this amount will be paid in September 2009 dependent on certain hurdles being met. In terms of IAS 34 requirements the profit from this entity included in Group profits for the year ended February 2009 is R21,0 million. This profit has been arrived at after deduction of the interest attributable to the borrowings required to fund the cash portion of the purchase price as well as the amortisation charges arising from the valuation of the intangible assets acquired. Had SUN been acquired with effect from 1 March 2008 on the same basis as above, the amount of profit that would have been included in Group profits for the year would have been R23,7 million.

OUTLOOK

The extent and duration of the recent, extreme turbulence in the world's major economies and its likely impact on the South African economy remains unclear.

The strategy of the Group during these uncertain times is to protect top line business as far as possible, realise the full potential of a number of promising internal productivity and efficiency initiatives, focus on cash generation, retain our top people talent, positively influence industry regulation and seek out quality acquisitions.

Despite a troubled global and local economic outlook for the foreseeable future, certain mitigating factors should position the Group relatively well to weather the storm.

SHARE CAPITAL

Movements in share capital during the period are shown below:

SHARE PREMIUM

Movements in share premium during the period are shown below:

DIVIDEND

On 6 May 2009, the board declared a dividend of 160 cents (2008: 160 cents) per share which, together with the interim dividend of 62 cents per share, results in a total distribution in respect of the financial year ending 28 February 2009 of 222 cents per share.

The dividend of 160 cents per share will be paid on 3 August 2009.

STRATE

Adcorp dematerialised its issued shares with effect from 9 July 2001 since time settlement of any trade on or outside of the JSE can only be done in electronic format. All shareholders were circulated with a brochure at the time giving details of how to go about dematerialising their shares. Despite this, a number of shares remain in certificate format and will have to be dematerialised before they can be traded. Adcorp's company secretary may be contacted should a shareholder require advice on the dematerialisation of their share certificates.

ADCORP EMPLOYEE SHARE OPTION SCHEME

The old Adcorp Employee Share Option Scheme was introduced in 1987 and expanded during 1989 to include a share purchase scheme and again in 1994 to allow for the creation of a combined option/deferred payment scheme.

Under this scheme options to purchase shares have been granted on 267 244 shares as at 28 February 2009. These options have already vested and may therefore be paid for and converted into shares at any time at the option of the relevant employees.

Movements for the year in the Adcorp Employee Share Option Scheme appear below:

NEW ADCORP EMPLOYEE SHARE SCHEME

Under the new Adcorp Employee Share Scheme eligible employees received conditional allocations of Share Appreciation Rights (SARs). The scheme also makes provision for the allocation of performance shares (PFs).

The SARs provide employees, at the date the rights vest, with the right to receive shares equal to the appreciation in the share price since grant date. In the event of the share price decreasing, no value is inherent in the shares and as a result no benefit is due to the employee. The vesting of the shares is subject to various non-market-related performance criteria. All SARs and PFs expire after six years from grant date.

Movements for the year in the new Adcorp Employee Share Scheme appear below:

The quantities shown below are the number of shares allocated to which the holders are entitled to the appreciation in the share price from grant date to exercise date. The number of shares that will be exercised to cover this commitment depends on the share price at the time. As at 28 February 2009 the value inherent in the above 7 843 000 shares was R0,56 million based on the share price of that date of R20,50 per share. This would have required the issue of 27 282 shares in order to discharge this commitment in full. There is no amount payable by participants on exercise. They will receive shares equal in value to the increase in the share price between the grant date and the exercise date.

ADCORP EMPOWERMENT SHARE TRUST

The trust owns 42 802 Adcorp shares of which 30 302 shares were unallocated as at 28 February 2009 as a result of employees leaving the Group. These will be reallocated during 2009. All the allocated options have vested and therefore can be paid for and the shares transferred into the employee's name at any time at the option of the employee:

Movements for the year in the Adcorp Empowerment Share Trust:

ADCORP EMPLOYEE SHARE TRUST ESTABLISHED 2007

As advised in the circular to shareholders dated 12 April 2007, Adcorp concluded a BBBEE transaction which allows for up to 10% of Adcorp shares to be owned by Adcorp employees, the majority of whom are previously disadvantaged individuals.

The Employee Share Trust owns 6 729 140 Adcorp “A” shares on behalf of the employees of Adcorp. These shares are represented by units which were allocated to all Adcorp employees in the Group at the time of the initial allocation, which was August 2007. Units which are forfeited due to employees leaving early are reallocated to new employees, however the total number of “A” shares does not change. In 2017 a percentage of the “A” shares will convert to Adcorp ordinary shares depending on the amount of the notional debt that has been repaid at that time. Based on the amount of the notional debt that has been paid down as at 29 February 2008 and using the same share price at that date, the theoretical number of shares that would have vested is nil. This is due to the significant fall-off in share prices.

SUBSIDIARIES AND ASSOCIATES

Details of the company’s operating subsidiaries and associates are set out in Annexure A.

The summarised attributable interest of the company in the profits and losses of its subsidiary companies is as follows:

SIGNIFICANT SHAREHOLDERS

Details of significant shareholders are included in Shareholders` information section.

SPECIAL RESOLUTIONS

No special resolutions were passed during the year ended 28 February 2009.

STATUTORY INFORMATION

The company was incorporated in the Republic of South Africa on 16 July 1974. The registration number is 1974/001804/06. For details of the registered office, company secretary and auditors refer to inside back cover.

DIRECTORS' REMUNERATION AND INTEREST

Details of directors' remuneration and interests appear in notes 47 and 48 of the annual financial statements.

SUBSEQUENT EVENTS

No subsequent event to report on.

DIRECTORATE AND SECRETARY

The names of the directors and company secretary are set out in the Board of Directors, Corporate governance section. Changes to the directorate during 2008/09 are detailed in this section.